Zedge, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2025 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-37782 ZEDGE, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 26-3199071 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 1178 Broadway , 3 rd Floor #1450 , New York , NY 10001 (Address of principal executive offices) (Zip Code) (330) 577-3424 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Class B common stock, par value $.01 per share NYSE American Trading symbol: ZDGE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒ As of March 12, 2025, the registrant had the following shares outstanding: Class A common stock, $.01 par value: 524,775 shares Class B common stock, $.01 par value: 13,343,099 shares ZEDGE, INC. TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Operations and Comprehensive Loss 2 Condensed Consolidated Statements of Changes in Stockholders’ Equity 3 Condensed Consolidated Statements of Cash Flows 4 Notes To Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risks 30 Item 4. Controls and Procedures 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 1A. Risk Factors 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31 Item 3. Defaults Upon Senior Securities 31 Item 4. Mine Safety Disclosures 31 Item 5. Other Information 31 Item 6. Exhibits 32 SIGNATURES 33 i PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements ZEDGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value data) January 31, July 31, 2025 2024 (Unaudited) Assets Current assets: Cash and cash equivalents $ 20,054 $ 19,998 Trade accounts receivable 2,990 3,406 Prepaid expenses and other receivables 953 593 Total Current assets 23,997 23,997 Property and equipment, net 1,271 2,306 Intangible assets, net 5,145 5,369 Goodwill 1,760 1,824 Deferred tax assets, net 4,528 4,344 Other assets 391 355 Total assets $ 37,092 $ 38,195 Liabilities and stockholders’ equity Current liabilities: Trade accounts payable $ 1,444 $ 1,113 Accrued expenses and other current liabilities 2,994 2,969 Deferred revenues 2,727 2,168 Total Current liabilities 7,165 6,250 Deferred revenues--non-current 1,606 931 Other liabilities 116 118 Total liabilities 8,887 7,299 Commitments and contingencies (Note 9) 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 January 31, 2025 and July 31, 2024 5 5 Class B common stock, $ .01 par value; authorized shares— 40,000 ; 14,969 shares issued and 13,447 shares outstanding at January 31, 2025, and 14,866 shares issued and 13,815 outstanding at July 31, 2024 150 149 Additional paid-in capital 49,244 48,263 Accumulated other comprehensive loss ( 1,993 ) ( 1,832 ) Accumulated deficit ( 15,131 ) ( 13,113 ) Treasury stock, 1,522 shares at January 31, 2025 and 1,051 shares at July 31, 2024, at cost ( 4,070 ) ( 2,576 ) Total stockholders’ equity 28,205 30,896 Total liabilities and stockholders’ equity $ 37,092 $ 38,195 See accompanying notes to unaudited condensed consolidated financial statements. 1 ZEDGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except for per share data) (Unaudited) Three Months Ended Six Months Ended January 31, January 31, 2025 2024 2025 2024 Revenues $ 6,979 $ 7,771 $ 14,173 $ 14,852 Costs and expenses: Direct cost of revenues (excluding amortization of capitalized software and technology development costs which is included below) 447 458 908 944 Selling, general and administrative 7,126 6,523 13,935 12,022 Depreciation and amortization 317 762 698 1,537 Impairment of intangible assets - 11,958 - 11,958 Restructuring charges 481 - 481 - Impairment of capitalized software and technology development costs 827 - 827 - Loss from operations ( 2,219 ) ( 11,930 ) ( 2,676 ) ( 11,609 ) Interest and other income, net 171 165 352 246 Net (loss) gain resulting from foreign exchange transactions ( 86 ) 76 ( 100 ) ( 143 ) Loss before income taxes ( 2,134 ) ( 11,689 ) ( 2,424 ) ( 11,506 ) Benefit from income taxes ( 455 ) ( 2,459 ) ( 406 ) ( 2,260 ) Net loss $ ( 1,679 ) $ ( 9,230 ) $ ( 2,018 ) $ ( 9,246 ) Other comprehensive (loss) income: Changes in foreign currency translation adjustment ( 132 ) 250 ( 161 ) ( 117 ) Total other comprehensive (loss) income ( 132 ) 250 ( 161 ) ( 117 ) Total comprehensive loss $ ( 1,811 ) $ ( 8,980 ) $ ( 2,179 ) $ ( 9,363 ) Loss per share attributable to Zedge, Inc. common stockholders: Basic and diluted $ ( 0.12 ) $ ( 0.66 ) $ ( 0.15 ) $ ( 0.66 ) Weighted-average number of shares used in calculation of loss per share: Basic and diluted 13,882 14,068 13,872 14,022 See accompanying notes to unaudited condensed consolidated financial statements. 2 ZEDGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) (Unaudited) Accumulated Class A Class B Additional Other Total Common Stock Common Stock Paid-in Comprehensive Accumulated Treasury Stock Stockholders’ Shares Amount Shares Amount Capital Loss Deficit Shares Amount Equity Balance – July 31, 2024 525 $ 5 14,866 $ 149 $ 48,263 $ ( 1,832 ) $ ( 13,113 ) 1,051 $ ( 2,576 ) $ 30,896 Stock-based compensation - - 30 - 379 - - - - 379 Purchase of treasury stock - - - - - - - 226 ( 804 ) ( 804 ) Foreign currency translation adjustment - - - - - ( 29 ) - - - ( 29 ) Net loss - - - - - - ( 339 ) - - ( 339 ) Balance – October 31, 2024 525 5 14,896 149 48,642 ( 1,861 ) ( 13,452 ) 1,277 ( 3,380 ) $ 30,103 Stock-based compensation - - 73 1 602 - - - - 603 Purchase of treasury stock - - - - - - - 245 ( 690 ) ( 690 ) Foreign currency translation adjustment - - - - - ( 132 ) - - - ( 132 ) Net loss - - - - - - ( 1,679 ) - - ( 1,679 ) Balance – January 31, 2025 525 $ 5 14,969 $ 150 $ 49,244 $ ( 1,993 ) $ ( 15,131 ) 1,522 $ ( 4,070 ) $ 28,205 Class A Common Stock Class B Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Treasury Stock Total Stockholders’ Shares Amount Shares Amount Capital Loss Deficit Shares Amount Equity Balance – July 31, 2023 525 $ 5 14,634 $ 146 $ 46,122 $ ( 1,537 ) $ ( 3,942 ) 833 $ ( 1,930 ) $ 38,864 Exercise of stock options - - 2 - 3 - - - - 3 Stock-based compensation - - 33 1 506 - - - - 507 Purchase of treasury stock - - - - - - - 6 ( 13 ) ( 13 ) Foreign currency translation adjustment - - - - - ( 367 ) - - - ( 367 ) Net loss - - - - - - ( 15 ) - - ( 15 ) Balance – October 31, 2023 525 5 14,669 147 46,631 ( 1,904 ) ( 3,957 ) 839 ( 1,943 ) 38,979 Stock-based compensation - - 87 1 682 - - - - 683 Foreign currency translation adjustment - - - - - 250 - - - 250 Net loss - - - - - - ( 9,230 ) - - ( 9,230 ) Balance – January 31, 2024 525 $ 5 14,756 $ 148 $ 47,313 $ ( 1,654 ) $ ( 13,187 ) 839 $ ( 1,943 ) $ 30,682 See accompanying notes to unaudited condensed consolidated financial statements. 3 ZEDGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Six Months Ended January 31, 2025 2024 Operating activities Net loss $ ( 2,018 ) $ ( 9,246 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 30 28 Amortization of intangible assets 224 1,158 Amortization of capitalized software and technology development costs 444 351 Amortization of deferred financing costs - 15 Stock-based compensation 982 1,190 Impairment charge of capitalized software and technology development costs 827 - Impairment charge of intangible assets - 11,958 Impairment of investment in privately-held company - 50 Deferred income taxes ( 184 ) ( 2,619 ) Change in assets and liabilities: Trade accounts receivable 416 ( 480 ) Prepaid expenses and other current assets ( 360 ) ( 106 ) Other assets ( 39 ) 15 Trade accounts payable and accrued expenses 322 445 Deferred revenue 1,234 53 Net cash provided by operating activities 1,878 2,812 Investing activities Capitalized software and technology development costs ( 236 ) ( 777 ) Purchase of property and equipment ( 30 ) ( 23 ) Net cash used in investing activities ( 266 ) ( 800 ) Financing activities Prepayment of term loan - ( 2,000 ) Proceeds from exercise of stock options - 3 Purchase of treasury stock in connection with share buyback program and stock awards vesting ( 1,494 ) ( 13 ) Net cash used in financing activities ( 1,494 ) ( 2,010 ) Effect of exchange rate changes on cash and cash equivalents ( 62 ) ( 63 ) Net increase (decrease) in cash and cash equivalents 56 ( 61 ) Cash and cash equivalents at beginning of period 19,998 18,125 Cash and cash equivalents at end of period $ 20,054 $ 18,064 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments made for income taxes $ 130 $ 67 Cash payments made for interest expenses $ - $ 65 See accompanying notes to unaudited condensed consolidated financial statements. 4 ZEDGE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1—Basis of Presentation and Summary of Significant Accounting Policies Description of Business Zedge, Inc. builds digital marketplaces and friendly competitive games around content that people use to express themselves. Our leading products include Zedge Ringtones and Wallpapers, which we refer to as our Zedge App, a freemium digital content marketplace offering mobile phone wallpapers, video wallpapers, ringtones, and notification sounds as well as pAInt, a suite of tools that can be used to render images from text or image prompts powered by generative AI, 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. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Zedge, Inc. and its wholly-owned subsidiaries: GuruShots Ltd. (“GuruShots”); Zedge Europe AS; and Zedge Lithuania UAB (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended January 31, 2025 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2025 or any other period. The balance sheet at July 31, 2024 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2024 (the “2024 Form 10-K”), as filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2024 refers to the fiscal year ended July 31, 2024). Significant Accounting Policies and Estimates Restructuring Charges The restructuring charges consist primarily of cash expenditures for compensation and severance payments, employee benefits, payroll taxes and related facilitation costs associated with the Company’s workforce reduction plans, as well as facilities restructuring costs related to early termination of the lease agreement and impairment of the right-of-use asset. Employee termination benefits are recognized as a liability at estimated fair value, at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits is probable and reasonably estimable. There have been no other material changes to the Company’s significant accounting policies and critical accounting estimates described in the 2024 Form 10-K. Use of Estimates The preparation of our unaudited condensed 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. 5 Recently Issued Accounting Pronouncements Segment Reporting: In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The guidance in ASU 2023-07 seeks to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU require a public entity to disclose the following: significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss; an amount for other segment items by reportable segment and a description of its composition; and the title and position of the CODM and how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. This ASU requires public entities to provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods. ASU 2023-07 clarifies that, if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. A retrospective approach is required to be applied to all prior periods presented in the financial statements. We plan to adopt the provisions of ASU 2023-07 in the third quarter of fiscal 2025 (the three months ending April 30, 2025), which will result in additional disclosures in the notes to our consolidated financial statements. The adoption of the provisions of ASU 2023-07 will not impact our financial position or results of operations. Income Taxes: In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The guidance in this ASU enhances the transparency and decision functionality of income tax disclosures to provide investors information to better assess how an entity’s operations and related tax risks, tax planning and operational opportunities affect its tax rate and prospects for future cash flow. The amendments in this ASU require public entities to disclose the following specific categories in the rate reconciliation by both percentages and reporting currency amounts: the effect of state and local income tax, net of federal (national) income tax, foreign tax effects, effects of changes in tax laws or rates enacted in the current period, effects of cross-border tax laws, tax credits, changes in valuation allowances, nontaxable or nondeductible items and changes in unrecognized tax benefits. The amendments in ASU 2023-09 also require public entities to provide additional information for reconciling items that meet the qualitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pre-tax income (loss) by the applicable statutory income tax rate). This ASU requires reporting entities to annually disclose the year-to-date amount of income taxes paid (net of refunds received) disaggregated by federal, state and foreign localities. The amendments in this ASU should be applied on a prospective basis and retrospective application is permitted. For public business entities, ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We plan to adopt the provisions of ASU 2023-09 in fiscal 2026 and we are evaluating the disclosure requirements related to the new standard. Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. In November 2024, the FASB issued ASU 2024-03, Income Statement (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires public entities to disclose, in the notes to the financial statements, specified information about certain costs and expenses at each interim and annual reporting period. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027 (as amended by ASU 2025-01 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date ), with early adoption permitted. We are currently evaluating the impact of the standard on our condensed consolidated financial statements. All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations. Related Party Transactions The Company was formerly a majority-owned subsidiary of IDT Corporation (“IDT”). On June 1, 2016, IDT’s interest in the Company was spun-off by IDT to IDT’s stockholders and the Company became an independent public-held company. IDT charges the Company for services it provides, and the Company charges IDT for services it provides, pursuant to a Transition Services Agreement (“TSA”). The Company is party to a consulting agreement with Activist Artist Management, LLC (“Activist”), which assists the Company in strategic business development. A member of the Company’s Board of Directors owns a significant minority stake in Activist. The Company is party to a revenue sharing agreement with National Retail Services, Inc. (“NRS”), a wholly owned subsidiary of IDT, under which Zedge and certain of its subsidiaries (Emojipedia and GuruShots) provide a selection of their digital content for display on NR screens and share in the revenue generated from the resulting advertisements. 6 Transactions with these related parties did not have a material impact on the condensed consolidated balance sheets as of January 31, 2025 or July 31, 2024, or the condensed consolidated statements of operations and comprehensive loss for the three and six months ended January 31, 2025 or 2024. Note 2—Revenue Disaggregation of Revenue The following table presents revenue disaggregated by segment and type (in thousands): Three Months Ended January 31, Six Months Ended January 31, 2025 2024 2025 2024 Zedge Marketplace Advertising revenue $ 4,698 $ 5,482 $ 9,572 $ 10,421 Paid subscription revenue 1,233 1,088 2,415 2,064 Other revenues 432 282 926 504 Total Zedge Marketplace revenue 6,363 6,852 12,913 12,989 GuruShots Digital goods and services 616 919 1,260 1,863 Total revenue $ 6,979 $ 7,771 $ 14,173 $ 14,852 Contract Balances Contract liabilities consist of deferred revenue, which are recorded for payments received in advance of the satisfaction of performance obligations . The Company records deferred revenues related to the unsatisfied performance obligations with respect to subscription revenue. The Company’s deferred revenue balance for paid subscriptions was approximately $ 4.1 million related to approximately 791,000 active subscribers, and approximately $ 2.9 million, related to approximately 669,000 active subscribers, as of January 31, 2025 and July 31, 2024, respectively. 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 use Zedge Credits to acquire Zedge Premium content or upon expiration of the Zedge Credits after 180 days of account inactivity (“Breakage”). As of January 31, 2025, and July 31, 2024, the Company’s deferred revenue balance related to Zedge Premium was approximately $ 252,000 and $ 251,000 , respectively. The amount of deferred revenue recognized in the six months ended January 31, 2025 that was included in the deferred revenue balance at July 31, 2024 was $ 1.2 million. Unsatisfied Performance Obligations Substantially all of the Company’s unsatisfied performance obligations relate to contracts with an original expected length of 30 months or less. Significant Judgments The advertising networks and advertising exchanges to which the Company sells its inventory track and report the impressions and revenues 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 and revenues 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. 7 Note 3—Fair Value Measurements The following tables present the balance of liabilities measured at fair value on a recurring basis (in thousands): Level 1 Level 2 Level 3 Total January 31, 2025 Liabilities: Foreign exchange forward contracts $ - $ 111 $ - $ 111 July 31, 2024 Liabilities: Foreign exchange forward contracts $ - $ 51 $ - $ 51 (1) – quoted prices in active markets for identical assets or liabilities (2) – observable inputs other than quoted prices in active markets for identical assets and liabilities (3) – no observable pricing inputs in the market 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 January 31, 2025 and July 31, 2024 included trade accounts receivable and trade accounts payable. The carrying amounts of other assets and liabilities such as prepaid expenses, 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 (USD) to Norwegian Kroner (NOK) and USD to Euro (EUR) exchange rates. The Company is party to a Foreign Exchange Agreement with Western Alliance Bank (“WAB”) allowing the Company to enter into foreign exchange contracts under its revolving credit facility with the bank (see Note 10 Term Loan and Revolving Credit Facility ). The Company does not apply hedge accounting to these contracts, and therefore the changes in fair value are recorded in unaudited condensed consolidated statements of operations and comprehensive loss. 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. 8 The outstanding contracts at January 31, 2025 were as follows: Settlement Date U.S. Dollar Amount NOK Amount Feb-25 225,000 2,413,827 Mar-25 225,000 2,413,035 Apr-25 225,000 2,411,421 May-25 225,000 2,410,245 Total 900,000 9,648,528 Settlement Date U.S. Dollar Amount EUR Amount Feb-25 275,000 249,836 Mar-25 275,000 249,487 Apr-25 275,000 248,863 May-25 275,000 248,307 Total 1,100,000 996,493 The fair value of outstanding derivative instruments recorded in the accompanying unaudited condensed consolidated balance sheets were as follows (in thousands): January 31, July 31, (in thousands) 2025 2024 Assets and Liabilities Derivatives: Balance Sheet Location Derivatives not designated or not qualifying as hedging instruments Foreign exchange forward contracts Accrued expenses and other current liabilities $ 111 $ 51 The effects of derivative instruments on the condensed consolidated statements of operations and comprehensive loss were as follows (in thousands): Three Months Ended January 31, Six Months Ended January 31, Amount of Income (Loss) Recognized on Derivatives 2025 2024 2025 2024 Derivatives not designated or not qualifying as hedging instruments Location of (loss) income recognized on derivatives Foreign exchange forward contracts Net (loss) income resulting from foreign exchange transactions $ ( 131 ) $ 131 $ ( 149 ) $ ( 151 ) Note 5—Intangible Assets and Goodwill Intangible assets are initially recorded at fair value and stated net of accumulated amortization and impairments. The Company amortizes its intangible assets that have finite lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized. Amortization is recorded over the estimated useful lives ranging from 5 to 15 years. The Company evaluates the recoverability of its definite lived intangible assets whenever events or changes in circumstances or business conditions indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each asset group. If the carrying value of an asset or asset group exceeds its undiscounted cash flows, the Company estimates the fair value of the assets, generally utilizing a discounted cash flow analysis based on the present value of after-tax cash flows to be generated by the assets using a risk-adjusted discount rate. To estimate the fair value of the assets, the Company uses market participant assumptions pursuant to ASC 820, Fair Value Measurements. During the second quarter of fiscal 2024, in connection with its company-wide strategic planning process as well as evaluating the current operating performance of its GuruShots reporting unit, including product enhancement and marketing, the Company reassessed its short-term and long-term commercial plans for this business. The Company made certain operational and strategic decisions to invest in, and increase its focus on, the long-term success of this business, which resulted in the Company significantly reducing its forecasted revenues and operating results. 9 As a result, the Company identified indicators of impairment and performed an undiscounted cash flow analysis pursuant to ASC 360, Property, Plant, and Equipment - Overall , to determine if the cash flows expected to be generated by the GuruShots business over the estimated remaining useful life of its primary assets were sufficient to recover the carrying value of the asset group. Based on this analysis, the undiscounted cash flows were not sufficient to recover the carrying value of the long-lived assets. As a result, the Company was required to perform Step 3 of the impairment test and determine the fair value of the asset group. To estimate the fair value of the asset group, the Company utilized the income approach, which is based on a discounted cash flow (DCF) analysis and calculates the fair value by estimating the after-tax cash flows attributable to the asset group and then discounting the after-tax cash flows to present value using a risk-adjusted discount rate. Assumptions used in the DCF require significant judgment, including judgment about appropriate discount rates, growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows were based on the Company’s most recent strategic plan and for periods beyond the strategic plan, the Company’s estimates were based on assumed growth rates expected as of the measurement date. The Company believes its assumptions were consistent with the plans and estimates that a market participant would use to manage the business. The discount rate used was intended to reflect the risks inherent in future cash flow projections and was based on an estimate of the weighted average cost of capital (WACC) of market participants relative to the asset group. The Company used a discount rate of 30.5 %. Based on this analysis, the fair value of the GuruShots asset group was below its carrying value. The Company determined that the fair value of this asset group was approximately zero and the carrying value of the long-lived assets was fully impaired. To record the adjustment of the carrying value of the asset group to fair value, the Company recorded an impairment charge of $ 11.9 million during the second quarter of fiscal 2024. The impairment charge was allocated to the long-lived assets on a pro-rata basis as follows: $ 2.5 million to acquired developed technology, $ 6.4 million to customer relationships, and $ 3.0 million to trade names. The Company believes its assumptions used to determine the fair value of the asset group were reasonable. The following table presents the detail of intangible assets, net as of January 31, 2025 and July 31, 2024 (in thousands): January 31, 2025 July 31, 2024 Gross Carrying Value Accumulated Amortization Allocation of Impairment Loss Net Carrying Value Gross Carrying Value Accumulated Amortization Allocation of Impairment Loss Net Carrying Value Emojipedia.org and other internet domains acquired $ 6,711 $ 1,566 $ - $ 5,145 $ 6,711 $ 1,342 $ - $ 5,369 Acquired developed technology - - - - 3,950 1,422 2,528 - Customer relationships - - - - 7,800 1,403 6,397 - Trade names - - - - 3,570 537 3,033 - Total intangible assets $ 6,711 $ 1,566 $ - $ 5,145 $ 22,031 $ 4,704 $ 11,958 $ 5,369 Estimated future amortization expense as of January 31, 2025 is as follows (in thousands): Fiscal 2025 $ 224 Fiscal 2026 447 Fiscal 2027 447 Fiscal 2028 447 Fiscal 2029 447 Thereafter 3,133 Total $ 5,145 The Company’s amortization expense for intangible assets were $ 224,000 and $ 1.2 million for the six months ended January 31, 2025 and 2024, respectively. 10 Goodwill The following table summarizes the changes in the carrying amount of goodwill for the six months ended January 31, 2025 (in thousands). Carrying Amounts Balance as of July 31, 2024 $ 1,824 Impact of currency translation ( 64 ) Balance as of January 31, 2025 $ 1,760 The total accumulated impairment loss of the Company’s goodwill as of January 31, 2025 was $ 8.7 million. Note 6—Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in thousands): January 31, July 31, 2025 2024 Accrued payroll and bonuses $ 1,136 $ 1,416 Restructuring accrual and related charges (1) 450 - Accrued vacation 771 690 Accrued payroll taxes 52 59 Due to artists 195 242 Accrued expenses 98 301 Operating lease liability-current portion 130 85 Derivative liability for foreign exchange contracts 111 51 Accrued income taxes payable 46 123 Due to related party - IDT 5 2 Total accrued expenses and other current liabilities $ 2,994 $ 2,969 1) See Note 14 Restructuring and Other Related Charges for more details Note 7—Stock-Based Compensation 2016 Stock Incentive Plan In November 2024, 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 100,000 shares to an aggregate of 2,631,000 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 15, 2025. At January 31, 2025, there were 143,000 shares of Class B common stock available for awards under the 2016 Incentive Plan. The Company recognizes stock-based compensation for stock-based awards, including stock options, restricted stock and deferred stock units (“DSUs”) based on the estimated fair value of the awards and recognized over the relevant service period and/or market conditions. The Company estimates the fair value of stock options on the measurement date using the Black-Scholes option valuation model. The Company estimates the fair value of the restricted stock and DSU’s with service conditions only using the current market price of the stock. The Company estimates the fair value of the DSU’s with both service and market conditions using the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. The Company recognizes stock-based compensation expense related to options and restricted stock units on a straight-line basis over the service period of the award, which is generally 4 years for options and 3 years for restricted stock units. 11 Deferred Stock Units Equity Incentive Programs In November 2024, the Company adopted an equity incentive program (under the 2016 Incentive Plan) in the form of grants of DSUs that, upon vesting, will entitle the grantees to receive shares of the Company’s Class B common stock. The number of shares that will be issuable on each vesting date will vary between 33 % to 300 % of the number of DSUs that vest on that vesting date, depending on the market price for the underlying Class B common stock on the vesting date relative to the grant price approved by the Compensation Committee of the Company’s Board of Directors of $ 2.76 per share. The Company estimated that the fair value of the DSUs on the date of grants was an aggregate of $ 388,000 , which is being recognized on a graded vesting basis over the requisite service periods ending in September 2027. The Company used a risk neutral Monte Carlo simulation method in its valuation of the DSUs, which simulated the range of possible future values of the Company’s Class B common stock over the life of the DSUs. The Monte Carlo simulation model incorporates the likelihood of achieving the stock price targets and requires the input of assumptions including the underlying stock price, expected volatility, risk-free rate and dividend yield. Stock Options Grants The Company’s option awards generally have a 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 January 2025 and 2024, the Compensation Committee approved grants of options to purchase 55,100 and 12,450 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 were $ 107,000 and $ 21,000 respectively based on the estimated fair value of the options on the grant dates. Stock-based Compensation Expense In our accompanying unaudited condensed consolidated statements of operations and comprehensive loss, the Company recognized stock-based compensation expense for our employees and non-employees as follows (in thousands): Three Months Ended January 31, Six Months Ended January 31, 2025 2024 2025 2024 Stock-based compensation expense $ 603 $ 683 $ 982 $ 1,190 As of January 31, 2025, the Company’s unrecognized stock-based compensation expense was $ 237,000 for unvested stock options, $ 331,000 for unvested DSUs and $ 446,000 for unvested restricted stock including the remaining unpaid amounts portion from the equity portion (in the original aggregate amount of $ 4 million) of the GuruShots retention bonus pool. Vesting and Cancellation of Restricted Stock and DSUs In the six months ended January 31, 2025 and 2024, awards of restricted stock and DSUs with respect to 119,000 shares and 125,000 shares, respectively, vested, and in connection with these vesting events, the Company purchased 6,903 shares and 6,328 shares respectively, of our Class B common stock from certain employees for $ 22,000 and $ 13,000 , respectively, to satisfy tax withholding obligations. On September 7, 2024, DSUs award with both service and market condition with respect to approximately 170,000 shares were canceled without the reversal of compensation expenses of approximately $ 1.2 million because the market condition was not achieved. Note 8—Earnings Per Share Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture, issuances to be made on the vesting of unvested DSUs and the exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive. 12 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 earnings per share 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): Three Months Ended Six Months Ended January 31, January 31, 2025 2024 2025 2024 Basic weighted-average number of shares 13,882 14,068 13,872 14,022 Effect of dilutive securities: Stock options - - - - Non-vested restricted Class B common stock - - - - Deferred stock units - - - - Diluted weighted-average number of shares 13,882 14,068 13,872 14,022 The following shares were excluded from the dilutive earnings per share computations because their inclusion would have been anti-dilutive (in thousands): Three Months Ended Six Months Ended January 31, January 31, 2025 2024 2025 2024 Stock options 898 860 895 861 Non-vested restricted Class B common stock 208 308 208 308 Deferred stock units 73 203 37 203 Shares excluded from the calculation of diluted earnings per share 1,179 1,371 1,140 1,372 For the three and six months ended January 31, 2025 and 2024, the diluted earnings per share equals basic earnings per share because the Company incurred a net loss during those periods and the impact of the assumed exercise of stock options and vesting of restricted stock and DSUs would have been anti-dilutive. Note 9—Commitments and Contingencies Legal Proceedings The Company may from time to time be subject to other 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 10—Term Loan and Revolving Credit Facility 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 expiring October 28, 2024 . 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, $ 2 million was advanced in a single-cash advance on the closing date, with the remaining $ 5 million available for drawdown during twenty-four (24) months after closing. 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 . On November 15, 2023, the Company elected to prepay the entire principal amount of $ 2 million. 13 On October 28, 2024, the Company entered into an Amended and Restated Loan and Security Agreement Modification Agreement with WAB. Pursuant to the modification agreement, WAB agreed to renew the $ 4 million revolving credit facility for another four-year term through October 28, 2028 and remove certain provisions, including financial covenants, in respect of the $ 2 million term loan which has been repaid. The Amended Loan Agreement 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 January 31, 2025, there were $ 2.0 million of outstanding foreign exchange contracts, which reduced the available borrowing under the revolving credit facility by approximately $ 200,000 . Note 11—Segment and Geographic Information Segment Information Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker was its Chief Executive Officer as of January 31, 2025. There are two reportable segments, which are the Zedge Marketplace and GuruShots. 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 (in thousands): Three Months Ended January 31, Six Months Ended January 31, 2025 2024 2025 2024 (in thousands, except percentages) Revenues: Zedge Marketplace $ 6,363 $ 6,852 $ 12,913 $ 12,989 GuruShots 616 919 1,260 1,863 Total $ 6,979 $ 7,771 $ 14,173 $ 14,852 Segment income (loss) from operations: Zedge Marketplace $ 42 $ 1,677 $ 976 $ 3,331 GuruShots ( 2,261 ) ( 13,607 ) ( 3,652 ) ( 14,940 ) Total $ ( 2,219 ) $ ( 11,930 ) $ ( 2,676 ) $ ( 11,609 ) The CODM does not evaluate operating segments using asset information and, accordingly, the Company does not report asset information by segment. 14 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 (in thousands): United States Foreign Total Long-lived assets, net: January 31, 2025 $ 6,310 $ 497 $ 6,807 July 31, 2024 $ 6,570 $ 1,460 $ 8,030 Total assets: January 31, 2025 $ 31,943 $ 5,149 $ 37,092 July 31, 2024 $ 32,412 $ 5,783 $ 38,195 Note 12— Operating Leases The Company has operating leases primarily for office space. Operating lease right-of-use (“ROU”) assets recorded and included in other assets were $ 251,000 and $ 214,000 at January 31, 2025 and July 31, 2024, respectively. On August 7, 2024, the Company renewed its lease for the office space in Tel Aviv, Israel for a two-year term. Future minimum lease payments related to this lease renewal are as follows (in thousands): Years ending July 31, Operating Leases 2025 $ 48 2026 58 2027 9 Total future minimum lease payments 115 Less imputed interest 9 Total $ 106 The Company reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. In connection with the restructuring we implemented in January 2025 (See Note 14 Restructuring, Impairments, and Related Charges for more details), we are evaluating the potential impairment of the right-of-use assets associated with our leased office space in Norway. There were no other material changes in the Company’s operating and finance leases in the six months ended January 31, 2025, as compared to the disclosure regarding such leases in the 2024 Form 10-K. Note 13—Income Taxes The Company’s tax provision or benefit from income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate applied to year-to-date income and records the discrete tax items in the period to which they relate. In each quarter, the Company updates the estimated annual effective tax rate and makes a year-to-date adjustment to the tax provision as necessary. The Company’s estimated annual effective tax rate for the fiscal year ending July 31, 2025 differs from the U.S. federal statutory tax rate due to certain items primarily related to stock-based compensation expense, jurisdictional mix of earnings, foreign derived intangible income deduction, global intangible low-taxed income and the change in basis differences associated with tax deductible intangible assets and goodwill. As of January 31, 2025, the Company had $ 6.3 million of deferred tax assets, for which it has established a valuation allowance of $ 1.8 million, related to U.S. federal and state taxes and for a certain international subsidiary. 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, Lithuania and Israel. 15 Note 14—Restructuring, Impairments, and Related Charges In January 2025, the Company implemented a corporate restructuring aimed to reduce headcount and other operating expenses, including the closure of our Norway operations. As a result of the restructuring steps, the Company’s workforce will be consolidated in Lithuania and Israel. We expect this to allow for more efficient operations and cost savings beyond the compensation expenses of the terminated employees. In connection with this initiative, the Company reduced its total global headcount by approximately 22 % and recognized a restructuring charge of $ 0.5 million primarily consisting of employee termination benefit which is recorded in the Company’s condensed consolidated statements of operations and comprehensive loss for the three months ended January 31, 2025. The Company capitalizes certain costs related to software to be sold, leased, or marketed in accordance with ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed related to GuruShots. The Company evaluates these long-lived assets for impairment whenever circumstances arise that indicate the carrying amount of an asset may not be recoverable. The Company’s strategic reassessment of GuruShots’ operations resulted in a $ 0.8 million impairment of capitalized software and technology development costs which is recorded in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended January 31, 2025. The following table summarizes total restructuring, impairments, and related charges for the Company’s two reportable segments (in thousands): Three Months Ended January 31, 2025 Zedge Marketplace $ 425 GuruShots 883 Total restructuring, impairments, and related charges $ 1,308 The following table provides information about restructuring, impairments, and related charges for the Company’s two reportable segments (in thousands): Restructuring, Impairment, and Related Charges Termination Benefits (1) Impairments and Assets Disposal (2) Total Zedge Marketplace $ 425 $ - $ 425 GuruShots 56 827 883 Three Months Ended January 31, 2025 $ 481 $ 827 $ 1,308 1) Primarily relates to the global restructuring initiated in January 2025 and consists of termination benefits related to workforce reduction actions across all segments. One-time severance and termination benefits of approximately $ 0.9 million, impairment of ROU assets, lease termination costs and other charges of approximately $ 0.2 million, were expected to be incurred but were not recognized as of January 31, 2025. 2) Primarily represents impairment of capitalized software and technology development costs resulting from the strategy assessment related to the restructuring initiative implemented in GuruShots. The following table shows a roll forward of restructuring reserves, primarily consists of employee termination benefits, that will result in cash spending. These amounts exclude asset impairment charges and other asset disposal activities (in thousands): Restructuring and Related Charges by Segment Balance at 7/31/2024 (3) Changes in reserves (1) Cash payments Other (2) Balance at 1/31/2025 (3) Zedge Marketplace $ - $ 425 $ ( 33 ) $ 2 $ 394 GuruShots - 56 - - 56 Total $ - $ 481 $ ( 33 ) $ 2 $ 450 1) Primarily consists of severance and employee termination costs. The impairment charges and other asset disposals associated with the restructuring implemented in January 2025 that have impacted our property, plant and equipment, intangible balances or other asset balances are not included in this table. 2) Primarily comprised of foreign currency translation and other non-cash adjustments. 3) Included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets. 16 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2024 (the “2024 Form 10-K”), as filed with the U.S. Securities and Exchange Commission (the “SEC”) on October 29, 2024. As used below, unless the context otherwise requires, the terms “the Company,” “Zedge,” “we,” “us,” and “our” refer to Zedge, Inc., a Delaware corporation and its subsidiaries, GuruShots Ltd., Zedge Europe AS and Zedge Lithuania UAB, collectively. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from future results. Factors that may cause such differences include, but are not limited to: (1) economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price; (2) delay or failure to realize the expected synergies and benefits of the GuruShots acquisition; (3) Russia’s invasion of Ukraine, and the international community’s response; and (4) recent attack by Hamas and other terrorist organizations from the Gaza Strip and Lebanon and Israel’s war against them. For further information regarding risks and uncertainties associated with our business, please refer to Item 1A to Part I “Risk Factors” in the 2024 Form 10-K. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the 2024 Form 10-K. Trends and Uncertainties Current Economic Conditions The majority of our users and employees are located outside of the United States exposing us to a range of economic factors and regulations including foreign exchange fluctuations. There is uncertainty surrounding macroeconomic factors in the U.S. and globally. We believe these macroeconomic conditions coupled with the global political climate and unrest, including the ongoing wars between Ukraine and Russia and Israel and Hamas, may negatively impact our performance. The Israel-Hamas and Israel-Hezbollah Conflicts Given our operations in Israel, the impact of economic, political, geopolitical, and military conditions in the region directly affects us, including conflicts involving missile strikes, infiltrations, and terrorism. Notably, on October 7, 2023, Hamas launched attacks in southern Israel, resulting in casualties and military engagement. In addition, Hezbollah, another terrorist organization based in Lebanon has been indiscriminately shelling Israel since October 8, 2023, the Houthi rebels based in Yemen have also launched ballistic missiles and kamikaze drones at Israel and the Islamic Republic of Iran has on two occasions attacked Israel with a barrage of ballistic missiles. Although a temporary ceasefire is in place, it is unclear if it is sustainable. The extent and duration of this conflict remains uncertain. Israel’s response to Hamas’ unprecedented attack led to the mobilization of IDF reservists, affecting our workforce. Prior to this, changes in Israel’s judicial system had already raised concerns about the business environment, compounded by recent events, potentially impacting foreign investment, currency fluctuations, credit ratings, interest rates, and security markets. Furthermore, regional political unrest and threats from extremist groups, notably Iran, pose additional risks. Management and our Board of Directors are closely monitoring the situation in Israel to address potential business disruptions and implications. 17 Overview Zedge builds digital marketplaces and friendly competitive games around content that people use to express themselves. Our leading products include Zedge Ringtones and Wallpapers, which we refer to as our “Zedge App,” 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. We are part of the ‘Creator Economy,’ which Goldman Sachs estimates is worth $250 billion globally. 1 According to Linktree, over 200 million individuals identify as creators, people who use their influence, skill, and creativity to amass an audience and monetize it. 2 Furthermore, Influencer Marketing Hub reports that out of 2,000 surveyed creators, 44.9% identify as full-time creators, 3 and Exploding Topics reports that 10% of influencers earn more than $100,000 per year. 4 We view the Creator Economy as an opportunity for Zedge to expand our business, especially as we execute by connecting our gamers with our marketplace. Our Zedge app (which is named “Zedge Wallpapers” in the App Store) offers a wide array of mobile personalization content including wallpapers, video wallpapers, ringtones, and notification sounds, and is available both in Google Play and the App Store. As of January 31, 2025, our Zedge App had been installed nearly 696 million times since inception and, over the past two fiscal years, has had between 24.7 million and 32.0 million monthly active users (“MAU”), ending with 24.7 million MAU as of January 31, 2025. MAU is a key performance indicator (“KPI”) for our Zedge app that captures the number of unique users that used our Zedge App during the final 30 days of the relevant period. Our platform allows creators to upload content to our marketplace and avail it to our users either for free or, via ‘Zedge Premium,’ the section of our marketplace where we offer premium content for purchase. In turn, our users utilize the content to personalize their phones and express their individuality. In fiscal 2023, we introduced pAInt, a generative AI wallpaper maker in the Zedge App. A generative AI wallpaper maker is an implementation of artificial intelligence software that can create images from text descriptions. To interface with a generative AI image maker, a user enters a text description of the image they want to create, and the software generates an image based on that description. In addition, we upgraded Zedge+, our paid subscription offering by bundling together an ad-free experience with value adds making the offering more compelling. We often refer to our freemium ringtones and wallpapers, our subscription offering, the functionality for creators to market their products and ancillary offering and features both in our Zedge App and website, as our Zedge Marketplace. The Zedge Marketplace’s monetization stack consists of advertising revenue generated when users view advertisements when using the Zedge App (and the related functionality under the zedge.net website), the in-app sale of Zedge Credits, our virtual currency, that is used to purchase Zedge Premium content, and a paid-subscription offering that provides an ad-free experience to users that purchase a monthly, annual or lifetime subscription. In April 2023, we introduced a subscription tier in the iOS version of the app. As of January 31, 2025, we had approximately 791,000 active subscribers. In April 2022, we acquired GuruShots Ltd, a recognized category leader focused on gamifying the photography vertical. GuruShots offers a platform spanning iOS, Android, and the web that provides a fun, educational and structured way for amateur photographers to compete in a wide variety of contests showcasing their photos while gaining recognition with votes, badges, and awards. We estimate that the total addressable market of amateur photographers using their smartphones to take and publicly share artistic photos is 30-40 million people per month and that the market is still in its infancy. Every month, GuruShots stages more than 300 competitions that result in players uploading in excess of 550,000 photographs and casting close to 3.0 billion “perceived votes,” which are calculated by multiplying the number of votes that each player casts by a weighting factor based on various factors related to that user. GuruShots utilizes a ‘Free-to-Play’ business model and generates revenue through in-app purchases of virtual currency. Players can use this currency to unlock competitions or gain an edge by purchasing resources and participating in additional gameplay. Over the past nine years, the monthly average paying player spend has increased in excess of 6.1% annually to more than $40.5 per player. 1 https://www.latimes.com/business/story/2024-01-08/creator-influencer-economy-2024-predictions-social-media-stars 2 https://linktr.ee/creator-report 3 https://influencermarketinghub.com/creator-earnings-benchmark-report 4 https://explodingtopics.com/blog/creator-economy-stats# 18 In fiscal 2024, we revamped GuruShots’ customer onboarding experience by guiding new players through simplified photo competitions of limited size and duration. The upgrade was designed to enhance the gaming experience for new players by increasing their potential for winning and providing immediate gratification. The new onboarding has shown improvements in engagement, retention, and revenue from new users. In addition, we migrated to a coin-based economy with multiple currencies in order to enable more players to earn and spend their currency on in-game resources. Since the acquisition, GuruShots has faced challenges in growth and profitability and its revenue has declined. As such the Company is cutting costs through the restructuring discussed earlier and materially scaling back on paid user acquisition, or PUA, in order to approach breakeven. In parallel, we are developing a plan, that we refer to as GuruShots 2.0, to revamp GuruShots’ offering in order to put it on a growth trajectory and unlock the potential value in this asset. Our strategy focuses on attracting new users and converting them into recurring, paying players. To date, we introduced a fun and comprehensive onboarding experience to draw new users into the gameplay with ease and migrated to a coin-based in-game economy to enable more possibilities to reward and monetize players. We also launched Missions, a set of tasks that players need to complete in exchange for earning rewards, and Duels, a fast-paced, real-time player-versus-player game mechanic that adds an exciting competitive layer to GuruShots. Historically, we marketed GuruShots to prospective players, primarily via PUA channels. We utilize a host of creative formats including static and video ads in order to promote the game. As a part of the restructuring plan discussed earlier, we have materially reduced PUA for GuruShots and do not expect to ramp up until we finalize the GuruShots 2.0 plan. Beyond our commitment to growing both the Zedge App and GuruShots on a standalone basis, we believe that there are untapped opportunities that we can capitalize on to unlock additional value. Specifically, we plan to enable GuruShots players the ability to sell their content both in the Zedge Marketplace and elsewhere. In addition, we are benefitting from the experience that the GuruShots team possesses in gamifying the Zedge App. Longer term, we believe that there are complementary content verticals that lend themselves to gamification. We own and operate Emojipedia, the world’s leading authority dedicated to providing up-to-date and well-researched emoji definitions, information, and news, as well as World Emoji Day and the annual World Emoji Awards. In January 2025, Emojipedia received approximately 33.7 million monthly page views and has approximately 10.0 million monthly active users as of January 31, 2025 of which approximately 48.8% are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Meta, and X, formerly known as Twitter. We believe that Emojipedia provides growth potential to the Zedge App, and it was immediately accretive to earnings post acquisition in August 2021. In the past year, we have made many changes to Emojipedia including overhauling its backend, redesigning the Emojipedia website, and introducing new entertainment-focused features to the site. We will continue to enhance this offering and are exploring additional new features which use artificial intelligence, some of which will be released before the end of the calendar year. Critical Accounting Policies Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the 2024 Form 10-K. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to revenue recognition, intangible assets, goodwill, capitalized software and technology development costs, stock-based compensation and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2024 Form 10-K. 19 Recently Issued Accounting Pronouncements Please see Note 1 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Key Performance Indicators (KPIs) Zedge App-MAU and ARPMAU The presentation of our results of operations related to our Zedge App includes disclosure of two key performance indicators – Monthly Active Users (MAU) and Average Revenue Per Monthly Active User (ARPMAU). MAU is a key performance indicator that we define as the number of unique users that used our Zedge App during the previous 30-day period, which is important to understanding the size of our active user base which is a main driver of our revenue. Changes and trends in MAU are useful for measuring the general health of our business, gauging both present and potential users/customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement. ARPMAU is defined as (i) the total revenue derived from Zedge App in a monthly period, divided by (ii) MAU in that same period. ARPMAU for a particular time period longer than one month is the average ARPMAU for each month during that period. ARPMAU is valuable because it provides insight into how well we monetize our users and, changes and trends in ARPMAU are indications of how effective our monetization investments are. MAU decreased 14.2% in the three months ended January 31, 2025 when compared to the same period a year ago. As of January 31, 2025, users in emerging markets represented about 77.3% of our MAU, as compared to 78.1% from the same period a year ago. ARPMAU for the three months ended January 31, 2025 increased 8.7% when compared to the same period a year ago, primarily due to the increase in price per advertising impression from the same period a year ago, which was driven by increased competition for our ad inventory as well as strong year-over-year subscription revenue growth. Subscription revenue and subscription billings for the three months ended January 31, 2025 increased 13.3% and 26.7%, respectively, when compared to the same period a year ago, as discussed below. The following tables present the MAU – Zedge App and ARPMAU – Zedge App for the three months ended January 31, 2025 as compared to the same period in the prior year: Three Months Ended January 31, (in millions, except ARPMAU - Zedge App) 2025 2024 % Change MAU- Zedge App 24.7 28.8 -14.2 % Developed Markets MAU - Zedge App 5.6 6.3 -11.1 % Emerging Markets MAU - Zedge App 19.1 22.5 -15.1 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App 77.3 % 78.1 % -1.0 % ARPMAU - Zedge App $ 0.0777 $ 0.0715 8.7 % 20 The following charts present the MAU – Zedge App and ARPMAU – Zedge App for the consecutive eight fiscal quarters ended January 31, 2025: GuruShots-MAPs and ARPMAP The presentation of our results of operations related to our GuruShots segment includes disclosure of two key performance indicators as discussed below: Monthly Active Payers (“MAPs”). We define a MAP as a unique active user on the GuruShots app or GuruShots.com in a month who completed at least one in-app purchase (“IAP”) during that time period. MAPs for a time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution platforms. MAP is a key performance indicator because it shows the size of GuruShots’ active paying user base which is a main driver of GuruShots’ revenue. Changes and trends in MAP are useful for measuring the general health of GuruShots’ business, gauging both present and potential users/customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement. Average Revenue Per Monthly Active Payer (“ARPMAP”). We define ARPMAP as (i) the total revenue from IAPs derived from GuruShots and GuruShots.com in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP. MAP decreased 22.2% in the three months ended January 31, 2025 when compared to the same period a year ago, primarily attributable to Apple’s App Tracking Transparence (“ATT”) framework which impedes our ability to invest in paid user acquisition (“PUA”) campaigns profitably in terms of return on ad spend or (“ROAS”). As such, we continued to scale back our PUA spend for GuruShots while testing new campaigns and creatives in order to unearth attractive ROAS scaling opportunities. As part of the restructuring implemented in January 2025, we expect to materially decrease PUA at least through the end of fiscal 2025. ARPMAP decreased 21.0% to $39.8 in the three months ended January 31, 2025 from $50.4 in the same period a year ago. The following table shows our MAP and ARPMAP for the three months ended January 31, 2025 and 2024: Three Months Ended January 31, 2025 2024 % Change Monthly Active Payers 4,672 6,009 -22.2 % Average Revenue per Monthly Active Payer $ 39.8 $ 50.4 -21.0 % 21 The following charts present the MAP and ARPMAP – GuruShots for the consecutive eight quarters ended January 31, 2025: Our KPIs related to GuruShots are not based on any standardized industry methodology and are not necessarily calculated in the same manner that other companies or third parties may use to calculate these or similarly titled measures. The numbers that we use to calculate MAP and ARPMAP are derived from data that we generate internally. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Results of Operations The following table summarizes our historical condensed consolidated statements of operations data: Three Months Ended January 31, Six months Ended January 31, 2025 2024 % Change 2025 2024 % Change (in thousands, except percentages) Revenues $ 6,979 $ 7,771 -10.2 % $ 14,173 $ 14,852 -4.6 % Direct cost of revenues 447 458 -2.4 % 908 944 -3.8 % Selling, general and administrative 7,126 6,523 9.2 % 13,935 12,022 15.9 % Depreciation and amortization 317 762 -58.4 % 698 1,537 -54.6 % Impairment of intangible assets - 11,958 nm - 11,958 nm Restructuring charges 481 - nm 481 - nm Impairment of capitalized software and technology development costs 827 - nm 827 - nm Loss from operations (2,219 ) (11,930 ) -81.4 % (2,676 ) (11,609 ) -76.9 % Interest and other income, net 171 165 3.6 % 352 246 43.1 % Net (loss) gain resulting from foreign exchange transactions (86 ) 76 nm (100 ) (143 ) -30.1 % Benefit from income taxes (455 ) (2,459 ) -81.5 % (406 ) (2,260 ) -82.0 % Net loss $ (1,679 ) $ (9,230 ) -81.8 % $ (2,018 ) $ (9,246 ) -78.2 % nm-not meaningful Comparison of Our Results of Operations for the Three and Six Months Ended January 31, 2025 and 2024 Revenues The following table sets forth the composition of our revenues for the three and six months ended January 31, 2025 and 2024 (in thousands): Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Changes 2025 2024 % Changes Zedge Marketplace Advertising revenue $ 4,698 $ 5,482 -14.3 % $ 9,572 $ 10,421 -8.1 % Paid subscription revenue 1,233 1,088 13.3 % 2,415 2,064 17.0 % Other revenues 432 282 53.2 % 926 504 83.7 % Total Zedge Marketplace revenue 6,363 6,852 -7.1 % 12,913 12,989 -0.6 % GuruShots Digital goods and services 616 919 -33.0 % 1,260 1,863 -32.4 % Total revenue $ 6,979 $ 7,771 -10.2 % $ 14,173 $ 14,852 -4.6 % 22 The following table summarizes our subscription revenue for the three and six months ended January 31, 2025 and 2024: Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2024 % Change (in thousands, except revenue per subscriber and percentages) Subscription Revenue $ 1,233 $ 1,088 13.3 % $ 2,415 $ 2,064 17.0 % Active subscriptions net increase 93 - nm 122 1 nm Active subscriptions at end of period 791 648 22.1 % 791 648 22.1 % Average active subscriptions during the period 693 648 7.0 % 686 651 5.4 % Average monthly revenue per active subscription $ 0.59 $ 0.56 5.9 % $ 0.59 $ 0.53 11.3 % nm-not meaningful The following table presents a reconciliation of subscription billings to the most directly comparable GAAP financial measures, for each of the periods indicated. We calculate subscription billings by adding the change in subscription deferred revenue between the start and end of the period to subscription revenue recognized in the same period. Subscription billings is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the growth of the subscription-based portion of our business, which is a critical part of our business plan. Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2024 % Change (in thousands, except percentages) Subscription Revenue $ 1,233 $ 1,088 $ 2,415 $ 2,064 Changes in subscription deferred revenue 638 389 1,232 552 Subscription Billings (Non-GAAP) $ 1,871 $ 1,477 26.7 % $ 3,647 $ 2,616 39.4 % The following table summarizes Zedge Premium gross and net revenue for the three and six months ended January 31, 2025 and 2024: Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Changes 2025 2024 % Changes (in thousands, except percentages) Zedge Premium-gross revenue (“GTV”) $ 679 $ 537 26.4 % $ 1,361 $ 958 42.1 % Zedge Premium-net revenue 431 $ 277 55.6 % $ 924 $ 481 92.1 % Gross margin 63 % 52 % 68 % 50 % Three Months Ended January 31, 2025 Compared to Three Months Ended January 31, 2024 For the three months ended January 31, 2025, our advertising revenue decreased 14.3% compared to the same period in the prior year primarily due to a 14.2% decrease in MAU partially offset by an increase in price per advertising impression paid by the advertisers on our platform when compared to the same period a year ago, which was driven by increased competition for our ad inventory. For the three months ended January 31, 2025, our subscription revenue increased 13.3%, and our subscription billings increased 26.7% compared to the same period in the prior year primarily due to the introduction of our iOS subscription offering in April 2023 and the lifetime subscription product for Android users we rolled out in August 2023. For the three months ended January 31, 2025, our other revenue increased 53.2% compared to the same period in the prior year primarily due to the increase in Zedge Premium net revenue. For the three months ended January 31, 2025, Zedge Premium net revenue increased 55.6% compared to the same period in the prior year primarily attributable to additional revenue from certain AI generative features we rolled out in our Zedge App in fiscal 2024. For the three months ended January 31, 2025, digital goods and services revenue declined 33.0% compared to the same period in the prior year primarily due to the 22.2% decrease in GuruShots’ MAP coupled with 21.0% decrease in ARPMAP for the corresponding periods. 23 Six Months Ended January 31, 2025 Compared to Six Months Ended January 31, 2024 For the six months ended January 31, 2025, our advertising revenue decreased 8.1% compared to the same period in the prior year primarily due to a 12.3% and 14.2% decrease in MAU in our Q1 and Q2 of our fiscal 2025, respectively, partially offset by an increase in price per advertising impression paid by the advertisers on our platform when compared to the same periods a year ago, which was driven by increased competition for our ad inventory. For the six months ended January 31, 2025, our subscription revenue increased 17.0%, and our subscription billings increased 39.4% compared to the same period in the prior year primarily due to the introduction of our iOS subscription offering in April 2023 and the lifetime subscription product for Android users we rolled out in August 2023. For the six months ended January 31, 2025, our other revenue increased 83.7% compared to the same period in the prior year primarily due to the increase in Zedge Premium net revenue. For the six months ended January 31, 2025, Zedge Premium net revenue increased 92.1% compared to the same period in the prior year primarily attributable to additional revenue from certain AI generative features we rolled out in our Zedge App in fiscal 2024. For the six months ended January 31, 2025, digital goods and services revenue declined 32.4% compared to the same period in the prior year primarily due to the 25.9% decrease in GuruShots’ MAP coupled with 15.4% decrease in ARPMAP in Q1 of our fiscal 2025 and the 22.2% decrease in GuruShots’ MAP coupled with 21.0% decrease in ARPMAP in Q2 of our fiscal 2025. Direct cost of revenues . Direct cost of revenues consists primarily of content hosting and content delivery costs. Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2024 % Change (in thousands, except percentages) Direct cost of revenues $ 447 $ 458 -2.4 % $ 908 $ 944 -3.8 % As a percentage of revenues 6.4 % 5.9 % 6.4 % 6.4 % Direct cost of revenues decreased 2.4% in the three months ended January 31, 2025 compared to the same period in the prior year primarily due to continuing optimizing of our backend infrastructure. As a percentage of revenue, direct cost of revenues in the three months ended January 31, 2025 increased to 6.4% from 5.9% for the same period in the prior year primarily due to lower revenue in the current year period. Direct cost of revenues decreased 3.8% in the six months ended January 31, 2025 compared to the same period in the prior year primarily due to continuing optimizing of our backend infrastructure. As a percentage of revenue, direct cost of revenues in the six months ended January 31, 2025 was flat at 6.4% when compared to the same period in the prior year primarily due to the cost savings offset by lower revenue in the current year period. Selling, general and administrative expense . Selling, general and administrative expense (“SG&A”) consists mainly of payroll and benefits, stock-based compensation expense (as discussed below), PUA expenses, third-party payment processing fee relate to in-app purchases, marketing, consulting, professional fees, software licensing (“SaaS”), recruiting fees, facilities and public company related expenses. Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2024 % Change (in thousands, except percentages) Selling, general and administrative $ 7,126 $ 6,523 9.2 % $ 13,935 $ 12,022 15.9 % As a percentage of revenues 102.1 % 83.9 % 98.3 % 80.9 % SG&A expense increased 9.2% in the three months ended January 31, 2025 compared to the same period in the prior year primarily due to higher PUA, higher compensation expenses (resulting primarily from lower capitalized software and technology development costs) and higher platform fee paid to Google and Apple offset by lower discretionary spends and lower stock-based compensation expense. In the three months ended January 31, 2025, we ramped up PUA for our Zedge App significantly but scaled back PUA spend for GuruShots as compared to the same period in the prior year. We expect to continue our investment in PUA for our Zedge App in the near term provided that the ROAS remains compelling while materially cutting back on PUA for GuruShots, at least through the end of the fiscal year. As a percentage of revenue, SG&A expense in the three months ended January 31, 2025 was 102.1% compared to 83.9% for the same period in the prior year. 24 SG&A expense increased 15.9% in the six months ended January 31, 2025 compared to the same period in the prior year primarily due to higher PUA, higher compensation expenses (resulting primarily from lower capitalized software and technology development costs) and higher platform fee paid to Google and Apple offset by lower discretionary spends and lower stock-based compensation expense. In the six months ended January 31, 2025, we ramped up PUA for our Zedge App significantly but scaled back PUA spend for GuruShots as compared to the same period in the prior year. We expect to continue our investment in PUA for our Zedge App in the near term provided that the ROAS remains compelling while materially cutting back on PUA for GuruShots, at least through the end of the fiscal year. As a percentage of revenue, SG&A expense in the six months ended January 31, 2025 was 98.3% compared to 80.9% for the same period in the prior year. Global headcount as of January 31, 2025 totaled 106 (including 28 at GuruShots) compared to 99 (including 30 at GuruShots) as of January 31, 2025 with the majority of those employees based in Lithuania and Israel. In January 2025, we implemented a corporate restructuring and reduced our global headcount by approximately 22%. Details are more fully described in Note 14 Restructuring and Other Related Charges to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. The following table summarizes stock-based compensation expense included in SG&A expense for the three and six months ended January 31, 2025 and 2024: Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2024 % Change Stock-based compensation expense $ 603 $ 683 -11.7 % $ 982 $ 1,190 -17.5 % Stock-based compensation expenses decreased 11.7% in the three months ended January 31, 2025 compared to the same period in the prior year. The decrease was primarily attributable to the lower compensation expense related to the DSUs granted in September 2021 with both service and market conditions which were recognized based on the graded vesting method. Certain stock options, DSUs and restricted stock grants are more fully described in Note 7 Stock-Based Compensation to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Stock-based compensation expenses decreased 17.5% in the six months ended January 31, 2025 compared to the same period in the prior year. The decrease was primarily attributable to the lower compensation expense related to the DSUs granted in September 2021 with both service and market conditions which were recognized based on the graded vesting method. Depreciation and amortization . Depreciation and amortization consist mainly of amortization of intangible assets in connection with the GuruShots and Emojipedia acquisitions and capitalized software and technology development costs of our internal developers on various projects that we invested in specific to the various platforms on which we operate our service. Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2,024 % Change (in thousands, except percentages) Depreciation and amortization $ 317 $ 762 -58.4 % $ 698 $ 1,537 -54.6 % As a percentage of revenues 4.5 % 9.8 % 4.9 % 10.3 % Depreciation and amortization expenses decreased 58.4% in three months ended January 31, 2025 compared to the same period in the prior year primarily due to the $11.9 million impairment charge recorded in Q2 of fiscal 2024. Depreciation and amortization expenses decreased 54.6% in six months ended January 31, 2025 compared to the same period in the prior year also due to the $11.9 million impairment charge recorded in Q2 of fiscal 2024. Impairment of intangible assets . For the three and six months ended January 31, 2024, we recorded an approximately $11.9 million impairment of intangible assets of our GuruShots reporting segment, as more fully described in Note 5 Intangible Assets and Goodwill to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Restructuring charges . For the three and six months ended January 31, 2025, we recorded an approximately $0.5 million restructuring charges primarily consists of severance and employee benefits in connection with the global restructuring implemented in January 2025, as more fully described in Note 14 Restructuring and Other Related Charges to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. 25 Impairment of capitalized software and technology development costs . For the three and six months ended January 31, 2025, we wrote off approximately $0.8 million of GuruShots’ capitalized software and technology development costs in connection with the global restructuring implemented in January 2025, as more fully described in Note 14 Restructuring and Other Related Charges to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Interest and other income, net. Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2,024 % Change (in thousands, except percentages) Interest and other income, net $ 171 $ 165 3.6 % $ 352 $ 246 43.1 % As a percentage of revenues 2.5 % 2.1 % 2.5 % 1.7 % In the three months ended January 31, 2025, interest and other income, net increased by $6,000 compared to the same period in the prior year, which included a deduction of $19,000 in interest expense related to the $2 million term loan which was repaid in November 2023. In the six months ended January 31, 2025, interest and other income, net increased by $106,000 compared to the same period in the prior year, which included a deduction of $65,000 in interest expense related to the $2 million term loan which was repaid in November 2023 and a $50,000 impairment charge related to our investment in a privately held company of which the carrying value was reduced to $0 as of October 30, 2023. Net (loss) gain resulting from foreign exchange transactions . Net (loss) gain resulting from foreign exchange transactions is comprised of gains and losses generated from movements in NOK and EUR relative to the U.S. Dollar, including gains or losses from our hedging activities. Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2,024 % Change (in thousands, except percentages) Net (loss) gain resulting from foreign exchange transactions $ (86 ) $ 76 nm $ (100 ) $ (143 ) -30.1 % As a percentage of revenues -1.2 % 1.0 % -0.7 % -1.0 % nm-not meaningful In the three months ended January 31, 2025, net loss resulting from foreign exchange transactions was $86,000 compared to a net gain of $76,000 for the same period in the prior year primarily due to unfavorable FX movement related to our NOK and EUR hedging activities in the current period. In the six months ended January 31, 2025, net loss resulting from foreign exchange transactions decreased by $43,000 from $143,000 to $100,000 when compared to the same period in the prior year primarily due to favorable FX movement related to our NOK and EUR hedging activities in the current period. We recognized Mark to Market (“MTM”) losses of $111,000 and $51,000 from NOK and EUR hedging activities, respectively, as of January 31, 2025 and July 31, 2024, as more fully described in Note 4, Derivative Instruments, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. 26 Benefit from Income taxes Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2,024 % Change (in thousands, except percentages) Benefit from income taxes $ (455 ) $ (2,459 ) -81.5 % $ (406 ) $ (2,260 ) -82.0 % As a percentage of revenues -6.5 % -31.6 % -2.9 % -15.2 % In the three months ended January 31, 2025, income tax benefit decreased by $2.0 million compared to the same period in the prior year, resulting primarily from the $2.5 million increase in deferred tax assets related to the $11.9 million impairment loss on GuruShot’s intangible assets recorded in the prior period offset by $0.2 million increase in deferred tax assets related to the impairment charge of GuruShot’s capitalized software and technology development costs of $0.8 million recorded in the current period. In the six months ended January 31, 2025, income tax benefit decreased by $1.9 million compared to the same period in the prior year, resulting primarily from the $2.5 million increase in deferred tax assets related to the $11.9 million impairment loss on GuruShot’s intangible assets recorded in the prior period offset by $0.2 million increase in deferred tax assets related to the impairment charge of GuruShot’s capitalized software and technology development costs of $0.8 million recorded in the current period. Comparison of our Segment Results of Operations The following table presents the results for our Zedge Marketplace and GuruShots segment income (loss) from operations for the three and six months ended January 31, 2025 and 2024: Three Months Ended January 31, Six Months Ended January 31, 2025 2024 % Change 2025 2024 % Change (in thousands, except percentages) Segment income (loss) from operations: Zedge Marketplace $ 42 $ 1,677 -97.5 % $ 976 $ 3,331 -70.7 % GuruShots (2,261 ) (13,607 ) -83.4 % (3,652 ) (14,940 ) -75.6 % Total $ (2,219 ) $ (11,930 ) -81.4 % $ (2,676 ) $ (11,609 ) -76.9 % Three months Ended January 31, 2025 Compared to Three Months Ended January 31, 2024 For the three months ended January 31, 2025, our income from operations related to the Zedge Marketplace decreased to $42,000 from $1.7 million for the same period in the prior year, primarily due to lower revenue coupled with higher SG&A expenses incurred in the current period. Additionally, we recorded $0.4 million in restructuring charges in the current year period which contributed in part to the decrease in the segment income from operation related to the Zedge Marketplace. For the three months ended January 31, 2025, our loss from operations related to GuruShots decreased to $2.3 million from $13.6 million for the same period in the prior year, primarily due to the $11.9 million impairment loss of intangible assets recorded in the prior period. Additionally, we recorded $0.9 million restructuring and other related charges in the current period which contributed in part to the increase in the loss from operation for GuruShots. Excluding the restructuring and other related charges of $0.9 million in the current period and impairment loss of $11.9 million in the prior period, loss from operation related to GuruShots would have been $1.4 million in the three months ended January 31, 2025 compared to $1.7 million for the same period in the prior year. The $0.3 million decrease in loss from operations can be attributed to lower SG&A and lower depreciation and amortization, the combination thereof more than offset the decline in revenue in the three months ended January 31, 2025 compared to the same period in the prior year. 27 Six months Ended January 31, 2025 Compared to Six Months Ended January 31, 2024 For the six months ended January 31, 2025, our income from operations related to the Zedge Marketplace decreased to $976,000 from $3.3 million for the same period in the prior year, primarily due to higher SG&A expenses incurred in the current period. Additionally, we recorded $0.4 million restructuring charges in the current period which contributed in part to the decrease in the segment income from operation related to the Zedge Marketplace. For the six months ended January 31, 2025, our loss from operations related to GuruShots decreased to $3.7 million from $14.9 million for the same period in the prior year, primarily due to the $11.9 million impairment loss of intangible assets recorded in the prior period. Additionally, we recorded $0.9 million restructuring and other related charges in the current period which contributed in part to the increase in the loss from operation related to GuruShots. Excluding the restructuring and other related charges of $0.9 million in the current period and impairment loss of $11.9 million in the prior period, loss from operation related to GuruShots would have been $2.8 million in the six months ended January 31, 2025 compared to $3.0 million for the same period in the prior year. The $0.2 million decrease in loss from operations can be attributed to lower SG&A and lower depreciation and amortization, the combination thereof more than offset the decline in revenue in the six months ended January 31, 2025 compared to the same period in the prior year. Liquidity and Capital Resources General At January 31, 2025, we had cash and cash equivalents of $20.0 million and working capital (current assets less current liabilities) of $16.8 million, compared to $20.0 million and $17.7 million, respectively, at July 31, 2024. We expect that our cash and cash equivalents on hand and our cash flow from operations will be sufficient to meet our anticipated cash requirements for the twelve-month period ending March 14, 2026. We maintain a revolving credit facility of $4 million, including a foreign exchange contract facility of up to $7.5 million with WAB, as discussed below under Financing Activities and in Note 10, Term Loan and Revolving Credit Facility , to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. The following tables present selected financial information for the six months ended January 31, 2025 and 2024: Six Months Ended January 31, (in thousands) 2025 2024 $ Changes Cash flows provided by (used in): Operating activities $ 1,878 $ 2,812 $ (934 ) Investing activities (266 ) (800 ) 534 Financing activities (1,494 ) (2,010 ) 516 Effect of exchange rate changes on cash and cash equivalents (62 ) (63 ) 1 Increase (decrease) in cash and cash equivalents $ 56 $ (61 ) $ 117 Operating Activities Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable. Cash provided by operating activities decreased by $934,000 in the six months ended January 31, 2025 to $1.9 million from $2.8 million in the same period in the prior year, primarily attributable to the $1.4 million loss from operation in the current period compared to $0.3 million income from operation in the prior period, before accounting for the restructuring and acquisition related charges, and changes in assets and liabilities. 28 Changes in Trade Accounts Receivable Gross trade accounts receivable decreased $0.4 million to $3.0 million at January 31, 2025 from $3.4 million at July 31, 2024, primarily due to lower revenue in the preceding two months ended January 31, 2025 when compared to the same period ended July 31, 2024. Investing Activities Cash used in investing activities in the six months ended January 31, 2025 and 2024 consisted primarily of capitalized software and technology development costs related to various projects that we invested in specific to the various platforms on which we operate our service. Financing Activities In the six months ended January 31, 2025 and 2024, we purchased 6,903 shares and 6,328 shares, respectively, of our Class B common stock from certain employees for $22,000 and $13,000, respectively, to satisfy tax withholding obligations in connection with the vesting of DSUs. In the six months ended January 31, 2025, we repurchased - in connection with the share repurchase program - 464,419 shares of our Class B common stock for approximately $1.5 million. We did not buy back any shares in the six months ended January 31, 2024. We do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors. Concentration of Credit Risk and Significant Customers Historically, we have had very little or no bad debt, which is common with other platforms of our size that derive their revenue from mobile advertising, as we aggressively manage our collections and perform due diligence on our customers. In addition, the majority of our revenue is derived from large, credit-worthy customers, e.g. Google, Facebook, Vungle and AppLovin, and we terminate our services with smaller customers immediately upon balances becoming past due. Since these smaller customers rely on us to derive their own revenue, they generally pay their outstanding balances on a timely basis. In the six months ended January 31, 2025, one major customer represented 31% of our revenue. In the six months ended January 31, 2024, two customers represented 29% and 11% of our revenue, respectively. At January 31, 2025, three customers represented 42%, 14% and 10% of our accounts receivable balance, respectively. At January 31, 2024, two customers represented 35% and 15% of our accounts receivable balance, respectively. All of these significant customers were advertising exchanges operated by leading companies, and the receivables represent many smaller amounts due from their advertisers. Contractual Obligations and Other Commercial Commitments Smaller reporting companies are not required to provide the information required by this item. Off-Balance Sheet Arrangements At January 31, 2025, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. 29 Item 3. Quantitative and Qualitative Disclosures About Market Risks Smaller reporting companies are not required to provide the information required by this item. Item 4. 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 Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level as of January 31, 2025. Changes in Internal Control over Financial Reporting . There were no changes in our internal control over financial reporting during the quarter ended January 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings in which we are involved are more fully described in Note 9, Commitments and Contingencies , to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Item 1A. Risk Factors There are no material changes from the risk factors previously disclosed in Item 1A to Part I of the 2024 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In October 2021, our Board of Directors authorized a repurchase program of up to 1.5 million shares of our Class B common stock at a maximum aggregate purchase price of $3 million. In September 2024, upon the completion of the initial $3.0 million repurchase program, our Board of Directors authorized an additional $5 million for the repurchase program with no limitation on the number of shares that may be repurchased. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. Open market repurchases may be structured to occur in accordance with the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also, from time to time, enter into Rule 10b5-1 (under the Exchange Act) trading plans to facilitate repurchases of our shares. The repurchase program does not obligate us to acquire any particular amount of our Class B common stock, has no expiration date and may be modified, suspended, or terminated at any time at our discretion. The following table summarizes the share repurchase activity for the second quarter of our fiscal 2025: Period Total Number of Shares Purchased Average Price Paid Per Share (1) Total Number of Shares Purchased as Part of the Publicly Announced Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in thousands) (in thousands) (in thousands) November 1, 2024 to November 30, 2024 - $ - $ 5,006 December 1, 2024 to December 31, 2024 144 $ 2.83 144 $ 4,600 January 1, 2025 - January 31, 2025 101 $ 2.80 101 $ 4,316 Total 245 245 (1) The average price paid per share includes any broker commissions. Item 3. Defaults Upon Senior Securities None Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information None 31 Item 6. Exhibits Exhibit Number Description 31.1* Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §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 or furnished herewith. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ZEDGE, INC. March 14, 2025 By: /s/ JONATHAN REICH Jonathan Reich Chief Executive Officer March 14, 2025 By: /s/ YI TSAI Yi Tsai Chief Financial Officer 33