Zedge, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 31, 2022. Report of Management on Internal Control over Financial Reporting We, the management of Zedge, Inc. and subsidiaries (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting of the Company. The Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that: 1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company; 2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and 3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2022. In making this assessment, the Company’s management used the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting, as prescribed above, as of July 31, 2022. Based on our evaluation, our principal executive officer and principal financial officer concluded that the Company’s internal control over financial reporting was effective as of July 31, 2022. 60 Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Previously Reported Material Weakness Management previously identified a material weakness in internal control over financial reporting related to accounting for taxes, which is disclosed in Item 9A. “Controls and Procedures” of our Form 10-K for the fiscal year ended July 31, 2021. Specifically, we determined that our management review controls related to valuation allowance against deferred tax assets were ineffective. Remediation In order to remediate the material weakness, we designed and implemented the following internal controls: ● We have historically engaged tax consultants to prepare and review the Company’s income tax provision. The tax consultants appointed a second tax partner as an independent reviewer to perform a final review of the tax provision work prepared by its engagement team. ● The chief financial officer performed a final review of the tax provision, which is performed at a more granular level than in the past, and performed at a sufficient level of precision. This review involves a detailed review of the tax provision schedules prepared by the tax consultants. This includes, among other procedures, assessing the completeness and accuracy of amounts included in the tax provision schedules, reconciling amounts in the tax provision schedules to the Company’s records, reviewing the mathematical accuracy of the schedules, understanding key fluctuations in the tax accounts, and reviewing that amounts recorded in the financial statements for income taxes reconciles to the tax provision schedules. We believe our material weakness related to accounting for taxes has been remediated and that our internal control processes over financial reporting were effective as of July 31, 2022. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 61 PART III Item 10. Directors and Executive Officers of the Registrant, and Corporate Governance The following is a list of our directors and executive officers along with the specific information required by Rule 14a-3 of the Securities Exchange Act of 1934: Executive Officers Jonathan Reich – Chief Executive Officer and President Yi Tsai – Chief Financial Officer and Treasurer Michael Jonas – Executive Chairman Directors Michael Jonas, Chairman of the Board Howard Jonas, Vice Chairman of the Board Mark Ghermezian Elliot Gibber Paul Packer Gregory Suess The remaining information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2022, and which is incorporated by reference herein. Corporate Governance We have included as exhibits to this Annual Report on Form 10-K certificates of our Chief Executive Officer and Chief Financial Officer certifying the quality of our public disclosure. We make available free of charge through the investor relations page of our web site ( investor.zedge.net ) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. We have adopted codes of business conduct and ethics for all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. Copies of the codes of business conduct and ethics are available on our web site. Our web site and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission. Item 11. Executive Compensation The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2022, and which is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2022, and which is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2022, and which is incorporated by reference herein. Item 14. Principal Accounting Fees and Services The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2022, and which is incorporated by reference herein. 62 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this Report: 1. Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements Consolidated Financial Statements covered by Report of Independent Registered Public Accounting Firm 2. Financial Statement Schedule. All schedules have been omitted since they are either included in the Notes to Consolidated Financial Statements or not required or not applicable. 3. Exhibits. Exhibit Numbers 10.1, 10.6, 10.7, 10.8 and 10.9 are management contracts or compensatory plans or arrangements. The exhibits listed in paragraph (b) of this item are filed, furnished, or incorporated by reference as part of this Form 10-K. Certain of the agreements filed as exhibits to this Form 10-K contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties: ● may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements; ● may apply standards of materiality that differ from those of a reasonable investor; and ● were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact. 63 (b) Exhibits. Exhibit Number Description of Exhibits 3.1(1) Third Amended and Restated Certificate of Incorporation of Zedge, Inc. 3.2(2) Second Amended and Restated By-Laws of Zedge, Inc. 4.2(3) Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 10.1(4) 2016 Stock Option and Incentive Plan, as Amended and Restated 10.2(1) Transition Services Agreement 10.3(1) Tax Separation Agreement 10.4(5) Google Services Agreement between Zedge, Inc. and Google, Inc., dated June 18, 2014 10.5(6) Marketplace for Premier Publishers Agreement between Zedge, Inc. and MoPub, Inc., dated February 20, 2013 10.6(6) Zedge Holdings, Inc. 2008 Omnibus Stock Incentive Plan, as amended and restated on November 1, 2011 10.7(1) Form of ISO Stock Option Agreement 10.8(1) Form of Nonqualified Stock Option Agreement 10.9(1) Form of Restricted Stock Agreement 10.10(7) At Market Issuance Sales Agreement among Zedge, Inc. and National Securities Corporation and H.C. Wainwright & Co., LLC, dated December 9, 2020. 10.11(8) Amended and Restated Loan Security Agreement between Zedge, Inc. and Western Alliance Bank, dated October 28, 2022 21.01* Subsidiaries of the Registrant 23.01* Consent of Friedman, LLP, Independent Registered Public Accounting Firm 23.02* Consent of Mayer Hoffman McCann CPAs, The New York Practice of Mayer Hoffman McCann P.C., Independent Registered Public Accounting Firm 31.01* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.02* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.01* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.02* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. * filed herewith. (1) Incorporated by reference to Form 10-12G/A, filed June 1, 2016. (2) Incorporated by reference to Form 10-K, filed October 28, 2019 (3) Incorporated by reference to Form 10-K/A, filed December 9, 2020. (4) Incorporated by reference to the Schedule 14A, filed November 21, 2019. (5) Incorporated by reference to Form 10-12G/A, filed April 25, 2016. (6) Incorporated by reference to Form 10-12G/A, filed May 20, 2016. (7) Incorporated by reference to Form 8-K, filed December 9, 2020. (8) Incorporated by reference to Form 8-K, filed November 1, 2022. Item 16. Form 10-K Summary. None. 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ZEDGE, INC. By: /s/ Jonathan Reich Jonathan Reich Chief Executive Officer Date: November 14, 2022 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Titles Date /s/ Jonathan Reich Chief Executive Officer November 14, 2022 Jonathan Reich (Principal Executive Officer) /s/ Yi Tsai Chief Financial Officer November 14, 2022 Yi Tsai (Principal Financial Officer and Principal Accounting Officer) /s/ Michael Jonas Director November 14, 2022 Michael Jonas /s/ Howard S. Jonas Director November 14, 2022 Howard S. Jonas /s/ Mark Ghermezian Director November 14, 2022 Mark Ghermezian /s/ Elliot Gibber Director November 14, 2022 Elliot Gibber /s/ Paul Packer Director November 14, 2022 Paul Packer /s/ Gregory Suess Director November 14, 2022 Gregory Suess 65 Zedge, Inc. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm- Friedman LLP (PCAOB ID 711) F-2 Report of Independent Registered Public Accounting Firm- Mayer Hoffman McCann CPAs, The New York Practice of Mayer Hoffman McCann P.C (PCAOB ID 199 ). F-4 Consolidated Balance Sheets as of July 31, 2022 and 2021 F-5 Consolidated Statements of Income and Comprehensive Income for the Years Ended July 31, 2022 and 2021 F-6 Consolidated Statements of Stockholders’ Equity for the Years Ended July 31, 2022 and 2021 F-7 Consolidated Statements of Cash Flows for the Years Ended July 31, 2022 and 2021 F-8 Notes to Consolidated Financial Statements F-9 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Zedge, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Zedge, Inc. (the “Company”) as of July 31, 2022, the related consolidated statement of income and comprehensive income, stockholders’ equity, and cash flow for the year ended July 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2022, and the results of its operations and its cash flow the year ended July 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Fair value measurement of contingent consideration and intangible assets acquired related to business acquisitions Description of the Matter As described in Note 6 to the financial statements, On April 12, 2022, the Company acquired 100% of the outstanding equity securities of GuruShots, Ltd. (“GuruShots”), an Israeli company that operates a platform used for its competitive photography game available across iOS, Android and the web, which included $6 million in contingent consideration, and resulted in approximately $15 million of intangible assets being recorded. The Company accounts for business combinations using the acquisition method, which requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition. The contingent consideration was estimated using a Monte Carlo simulation and the intangible assets acquired were estimated using an income approach. The fair values of intangible assets acquired are typically estimated using an income approach, which is based on the present value of future discounted cash flows or cost based methods based on estimated costs to construct an asset. Management applied significant judgment in estimating the fair value of the contingent consideration and intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the rate of future revenue growth, profitability of the acquired business and the discount rate, among other factors. F- 2 The principal considerations for our determination that performing procedures relating to the fair value measurement of the contingent consideration and intangible assets acquired related to the acquisition is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when estimating the fair values of intangible assets acquired; (ii) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of intangible assets acquired; (iii) the significant audit effort in evaluating the reasonableness of the significant assumptions relating to the rate of future revenue growth and profitability of the acquired business and the discount rate; and (iv) the audit effort involved the use of professionals with specialized skill and knowledge. How We Addressed the Matter in Our Audit Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included identifying and evaluating the design of controls relating to the acquisition accounting, including controls over management’s valuation of the intangible assets acquired and contingent consideration, and controls over the development of the valuation models, as well as the significant assumptions related to the rate of future revenue growth and profitability of the acquired business and the discount rate, and the costs to create an asset. These procedures also included, among others, (i) reading the purchase agreement; and (ii) testing management’s process for estimating the fair values of the intangible assets acquired and contingent consideration. Testing management’s process included evaluating the appropriateness of the valuation method, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions related to the rate of future revenue growth, profitability of the acquired business and the discount rate, and the estimated costs to construct the asset. Evaluating the reasonableness of the rate of future revenue growth and the profitability of the acquired business involved considering the historical performance of the acquired businesses and market comparable information, as well as economic and industry forecasts. The reasonableness of the discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the discounted cash flow models and the reasonableness of the discount rate. /s/ Friedman LLP We have served as the Company’s auditor since 2022. Marlton, New Jersey November 14, 2022 F- 3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Zedge, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Zedge, Inc. (the “Company”) as of July 31, 2021, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Mayer Hoffman McCann CPAs (The New York Practice of Mayer Hoffman McCann P.C.) We served as the Company’s auditor from 2018 to 2021. New York, New York November 9, 2021 F- 4 ZEDGE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value) July 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 17,085 $ 24,908 Trade accounts receivable 2,411 2,545 Prepaid expenses 396 160 Total current assets 19,892 27,613 Property and equipment, net 1,660 1,980 Intangible assets, net 21,025 - Goodwill 10,788 2,262 Deferred tax assets, net 861 477 Other assets 400 5,145 Total assets $ 54,626 $ 37,477 Liabilities and stockholders’ equity Current liabilities: Trade accounts payable $ 1,180 $ 585 Deferred acquisition payment payable 962 - Contingent consideration-current portion 215 - Accrued expenses and other current liabilities 2,898 1,771 Deferred revenues 3,402 1,821 Total current liabilities 8,657 4,177 Contingent consideration-long term portion 1,728 - Other liabilities 53 145 Total liabilities 10,438 4,322 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock, $ .01 par value; authorized shares— 2,400 ; no shares issued and outstanding - - Class A common stock, $ .01 par value; authorized shares— 2,600 ; 525 shares issued and outstanding at July 31, 2022 and 2021 5 5 Class B common stock, $ .01 par value; authorized shares— 40,000 ; 13,951 shares issued and 13,877 shares outstanding at July 31, 2022, and 13,923 shares issued and 13,865 outstanding at July 31, 2021 139 139 Additional paid-in capital 43,609 41,664 Accumulated other comprehensive loss ( 1,391 ) ( 997 ) Retained Earnings (Accumulated deficit) 2,160 ( 7,554 ) Treasury stock, 74 shares at July 31, 2022 and 58 shares at July 31, 2021, at cost ( 334 ) ( 102 ) Total stockholders’ equity 44,188 33,155 Total liabilities and stockholders’ equity $ 54,626 $ 37,477 The accompanying notes are an integral part of these consolidated financial statements. F- 5 ZEDGE, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands, except per share data) Year ended July 31, 2022 2021 Revenues, net $ 26,545 $ 19,569 Costs and expenses: Direct cost of revenues (exclusive of amortization of capitalized software and technology development costs included below) 1,641 1,194 Selling, general and administrative 15,061 9,311 Depreciation and amortization 1,966 1,261 Change in fair value of contingent consideration ( 3,961 ) - Income from operations 11,838 7,803 Interest and other income, net 49 245 Net loss resulting from foreign exchange transactions ( 281 ) ( 2 ) Income before income taxes 11,606 8,046 Provision for (benefit from) income taxes 1,892 ( 202 ) Net income $ 9,714 $ 8,248 Other comprehensive (loss) income: Foreign currency translation adjustment ( 394 ) 88 Total other comprehensive (loss) income ( 394 ) 88 Total comprehensive income $ 9,320 $ 8,336 Income per share attributable to Zedge, Inc. common stockholders: Basic $ 0.69 $ 0.63 Diluted $ 0.65 $ 0.59 Weighted-average number of shares used in calculation of income per share: Basic 14,177 13,156 Diluted 14,862 14,038 The accompanying notes are an integral part of these consolidated financial statements. F- 6 ZEDGE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Class A Common Stock Class B Common Stock Additional Paid-in Accumulated Other Comprehensive Retained Earnings (Accumulated Treasury Total Stockholders’ Shares Amount Shares Amount Capital Loss Deficit) Stock Equity Balance -July 31, 2020 525 $ 5 11,788 $ 118 $ 25,725 $ ( 1,085 ) $ ( 15,802 ) $ ( 76 ) $ 8,885 Net proceeds from sales of Class B Common Stock - - 1,426 14 14,421 - - - 14,435 Exercise of stock options - - 560 6 867 - - - 873 Stock-based compensation - - 142 1 612 - - - 613 Stock issued for matching contributions to the 401(k) Plan - - 7 - 39 - - - 39 Purchase of treasury stock - - - - - - - ( 26 ) ( 26 ) Foreign currency translation adjustment - - - - - 88 - - 88 Net income - - - - - - 8,248 - 8,248 Balance -July 31, 2021 525 $ 5 13,923 $ 139 $ 41,664 $ ( 997 ) $ ( 7,554 ) $ ( 102 ) $ 33,155 Exercise of stock options - - 5 - 9 - - - 9 Stock-based compensation - - 18 - 1,893 - - - 1,893 Stock issued for matching contributions to the 401(k) Plan - - 5 - 43 - - - 43 Purchase of treasury stock - - - - - - - ( 232 ) ( 232 ) Foreign currency translation adjustment - - - - - ( 394 ) - - ( 394 ) Net income - - - - - - 9,714 - 9,714 Balance – July 31, 2022 525 $ 5 13,951 $ 139 $ 43,609 $ ( 1,391 ) $ 2,160 $ ( 334 ) $ 44,188 The accompanying notes are an integral part of these consolidated financial statements. F- 7 ZEDGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended July, 31 2022 2021 Operating activities Net income $ 9,714 $ 8,248 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,966 1,261 Change in fair value of contingent consideration ( 3,961 ) - Stock-based compensation 1,936 652 Deferred income taxes ( 384 ) ( 477 ) PPP Loan forgiveness - ( 218 ) Change in assets and liabilities: Trade accounts receivable 371 ( 1,138 ) Prepaid expenses and other current assets ( 161 ) 257 Other assets ( 6 ) 232 Trade accounts payable and accrued expenses 436 830 Deferred revenue 1,581 483 Net cash provided by operating activities 11,492 10,130 Investing activities Payments for business combination, net of cash acquired ( 17,422 ) - Payments for asset acquisitions ( 917 ) ( 4,776 ) Capitalized software and technology development costs and purchase of equipment ( 611 ) ( 653 ) Investment in private company - ( 50 ) Net cash used in investing activities ( 18,950 ) ( 5,479 ) Financing activities Proceeds from sales of Class B Common Stock - 15,000 Payment of issuance costs - ( 565 ) Repayment of insurance premium loan payable - ( 181 ) Proceeds from exercise of stock options 9 873 Purchase of treasury stock in connection with restricted stock vesting ( 232 ) ( 26 ) Net cash (used in) provided by financing activities ( 223 ) 15,101 Effect of exchange rate changes on cash and cash equivalents ( 142 ) 45 Net (decrease) increase in cash and cash equivalents ( 7,823 ) 19,797 Cash and cash equivalents at beginning of period 24,908 5,111 Cash and cash equivalents at end of period $ 17,085 $ 24,908 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments made for income taxes $ 2,362 $ 1 Cash payments made for interest expenses $ - $ 3 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Contingent consideration fair value on acquisition date $ 5,904 $ - Right-of-use assets acquired under operating leases $ 86 $ - Acquisition of Emojipedia through release of escrow funds of $ 4,776 , due to seller of $ 1,923 and legal fee of $ 12 $ 6,711 $ - Accounts receivable from certain Emojipedia websites collected by Seller $ 45 $ - Note payable issued for insurance premium financing $ - $ 181 The accompanying notes are an integral part of these consolidated financial statements. F- 8 ZEDGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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”). F- 9 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 : The Company generates the bulk of its revenue from selling its Zedge App’s advertising inventory to advertising networks and advertising exchanges and direct sales to advertisers. ● 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. F- 10 Paid Subscription Revenue: Beginning in January 2019, the Company started offering monthly and yearly paid subscription services sold through Google Play. When a customer subscribes, they execute a clickthrough agreement with Zedge outlining the terms and conditions between Zedge and the subscriber. Google Play processes subscription prepayment on Zedge’s behalf, and retains up to 30% as its fee. Both monthly and yearly subscriptions are nonrefundable after a period of seven days. Paid subscriptions are automatically renewed at expiration unless cancelled by subscribers. While the customer can cancel at any time, he or she will not receive any refund but will remain entitled to receive the ad free service until the end of the subscription period. The duration of these contracts is daily, and revenue for these contracts is recognized on a daily ratable basis. The payment terms for subscriptions sold through Google Play is net 30 days after month-end. Zedge Premium : Zedge Premium is the Company’s 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, the Company’s closed virtual currency. 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 (ranging from 500 credits for $0.99 to 700,000 credits for $999.99), Google Play or iTunes retains 30% of the purchase price as its fee. When a user purchases Zedge Premium content using Zedge credits, the artist or brand receives 70% of the actual revenue after the Google Play or iTunes fee (“Royalty Payment”) and the Company receives the remaining 30%, which is recognized as revenue. Virtual goods used for online game : GuruShots generates substantially all of its revenues from selling virtual goods (or Resources) to its users. GuruShots distributes its game to the end customer through mobile platforms such as Apple and Google. Through these platforms, users can download the free-to-play game and can purchase virtual goods which are redeemed in the game to enhance their game-playing experience. 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. F- 11 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 ) as a performance metric, we record net revenue from Zedge Premium which consists of a 30% platform fee, in-app purchases profit and breakage. 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. F- 12 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. F- 13 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 , goodwill is not amortized, but instead is tested for impairment annually, or if certain circumstances indicate a possible impairment may exist. The Company determined that it is a single reporting unit for its annual impairment test. 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. F- 14 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. F- 15 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 ) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing a third-party valuation specialist. F- 16 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. There were no allowance for credit losses as of July 31, 2022 and 2021. 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 Company has elected not to recognize leases with terms of one year or less on the consolidated balance sheets. Lease obligations and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. As the interest rate implicit in lease contracts is typically not readily determinable, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has elected to combine lease components (including land, building or other similar items) and non-lease components (including common area maintenance, maintenance, consumables, or other similar items) as a single component and therefore the non-lease components are included the calculation of the present value of lease payments. The lease expense is recognized over the expected term on a straight-line basis. F- 17 Correction of Immaterial Misstatement During the third quarter of fiscal 2022, the Company determined that there were immaterial errors in its historical financial statements. The errors resulted in overstatement of the issued and outstanding shares of the Company Class B Common Stock by 626,242 shares in connection with the GuruShots Acquisition (Note 5). The Company evaluated the effect of these errors on prior periods under the guidance of the Securities Exchange Commission Staff Accounting Bulletin (“SAB”) No. 99 - Materiality, and determined the amounts were not material to any previously issued financial statements. The Company corrected these misstatements with an out-of- period adjustment during the third quarter of fiscal 2022. Recently Adopted Accounting Pronouncements In December 2019, the FASB issued Accounting Standard Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. The Company adopted this new accounting standard on August 1, 2021, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures. Recently Issued Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires consideration of forward-looking information to calculate credit loss estimates. These changes will result in an earlier recognition of credit losses. The Company’s financial assets held at amortized cost include accounts receivable. The amendments in ASU 2020-05 deferred the effective date for Topic 326 to fiscal years beginning after December 15, 2022. The Company will adopt the new standard effective August 1, 2023 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASC 350). The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The guidance is effective for the Company beginning after December 15, 2022; and aligns with the effective date of ASU 2016-13. The Company will adopt the new standard effective August 1, 2023 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers . ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities from acquired contracts using the revenue recognition guidance in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, rather than the prior requirement to record them at fair value. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company will adopt the new standard effective August 1, 2023 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. In March 2022 the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for Troubled Debt Restructurings (TDRs) by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, this ASU requires a company to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. This ASU is effective for the Company beginning July 1, 2023, and shall be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which may be applied following a modified retrospective method. Early adoption is permitted. The Company is currently assessing the impact of this ASU on the consolidated financial statements and related disclosures. F- 18 Note 2—Revenue Disaggregation of Revenue The following table summarizes revenue by type of monetization mechanisms of the Zedge App and GuruShots for the periods presented: Fiscal year ended July 31, % Change 2022 2021 YoY Advertising revenue $ 18,883 $ 15,741 20 % Virtual items used for online game 1,673 - NM Paid subscription revenue 3,741 3,311 13 % Zedge Premium revenue 827 509 62 % Emojipedia revenue 1,079 - NM AppLovin integration bonus amortization 333 - NM Other revenues 9 8 12.5 % Total revenues $ 26,545 $ 19,569 36 % nm-not meaningful Contract Balances Deferred revenues The Company records deferred revenues related to the unsatisfied performance obligations with respect to subscription revenue. As of July 31, 2022, the Company’s deferred revenue balance related to subscriptions was approximately $1.5 million, representing approximately 692 thousand active subscribers. As of July 31, 2021, the Company’s deferred revenue balance related to subscriptions was approximately $1.6 million, representing approximately 752 thousand active subscribers. The Company also records deferred revenues when users purchase or earn Zedge Credits. Unused Zedge Credits represent the value of the Company’s unsatisfied performance obligation to its users. Revenue is recognized when Zedge App users redeem Zedge Credits to acquire Zedge Premium content or upon expiration of the Zedge Credits upon 180 days of account inactivity. As of July 31, 2022, and 2021, the Company’s deferred revenue balance related to Zedge Premium was approximately $ 259 thousand and $ 218 thousand, respectively. On April 1, 2022, the Company received a one-time integration bonus for set up activities of $ 2 million from AppLovin Corporation for migrating to their mediation platform. This amount is being amortized over an estimated service period of 24 months. As of July 31, 2022, the Company’s deferred revenue balance related to integration bonus was $ 1.7 million. Total deferred revenues increased $ 1.6 million from $ 1.8 million at July 31, 2021 to $ 3.4 million at July 31, 2022, primarily due to integration bonus discussed above. Significant Judgments The advertising networks and advertising exchanges to which the Company sells its inventory track and report the impressions to Zedge and Zedge recognizes revenues based on these reports. The networks and exchanges base their payments off of those reports and Zedge independently compares the data to each of the client sites to validate the imported data and identify any differences. The number of impressions delivered by the advertising networks and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period. F- 19 Practical Expedients The Company expenses the fees retained by Google Play related to the subscriptions revenue when incurred because the duration of the contracts for which the Company pay commissions are less than one year. These costs are included in the selling, general and administrative expenses of the consolidated statements of income and comprehensive income. Note 3—Fair Value Measurements The following table presents the balance of assets and liabilities measured at fair value on a recurring basis: Level 1 Level 2 Level 3 Total (in thousands) July 31, 2022 Liabilities: Contingent consideration-short term $ - $ - $ 215 $ 215 Contingent consideration-long term $ - $ - $ 1,728 $ 1,728 Foreign exchange forward contracts $ - $ 141 $ - $ 141 July 31, 2021 Liabilities: Foreign exchange forward contracts $ - $ 54 $ - $ 54 Contingent Consideration Contingent consideration related to the business combinations discussed below in Note 6 are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. The following table provides a rollforward of the contingent consideration related to business acquisition discussed in Note 6, Business Combinations and Assets Acquisition. Fiscal years ended July 31, (in thousands) 2022 2021 Balance at beginning of year $ - $ - Additions 5,904 - Payments - - Change in fair value ( 3,961 ) - Balance at end of year $ 1,943 $ - The overall fair value of the contingent consideration decreased by $ 3.9 million during the years ended July 31, 2022, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved. Fair Value of Other Financial Instruments Fair value of the outstanding foreign exchange forward contracts are marked to market price at the end of each measurement period. The Company’s other financial instruments at July 31, 2022 and 2021 included trade accounts receivable and trade accounts payable. The carrying amounts of the trade accounts receivable and trade accounts payable approximated fair value due to their short-term nature. Note 4—Derivative Instruments The primary risk managed by the Company using derivative instruments is foreign exchange risk. Foreign exchange forward contracts are entered into as hedges against unfavorable fluctuations in the U.S. Dollar to NOK and EUR exchange rates. The Company is party to a Foreign Exchange Agreement with Western Alliance Bank allowing the Company to enter into foreign exchange contracts under its revolving credit facility with the bank (see Note 16). The Company does not apply hedge accounting to these contracts because these are not qualified as hedging accounting pursuant to ASC 815; therefore the changes in fair value are recorded in earnings. By using derivative instruments to mitigate exposures to changes in foreign exchange rates, the Company is exposed to credit risk from the failure of the counterparty to perform under the terms of the contract. The credit or repayment risk is minimized by entering into transactions with high-quality counterparties. F- 20 The outstanding contracts at July 31, 2022 were as follows: Settlement Date U.S. Dollar Amount NOK Amount Aug-22 225,000 2,000,025 Sep-22 225,000 2,000,250 Oct-22 225,000 2,000,700 Nov-22 225,000 2,000,925 Total $ 900,000 8,001,900 Settlement Date U.S. Dollar Amount EUR Amount Aug-22 225,000 202,812 Sep-22 225,000 202,484 Oct-22 225,000 202,156 Nov-22 225,000 201,848 Total $ 900,000 809,300 The fair value of outstanding derivative instruments recorded in the accompanying consolidated balance sheets were as follows: July 31, (in thousands) 2022 2021 Assets and Liabilities Derivatives: Balance Sheet Location Derivatives not designated or not qualifying as hedging instruments Foreign exchange forward contracts Accrued expenses and other current liabilities $ 141 $ 54 The effects of derivative instruments on the consolidated statements of income and comprehensive income were as follows: Amount of Loss Recognized on Derivatives Year ended July 31, (in thousands) 2022 2021 Derivatives not designated or not qualifying as hedging instruments Location of Loss Recognized on Derivatives Foreign exchange forward contracts Net loss resulting from foreign exchange transactions $ ( 368 ) $ ( 18 ) Note 5—Property and Equipment, Net Property and equipment, net consisted of the following: July 31, (in thousands) 2022 2021 Capitalized software and technology development costs $ 8,410 $ 7,845 Other 493 372 8,903 8,217 Less accumulated depreciation and amortization ( 7,243 ) ( 6,237 ) Total $ 1,660 $ 1,980 Depreciation and amortization expense pertaining to property and equipment was approximately $ 1.0 million and $ 1.3 million for the fiscal years ended July 31, 2022 and 2021, respectively. F- 21 Note 6—Business Combination and Asset Acquisition GuruShots Acquisition On April 12, 2022, the Company consummated the acquisition of 100 % of the outstanding equity securities of GuruShots, Ltd. (“GuruShots”), an Israeli company that operates a platform used for its competitive photography game available across iOS, Android and the web. The acquisition was effected pursuant to a Share Purchase Agreement (the “SPA”) between the Company, GuruShots and the holders of the GuruShots equity interests. This acquisition was accounted for as a business combination under the acquisition method of accounting and the results of operations of GuruShots have been included in the Company’s results of operations as of the acquisition date. The purchase price for the equity securities of GuruShots consists of approximately $ 18 million in cash paid at closing and contingent payments (the “Earnout”) of up to a maximum of $ 8.4 million due on each of the first and second anniversaries from the closing, payable either in cash or Class B common stock of the Company or a combination thereof, at the Company’s discretion, and subject to GuruShots achieving certain financial targets set forth in the SPA. The fair value of the earnout amount has been estimated at $ 5.9 million based on a Monte Carlo simulation model in an option pricing framework at the acquisition date, whereby a range of possible scenarios were simulated. This Earnout as part of the preliminary purchase price allocation. The liability for contingent consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. See Note 3, Fair Value Measurements , for additional discussion of contingent consideration as of July 31, 2022. In connection therewith, the Company has agreed to make certain minimum investments in user acquisition for GuruShots in the period covered by the Earnout, subject to GuruShots maintaining agreed upon levels of Return On Ad Spend (“ROAS”). In addition, the Company has committed to a retention pool of $4 million in cash and 626,242 shares of the Company Class B common stock with a fair value of $4 million or $6.39 per share (based on the volume weighted average closing prices of the Class B common stock on the NYSE American Exchange for the thirty trading days ended April 12, 2022) for GuruShots’ founders and employees that will be payable or vest, as applicable, over three years from closing based on the beneficiaries thereof remaining employed by the Company or a subsidiary. The parties to the SPA have made customary representations, warranties and covenants therein. The assertions embodied in those representations and warranties were made for purposes of the SPA and are subject to qualifications and limitations agreed by the respective parties in connection with negotiating the terms of the SPA. The cash purchase price and the earnout have been preliminarily allocated to GuruShots’ tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as the Company obtains additional information for those estimates during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill. F- 22 The Company will record measurement period adjustments based on its ongoing valuation and purchase price allocation procedures. The Company is still finalizing the valuation and purchase price allocation as it relates to the net working capital amount in the table below. The allocation of the preliminary purchase price is as follows (in thousands): (Dollar Amounts in Thousands) Purchase price consideration: Cash consideration paid at close $ 15,242 Cash contributed to escrow accounts at close 2,700 Cash deducted from purchase price and contributed to GuruShots’ working capital 58 Fair value of contingent consideration to be achieved at year 1 3,396 Fair value of contingent consideration to be achieved at year 2 2,508 Fair value of total consideration transferred 23,904 Total purchase price, net of cash acquired $ 23,384 Fair value allocation of purchase price: Cash and cash equivalents $ 520 Trade accounts receivable 282 Prepaid expenses 145 Property and equipment, net 17 Other assets (including ROU) 151 Accounts payable and accrued expenses ( 1,351 ) Operating lease liabilities, current ( 53 ) Operating lease liabilities, noncurrent ( 34 ) Acquired intangible assets 15,320 Goodwill 8,907 Total purchase price $ 23,904 The cash consideration paid includes $ 2.7 million deposited with the escrow agent that is available to satisfy for post-closing indemnification claims made within 18 months of the acquisition date. The maximum earnout of $ 16.8 million will be determined based upon the satisfaction of certain defined operational milestones and will be remeasured at fair value at each reporting period through earnings. As the fair value is based on unobservable inputs, the liabilities are included in Level 3 of the fair value measurement hierarchy. The unobservable inputs used in the determination of the fair value of the earnout which is assumed to be paid in cash include managements assumptions about the likelihood of payment based on the satisfaction of certain defined operational milestones and discount rates based on cost of debt. The Company committed to issuing 626,242 shares of the Company’s Class B common on the closing date to the founders and employees as a retention bonus pool, managed by a trustee based in Israel. These shares will vest, in equal tranches, over three years assuming that the recipients remain employed by the Company or a subsidiary through the vesting dates. The $4 million fair value of these unvested restricted stock is not included as purchase consideration above, as it has a post-combination service requirement and will be accounted for separately from the business combination as stock compensation expense. Additionally, the founders and employees are also entitled to receive $4 million retention cash bonus over three years, which was not included in the purchase price above. As of July 31, 2022, the Company has accrued $ 437 thousand in retention bonus which is included in the accrued expense and other current liabilities. Identified intangible assets consist of trade names, technology and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below: (Dollar Amounts in Thousands) Asset Value Useful Life Identified intangible assets: Trade names $ 3,570 12 years Acquired developed technology 3,950 5 years Customer relationships 7,800 10 years Total identified intangible assets $ 15,320 F- 23 The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the Relief-from-Royalty Method and Multi-period excess earnings. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the GuruShots over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate. The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed. The Company recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. The Company believes that the investment value of the future enhancement of the Company’s products and offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $ 8.9 million of goodwill, which has been reduced by $ 180,000 subsequently related to accounts payable balance as of the closing date. The goodwill is deductible for tax purposes. Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) are not included as a component of consideration transferred but are required to be expensed as incurred. During fiscal 2022, we incurred and accrued $ 860,000 of acquisition-related costs, which are included in Selling, General and Administrative expenses on the Company’s consolidated statements of income and comprehensive income. Unaudited Pro Forma Consolidated Financial Information The Company completed the acquisition for GuruShots on April 12, 2022, and accordingly, GuruShots’ operations for the period from April 13, 2022 to July 31, 2022 are included in the Company’s Consolidated statements of income and comprehensive income. GuruShots contributed revenues of approximately $1.7 million and estimated net loss of $1.7 million for the period from the completion of acquisition through July 31, 2022. The unaudited pro forma financial information for the fiscal years ended July 31, 2022 and 2021 presented below has been calculated after adjusting the results of Zedge and GuruShots to reflect the business combination accounting effects resulting from this acquisition, including acquisition costs and the amortization expense from acquired intangible assets as though the acquisition occurred on August 1, 2020. The historical consolidated financial statements have been adjusted in the pro forma financial statements to give effect to pro forma events that are directly attributable to the business combination. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020. Year ended July 31, 2022 2021 Revenue $ 31,506 $ 28,154 Net income $ 7,111 $ 3,648 The unaudited pro forma financial information includes the following adjustments, net of any tax impacts: (i) incremental amortization expense recognized based on fair value of intangible assets recorded upon acquisition of GuruShots; (ii) incremental compensation expense related to the vesting of retention awards to GuruShots employees consisting of restricted stock awards and cash payments; and (iii) the reversal of historical fair value adjustments and interest expense recorded on GuruShots’ convertible notes that were settled on the acquisition date. (iv) Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period. F- 24 Emojipedia Acquisition Pursuant to an Asset Purchase Agreement, on August 1, 2021 (“Closing”), the Company consummated the acquisition of substantially all of the assets of Emojipedia Pty Ltd, a proprietary company organized under the laws of Australia. The total purchase price of the assets has been determined to be $6.7 million of which $4.8 million was paid on August 2, 2021 and $917,000 was paid on February 1, 2022, with the remaining $962,000 to be paid out on the twelve-month anniversary of the Closing. The $ 4.8 million was funded into an escrow account on July 30, 2021 and classified as other assets on our balance sheet as of July 31, 2021. The assets purchased include emojipeida.org, a set of smaller websites, a bank of emoji related URLs related to the seller’s business, including World Emoji Day, the annual World Emoji Awards, and Emojitracker. The asset purchase does not qualify as a business combination under FASB ASC 805, Business Combinations , and has therefore been accounted for as an asset acquisition. The total purchase price for this acquisition was allocated to intangible assets are amortized on a straight-line basis over their estimated useful lives of fifteen years. Note 7—Intangible Assets, Net and Goodwill The following table presents the detail of intangible assets, net as of July 31, 2022 and 2021 (in thousands): Gross Carrying Value Accumulated Amortization Net Carrying Value Balance at July 31, 2021 $ - $ - $ - Emojipedia.org and other internet domains acquired 6,711 447 6,264 Acquired developed technology 3,950 238 3,713 Customer relationships 7,800 233 7,567 Trade names 3,570 89 3,481 Balance at July 31, 2022 $ 22,031 $ 1,007 $ 21,025 Amortization expense of intangible assets for the fiscal years ended July 31, 2022 and 2021 were approximately $ 1.0 million and $ 0 , respectively. Estimated future amortization expense as of July 31, 2022 is as follows (in thousands): Fiscal 2023 2,315 Fiscal 2024 2,315 Fiscal 2025 2,315 Fiscal 2026 2,315 Fiscal 2027 2,315 Thereafter 9,450 Total $ 21,025 F- 25 Goodwill The Company’s goodwill related to acquisitions is carried on the balance sheet of Zedge Europe AS and GuruShots Ltd. The table below reconciles the change in the carrying amount of goodwill for the period from July 31, 2020 to July 31, 2022: (in thousands) Carrying Amount Balance at July 31, 2020 $ 2,196 Foreign currency translation adjustments 66 Balance at July 31, 2021 2,262 Goodwill acquired during the period 8,907 Measurement period adjustment ( 180 ) Foreign currency translation adjustments ( 201 ) Balance at July 31, 2022 $ 10,788 Note 8—Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: July 31, (in thousands) 2022 2021 Accrued vacation $ 585 $ 424 Accrued income taxes payable 169 264 Accrued payroll taxes 214 291 Accrued payroll and bonuses 1,084 374 Accrued expenses 262 - Operating lease liability-current portion 142 86 Derivative liability for foreign exchange contracts 141 54 Due to artists 301 246 Other - 32 Total accrued expenses and other current liabilities $ 2,898 $ 1,771 Note 9—Equity Class A Common Stock and Class B Common Stock 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. The holders of Class A common stock and Class B common stock have the right to receive identical dividends per share if and when declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock. F- 26 Note 10—Commitments and Contingencies Commitments In connection with the acquisition of GuruShots, the Company has (i) committed to a retention pool of $ 4 million in cash to be paid to the founders and employees of GuruShots that will be payable over three years from closing of the acquisition based on the beneficiaries thereof remaining employed by the Company or a subsidiary; and (ii) agreed to make certain minimum investments in user acquisition for GuruShots in the period covered by the earnout to be contingently paid to the prior owners of GuruShots subject to GuruShots maintaining agreed upon levels of return on ad spend (ROAS). Legal Proceedings The Company may from time to time be subject to legal proceedings that arise in the ordinary course of business. Although there can be no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition. Note 11— Operating Leases The Company has operating leases primarily for office space located in Trondheim, Norway. Operating lease right-of-use assets recorded and included in other assets were approximately $ 139,000 and $ 243,000 at July 31, 2022 and 2021, respectively. In connection with the GuruShots acquisition, the Company also acquired approximately $ 86,000 of right-of-use assets related to its office space in Tel Aviv and assumed approximately $ 86,000 lease liabilities as of April 12, 2022. As of July 31, 2022, right-of-use assets and lease liability were approximately $ 65,000 and $ 65,000 , respectively. The following table presents the lease-related assets and liabilities for leases recorded on the consolidated balance sheets (in thousands) as of July 31, 2022 and 2021: As of July 31, 2022 2021 Operating leases: Other assets $ 204 $ 243 Other current liabilities $ 142 $ 86 Other liabilities 53 145 Total operating lease liabilities $ 195 $ 231 The following table summarizes the weighted average remaining lease term and weighted average discount rate as of July 31, 2022 and 2021: As of July 31, 2022 2021 Weighted average remaining lease term: Operating leases 2.67 years 1.50 years Weighted average discount rate: Operating leases 1.00 % 5.36 % Future minimum lease payments under non-cancellable leases at July 31, 2022 are as follows (in thousands): Years ending July 31, Operating Leases 2023 $ 149 2024 68 Total future minimum lease payments 217 Less imputed interest 7 Total $ 210 As of July 31, 2022, the Company did not have any leases that have not yet commenced that create significant rights and obligations. F- 27 Note 12—Income Taxes The components of income before income taxes are as follows: Fiscal year ended July 31, (in thousands) 2022 2021 Domestic $ 12,009 $ 7,629 Foreign ( 403 ) 417 Income before income taxes $ 11,606 $ 8,046 Provision for (benefit from) income taxes consisted of the following: Fiscal year ended July 31, (in thousands) 2022 2021 Current: Foreign $ 60 $ 30 Federal 2,163 239 State 53 6 Total current expense 2,276 275 Deferred: Foreign 44 ( 44 ) Federal ( 507 ) ( 253 ) State 79 ( 180 ) Total deferred expense ( 384 ) ( 477 ) Provision for (benefit from) income taxes $ 1,892 $ ( 202 ) The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes reported were as follows: Fiscal year ended July 31, (in thousands) 2022 2021 U.S federal income tax at statutory rate $ 2,437 $ 1,690 State tax (net of federal benefit) 120 5 Change in valuation allowance - ( 1,601 ) Foreign tax rate differential ( 12 ) ( 10 ) Change in fair value of contingent consideration ( 832 ) - Other 179 ( 286 ) Provision for (benefit from) income taxes $ 1,892 $ ( 202 ) On March 27, 2020, the CARES Act was signed into law. The Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. Most of these provisions are either not applicable or have no material effect on the Company. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) contains a provision which subjects a U.S parent of a foreign subsidiary to current U.S. tax on its global intangible low-taxed income (“GILTI”). The GILTI income is eligible for a deduction, which lowers the effective tax. The Company will report the tax impact of GILTI as a period cost when incurred. Accordingly, the Company is not providing deferred taxes for basis differences expected to reverse as GILTI. U.S Companies are eligible for a deduction that lowers the effective tax rate on certain foreign income. This regime is referred to as the Foreign-Derived Intangible Income deduction (“FDII”). F- 28 Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows: July 31, (in thousands) 2022 2021 Deferred tax assets: Net operating loss carryforwards (Foreign) $ 1,840 $ 44 Net operating loss carryforwards (State) 66 168 Reserves and accruals 240 163 Stock-based compensation 313 157 Depreciation and amortization 57 - Others 240 - Net deferred tax assets 2,756 532 Less valuation allowance ( 1,895 ) ( 55 ) Total deferred tax assets $ 861 $ 477 At July 31, 2022 and 2021, the Company had no available U.S. federal NOL carryforwards from domestic operations to offset future taxable income. At July 31, 2022 and 2021, the Company had available U.S. state NOL carryforwards from domestic operations of approximately $ 0.9 million and $ 1.7 million, respectively, to offset future taxable income. The state NOL carryforwards will begin to expire in 2039 At July 31, 2022 and 2021, the Company had available Norwegian NOL carryforwards of approximately $ 0 and $ 201,000 , respectively, to offset future taxable income. In addition, the Company has approximately $ 8 million of Foreign NOLs (Israel) which is available to offset Israel’s future taxable income without time limit. Due to its financial performance during fiscal 2022 the Company believes that it is more-likely-than-not that substantially all of the deferred tax assets except certain foreign net operating loss carryforward and capital loss carryforward will be realized. Therefore, the Company has released the valuation allowance on deferred tax assets other than those stated above in fiscal 2021. The change in the valuation allowance is as follows: Fiscal year ended July 31, (in thousand) Balance at beginning of year Additions related to GuruShots acquisition Deductions Balance at end of year 2022 Reserves deducted from deferred income taxes, net: Valuation allowance $ 55 $ 1,840 $ - $ 1,895 2021 Reserves deducted from deferred income taxes, net: Valuation allowance $ 1,974 $ - $ ( 1,919 ) $ 55 At July 31, 2022 and 2021, the Company did not have any unrecognized tax benefits and does not anticipate any significant changes to the unrecognized tax benefits within twelve months of this reporting date. In the fiscal years ended July 31, 2022 and 2021, the Company recorded no interest and penalties on income taxes. At July 31, 2022 and 2021, there was no accrued interest included in income taxes payable. The Company currently remains subject to examinations of its U.S. tax returns as follows: U.S. federal tax returns for fiscal 2019 to fiscal 2021, state and local tax returns generally for fiscal 2019 to fiscal 2021 and foreign tax returns generally for fiscal 2020 to fiscal 2021. In connection with the Spin-Off, the Company and IDT entered into various agreements prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with IDT after the Spin-Off, and a Tax Separation Agreement, which sets forth the responsibilities of the Company and IDT with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to Separation and Distribution Agreement, among other things, the Company indemnifies IDT and IDT indemnifies the Company for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, IDT indemnifies the Company from all liability for taxes of the Company and any of its subsidiaries or relating to its business with respect to taxable periods ending on or before the Spin-Off, and the Company indemnifies IDT from all liability for taxes of the Company and any of its subsidiaries or relating to its business accruing after the Spin-Off. Notwithstanding the foregoing, the Company is responsible for, and IDT has no obligation to indemnify the Company for, any tax liability of the Company resulting from an audit, examination or other proceeding related to any tax returns that relate solely to it and its subsidiaries regardless of whether such tax return relates to a period prior to or following the Spin-Off. F- 29 Note 13—Stock-Based Compensation 2016 Stock Option and Incentive Plan The Company adopted the Zedge, Inc. 2016 Stock Option and Incentive Plan (as amended to date, the “2016 Incentive Plan”). The 2016 Incentive Plan is intended to provide incentives to executive officers, employees, directors and consultants of the Company. Incentives available under the 2016 Incentive Plan include restricted stock, deferred stock unit, stock options and stock appreciation rights. The 2016 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors. Pursuant to the 2016 Incentive Plan, the option exercise price for all stock option awards that are designated as “Incentive Stock Options” must not be less than the Fair Market Value of the shares of Class B Common Stock covered by the option award on the date of grant. In general, Fair Market Value means the closing sale price per share of Class B Common Stock on the exchange on which the Class B Common Stock is principally traded for the last preceding date on which there was a sale of Class B Common Stock on such exchange. On November 10, 2021, the Company’s Board of Directors amended the 2016 Incentive Plan to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 325,000 shares to an aggregate of 1,846,000 shares. This amendment was ratified by the Company’s stockholders at the Annual Meeting of Stockholders held on January 12, 2022. On March 23, 2022, the Company’s Board of Directors amended the 2016 Incentive Plan to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 685,000 shares to an aggregate of 2,531,000 shares, including 685,000 shares for the GuruShots retention pool. The Company expects to submit the amendment for ratification by the Company’s stockholders at the Annual Meeting of Stockholders to be held in January 2023. At July 31, 2022, there were 489,000 shares of Class B common stock available for awards under the 2016 Incentive Plan before accounting for the approximately 204,000 contingently issuable shares related to the deferred stock units (“DSUs”) with both service and market conditions. The Company recognizes stock-based compensation for stock-based awards, including stock options, restricted stock and DSUs based on the estimated fair value of the awards and recognizes over the relevant service period. The Company estimates the fair value of stock options on the measurement date using the Black-Scholes option valuation model (“BSM”). The Company estimates the fair value of restricted stock and DSUs with service conditions only using the current market price of the stock. The Company estimates the fair value of DSUs with both service and market conditions using the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. The Company recognizes stock-based compensation 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. F- 30 In fiscal 2022 and fiscal 2021, the Company recognized stock-based compensation for its employees and non-employees as follows: Fiscal year ended July 31, (in thousands) 2022 2021 Selling, general and administrative $ 1,936 $ 652 In the fiscal years ended July 31, 2022 and 2021 there were $ 85,000 and $ 105,000 , respectively, income tax benefit resulting from tax deductions in excess of the compensation cost recognized for the Company’s stock-based compensation. Stock Options The Company’s option awards generally have a maximum term of 10 years from grant date, are exercisable upon vesting unless otherwise designated for early exercise by the Board of Directors at the time of grant and are pursuant to individual written agreements. Grants generally vest over a three-year or four -year period. In fiscal years 2022 and 2021, the Compensation Committee approved equity grants of options to purchase 60,000 and 189,000 shares respectively of the Company’s Class B common stock to various executives, consultants and employees, vesting mostly over a three-year or four-year period. Unrecognized compensation expense related to these grants were $ 587,000 and $ 774,000 in fiscal 2022 and 2021 respectively based on the estimated fair value of the options on the grant dates. In fiscal 2022, the Company received proceeds of $ 8,631 from the exercise of stock options for which the Company issued 5,166 shares of its Class B common stock. In fiscal 2021, the Company received proceeds of $ 873,261 from the exercise of stock options for which the Company issued 559,840 shares of its Class B common stock. The Company cancelled or forfeited options grants of 41,000 shares and 13,000 shares in fiscal 2022 and fiscal 2021 respectively primarily due to employee resignations or layoffs. The fair value of stock options was estimated on the date of the grant using a Black-Scholes valuation model and the assumptions in the following table. Expected volatility is based on historical volatility of the Company’s Class B common stock. The Company uses the simplified method to estimate the expected term of the stock-based payments granted due to the limited history of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. F- 31 The Company used the following weighted average assumptions in its BSM pricing model: Fiscal year ended July 31, 2022 2021 Expected term 6.0 years 6.0 years Volatility 92.0 % 92.3 % Risk free interest rate 1.8 % 0.7 % Dividends — — The following represents option activity for the fiscal years ended July 31, 2022 and 2021, including options granted prior to our separation from our former parent in a spin-off on June 1, 2016 and options granted under the 2016 Incentive Plan adopted on June 2, 2016: Stock Options Weighted- Average Remaining Aggregate Number of Weighted- Contractual Intrinsic Options (in thousands) Average Exercise Price Term (in years) Value (in thousands) Outstanding at July 31, 2020 1,227 $ 1.76 5.95 $ 402 Granted 189 5.40 Exercised ( 560 ) 1.56 Cancelled / forfeited ( 13 ) 1.48 Outstanding at July 31, 2021 843 $ 2.72 6.76 $ 10,657 Granted 60 8.80 Exercised ( 5 ) 1.67 Cancelled / forfeited ( 41 ) 11.02 Outstanding at July 31, 2022 857 $ 2.76 5.88 $ 763 Exercisable at July 31, 2022 648 $ 2.09 5.07 $ 646 The following table summarizes the weighted average grant date fair value of options granted, intrinsic value of options exercised and fair value of awards vested in the periods indicated: July 31, (in thousands except per share amounts) 2022 2021 Weighted average grant date fair value of options granted $ 6.64 $ 4.09 Intrinsic value of options exercised $ 29 $ 3,978 Fair value of awards vested $ 216 $ 135 At July 31, 2022, there was approximately $ 587,000 of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.9 years. At July 31, 2021, there was $ 774,000 of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 3.2 years. F- 32 Restricted Stock In connection with the GuruShots acquisition, the Company committed to issue 626,242 shares of the Company’s Class B common stock with a grant date fair value of $ 4 million on the closing date to the founders and employees as a retention bonus pool which is managed by a trustee based in Israel. These shares will vest, in equal tranches, over three years assuming that the recipients remain employed by the Company or a subsidiary through the vesting dates. In fiscal 2022, the Company has amortized $ 444 thousands in stock-based compensation expenses related to these shares. In fiscal 2021, the Compensation Committee and the Corporate Governance Committee of our Board of Directors approved a grant of 92,593 restricted shares of the Company’s Class B Common Stock to our Executive Chairman Michael Jonas. Mr. Jonas agreed to accept all of his compensation for his service as Executive Chairman during fiscal 2021 in the form of equity in the Company and to make receipt of such equity compensation contingent on the Company achieving certain milestones relative to its fiscal 2021 budget. The grant was made at that time because the milestones previously set were achieved. These shares shall vest in equal amounts on February 7, 2022, 2023 and 2024.These shares had an aggregate grant date fair value of $ 350,000 which is being amortized on a straight-line basis over the vesting period. In fiscal 2021, the Compensation Committee approved a grant of 10,619 restricted shares of Class B Common Stock to each of Mr. Elliot Gibber and Mr. Howard Jonas which were fully vested upon grant. These shares had an aggregate grant date fair value of $ 30,000 and have been fully amortized accordingly. In fiscal 2021, the Company granted 10,869 restricted shares of its Class B common stock, which vested immediately, to its non-employee Board of Directors at an average grant date fair value of $ 8.22 per share . At July 31, 2022, there were 688,000 non-vested restricted shares of the Company’s Class B common stock. At July 31, 2022, there was $ 3.7 million of total unrecognized compensation cost related to these non-vested restricted shares, which is expected to be recognized over a weighted-average period of 2.6 years. At July 31, 2021, there were 127,300 non-vested restricted shares of the Company’s Class B common stock. At July 31, 2021, there was $ 288,000 of total unrecognized compensation cost related to these non-vested restricted shares, which is expected to be recognized over a weighted-average period of 2.4 years. In fiscal 2022 and fiscal 2021, there were 65,000 shares and 92,000 shares vested. In connection with this vesting, the Company purchased 11,665 shares and 12,005 shares respectively of Class B Stock from certain employees for $ 161,000 and $ 18,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock. The following represents restricted shares activity for the fiscal years ended July 31, 2022 and 2021: Number of Shares Weighted Average Grant Date Fair Value Non-vested stock award as of July 31, 2020 105,128 $ 2.30 Granted 113,831 3.34 Vested ( 91,659 ) 2.24 Forfeited - - Non-vested stock award as of July 31, 2021 127,300 $ 3.27 Granted (GuruShots retention bonus shares) 626,242 6.39 Vested ( 65,101 ) 2.80 Forfeited - - Non-vested stock award as of July 31, 2022 688,441 $ 6.15 Deferred Stock Units On September 7, 2021, the Company granted a total of 291,320 DSUs to 64 of its employees and consultants. Each DSU represents the right to receive one share of the Company’s Class B common stock. F- 33 30% of the DSU’s (or 87,396) have service vesting conditions only, with a vesting schedule of 25% on September 7, 2022, 33% on September 7, 2023, and remaining on September 7, 2024. Vesting of the remaining 70% of the DSUs (or 203,924) is subject to continued service as well as a market condition. These DSUs will vest if the grantee remains in service to the Company and only if the aggregate market capitalization of the Company’s equity securities has reached or exceeded $451 million for five consecutive trading days between the grant date and the vest date. Subject to satisfaction of both of those conditions, these DSU’s with both service and market conditions have a vesting schedule of 25% September 7, 2022, up to 58% (the 25% eligible to vest in 2022 and an additional 33%) on September 7, 2023, and up to 100% on September 7, 2024. In the event the market capitalization condition has not been met prior to a vesting date, but is met by a subsequent vesting date, all DSUs with a market condition eligible for vesting prior to that date shall vest. In the event that the market capitalization condition has not been met by September 7, 2024, the DSUs with a market condition shall expire. In fiscal 2022, the Company purchased 4,450 shares of Class B Common Stock from various employees for $ 72,000 to satisfy tax withholding obligations in connection with the vesting of DSUs. In fiscal 2021, the Company purchased 5,625 shares of Class B Stock from various employees for $ 8,000 to satisfy tax withholding obligations in connection with the vesting of DSUs. The following represents restricted shares activity for the fiscal years ended July 31, 2022 and 2021: Weighted Average Grant Number of Shares Date Fair Value Non-vested DSU award as of July 31, 2020 60,544 $ 1.56 Granted - - Vested ( 17,044 ) 1.60 Forfeited ( 6,000 ) 1.54 Non-vested DSU award as of July 31, 2021 37,500 $ 1.54 Granted (1) 291,320 9.60 Vested ( 12,500 ) 1.54 Forfeited ( 33,720 ) 8.64 Non-vested DSU award as of July 31, 2022 282,600 $ 9.00 (1) Includes 203,924 DSUs (or 70 % of total awards) of which vesting are subject to both service and market condition. The DSUs with both service and market conditions were valued using a Monte Carlo Simulation valuation model, with a valuation of $ 7.19 per DSU. Total grant date fair value for these DSUs was approximately $ 1.5 million. The unrecognized compensation expense is being recognized on a graded vesting method over the vesting period. The DSUs with a service condition had a grant date fair value of $ 1.3 million. The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period. At July 31, 2022, there were 282,600 non-vested DSUs and the unrecognized compensation expense related to unvested DSUs was an aggregate of $ 1.5 million which is expected to be recognized over a weighted-average period of 1.9 years. F- 34 Note 14—Related Party Transactions 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 publicly-held company. IDT and the Company are controlled by members of the same family. Following the Spin-Off, IDT charges the Company for services it provides, and the Company charges IDT for services it provides, pursuant to a Transition Services Agreement (“TSA”). In fiscal 2022 and 2021 the Company was charged by IDT a total of $ 118,000 and $ 113,000 , respectively, for legal services. In addition, the Company charged IDT approximately $ 167,000 and $ 144,000 , respectively, for consulting services provided to IDT by a Zedge employee. As of July 31, 2022, the Company owed IDT $ 1,000 and as of July 31, 2021, IDT owed the Company $ 6,000 . The activities between the Company and IDT were as follows: Fiscal years ended July 31, (in thousands) 2022 2021 Balance at beginning of year $ ( 6 ) $ ( 39 ) Legal services provided by IDT 118 113 Consulting services provided to IDT ( 167 ) ( 144 ) Cash payments received from IDT 56 64 Cash payments made to IDT - - Due to (from) IDT* $ 1 $ ( 6 ) * Due to (from) IDT is included in accrued expenses and other current liabilities or prepaid expenses The Company is party to a consulting agreement with Activist Artist Management, LLC (“Activist”), which assists the company in strategic business development. A member of the Company’s Board of Directors owns a significant minority stake in Activist. Under the terms of the agreement, which was amended as of August 1, 2020, the Company pays Activist $ 3,750 per month, plus possible commissions. On June 7, 2022 the Company’s Board approved a $ 65,000 advisory fee to Activist in connection with the GuruShots acquisition. In addition, the Board approved the increase in monthly retainer from $ 3,750 to $ 5,000 per month retroactive from April 1, 2022. In aggregate the Company paid approximately $ 114,000 and $ 41,000 respectively, to Activist in the fiscal years ended July 31, 2022 and 2021, respectively. In the fiscal years ended July 31, 2022 and 2021, the Company paid $30,000 and $0 , respectively, to Braze Inc. (formerly “Appboy, Inc.”) for use of its customer relationship management and lifecycle marketing platform. The former Chief Executive Officer and Co-Founder of Braze, Inc. is a member of the Company’s Board of Directors. Note 15—Segment and Geographic Information Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer as of July 31, 2022. Based on the criteria established by ASC 280, Segment Reportin g, the Company has one operating and reportable segment. F- 35 Net long-lived assets and total assets held outside of the United States, which are located primarily in Israel and Norway, were as follows: United States Foreign Total (in thousands) Long-lived assets, net: July 31, 2022 $ 7,818 $ 15,217 $ 23,035 July 31, 2021 $ 1,900 $ 399 $ 2,299 Total assets: July 31, 2022 $ 26,229 $ 28,397 $ 54,626 July 31, 2021 $ 32,745 $ 4,732 $ 37,477 Note 16—Revolving Credit Facility As of September 27, 2016, the Company entered into a loan and security agreement with Western Alliance Bank for a revolving credit facility of up to $ 2.5 million for an initial two-year term which was extended twice for another two two-year term expired September 26, 2022 (“Existing Agreement”), which was extended through October 28, 2022 (see Note 20). At the Company’s request in September 2020, advances under this facility have been reduced to the lesser of $2.0 million or 80% of the Company’s eligible accounts receivable, subject to certain concentration limits. The revolving credit facility is secured by a lien on substantially all of the Company’s assets. Effective with the September 2020 extension, the outstanding principal amount bears interest per annum at the greater of 3.5% or the prime rate plus 1.25%. Previously the interest rate was capped at 5.0%. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date of September 26, 2022. The Company is required to pay an annual facility fee of $ 10,000 to Western Alliance Bank. The Company is also required to comply with various affirmative and negative covenants and to maintain certain financial ratios during the term of the revolving credit facility. The covenants include a prohibition on the Company paying any dividend on its capital stock. The Company may terminate this agreement at any time without penalty or premium provided that it pays down any outstanding principal, accrued interest and bank expenses. At July 31, 2022 and 2021, there were no amounts outstanding under the revolving credit facility and the Company was in compliance with all of the covenants. As of November 16, 2016, the Company entered into a Foreign Exchange Agreement with Western Alliance Bank to allow the Company to enter into foreign exchange contracts not to exceed $5.0 million in the aggregate at any point in time under its revolving credit facility. This limit was raised to approximately $6.5 million pursuant to the Loan and Security Modification Agreement dated May 30, 2018. The available borrowing under the revolving credit facility is reduced by an applicable foreign exchange reserve percentage as determined by Western Alliance Bank, in its reasonable discretion from time to time, which was initially set at 10% of the nominal amount of the foreign exchange contracts in effect at the relevant time. At July 31, 2022, there were $ 1.8 million of outstanding foreign exchange contracts under the credit facility, which reduced the available borrowing under the revolving credit facility by $ 180,000 (see Note 4 above). Note 17—Defined Contribution Plan In September 2016, the Company adopted a 401(k) Plan, effective August 1, 2016, available to all employees meeting certain eligibility criteria. The Plan permits participants to elect pre-tax or after-tax salary deferrals that will be contributed to the Plan, not to exceed the limits established by the Internal Revenue Code. The Plan provides for enhanced safe harbor employer matching contributions. All contributions made by participants and safe harbor matching contributions by the Company will be fully vested. The Company’s Class A common stock and Class B common stock are not investment options for elective deferrals by the Plan’s participants. However, matching contributions may be made in shares of the Company. The Company’s cost for matching contributions to the Plan were $ 43,000 and $ 39,000 for the fiscal years ended July 31, 2022 and 2021, respectively. In lieu of making cash contributions, the Company opted to contribute 4,812 shares and 6,572 shares of the Company’s Class B common stock to the Plan for fiscal 2022 and fiscal 2021, respectively. F- 36 Note 18—Insurance Loan and PPP Loan Payable Effective August 1, 2020, the Company obtained a loan of $ 181,462 to pay for its insurance coverages, repayable in nine equal installments of $ 20,491 starting from September 1, 2020 which represented a 3.89 % annual percentage interest rate. There were no outstanding balance as of July 31, 2022 and July 31, 2021. The Company obtained a loan under the Payroll Protection Program (PPP) of the CARES Act in the amount of $ 218,000 loan from Western Alliance Bank, a loan servicer and the Company’s lender (see Note 16), on April 22, 2020. The Company used these proceeds in full for payroll purposes for its U.S. based employees during the covered period provided under the PPP. Any portion of the loan that is not forgiven would have been due two years after inception of the loan. On November 25, 2020, the Company submitted the PPP Loan Forgiveness Application Form 3508EZ and on May 21, 2021, the Company was notified that such application for the loan forgiveness has been approved and the loan, including accrued interest, has been deemed satisfied in full by the Small Business Administration to Western Alliance Bank. The Company therefore recorded a gain of forgiveness of debt of $ 218,000 which is included in interest and other income, net on the consolidated statements of income and comprehensive income. Note 19—Sales of Class B Common Stock The Company filed with the SEC a Registration Statement on Form S-3 (the “Form S-3”) on November 30, 2020 which became effective on December 4, 2020 to facilitate capital raising. The Registration Statement registered the issuance and sale by the Company of Class B common stock or related securities for gross proceeds to the Company of up to $ 20 million. On November 30, 2020, the Company engaged National Securities Corp. and H.C. Wainwright & Co, LLC (the “Sales Agents”) to act as the Company’s exclusive co-Sales Agents in connection with the Company’s “at-the-market” offering of shares of the Company’s Class B common stock up to $5 million. The Company filed a Prospectus Supplement (supplementing the Prospectus included in the Form S-3) on December 9, 2020 and contemporaneously entered into an At The Market Offering Agreement with the Sales Agents (the “ATM Sales Agreement”), pursuant to which the Company sold 761,906 shares at an average price of $6.5625 per share for total proceeds of $5 million as of January 28, 2021. In connection with this offering, the Company incurred a total issuance cost of $215,000. On March 16, 2021, the Company filed a prospectus supplement with the SEC which contemplates the sale, for a gross aggregate sale price of up to $ 10,000,000 , of shares of the Company’s Class B common stock, from time to time in “at the market offerings” pursuant to an At Market Issuance Sales Agreement with National Securities Corporation and Maxim Group LLC (the “New Sales Agents”), dated as of March 16, 2021 (the “New ATM Sales Agreement”), pursuant to which we sold 663,686 shares at an average price of $ 15.0674 per share for total proceeds of $ 10 million. In connection with this offering, we incurred a total issuance cost of $ 350,000 . Note 20—Subsequent Events Term Loan and Revolving Credit Facility with Western Alliance Bank On October 28, 2022, the Company entered into an Amended and Restated Loan and Security Agreement (“Amended Loan Agreement”) with Western Alliance Bank. Pursuant to the Amended Loan Agreement, Western Alliance Bank agreed to provide the Company with a new term loan facility in the maximum principal amount of $7,000,000 for a four-year term and a $4,000,000 revolving credit facility for a two-year term. Amounts outstanding under the term loan and credit facility of the Amended Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 0.5%, with a Prime “floor” rate of 4.00%. F- 37 Pursuant to the Amended Loan Agreement, the Company discontinued the existing $ 2,000,000 revolving credit facility under the existing Loan and Security Agreement, dated as of September 26, 2016 (See Note 16), as amended, restated, supplemented and otherwise modified from time to time prior to the date of the Amended Loan Agreement. At the time of the discontinuance, there was no outstanding balance on the revolving credit facility. Pursuant to the Amended Loan Agreement, $ 2,000,000 was advanced in a single-cash advance on or about the closing date, with the remaining $ 5,000,000 available for drawdown during twenty-four (24) months after closing. Each drawdown must be in an amount of not less than One Million Dollars ($ 1,000,000 ). Interest accrued under the Amended Loan Agreement is due monthly, and the Company shall make monthly interest-only payments related to the term loan through the eighteen (18) month anniversary of the closing date. From the nineteen (19) month anniversary of the Closing Date through the maturity date, the Company shall repay each outstanding term loan by paying the Applicable Term Advance Amortization Payment equal to 1/12 th of 10 % of the outstanding term loan balance plus monthly payments of accrued interest, in each case payable on the tenth (10th) day of each month. Zedge’s final payment for each Term Advance, due on the Term Loan Maturity Date, shall include all outstanding principal of and accrued and unpaid interest on such Term Advance. Once repaid, a Term Advance may not be reborrowed. The Amended Loan Agreement may also require early repayments if certain conditions are met. The Amended Loan Agreement is secured by substantially all of the assets of the Company, its subsidiaries, and certain of its affiliates. The Amended Loan Agreement includes the following financial covenants: a) Debt Service Coverage Ratio . Zedge shall maintain, at all times, a Debt Service Coverage Ratio of no less than 1.25 to 1.00. This covenant shall be tested quarterly as of the end of each fiscal quarter. F- 38 b) Maximum Debt to EBITDA . Zedge shall maintain, at all times, a ratio of (a) indebtedness owed by Zedge to Western Alliance Bank, to (b) Zedge’s EBITDA for the trailing twelve (12) month period ended on such date of determination, shall not be greater than the amount set forth under the heading “Maximum Debt to EBITDA Ratio” as of, and for each of the dates appearing adjacent to such Maximum Debt to EBITDA Ratio”. Maximum Debt to Quarter Ending EBITDA Ratio October 31, 2022 1.75 to 1.00 January 31, 2023 1.75 to 1.00 April 30, 2023 1.75 to 1.00 July 31, 2023 1.75 to 1.00 October 31, 2023 1.25 to 1.00 January 31, 2024 1.25 to 1.00 April 30, 2024 1.25 to 1.00 July 31, 2024 1.25 to 1.00 Thereafter To be agreed upon The Amended Loan Agreement also includes customary negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default. Foreign Exchange Forward Contracts On September 21, 2022 the Company entered into the following foreign exchange forward contracts with Western Alliance Bank: Settlement Date U.S. Dollar Amount NOK Amount Dec-22 225,000 2,297,948 Jan-23 225,000 2,296,103 Feb-23 225,000 2,294,685 Mar-23 225,000 2,293,065 Apr-23 225,000 2,291,355 May-23 225,000 2,317,545 Total $ 1,350,000 13,790,701 Settlement Date U.S. Dollar Amount EUR Amount Dec-22 225,000 222,332 Jan-23 225,000 221,653 Feb-23 225,000 221,195 Mar-23 225,000 220,826 Apr-23 225,000 220,459 May-23 225,000 220,070 Total $ 1,350,000 1,326,535 Issuer Repurchases of Equity Securities Our Board of Directors authorized a buyback program, effective December 1, 2021, of up to 1.5 million shares of our Class B common stock. The Company did not purchase any shares under this buyback program in fiscal 2022. Through November 10, 2022, the Company had purchased 160,002 shares of Class B common stock at an average price of $ 2.26 per share under this program. F-39