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, 2023. 60 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, 2023. 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, 2023. 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, 2023. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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, 2023, 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, 2023, 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, 2023, 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, 2023, 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, 2023, 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 UHY, LLP, Independent Registered Public Accounting Firm 23.02* Consent of Friedman, LLP, 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* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * 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: October 30, 2023 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 October 30, 2023 Jonathan Reich (Principal Executive Officer) /s/ Yi Tsai Chief Financial Officer October 30, 2023 Yi Tsai (Principal Financial Officer and Principal Accounting Officer) /s/ Michael Jonas Director October 30, 2023 Michael Jonas /s/ Howard S. Jonas Director October 30, 2023 Howard S. Jonas /s/ Mark Ghermezian Director October 30, 2023 Mark Ghermezian /s/ Elliot Gibber Director October 30, 2023 Elliot Gibber /s/ Paul Packer Director October 30, 2023 Paul Packer /s/ Gregory Suess Director October 30, 2023 Gregory Suess 65 Zedge, Inc. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm- UHY LLP (PCAOB ID 1195) F-2 Report of Independent Registered Public Accounting Firm- Friedman LLP (PCAOB ID 711 ) F-4 Consolidated Balance Sheets as of July 31, 2023 and 2022 F-5 Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the Years Ended July 31, 2023 and 2022 F-6 Consolidated Statements of Stockholders’ Equity for the Years Ended July 31, 2023 and 2022 F-7 Consolidated Statements of Cash Flows for the Years Ended July 31, 2023 and 2022 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, 2023, and the related consolidated statements of loss and comprehensive loss, stockholders’ equity, and cash flows for the fiscal year ended July 31, 2023, 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, 2023, and the results of its operations and its cash flows for the fiscal year ended July 31, 2023, 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 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 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated 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 consolidated 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 consolidated 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. Definite-Lived Intangible Assets Impairment Assessment – GuruShots Asset Group As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated net definite-lived intangible assets balance consisted of primarily of $5.8 million of Emojipedia.org assets and $12.9 million of the GuruShots asset group as of July 31, 2023. The GuruShots asset group consisted of acquired developed technology, customer relationships, and trade names. Management tests the definite-lived intangible assets if events or circumstances indicate that the asset group may not be recoverable. Definite-lived intangible assets are tested for recoverability by comparing the net carrying value of the asset group to the undiscounted cash flows expected to be generated from the use of the asset group. If the net carrying value of the definite-lived intangible assets is not recoverable, an impairment loss is recognized if the carrying amount of the asset group exceeds its fair value. Given the triggering events identified with the GuruShots asset group, management compared the net carrying value of the GuruShots asset group to the projected undiscounted cash flows of the asset group. Using this method, management’s cash flow projections included significant judgments and assumptions relating to sales, cost of platform fees, selling, general and administrative expenses (“SG&A expenses”), long-term growth rates, and other market factors. F- 2 The principal considerations for our determination that performing procedures relating to the definite-lived intangible assets impairment assessment is a critical audit matter are (i) the significant judgment by management when developing the fair value measurements of the definite-lived intangible assets; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to sales, cost of platform fees, SG&A expenses, long-term growth rates, and other market factors. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s definite-lived intangible assets impairment assessment, including controls over the valuation of the Company’s definite-lived intangible assets. These procedures also included, among others (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the projected undiscounted cash flows approach; (iii) testing the completeness and accuracy of underlying data used in the fair value estimates; and (iv) evaluating the significant assumptions used by management related to sales, cost of platform fees, SG&A expenses, long-term growth rates, and other market factors. Evaluating management’s assumptions related to sales, cost of platform fees, SG&A expenses, long-term growth rates, and other market factors involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the individual definite-lived intangible assets; (ii) the consistency of the data and assumptions utilized with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. /s/ UHY LLP We have served as the Company’s auditor since 2023. New York, New York October 30, 2023 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, 2022, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the twelve-month period 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 flows for the twelve-month period 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. /s/ Friedman LLP We served as the Company’s auditor from January 2022 through February 2023. November 14, 2022 F- 4 ZEDGE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value) July 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 18,125 $ 17,085 Trade accounts receivable 2,883 2,411 Prepaid expenses and other receivables 569 396 Total current assets 21,577 19,892 Property and equipment, net 2,186 1,660 Intangible assets, net 18,709 21,025 Goodwill 1,961 10,788 Deferred tax assets, net 1,842 861 Other assets 556 400 Total assets $ 46,831 $ 54,626 Liabilities and stockholders’ equity Current liabilities: Trade accounts payable $ 669 $ 1,180 Deferred acquisition payment payable - 962 Contingent consideration-current portion - 215 Accrued expenses and other current liabilities 2,676 2,898 Deferred revenues 2,414 3,402 Total current liabilities 5,759 8,657 Term loan, net of deferred financing costs 1,985 - Contingent consideration-long term portion - 1,728 Other liabilities 223 53 Total liabilities 7,967 10,438 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, 2023 and 2022 5 5 Class B common stock, $ .01 par value; authorized shares— 40,000 ; 14,634 shares issued and 13,801 shares outstanding at July 31, 2023, and 13,951 shares issued and 13,877 outstanding at July 31, 2022 146 139 Additional paid-in capital 46,122 43,609 Accumulated other comprehensive loss ( 1,537 ) ( 1,391 ) (Accumulated deficit) retained earnings ( 3,942 ) 2,160 Treasury stock, 833 shares at July 31, 2023 and 74 shares at July 31, 2022, at cost ( 1,930 ) ( 334 ) Total stockholders’ equity 38,864 44,188 Total liabilities and stockholders’ equity $ 46,831 $ 54,626 The accompanying notes are an integral part of these consolidated financial statements. F- 5 ZEDGE, INC. CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (in thousands, except per share data) Year ended July 31, 2023 2022 Revenues $ 27,241 $ 26,545 Costs and expenses: Direct cost of revenues (exclusive of amortization of capitalized software and technology development costs included below) 2,242 1,641 Selling, general and administrative 21,857 15,061 Depreciation and amortization 3,269 1,966 Goodwill impairment 8,727 - Change in fair value of contingent consideration ( 1,943 ) ( 3,961 ) (Loss) income from operations ( 6,911 ) 11,838 Interest and other income, net 311 49 Net income (loss) resulting from foreign exchange transactions 36 ( 281 ) (Loss) income before income taxes ( 6,564 ) 11,606 (Benefit from) provision for income taxes ( 462 ) 1,892 Net (loss) income $ ( 6,102 ) $ 9,714 Other comprehensive loss: Foreign currency translation adjustment ( 146 ) ( 394 ) Total other comprehensive loss ( 146 ) ( 394 ) Total comprehensive (loss) income $ ( 6,248 ) $ 9,320 (Loss) income per share attributable to Zedge, Inc. common stockholders: Basic $ ( 0.43 ) $ 0.69 Diluted $ ( 0.43 ) $ 0.65 Weighted-average number of shares used in calculation of income per share: Basic 14,096 14,177 Diluted 14,096 14,862 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 Stock Total Stockholders’ Shares Amount Shares Amount Capital Loss Deficit) Shares Amount Equity Balance – July 31, 2021 525 $ 5 13,923 $ 139 $ 41,664 $ ( 997 ) $ ( 7,554 ) 58 $ ( 102 ) $ 33,155 Exercise of stock options - - 5 - 9 - - - - 9 Stock-based compensation - - 23 - 1,936 - - - - 1,936 Purchase of treasury stock - - - - - - - 16 ( 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 74 ( 334 ) 44,188 Exercise of stock options - - 1 - 1 - - - - 1 Restricted stock issuance in connection with GuruShots acquisition - - 575 6 ( 6 ) - - - - - Stock-based compensation - - 107 1 2,518 - - - - 2,519 Purchase of treasury stock - - - - - - - 759 ( 1,596 ) ( 1,596 ) Foreign currency translation adjustment - - - - - ( 146 ) - - - ( 146 ) Net loss - - - - - - ( 6,102 ) - - ( 6,102 ) Balance – July 31, 2023 525 $ 5 14,634 $ 146 $ 46,122 $ ( 1,537 ) $ ( 3,942 ) 833 $ ( 1,930 ) $ 38,864 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 2023 2022 Operating activities Net (loss) income $ ( 6,102 ) $ 9,714 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 60 48 Amortization of intangible assets 2,316 1,008 Amortization of capitalized software and technology development costs 893 910 Amortization of deferred financing costs 3 - Change in fair value of contingent consideration ( 1,943 ) ( 3,961 ) Loss on goodwill impairment 8,727 - Stock-based compensation 2,519 1,936 Deferred income taxes ( 981 ) ( 384 ) Change in assets and liabilities: Trade accounts receivable ( 472 ) 371 Prepaid expenses and other current assets ( 173 ) ( 161 ) Other assets 14 ( 6 ) Trade accounts payable and accrued expenses ( 711 ) 436 Deferred revenue ( 988 ) 1,581 Net cash provided by operating activities 3,162 11,492 Investing activities Payments for business combination, net of cash acquired - ( 17,422 ) Payments for asset acquisitions ( 962 ) ( 917 ) Capitalized software and technology development costs ( 1,406 ) ( 566 ) Purchase of property and equipment ( 54 ) ( 45 ) Net cash used in investing activities ( 2,422 ) ( 18,950 ) Financing activities Proceeds from term loan payable 2,000 - Payment of deferred financing costs ( 18 ) - Proceeds from exercise of stock options 1 9 Purchase of treasury stock in connection with share buyback program and stock awards vesting ( 1,596 ) ( 232 ) Net cash provided by (used in) financing activities 387 ( 223 ) Effect of exchange rate changes on cash and cash equivalents ( 87 ) ( 142 ) Net increase (decrease) in cash and cash equivalents 1,040 ( 7,823 ) Cash and cash equivalents at beginning of period 17,085 24,908 Cash and cash equivalents at end of period $ 18,125 $ 17,085 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments made for income taxes $ 795 $ 2,362 Cash payments made for interest expenses $ 118 $ - 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 , plus additional amounts due to seller of $ 1,923 and legal fees of $ 12 $ - $ 6,711 Accounts receivable from certain Emojipedia websites collected by Seller $ - $ 45 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 as well as pAInt, a generative AI wallpaper maker, GuruShots, a skill-based photo challenge game, and Emojipedia, the #1 trusted source for ‘all things emoji’. Our vision is to enable and connect creators who enjoy friendly competitions with a community of prospective consumers in order to drive commerce. Except where the context clearly indicates otherwise, the terms the “Company,” “Zedge” “we,” “us” or “our” refer to Zedge, Inc. and its consolidated subsidiaries. Our fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2023 refers to the fiscal year ended July 31, 2023). The Spin-Off The Company was formerly a majority-owned subsidiary of IDT Corporation (“IDT”). On June 1, 2016, IDT spun off its interest in the Company to IDT’s stockholders and the Company became an independent public company through a pro rata distribution of the Company’s common stock held by IDT to IDT’s stockholders (the “Spin-Off”). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Reportable Segments Effective August 1, 2022, we revised the presentation of segment information to reflect our acquisition of GuruShots (see Note 6, Business Combination and Asset Acquisition, for additional information). As such, we now report operating results through two reportable segments: Zedge Marketplace and GuruShots, as further discussed in Note 15, Segment and Geographic Information . Use of Estimates The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ materially from our estimates due to risks and uncertainties, including uncertainty in the economic environment due to various global events. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Revenue Recognition We generate revenue from the following sources: (1) Advertising; (2) Paid Subscription; (3) Other revenues including primarily Zedge Premium, the section of our marketplace where we offer premium content (i.e., for purchase), and (4) Digital Goods and Services (from the GuruShots acquisition). The substantial majority of our revenue is generated from selling its advertising inventory (“Advertising Revenue”) to advertising networks, advertising exchanges, and direct arrangements with advertisers. Our monthly and yearly subscriptions allow users to prepay a fixed fee to remove unsolicited advertisements from its Android Zedge App in January 2019 and iOS Zedge App users that began in April 2023. In Zedge Premium, we receive 30 % as a fee when users purchase licensed content using Zedge Credits or unlock licensed content by watching a video or taking a survey on Zedge Premium. Sales and other similar taxes are excluded from revenues. F- 9 Advertising Revenue : We generate the bulk of our revenue from selling the Zedge Marketplace’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, we 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. We had no direct sales of advertising during fiscal 2023 and 2022 and have no current expectation that this will represent a material portion of its sales in the near term. We recognize advertising revenue as advertisements are delivered to users through impressions or ad views (depending on the terms agreed upon with the advertiser). For in-app display ads, in-app offers, engagement advertisements and other advertisements, our performance obligations are satisfied over the life of the relevant contract (i.e., over time), with revenue being recognized as advertising units are delivered, which is Zedge’s performance obligation. The advertiser may compensate us on a cost-per-impression, cost-per-click, cost-per-action basis. Paid Subscription Revenue: Beginning in January 2019 and April 2023, we started offering monthly and yearly paid subscription services sold through Google Play and App Store, respectively. When a customer subscribes, they execute a clickthrough agreement with Zedge outlining the terms and conditions between Zedge and the subscriber. Google Play and App Store process subscription prepayment on Zedge’s behalf, and retain a fee of up to 30 %. 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. The payment terms for subscriptions sold through App Store is net 45 days after month-end. Zedge Premium : Zedge Premium is our marketplace where artists and brands can market, distribute and sell their digital content to Zedge’s users. The content owner sets the price and the end user can purchase the content by paying for it with Zedge Credits, our closed virtual currency. 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 App Store retains a fee of 30% of the purchase price. 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 we receive the remaining 30%, which is recognized as revenue. Digital Goods and Services : GuruShots generates substantially all of its revenues by selling virtual goods (ex. power-ups, in-game resources) to its users. GuruShots distributes its game to the end customer through mobile platforms such as Apple’s App Store and Google Play, as well as via the web. 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. F- 10 Players can pay for their virtual item purchases through various widely accepted payment methods offered in the game. Payments from players for virtual goods are required at the time of purchase, are non-cancellable and relate to non-cancellable contracts that specify GuruShots’ obligations and cannot be redeemed for cash nor exchanged for anything other than virtual goods within the GuruShots’ game. The purchase price is a fixed amount which reflects the consideration that GuruShots expects to be entitled to receive in exchange for use of virtual goods by its customers. The platform providers collect proceeds from the game players and remit the proceeds to GuruShots after deducting their respective platform fees. Sales and other taxes collected from customers on behalf of governmental authorities are accounted for on a net basis and are not included in revenues or operating expenses. GuruShots’ performance obligation is to display the virtual goods in game play based upon the nature of the virtual item. GuruShots categorizes its virtual goods as consumable. GuruShots’ game sells only consumable virtual goods. Consumable virtual goods represent items that can be consumed by a specific player action and do not provide the player any continuing benefit following consumption. GuruShots has determined through a review of game play behavior that players generally do not purchase additional virtual goods until their existing virtual goods balances have been substantially consumed. This review includes an analysis of game players’ historical play behavior, purchase behavior, and the amounts of virtual goods outstanding. Revenue is recognized once the virtual goods are sold. GuruShots monitors its analysis of customer play behavior on a quarterly basis. As discussed above, GuruShots concluded that revenue related to the promise of enhancing users’ gaming experience through in-game resource purchases should be recognized ratably over the period of benefit period (i.e., the period over which the enhanced gaming experience is provided). However, for practical reasons, GuruShots does not defer the portion of revenue attributable to future uses of Resources as of any given balance sheet date. This is due to the duration of the enhanced gaming experience that is provided being, in substantially all of the cases, and applying the portfolio approach (as GuruShots reasonably expects that the effects on the financial statements of applying ASC 606 guidance to the portfolio would not differ materially from applying ASC 606 guidance to the individual contracts), a very short time frame ranging from a few hours to less than two weeks. Therefore, the result of recognizing the related revenues at the point in time which user first consumes the respective resource would yield a result that is not substantially different then ratable recognition over the period of benefit. Accordingly, revenue is recognized once the virtual goods are sold. Gross Versus Net Revenue Recognition We report revenue on a gross or net basis based on management’s assessment of whether we act as a principal or agent in the transaction. To the extent we act as the principal, revenue is reported on a gross basis. To the extent we act as the agent, revenue is reported on a net basis. The determination of whether we act as a principal or an agent in a transaction is based on an evaluation of whether we control the good or service prior to transfer to the customer. We generally report our advertising revenue net of amounts due to agencies and brokers because we are not the primary obligor in the relevant arrangements, we do not finalize the pricing, and we do not establish or maintain a direct relationship with the advertiser. Certain advertising arrangements that are directly between us and advertisers are recognized on a gross basis equal to the price paid to us by the customer since we are the primary obligor and we determine the price. Any third-party costs related to such direct relationships are recognized as direct cost of revenues. GuruShots is primarily responsible for providing the virtual goods, has control over the content and functionality of games and has the discretion to establish the virtual goods’ prices. Therefore, GuruShots is the principal and, accordingly revenues are recorded on a gross basis. Payment processing fees paid to platform providers are recorded within selling, general and administrative expenses. We report subscription revenue gross of the fee retained by Google Play and App Store, as the subscriber is our customer in the contract and we control the service prior to the transfer to the subscriber. With respect to Zedge Premium, Zedge, as provider of the platform, is effectively operating as a broker or intermediary connecting online content providers with the end user. While we use gross revenue ( net of the 30% fee retained by Google Play or App Store when a user purchases Zedge Credits ) 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. F- 11 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. We routinely assess the financial strength of our customers. As a result, we believe that our accounts receivable credit risk exposure is limited and have not experienced significant write-downs in our accounts receivable balances. In the fiscal year ended July 31, 2023, two customers represented 26 % and 16 % of our revenue. In the fiscal year ended July 31, 2022, two customers represented 28 % and 15 % of our revenue. At July 31, 2023, two customers represented 36 % and 18 % of our accounts receivable balance and at July 31, 2022, three customers represented 41 %, 17 % and 16 % of our accounts receivable balance. All of these significant customers are advertising exchanges operated by leading companies, and the receivables represent many smaller amounts due from advertisers. Direct Cost of Revenues Direct cost of revenues for the Company consists of fees paid to third parties that provide the Company with internet hosting, content serving and filtering, data analytic tools and marketing automation services. Such costs are charged to expense as incurred. Property and Equipment, net Property and equipment is recorded at cost less accumulated depreciation and amortization, and depreciated 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 Software and technology development activities generally fall into three stages: 1 Planning Stage activities include developing a project or business plan that outlines the goals for the content distribution platform or new product or service; determining the functionality; identifying hardware and software applications that will achieve functionality, security, and traffic flows; and selecting the internal resources that will be assigned to the project as well as the external vendors where applicable. 2 Application and Infrastructure Development Stage activities focus on acquiring or developing hardware and software to operate a content distribution platform or new product and service; and 3 Post-Implementation/Operating Stage activities address training, administration, maintenance, and all other activities to operate an existing content distribution platform or new product or service. During the Planning Stage, we charge all costs to expense as incurred. During the Application and Infrastructure Development Stage, we begin to capitalize costs when the project has been properly authorized and we determine that completion is probable. If a project is subsequently cancelled prior to placement in service, costs that have been capitalized to date will be reviewed for potential impairment. Capitalization ceases no later than the point at which a computer software project is substantially complete and ready for its intended use. Amortization, which is generally over three years, begins for each project when the code is ready for use, whether or not it is actually placed in service at that time (an exception being if the project’s functionality completely depends on the completion of another project, in which case, amortization begins when that other project is ready for use). During the Post-Implementation/Operating Stage, we expense training costs and maintenance costs as incurred. However, upgrades and enhancements, defined as modifications to existing internal-use software that result in additional functionality (modifications to enable the software to perform tasks that it was previously incapable of performing, normally requiring new software specifications and perhaps a change to all or part of the existing software specifications) are treated as though they were new projects, and are assessed utilizing the same stages and criteria on a project-by-project basis. As such, internal costs incurred for upgrades and enhancements are expensed or capitalized based on the requirements noted above, while costs incurred for maintenance are expensed as incurred. These projects are tracked individually, such that the beginning and ending of the capitalization can be appropriately established, as well as the amounts capitalized therein. Amortization of these costs is included in depreciation and amortization in the statement of comprehensive income. F- 12 Business Combinations and Contingent Consideration We account for business combination using the acquisition method of accounting. We allocate the purchase price, including contingent considerations, to the tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values at the date of acquisition. The fair values are primarily based on third-party valuations using our management assumptions that require significant judgments and estimates. 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, we 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 (loss) income and comprehensive (loss) income. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made. For contingent consideration, we update these estimates and the related fair value of contingent consideration using a Monte Carlo simulation at each reporting period based on the estimated probability of achieving the earn-out targets and applying a discount rate that measures the risk associated with the expected contingent payments. Changes in the fair value can result from changes pertaining to the achievement of the defined milestones and changes in assumed discount rates. Changes in the fair value of contingent consideration are recorded in our consolidated statements of (loss) income and comprehensive (loss) income. To the extent our estimates change in the future regarding the likelihood of achieving these targets, we would need to record adjustments to our contingent consideration liabilities. The inputs used to calculate the fair value of the contingent consideration liabilities are considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. See Note 3, Fair Value Measurement, for additional disclosure regarding fair value of financial instruments. Intangible Assets-Net We test the recoverability of its intangible assets (see Note 7, Intangible Assets, Net and Goodwill , for additional information) with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We test 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, we will record an impairment loss, if any, based on the difference between the estimated fair value and the carrying value of the asset. We generally measure 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, we 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. We review identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. There were no impairment charges recorded in the fiscal years ended July 31, 2023 and 2022 presented in the accompanying consolidated financial statements. Goodwill Goodwill represents the excess of purchase price and related costs over the fair value of assets acquired and liabilities assumed of the business acquired. Under ASC 350, Intangibles-Goodwill and Other , goodwill is not amortized, but instead is tested for impairment annually, or if certain circumstances indicate a possible impairment may exist. We test goodwill for impairment on the first day of the fourth fiscal quarter or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired. Goodwill is assigned to our reporting units, which are our operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available, and for which segment management regularly reviews the operating results. During the annual impairment review process we have the option to first perform a qualitative assessment (commonly referred to as “step zero”) over relative events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, or to perform a quantitative assessment (“step one”) where we estimate the fair value of each reporting unit using primarily a market capitalization approach. F- 13 We would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Additionally, we consider income tax effects from any tax-deductible goodwill on the carrying amount of its reporting unit when measuring the goodwill impairment loss, if applicable. We performed an interim impairment test during the third quarter of fiscal 2023 and concluded that the carrying value of the GuruShots reporting unit exceeded its fair value. Accordingly, we recorded a non-cash goodwill impairment charge of $ 8.7 million during the third quarter of fiscal 2023. See Note 7, Intangible, Net and Goodwill , for additional information. 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, 2023, 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 (loss) income and comprehensive (loss) 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 $ 12.2 million and $ 0 in cash equivalents as of July 31, 2023 and 2022, respectively. Income Taxes The accompanying consolidated 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 basis. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax assets and liabilities, projected future taxable income and tax planning strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change. 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. F- 14 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 (loss) income and comprehensive (loss) 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 Equity , the rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. As such, the Company is not required to break out EPS by class. The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following (in thousands): Fiscal Year Ended July 31, 2023 2022 Basic weighted-average number of shares 14,096 14,177 Effect of dilutive securities: Stock options - 570 Non-vested restricted Class B common stock - 97 Deferred stock units - 18 Diluted weighted-average number of shares 14,096 14,862 F- 15 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, 2023 2022 Stock options 832 75 Non-vested restricted Class B common stock 400 - Deferred stock units 237 234 Shares excluded from the calculation of diluted earnings per share 1,469 309 For the fiscal year ended July 31, 2023, the diluted earnings per share equals basic earnings per share because the Company incurred a net loss during this period and the impact of the assumed exercise of stock options and vesting of restricted stock and deferred stock units (“DSUs”) would have been anti-dilutive. Stock-Based Compensation We account for our share-based compensation arrangements in accordance with ASC 718, “Compensation-Stock Compensation” (“ASC 718”) which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values 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 (loss) income and comprehensive (loss) 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. 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 income (loss) resulting from foreign exchange transactions” in the consolidated statements of (loss) income and comprehensive (loss) income. F- 16 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 (loss) income and comprehensive (loss) 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 income (loss) resulting from foreign exchange transactions” in the accompanying consolidated statements of (loss) income and comprehensive (loss) 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, 2023 and 2022. 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 materially approximate 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 the practical expedient 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 (see Note 6, Business Combination and Asset Acquisition ). 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. Recent Accounting Pronouncements We considered all recent accounting pronouncements and concluded they are not expected to have a material impact on our consolidated financial statements. Note 2—Revenue Disaggregation of Revenue The following table summarizes revenue by type of monetization for the Zedge Marketplace and GuruShots for the periods presented: Fiscal Years Ended July 31, 2023 2022 % Changes (in thousands) Zedge Marketplace Advertising revenue $ 18,273 $ 20,296 - 10.0 % Paid subscription revenue 3,488 3,741 - 6.8 % Other revenues 833 835 - 0.2 % Total Zedge App revenue 22,594 24,872 - 9.2 % GuruShots Digital goods and services* 4,647 1,673 177.8 % Total revenue $ 27,241 $ 26,545 2.6 % * Since April 12, 2022 Closing Date. Contract Balances Deferred revenues The Company records deferred revenues related to the unsatisfied performance obligations with respect to subscription revenue. As of July 31, 2023, the Company’s deferred revenue balance related to subscriptions was approximately $1.5 million, representing approximately 638,000 active subscribers, including 11,000 active subscribers on the iOS platform. As of July 31, 2022, the Company’s deferred revenue balance related to subscriptions was approximately $1.5 million, representing approximately 692,000 active subscribers on the Android platform. 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, 2023, and 2022, the Company’s deferred revenue balance related to Zedge Premium was approximately $ 255 thousand and $ 259 thousand, respectively. F- 18 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, 2023 and 2022, the Company’s deferred revenue balance related to this integration bonus was $ 667 thousand and $ 1.7 million, respectively. The amount of deferred revenue recognized in fiscal 2023 that was included in the deferred revenue balance at July 31, 2022 was $ 2.7 million. 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. Practical Expedients The Company expenses the fees retained by Google Play and App Store 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 (loss) income and comprehensive (loss) 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 Level 4 July 31, 2023 Assets: Foreign exchange forward contracts $ - $ 19 $ - $ 19 July 31, 2022 Liabilities: Contingent consideration-short term $ - $ - $ 215 $ 215 Contingent consideration-long term $ - $ - $ 1,728 $ 1,728 Foreign exchange forward contracts $ - $ 141 $ - $ 141 Contingent Consideration Contingent consideration related to the business combinations discussed below in Note 6, Business Combination and Asset Acquisition are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. F- 19 The following table provides a rollforward of the contingent consideration related to business acquisition discussed in Note 6, Business Combinations and Assets Acquisition. Total Current Long-Term Balance at July 31, 2021 $ - - - Additions 5,904 3,396 2,508 Change in fair value ( 3,961 ) ( 3,181 ) ( 780 ) Balance at July 31, 2022 1,943 215 1,728 Change in fair value ( 1,943 ) ( 215 ) ( 1,728 ) Balance at July 31, 2023 $ - $ - $ - The overall fair value of the contingent consideration decreased by $ 1.9 million during the fiscal year ended July 31, 2023, primarily due 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, 2023 and 2022 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 Revolving Credit Facility ). 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. The outstanding contracts at July 31, 2023 were as follows: Settlement Date U.S. Dollar Amount NOK Amount Aug-23 225,000 2,267,100 Sep-23 225,000 2,263,388 Oct-23 225,000 2,260,238 Nov-23 225,000 2,256,750 Dec-23 225,000 2,253,285 Jan-24 225,000 2,249,730 Feb-24 225,000 2,246,265 Mar-24 225,000 2,242,823 Apr-24 225,000 2,240,550 May-24 225,000 2,237,738 Total 2,250,000 22,517,865 Settlement Date U.S. Dollar Amount EUR Amount Aug-23 225,000 207,852 Sep-23 225,000 207,526 Oct-23 225,000 207,240 Nov-23 225,000 206,935 Dec-23 225,000 206,555 Jan-24 225,000 206,271 Feb-24 225,000 205,893 Mar-24 225,000 205,611 Apr-24 225,000 205,386 May-24 225,000 205,142 Total 2,250,000 2,064,410 F- 20 The fair value of outstanding derivative instruments recorded in the accompanying consolidated balance sheets were as follows: July 31, (in thousands) 2023 2022 Assets and Liabilities Derivatives: Balance Sheet Location Derivatives not designated or not qualifying as hedging instruments Foreign exchange forward contracts Other current assets $ 19 $ - Foreign exchange forward contracts Accrued expenses and other current liabilities $ - $ 141 The effects of derivative instruments on the consolidated statements of (loss) income and comprehensive (loss) income were as follows: Fiscal Year Ended July 31, Amount of Loss Recognized on Derivatives 2023 2022 Derivatives not designated or not qualifying as hedging instruments Location of income (loss) recognized on derivatives (in thousands) Foreign exchange forward contracts Net income (loss) resulting from foreign exchange transactions 14 $ ( 368 ) Note 5—Property and Equipment, Net Property and equipment, net consisted of the following: July 31, (in thousands) 2023 2022 Capitalized software and technology development costs $ 9,518 $ 8,410 Other 457 493 9,975 8,903 Less accumulated depreciation and amortization ( 7,789 ) ( 7,243 ) Total $ 2,186 $ 1,660 Depreciation and amortization expense pertaining to property and equipment was approximately $ 953 thousand and $ 958 thousand for the fiscal years ended July 31, 2023 and 2022, 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., 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 specified financial targets set forth in the SPA. The fair value of the earnout amount at the acquisition date was estimated at $ 5.9 million based on a Monte Carlo simulation model in an option pricing framework, whereby a range of possible scenarios were simulated. This fair value was reduced from $ 5.9 million to $ 1.9 million as of July 31, 2022 and further reduced to $ 0 as of July 31, 2023. See Note 3, Fair Value Measurements . Under the SPA, the Company agreed to make certain minimum investments in user acquisition for GuruShots during the period covered by the Earnout, subject to, among other conditions, the acquired users generating minimum levels of Return On Ad Spend (“ROAS”) as set forth in the SPA. The Company was prepared to make the minimum investment, however, GuruShots was unable to achieve those minimum ROAS target conditions. GuruShots’ financial performance during the period from the April 2022 acquisition through July 31, 2023, was materially impacted by a combination of industry specific, macroeconomic, and geopolitical challenges that contributed to negatively impacting ROAS. The conditions for payment of the Earnout for the first year following the acquisition were not met and no Earnout payment was made. One of the prior owners of GuruShots has objected to that determination. The Company has responded to the objection in great detail and believes the assertion to be without merit. In addition to the cash payment at closing and the contingent Earnout, the Company has committed to a retention pool of $4 million in cash and 626,242 shares of the Company Class B common stock (the number of shares was determined based on a value of $4 million or $6.39 per share which was the volume weighted average closing prices of the Class B common stock on the NYSE American Exchange for the sixty trading days ended April 12, 2022) for GuruShots’ founders and employees that will be payable or vest, as applicable, over three years from April 1, 2022, based on the beneficiaries thereof remaining employed by the Company or a subsidiary. On April 17, 2023, 205,618 shares were vested with a fair value of $ 1.93 per share. On May 8, 2023, an aggregate of $ 1.3 million in retention bonuses was paid in cash. The parties to the SPA made various representations, warranties and covenants subject to the qualifications and limitations agreed by the respective parties in the SPA. On September 26, 2023, the Company noticed a claim for indemnification regarding material inaccuracies in certain of those representations and warranties. The Company does not currently know how this matter will be resolved and cannot make any assertions as to any eventual outcome. The cash purchase price and the earnout have been 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. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill which was $ 8.9 million at closing. F- 22 The Company recorded a measurement period adjustment of $ 180,000 in the three month period ended July 31, 2022 which reduced the goodwill balance from $ 8.9 million to $ 8.7 million. The Company wrote off the remaining goodwill balance and recorded a loss on goodwill impairment of $ 8.7 million in the fiscal year ended July 31, 2023 as discussed below in Note 7, Intangible Assets, Net and Goodwill . 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. There were no claims outstanding as of July 31, 2023. The earnout amount to be paid (up to the maximum of $ 8.4 million in each of the two annual post-acquisition all earnout periods) is determined based upon the satisfaction of certain defined operational milestones and will be remeasured at fair value at each reporting period through earnings. The conditions were not satisfied for the first annual earnout period and no payment was made. 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 management’s reasonable assumptions about the likelihood of payment based on the satisfaction of certain defined operational milestones and discount rates based on cost of debt. Please see Note 3, Fair value measurement . The Company has issued 575,099 (net of forfeiture of 51,143 shares for employees who left the Company) shares of the Company’s Class B common in respect of the retention pool to the GuruShots founders and employees, which are held by a trustee based in Israel. These shares will vest over three years from April 1, 2023 assuming that the recipients remain employed by the Company or a subsidiary through the vesting dates, 205,618 shares vested on April 1, 2023. The grant date fair value of these unvested restricted stock of $4 million 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 an aggregate of up to $4 million retention cash bonus over three years subject to the same continued service requirement, which was not included in the purchase price above. F- 23 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 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 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 was subsequent reduced by $ 180,000 as of July 31, 2022 and then to $ 0 as of July 31, 2023 as discussed below in Note 7, Intangible Assets, Net and Goodwill . Of the 8.7 million of goodwill impairment loss recorded in the third quarter of fiscal 2023, $ 2.8 million 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 approximately $ 860,000 of acquisition-related costs, which are included in Selling, General and Administrative expenses on the Company’s consolidated statements of (loss) income and comprehensive (loss) income. Unaudited Pro Forma Consolidated Financial Information The unaudited pro forma financial information for all periods presented below has been calculated after adjusting the results of a combined 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 information below reflects adjustments to Zedge’s historical consolidated 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 F- 24 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. 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 was $6.7 million, of which $4.8 million was paid on August 2, 2021, $917,000 was paid on February 1, 2022, and the remaining $962,000 paid on August 1, 2022. The $ 4.8 million was funded into an escrow account and classified as other assets on our consolidated 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. 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, 2023 and 2022 (in thousands): July 31, 2023 July 31, 2022 Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value Emojipedia.org and other internet domains acquired 6,711 894 5,817 6,711 446 6,265 Acquired developed technology 3,950 1,028 2,922 3,950 238 3,712 Customer relationships 7,800 1,013 6,787 7,800 233 7,567 Trade names 3,570 387 3,183 3,570 89 3,481 Total intangible assets $ 22,031 $ 3,322 $ 18,709 $ 22,031 $ 1,006 $ 21,025 Amortization expense of intangible assets for the fiscal years ended July 31, 2023 and 2022 were approximately $ 2.3 million and $ 1.0 million, respectively. F- 25 Estimated future amortization expense as of July 31, 2023 is as follows (in thousands): Fiscal 2024 2,315 Fiscal 2025 2,315 Fiscal 2026 2,315 Fiscal 2027 2,315 Fiscal 2028 2,315 Thereafter 7,134 Total $ 18,709 Goodwill Goodwill represents the difference between the purchase price and the fair value of assets and liabilities acquired in a business combination (see Note 6, Business Combination and Asset Acquisition ). The Company reviews goodwill annually, or more frequently whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered, for impairment by initially considering qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of reporting unit is less than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform a quantitative analysis. The Company may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis. The Company has two reporting units and assesses impairment based upon qualitative factors and if necessary, quantitative factors. A reporting unit’s fair value is determined using the income approach and discounted cash flow models by utilizing Level 3 inputs and assumptions such as future cash flows, discount rates, long-term growth rates, market value and income tax considerations. Specifically, the value of each reporting unit is determined on a stand-alone basis from the perspective of a market participant and represents the price estimated to be received in a sale of the reporting unit in an orderly transaction between market participants at the measurement date. The Company then reconciles the values of all reporting units to the market capitalization of the Company. Interim Impairment Assessment The Company performs its annual goodwill impairment tests on the first day of fiscal 4 th quarter in accordance with ASC 350-20-35-28. In light of a significant and sustained decline in the Company’s Class B common stock price, circumstances became evident that a possible goodwill impairment existed since the last annual impairment test on May 1, 2022. The Company performed an interim impairment test during the third quarter of fiscal 2023 and concluded that the carrying value of the GuruShots reporting unit exceeded its fair value. Accordingly, the Company recorded a non-cash goodwill impairment charge of $ 8.7 million in that quarter. F- 26 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, 2021 to July 31, 2023: (in thousands) Carrying Amounts Balance as of July 31, 2021 $ 2,262 Goodwill acquired during the period 8,907 Measurement period adjustment ( 180 ) Impact of currency translation ( 201 ) Balance as of July 31, 2022 10,788 Goodwill impairment charge ( 8,727 ) Impact of currency translation ( 100 ) Balance as of July 31, 2023 $ 1,961 The total accumulated impairment loss of the Company’s goodwill as of July 31, 2023 was $ 8.7 million. There were no accumulated impairment losses prior to the fiscal year ended July 31, 2022. Note 8—Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: July 31, (in thousands) 2023 2022 Accrued payroll and bonuses $ 1,136 $ 1,084 Accrued vacation 593 585 Accrued payroll taxes 237 214 Due to artists 226 301 Accrued expenses 301 261 Operating lease liability-current portion 124 142 Derivative liability for foreign exchange contracts - 141 Accrued income taxes payable 51 169 Due to related party - IDT 8 1 Total accrued expenses and other current liabilities $ 2,676 $ 2,898 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- 27 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 April 1, 2022 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 the acquired users generating minimum levels of ROAS. The Company was prepared to make the minimum investment, however, GuruShots was unable to achieve those minimum ROAS target conditions. GuruShots’ financial performance during the period from the April 2022 acquisition through July 31, 2023, was materially impacted by a combination of industry specific, macroeconomic, and geopolitical challenges that contributed to negatively impacting ROAS. The conditions for payment of the Earnout for the first year following the acquisition were not met and no Earnout payment was made or accrued. 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, Tel Aviv, Israel as well as a short-term lease in Vilnius, Lithuania. Operating lease right-of-use assets recorded and included in other assets were approximately $ 360,000 and $ 204,000 at July 31, 2023 and 2022, respectively. In connection with the GuruShots acquisition, the Company acquired approximately $ 86,000 of right-of-use assets related to its office space in Tel Aviv and assumed approximately $ 86,000 of lease liabilities as of April 12, 2022. The following table presents the lease-related assets and liabilities for leases recorded on the consolidated balance sheets (in thousands) as of July 31, 2023 and 2022: As of July 31, 2023 2022 Operating leases: Other assets $ 360 $ 204 Other current liabilities $ 124 $ 142 Other liabilities 223 53 Total operating lease liabilities $ 347 $ 195 The following table includes the components of our occupancy costs in our consolidated statements of (loss) income and comprehensive (loss) income: Years ended July 31, (in thousands) 2023 2022 Operating lease cost (1) $ 139 $ 111 Variable lease cost (2) $ 130 $ 70 (1) Operating lease costs include costs associated with fixed lease payments and index-based variable payments that qualified for lease accounting under ASC 842, Leases and complied with the practical expedients and exceptions we elected. (2) Variable lease costs include costs that were not fixed at the lease commencement date and are not dependent on an index or rate. These costs were not included in the measurement of lease liabilities and primarily include variable non-lease costs, such as utilities, real estate taxes, insurance and maintenance, as well as lease costs for those leases that qualified for the short-term lease exception. The following table summarizes the weighted average remaining lease term and weighted average discount rate as of July 31, 2023 and 2022: As of July 31, 2023 2022 Weighted average remaining lease term: Operating leases 3.23 years 1.50 years Weighted average discount rate: Operating leases 5.29 % 5.34 % F- 28 Future minimum lease payments under non-cancellable leases at July 31, 2023 are as follows (in thousands): Years ending July 31, Operating Leases 2024 $ 138 2025 102 2026 87 2027 58 Total future minimum lease payments 385 Less imputed interest 24 Total $ 361 As of July 31, 2023, the Company did not have any leases that have not yet commenced that create significant rights and obligations. Note 12—Income Taxes The components of (loss) income before income taxes are as follows: Fiscal year ended July 31, (in thousands) 2023 2022 Domestic $ ( 6,724 ) $ 12,009 Foreign 160 ( 403 ) (Loss) income before income taxes $ ( 6,564 ) $ 11,606 Provision for (benefit from) income taxes consisted of the following: Fiscal year ended July 31, (in thousands) 2023 2022 Current: Foreign $ 90 $ 60 Federal 413 2,163 State 16 53 Total current expense 519 2,276 Deferred: Foreign - 44 Federal ( 1,004 ) ( 507 ) State 23 79 Total deferred expense ( 981 ) ( 384 ) (Benefit from) provision for income taxes $ ( 462 ) $ 1,892 F- 29 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) 2023 2022 U.S federal income tax at statutory rate $ ( 1,378 ) $ 2,437 State tax (net of federal benefit) 36 120 Change in valuation allowance ( 55 ) - Foreign tax rate differential ( 18 ) ( 12 ) Change in fair value of contingent consideration and goodwill impairment 832 ( 832 ) Stock-based compensation 306 - Other ( 185 ) 179 (Benefit from) provision for income taxes $ ( 462 ) $ 1,892 The Company is subject to taxation in the United States and certain foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdictions where the Company is subject to potential examination by tax authorities include the United States, Norway and Lithuania. 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”). Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows: July 31, (in thousands) 2023 2022 Deferred tax assets: Net operating loss carryforwards (Foreign) $ 1,840 $ 1,840 Net operating loss carryforwards (State) 6 66 Reserves and accruals 162 240 Stock-based compensation 483 313 Depreciation and amortization 882 57 Others 309 240 Net deferred tax assets 3,682 2,756 Less valuation allowance ( 1,840 ) ( 1,895 ) Total deferred tax assets $ 1,842 $ 861 At July 31, 2023 and 2022, the Company had available U.S. state NOL carryforwards from domestic operations of approximately $ 0.1 million and $ 0.9 million, respectively, to offset future taxable income. The state NOL carryforwards will begin to expire in 2038. At July 31, 2023 and 2022, the Company has approximately $ 8.0 millions of Foreign NOLs (Israel) which is available to offset Israel’s future taxable income without time limit. F- 30 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 2023 Reserves deducted from deferred income taxes, net: Valuation allowance $ 1,895 $ - $ ( 55 ) $ 1,840 2022 Reserves deducted from deferred income taxes, net: Valuation allowance $ 55 $ 1,840 $ - $ 1,895 At July 31, 2023 and 2022, 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, 2023 and 2022, the Company recorded no interest and penalties on income taxes. At July 31, 2023 and 2022, there was no accrued interest included in income taxes payable. The Company currently remains subject to examinations of its U.S. federal, state, and foreign tax returns generally for the fiscal 2019 to fiscal 2022 years. The Tax Cuts and Jobs Act of 2017 (TCJA) has modified the IRC 174 expenses related to research and development (R&D) for the tax years beginning after December 31, 2021. The Company must now capitalize the expenditures related to R&D activities and amortize over 5 years for US activities and 15 years for non-US activities using mid-year convention. For US GAAP purposes, the Company capitalize all R&D expenditures on the consolidated balance sheet and amortize over 3 years for book purposes. Therefore, we will have book to tax difference in amortization expense and no additional capitalization on R&D expenditures for tax purposes under IRC 174. Note 13—Stock-Based Compensation 2016 Stock Incentive Plan On March 23, 2022, the Company’s Board of Directors amended the Company’s 2016 Stock Option and Incentive Plan (as amended to date, 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 626,000 shares for the GuruShots retention pool. This amendment was ratified by the Company’s stockholders at the Annual Meeting of Stockholders held on January 18, 2023. 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. At July 31, 2023, there were 467,000 shares of Class B common stock available for awards under the 2016 Incentive Plan before accounting for the remaining 173,000 contingently issuable shares related to the DSUs with both service and market conditions discussed below. Stock-based compensation 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. F- 31 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. In fiscal 2023 and fiscal 2022, the Company recognized stock-based compensation for its employees and non-employees as follows: Fiscal Year Ended July 31, (in thousands) 2023 2022 % Change Stock-based compensation expense $ 2,519 $ 1,936 30.1 % As of July 31, 2023, the Company’s unrecognized stock-based compensation expense was $321 thousand for unvested stock options, $616 thousand for unvested DSUs and $2.0 million for unvested restricted stock primarily related to the portion of retention bonus to be paid in the Company’s Class B common stock in connection with the GuruShots acquisition. In fiscal 2023 and 2022, restricted stock and DSUs awards with respect to 267,000 shares and 78,000 shares vested. In connection with this vesting, the Company purchased 6,310 shares and 16,115 shares respectively of Class B Stock from certain employees for $ 17,000 and $ 232,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock and DSUs. In the fiscal years ended July 31, 2023 and 2022 there were $ 0 and $ 107,000 , 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 2023 and 2022, the Compensation Committee approved equity grants of options to purchase 58,000 and 60,000 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 awards granted in fiscal 2023 and 2022 were $ 104,000 and $ 400,000 respectively based on the estimated fair value of the options on the grant dates. In fiscal 2023, the Company received proceeds of $ 1,785 from the exercise of stock options for which the Company issued 1,500 shares of its Class B common stock. 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. The Company cancelled or forfeited options grants of 57,000 shares and 41,000 shares in fiscal 2023 and fiscal 2022 respectively primarily due to employee resignations or layoffs. F- 32 Repricing of Outstanding and Unexercised Options On October 20, 2022, the Board unanimously approved the repricing of all outstanding and unexercised stock options granted under the 2016 Plan with exercise prices above the then current market value held by then current employees, executive officers, and consultants of the Company (the “Eligible Stock Options”). Effective October 20, 2022, the exercise price of the eligible stock options was reduced to $ 2.27 , the closing price of its common stock on October 19, 2022. Except for the modification to the exercise price of the Eligible Stock Options, all other terms and conditions of each of the Eligible Stock Options remained in full force and effect. Pursuant to the 2016 Incentive Plan, the Compensation Committee of the Board of Directors, as the administrator, has discretionary authority, exercisable on such terms and conditions that it deems appropriate under the circumstances, to reduce the exercise price in effect for outstanding options under the 2016 Incentive Plan. In approving the repricing, the Compensation Committee considered the impact of the current exercise prices of outstanding stock options on the incentives provided to employees and consultants, the lack of retention value provided by the outstanding stock options to employees and consultants, and the impact of such options on the capital structure of the Company. As of October, 2022, there were 532,750 stock options outstanding under the 2016 Incentive Plan, of which 191,663 outstanding stock options had exercise prices in excess of the market price of the Company’s common stock as of October 20, 2022, which is why the Compensation Committee made the determination to deem all outstanding and unexercised stock options held by current employees, executive officers, and consultants as Eligible Stock Options. Jonathan Reich, the Company’s Chief Executive Officer, and Yi Tsai, the Company’s Chief Financial Officer, hold Eligible Stock Options exercisable for an aggregate of 64,898 and 15,000 shares of the Company’s common stock, respectively. The option repricing resulted in incremental stock-based compensation of $ 87,000 , of which $ 52,000 was recorded as expense in the fiscal 2023, and $ 35,000 will be recognized as expense over the requisite service periods over which the Eligible Stock Options vest. 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. The Company used the following weighted average assumptions in its BSM pricing model: Fiscal year ended July 31, 2023 2022 Expected term 6.0 years 6.0 years Volatility 90.0 % 92.0 % Risk free interest rate 3.9 % 1.8 % Dividends — — F- 33 The following represents option activity for the fiscal years ended July 31, 2023 and 2022, 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 Aggregate Number of Options (in thousands) Weighted- Average Exercise Price Remaining Contractual Term (in years) Intrinsic Value (in thousands) 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 Granted 58 2.35 Exercised ( 2 ) 1.19 Cancelled / forfeited ( 57 ) 7.83 Outstanding at July 31, 2023 856 $ 1.79 4.98 $ 346 Exercisable at July 31, 2023 737 $ 1.72 4.40 $ 330 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) 2023 2023 Weighted average grant date fair value of options granted $ 1.78 $ 6.64 Intrinsic value of options exercised 2 29 Fair value of awards vested 215 216 At July 31, 2023, there was approximately $ 321,000 of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a period of 2.4 years. 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. Restricted Stock In fiscal 2023 and in connection with the GuruShots acquisition, the Company issued 626,242 shares of the Company’s Class B common stock with a grant date fair value of $ 4 million to the founders and employees as a retention bonus pool which is managed by a trustee based in Israel. These shares shall 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 2023 and 2022, the Company has amortized $ 1.3 million and $ 444 thousands in stock-based compensation expenses related to these shares. In fiscal 2023, 51,000 shares were forfeited due to resignations. At July 31, 2023, there were 400,000 non-vested restricted shares of the Company’s Class B common stock. At July 31, 2023, there was $ 2.0 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 1.6 years. 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. In fiscal 2023 and fiscal 2022, there were 237,000 shares and 65,000 shares vested. In connection with this vesting, the Company did not purchase any shares in fiscal 2023 and purchased 11,665 shares of Class B Stock from certain employee for $ 161,000 to satisfy tax withholding obligations. F- 34 The following represents restricted shares activity for the fiscal years ended July 31, 2023 and 2022: Number of Shares Weighted Average Grant Date Fair Value 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 ) 6.39 Forfeited - - Non-vested stock award as of July 31, 2022 688,441 $ 6.15 Granted - - Vested ( 236,953 ) 6.04 Forfeited ( 51,143 ) 6.39 Non-vested stock award as of July 31, 2023 400,345 $ 6.19 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. 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 42% 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 2023, the Company purchased 6,310 shares of Class B Common Stock from various employees for $ 17,000 to satisfy tax withholding obligations in connection with the vesting of DSUs. 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. The following represents restricted shares activity for the fiscal years ended July 31, 2023 and 2022: Number of Shares Weighted Average Grant Date Fair Value 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 Granted 2,000 2.21 Vested ( 29,820 ) 10.40 Forfeited ( 16,175 ) 8.32 Non-vested DSU award as of July 31, 2023 238,605 $ 8.81 (1) Includes 203,924 DSUs (or 70 % of total awards) of which vesting are subject to both service and market condition. F- 35 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, 2023, there were 238,605 non-vested DSUs and the unrecognized compensation expense related to unvested DSUs was an aggregate of $ 616,000 which is expected to be recognized over a weighted-average period of 1.1 years. 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. 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 2023 and 2022 the Company was charged by IDT a total of $ 125,000 and $ 118,000 , respectively, for legal services. In addition, the Company charged IDT approximately $ 81,000 and $ 167,000 , respectively, for consulting services provided to IDT by a Zedge employee. As of July 31, 2023 and 2022, the Company owed IDT $ 8,000 and $ 1,000 respectively. The activities between the Company and IDT were as follows (in thousands): Fiscal years ended July 31, (in thousands) 2023 2022 Balance at beginning of year $ 1 $ ( 6 ) Legal services provided by IDT 125 118 Consulting services provided to IDT ( 81 ) ( 167 ) Cash payments made to IDT ( 37 ) 56 Due to IDT* $ 8 $ 1 * Due to IDT is included in accrued expenses and other current liabilities 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 and Chairman of the Audit Committee 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 $ 60,000 and $ 114,000 respectively, to Activist in the fiscal years ended July 31, 2023 and 2022, respectively. 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 (“CODM”), 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, 2023. Based on the criteria established by ASC 280, Segment Reportin g, the Company has one operating and reportable segment as of July 31, 2022. Beginning in the first quarter of fiscal 2023, the Company revised the presentation of segment information to align with changes to how the Company’s CODM manages the business, allocates resources and assesses operating performance reports operating results based on two reportable segments, which are the Zedge Marketplace and GuruShots. F- 36 The CODM evaluates the performance of each operating segment using revenue and income (loss) from operations. The following table provides information about the Company’s two reportable segments. Fiscal Year Ended July 31, 2023 2022 Revenue: (in thousands) Zedge Marketplace $ 22,594 $ 24,872 GuruShots 4,647 1,673 Total $ 27,241 $ 26,545 Segment income (loss) from operations: Zedge Marketplace $ 6,321 $ 9,582 GuruShots ( 13,232 ) 2,256 Total $ ( 6,911 ) $ 11,838 The CODM does not evaluate operating segments using asset information and, accordingly, the Company does not report asset information by segment. GuruShots’ operating results are consolidated with our operating results beginning on April 13, 2022. Therefore, our consolidated results of operations for the fiscal year ended July 31, 2022 may not be comparable to the corresponding periods in fiscal 2023. Please refer to the unaudited pro forma consolidated financial information contained in Note 6, Business Combination and Asset Acquisition. Geographic Information 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 Long-lived assets, net: July 31, 2023 $ 7,054 $ 14,346 $ 21,400 July 31, 2022 $ 7,818 $ 15,217 $ 23,035 Total assets: July 31, 2023 $ 33,401 $ 13,430 $ 46,831 July 31, 2022 $ 26,229 $ 28,397 $ 54,626 F- 37 Note 16—Revolving Credit Facility As of September 27, 2016, the Company entered into a loan and security agreement with Western Alliance Bank (“WAB”) for a revolving credit facility of up to $ 2.5 million for an initial two-year term which was extended twice for another two-year term which expired September 26, 2022 and was amended on October 28, 2022 as discussed below. The revolving credit facility was secured by a lien on substantially all of the Company’s assets. Effective with the September 2020 extension, the outstanding principal amount bore 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 was payable monthly and all outstanding principal and any accrued and unpaid interest was due on the maturity date of September 26, 2022. The Company was required to pay an annual facility fee of $ 10,000 to WAB. The Company was 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 included a prohibition on the Company paying any dividend on its capital stock. At October 27, 2022 and July 31, 2022, there were no amounts outstanding under the revolving credit facility and the Company was in compliance with all of the covenants. On October 28, 2022, the Company entered into an Amended and Restated Loan and Security Agreement (“Amended Loan Agreement”) with WAB. Pursuant to the Amended Loan Agreement, WAB agreed to provide the Company with a new term loan facility in the maximum principal amount of $ 7 million for a four-year term and a $ 4 million 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 %. Pursuant to the Amended Loan Agreement, the Company discontinued the existing $ 2 million revolving credit facility under the prior version of the Loan and Security Agreement. At the time of the discontinuance, there was no outstanding balance on the revolving credit facility. Pursuant to the Amended Loan Agreement, $ 2 million was advanced in a single-cash advance on October 28, 2022, with the remaining $ 5 million 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 million). On May 11, 2023, the Company entered into a Modification Agreement pursuant to which the Company agreed to modify the Amended Loan Agreement to reduce the remaining $ 5 million availability to $ 0 . 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 (10 th ) 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. Future scheduled principal repayments on the term loan as of July 31, 2023 are as follows (in thousands): Years ending July 31, Principal Repayments Amount 2024 $ 50 2025 200 2026 200 2027 1,550 Total future principal repayments 2,000 Deferred financing costs ( 15 ) Term loan, net of deferred financing costs $ 1,985 The Amended Loan Agreement may also require early repayments if certain conditions are met. Borrowings under the Amended Loan Agreement is secured by substantially all of the assets of the Company, its subsidiaries, and certain of its affiliates. F- 38 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. b) Maximum Debt to EBITDA . Zedge shall maintain, at all times, a ratio of (a) indebtedness owed by Zedge to WAB, 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. As of November 16, 2016, the Company entered into a Foreign Exchange Agreement with WAB 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 $ 7.5 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 WAB, in its reasonable discretion from time to time, which was set at 10 % of the nominal amount of the foreign exchange contracts in effect at the relevant time. At July 31, 2023, there were $ 4.5 million of outstanding foreign exchange contracts, which reduced the available borrowing under the revolving credit facility by $ 450,000 . Note 17—Defined Contribution Plan In September 2016, the Company adopted a 401(k) Plan, effective August 1, 2016, available to all employees based in the US 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 $ 45,000 and $ 43,000 for the fiscal years ended July 31, 2023 and 2022, respectively. In lieu of making cash contributions, the Company opted to contribute 18,278 shares and 4,812 shares of the Company’s Class B common stock to the Plan for fiscal 2023 and fiscal 2022, respectively. Note 18—Subsequent Events The parties to the agreement governing our purchase of GuruShots made various representations, warranties and covenants subject to the qualifications and limitations agreed by the respective parties in the agreement. On September 26, 2023, the Company noticed a claim for indemnification regarding material inaccuracies in certain of those representations and warranties. The Company does not currently know how this matter will be resolved and cannot make any assertions as to any eventual outcome. F- 39