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, 2023

☐ 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 14, 2023, the registrant had the following shares outstanding:

Class A common stock, $.01 par value:	524,775 shares outstanding
Class B common stock, $.01 par value:	14,152,088 shares outstanding (excluding 522,000 shares held in treasury)

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 Income	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	19

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	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

SIGNATURES		34

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,
	2023			2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	17,459		$	17,085
Trade accounts receivable		2,788			2,411
Prepaid expenses and other receivables		1,334			396
Total current assets		21,581			19,892
Property and equipment, net		1,933			1,660
Intangible assets, net		19,866			21,025
Goodwill		10,716			10,788
Deferred tax assets, net		828			861
Other assets		326			400
Total assets	$	55,250		$	54,626
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	1,381		$	1,180
Deferred acquisition payment payable		-			962
Contingent consideration-current portion		-			215
Accrued expenses and other current liabilities		3,174			2,898
Deferred revenues		2,805			3,402
Total current liabilities		7,360			8,657
Term loan, net of deferred financing costs		1,983			-
Contingent consideration-long term portion		-			1,728
Other liabilities		-			53
Total liabilities		9,343			10,438
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $.01 par value; authorized shares—2,400; no shares issued and outstanding		-			-
Class A common stock, $.01 par value; authorized shares—2,600; 525 shares issued and outstanding at January 31, 2023 and July 31, 2022		5			5
Class B common stock, $.01 par value; authorized shares—40,000; 14,674 shares issued and 14,152 shares outstanding at January 31, 2023, and 13,951 shares issued and 13,877 outstanding at July 31, 2022		147			139
Additional paid-in capital		44,979			43,609
Accumulated other comprehensive loss		(1,498	)		(1,391	)
Retained earnings		3,597			2,160
Treasury stock, 522 shares at January 31, 2023 and 74 shares at July 31, 2022, at cost		(1,323	)		(334	)
Total stockholders’ equity		45,907			44,188
Total liabilities and stockholders’ equity	$	55,250		$	54,626

See accompanying notes to unaudited condensed consolidated financial statements.

ZEDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except for per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	January 31						January 31
	2023			2022			2023			2022
Revenues, net	$	6,983		$	6,915		$	13,883		$	12,943
Costs and expenses:
Direct cost of revenues (excluding amortization of capitalized software and technology development costs which is included below)		632			342			1,264			652
Selling, general and administrative		5,871			3,106			11,697			5,838
Depreciation and amortization		815			360			1,608			758
Change in fair value of contingent consideration		(1,793	)		-			(1,943	)		-
Income from operations		1,458			3,107			1,257			5,695
Interest and other income, net		77			14			112			27
Net gain (loss) resulting from foreign exchange transactions		160			(85	)		84			(95	)
Income before income taxes		1,695			3,036			1,453			5,627
Provision for income taxes		89			711			16			1,247
Net income	$	1,606		$	2,325		$	1,437		$	4,380
Other comprehensive income (loss):
Changes in foreign currency translation adjustment		152			(222	)		(107	)		(80	)
Total other comprehensive income (loss)		152			(222	)		(107	)		(80	)
Total comprehensive income	$	1,758		$	2,103		$	1,330		$	4,300
Income per share attributable to Zedge, Inc. common stockholders:
Basic	$	0.11		$	0.16		$	0.10		$	0.31
Diluted	$	0.11		$	0.16		$	0.10		$	0.29
Weighted-average number of shares used in calculation of income per share:
Basic		14,087			14,297			14,208			14,289
Diluted		14,259			14,971			14,440			15,007

See accompanying notes to unaudited condensed consolidated financial statements.

ZEDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

	Class A Common Stock				Class B Common Stock				Additional Paid-in			Accumulated Other Comprehensive			Retained			Treasury Stock					Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Loss			Earnings			Shares		Amount			Equity
Balance – July 31, 2022		525	$	5		13,951	$	139	$	43,609		$	(1,391	)	$	2,160			74	$	(334	)	$	44,188
Stock-based compensation		-		-		30		1		589			-			-					-			590
Purchase of treasury stock		-		-		-		-		-			-			-			130		(310	)		(310	)
Foreign currency translation adjustment		-		-		-		-		-			(259	)		-					-			(259	)
Net loss		-		-		-		-		-			-			(169	)				-			(169	)
Balance – October 31, 2022		525		5		13,981		140		44,198			(1,650	)		1,991			204		(644	)		44,040
Restricted stock issuance in connection with GuruShots acquisition		-		-		617		6		(6	)		-			-					-			-
Stock-based compensation		-		-		58		1		742			-			-					-			743
Purchase of treasury stock		-		-		-		-		-			-			-			318		(679	)		(679	)
Stock issued for matching contributions to the 401(k) Plan		-		-		18		-		45			-			-					-			45
Foreign currency translation adjustment		-		-		-		-		-			152			-					-			152
Net income		-		-		-		-		-			-			1,606					-			1,606
Balance – January 31, 2023		525	$	5		14,674	$	147	$	44,979		$	(1,498	)	$	3,597			522	$	(1,323	)	$	45,907

	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, 2021		525	$	5		13,923	$	139	$	41,664	$	(997	)	$	(7,554	)		58	$	(102	)	$	33,155
Stock-based compensation		-		-		12		-		319		-			-					-			319
Purchase of treasury stock		-		-		-		-		-		-			-			16		(232	)		(232	)
Foreign currency translation adjustment		-		-		-		-		-		142			-					-			142
Net income		-		-		-		-		-		-			2,055					-			2,055
Balance -October 31, 2021		525		5		13,935		139		41,983		(855	)		(5,499	)		74		(334	)		35,439
Exercise of stock options		-		-		3		-		7		-			-					-			7
Stock-based compensation		-		-		6		-		446		-			-					-			446
Stock issued for matching contributions to the 401(k) Plan		-		-		5		-		43		-			-					-			43
Foreign currency translation adjustment		-		-		-		-		-		(222	)		-					-			(222	)
Net income		-		-		-		-		-		-			2,325					-			2,325
Balance – January 31, 2022		525	$	5		13,949	$	139	$	42,479	$	(1,077	)	$	(3,174	)	$	74	$	(334	)	$	38,038

See accompanying notes to unaudited condensed consolidated financial statements.

ZEDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Six Months Ended
	January 31,
	2023			2022
Operating activities
Net income	$	1,437		$	4,380
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		30			23
Amortization of intangible assets		1,158			224
Amortization of capitalized software and technology development costs		420			511
Amortization of deferred financing costs		1			-
Change in fair value of contingent consideration		(1,943	)		-
Stock-based compensation		1,378			808
Deferred income taxes		33			(50	)

Change in assets and liabilities:
Trade accounts receivable		(377	)		(741	)
Prepaid expenses and other current assets		(938	)		(244	)
Other assets		22			1
Trade accounts payable and accrued expenses		497			806
Deferred revenue		(597	)		(39	)
Net cash provided by operating activities		1,121			5,679
Investing activities
Final payments for asset acquisitions		(962	)		-
Capitalized software and technology development costs		(668	)		(305	)
Purchase of property and equipment		(53	)		(18	)
Net cash used in investing activities		(1,683	)		(323	)
Financing activities
Proceeds from term loan payable		2,000			-
Payment of deferred financing costs		(18	)		-
Proceeds from exercise of stock options		-			7
Purchase of treasury stock in connection with share buyback program and restricted stock vesting		(989	)		(232	)
Net cash provided by (used in) financing activities		993			(225	)
Effect of exchange rate changes on cash and cash equivalents		(57	)		(23	)
Net increase in cash and cash equivalents		374			5,108
Cash and cash equivalents at beginning of period		17,085			24,908
Cash and cash equivalents at end of period	$	17,459		$	30,016

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments made for income taxes	$	711		$	309
Cash payments made for interest expenses	$	31		$	-

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Emojipedia through release of escrow funds of $4,776, plus additional amounts due to seller of $1,923 and legal fees of $12	$	-		$	6,711
Accounts receivable from certain Emojipedia websites collected by Seller	$	-		$	45

See accompanying notes to unaudited condensed consolidated financial statements.

ZEDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Zedge, Inc. and its 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, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2023 or any other period. The balance sheet at July 31, 2022 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 consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2022, 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 2022 refers to the fiscal year ended July 31, 2022).

Reportable Segments

Effective August 1, 2022, the Company revised the presentation of segment information to reflect its acquisition of GuruShots (see Note 5). As such, the Company now reports operating results through two reportable segments: Zedge App and GuruShots, as further discussed in Note 12

Use of Estimates

The preparation of the Company’s 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 the Company’s estimates due to risks and uncertainties, including uncertainty in the current economic environment due to various global events. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires consideration of forward-looking information to calculate credit loss estimates. These changes will result in an earlier recognition of credit losses. The Company’s financial assets held at amortized cost include accounts receivable. The amendments in ASU 2020-05 deferred the effective date for Topic 326 to fiscal years beginning after December 15, 2022. The Company will adopt the new standard effective August 1, 2023 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers. ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities from acquired contracts using the revenue recognition guidance in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, rather than the prior requirement to record them at fair value. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company will adopt the new standard effective August 1, 2023 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

With the exception of the standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended January 31, 2023, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2022, that are of significance or potential significance to the Company.

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.

Related party transactions with these related parties did not have a material impact to the consolidated balance sheets as of January 31, 2023 or July 31, 2022, or the consolidated statements of operations and comprehensive income for the three and six months ended January 31, 2023 or 2022.

Note 2—Revenue

Disaggregation of Revenue

The following table presents revenue disaggregated by segment and type (in thousands):

	Three Months Ended				Six Months Ended
	January 31,				January 31,
	2023		2022		2023		2022
Zedge App	(in thousands)				(in thousands)
Advertising revenue	$	4,630	$	5,718	$	9,120	$	10,598
Paid subscription revenue		875		953		1,766		1,913
Other revenues		230		244		420		432
Total Zedge App revenue		5,735		6,915		11,306		12,943
GuruShots
Digital goods and services		1,248		-		2,577		-
Total revenue	$	6,983	$	6,915	$	13,883	$	12,943

Contract Balances

The Company enters into contracts with its customers, which may give rise to contract liabilities (deferred revenue) and contract assets (unbilled revenue). The payment terms and conditions within the Company’s contracts vary by products or services purchased, the substantial all of which are due in less than one year. When the timing of revenue recognition differs from the timing of payments made by customers, the Company recognizes only deferred revenue (customer payment is received in advance of performance). The Company does not have unbilled revenue (its performance precedes the billing date).

Deferred revenues

On April 1, 2022, the AppLovin Corporation paid the Company a one-time integration bonus of $2 million for migrating to their mediation platform. This amount is being amortized over an estimated service period of 24 months. The Company’s deferred revenue balance related to this bonus was approximately $1.2 million and $1.7 million as of January 31, 2023 and July 31, 2022, respectively.

The Company records deferred revenues related to the unsatisfied performance obligations with respect to subscription revenue. The Company’s deferred revenue balance related to paid subscriptions was approximately $1.4 million related to approximately 654,000 active subscribers, and approximately $1.5 million, related to approximately 692,000 active subscribers as of January 31, 2023 and July 31, 2022, respectively. The amount of revenue related to subscribers recognized in the six months ended January 31, 2023 that was included in the deferred balance at July 31, 2022 was $1.1 million.

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 upon 180 days of account inactivity. As of January 31, 2023, and July 31, 2022, the Company’s deferred revenue balance related to Zedge Premium was approximately $268,000 and $259,000, respectively.

Total deferred revenues decreased by $0.6 million from $3.4 million at July 31, 2022 to $2.8 million at January 31, 2023, primarily attributed to the amortization of the one-time integration bonus mentioned above.

Significant Judgments

The advertising networks and advertising exchanges to which the Company sell its inventory track and report the impressions and installs 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 installs delivered by the advertising networks and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.

Practical Expedients

The Company expenses the fees retained by Google Play related to subscription revenue when incurred as marketing expense because the duration of the contracts for which the Company pays commissions are less than one year. These costs are included in the selling, general and administrative expenses of the condensed consolidated statements of operations and comprehensive income.

Note 3—Fair Value Measurements

The following tables present the balance of assets and liabilities measured at fair value on a recurring basis (in thousands):

	Level 1		Level 2		Level 3		Total
January 31, 2023
Assets:
Foreign exchange forward contracts	$	-	$	86	$	-	$	86

July 31, 2022
Liabilities:
Contingent consideration-short term	$	-	$	-	$	215	$	215
Contingent consideration-long term	$	-	$	-	$	1,728	$	1,728
Foreign exchange forward contracts	$	-	$	141	$	-	$	141

(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

Contingent Consideration

Contingent consideration related to the business combinations discussed below in Note 5 are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.

The following table provides a rollforward of the contingent consideration related to the GuruShots acquisition (in thousands):

Balance at July 31, 2022	$	1,943
Change in fair value		(1,943	)
Balance at January 31, 2023	$	0

The overall fair value of the contingent consideration decreased by $1,943,000 during the six months ended January 31, 2023, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved.

Fair Value of Other Financial Instruments

Fair value of the outstanding foreign exchange forward contracts are marked to market price at the end of each measurement period.

The Company’s other financial instruments at January 31, 2023 and July 31, 2022 included trade accounts receivable and trade accounts payable. The carrying amounts of the trade accounts receivable and trade accounts payable approximated fair value due to their short-term nature.

Note 4—Derivative Instruments

The primary risk managed by the Company using derivative instruments is foreign exchange risk. Foreign exchange forward contracts are entered into as hedges against unfavorable fluctuations in the U.S. Dollar (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 allowing the Company to enter into foreign exchange contracts under its revolving credit facility with the bank (see Note 11). 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 income. By using derivative instruments to mitigate exposures to changes in foreign exchange rates, the Company is exposed to credit risk from the failure of the counterparty to perform under the terms of the contract. The credit or repayment risk is minimized by entering into transactions with high-quality counterparties.

The outstanding contracts at January 31, 2023, were as follows:

Settlement Date	U.S. Dollar Amount		NOK Amount
Feb-23		225,000		2,294,685
Mar-23		225,000		2,293,065
Apr-23		225,000		2,291,355
May-23		225,000		2,317,545
Total		900,000		9,196,650

Settlement Date	U.S. Dollar Amount		EUR Amount
Feb-23		225,000		221,195
Mar-23		225,000		220,826
Apr-23		225,000		220,459
May-23		225,000		220,070
Total		900,000		882,550

The fair value of outstanding derivative instruments recorded in the accompanying unaudited condensed consolidated balance sheets were as follows:

		January 31,		July 31,
Assets and Liabilities Derivatives:	Balance Sheet Location	2023		2022
Derivatives not designated or not qualifying as hedging instruments		(in thousands)
Foreign exchange forward contracts	Other current assets	$	86	$	-
Foreign exchange forward contracts	Accrued expenses and other current liabilities	$	-	$	141

The effects of derivative instruments on the condensed consolidated statements of operations and comprehensive income were as follows:

		Three Months Ended January 31,					Six Months Ended January 31,
Amount of Gain (Loss) Recognized on Derivatives		2023		2022			2023		2022
Derivatives not designated or not qualifying as hedging instruments	Location of gain (loss) recognized on derivatives	(in thousands)					(in thousands)
Foreign exchange forward contracts	Net gain (loss) resulting from foreign exchange transactions	$	185	$	(127	)		64	$	(117	)

Note 5—Business Combination and Assets Acquisition

GuruShots Acquisition

On April 12, 2022, the Company consummated the acquisition of 100% of the outstanding equity securities of GuruShots, Ltd., an Israeli company that operates a platform used for its competitive photography game available across iOS, Android and the web. The acquisition was effected pursuant to a Share Purchase Agreement (the “SPA”) between the Company, GuruShots and the holders of the GuruShots equity interests. This acquisition was accounted for as a business combination under the acquisition method of accounting and the results of operations of GuruShots have been included in the Company’s results of operations as of the acquisition date.

The purchase price for the equity securities of GuruShots consists of approximately $18 million in cash paid at closing and contingent payments (the “Earnout”) of up to a maximum of $8.4 million due on each of the first and second anniversaries from the closing, payable either in cash or Class B common stock of the Company or a combination thereof, at the Company’s discretion, and subject to GuruShots achieving certain financial targets set forth in the SPA. The fair value of the earnout amount at the acquisition date was estimated at $5.9 million based on a Monte Carlo simulation model in an option pricing framework, whereby a range of possible scenarios were simulated. This fair value was reduced from $5.9 million to $1.9 million as of July 31, 2022 and further reduced to $0 as of January 31, 2023. See Note 3, Fair Value Measurements, for additional discussion of contingent consideration as of January 31, 2023.

Under the SPA, the Company has agreed to make certain minimum investments in user acquisition for GuruShots in the period covered by the Earnout, subject to the acquired users generating minimum levels of Return On Ad Spend (“ROAS”) as set forth in the SPA. As of January 31, 2023, due to market conditions in the mobile/on-line gaming industry and other factors, the Company was not on track to make the minimum investment for the first annual period covered by the Earnout. Based on the data from the user acquisition investment made, the Company does not believe that the minimum ROAS would have been maintained from the additional investment.

In addition, the Company has committed to a retention pool of $4 million in cash and 626,242 shares of the Company Class B common stock (the number of shares was determined based on a value of $4 million or $6.39 per share which was the volume weighted average closing prices of the Class B common stock on the NYSE American Exchange for the thirty trading days ended April 12, 2022) for GuruShots’ founders and employees that will be payable or vest, as applicable, over three years from April 1, 2022 based on the beneficiaries thereof remaining employed by the Company or a subsidiary.

The parties to the SPA have made customary representations, warranties and covenants therein. The assertions embodied in those representations and warranties were made for purposes of the SPA and are subject to qualifications and limitations agreed by the respective parties in connection with negotiating the terms of the SPA.

The cash purchase price and the earnout have been allocated to GuruShots’ tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as the Company obtains additional information for those estimates during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.

The Company will record measurement period adjustments based on its ongoing valuation and purchase price allocation procedures. The Company is still finalizing the valuation and purchase price allocation as it relates to the net working capital amount in the table below.

The allocation of the preliminary purchase price is as follows (in thousands):

(Dollar Amounts in Thousands)
Purchase price consideration:
Cash consideration paid at close	$	15,242
Cash contributed to escrow accounts at close		2,700
Cash deducted from purchase price and contributed to GuruShots’ working capital		58
Fair value of contingent consideration to be achieved at year 1		3,396
Fair value of contingent consideration to be achieved at year 2		2,508
Fair value of total consideration transferred		23,904
Total purchase price, net of cash acquired	$	23,384

Fair value allocation of purchase price:
Cash and cash equivalents	$	520
Trade accounts receivable		282
Prepaid expenses		145
Property and equipment, net		17
Other assets (including ROU)		151
Accounts payable and accrued expenses		(1,351	)
Operating lease liabilities, current		(53	)
Operating lease liabilities, noncurrent		(34	)
Acquired intangible assets		15,320
Goodwill		8,907
Total purchase price	$	23,904

The cash consideration paid includes $2.7 million deposited with the escrow agent that is available to satisfy for post-closing indemnification claims made within 18 months of the acquisition date. There have been no claims made as of January 31, 2023.

The earnout amount to be paid (up to the maximum of $16.8 million) will be determined based upon the satisfaction of certain defined operational milestones and will be remeasured at fair value at each reporting period through earnings. As the fair value is based on unobservable inputs, the liabilities are included in Level 3 of the fair value measurement hierarchy. The unobservable inputs used in the determination of the fair value of the earnout which is assumed to be paid in cash include management’s reasonable assumptions about the likelihood of payment based on the satisfaction of certain defined operational milestones and discount rates based on cost of debt.

The Company has issued 616,848 (net of forfeiture of 9,394 shares) shares of the Company’s Class B common in respect of the retention pool to the GuruShots founders and employees, which will be held by a trustee based in Israel when those shares vest. These shares will vest, in equal tranches, over three years assuming that the recipients remain employed by the Company or a subsidiary through the vesting dates. The grant date $4 million fair value of these unvested restricted stock is not included as purchase consideration above, as it has a post-combination service requirement and will be accounted for separately from the business combination as stock compensation expense. Additionally, the founders and employees are also entitled to receive an aggregate of up to $4 million retention cash bonus over three years subject to the same continued service requirement, which was not included in the purchase price above. As of January 31, 2023, the Company has accrued $1.1 million in retention bonus which is included in the accrued expense and other current liabilities.

Identified intangible assets consist of trade names, technology and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

(Dollar Amounts in Thousands)	Asset Value		Useful Life
Identified intangible assets:
Trade names	$	3,570	12 years
Acquired developed technology		3,950	5 years
Customer relationships		7,800	10 years
Total identified intangible assets	$	15,320

The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the relief-from-royalty method and multi-period excess earnings. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for GuruShots over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate.

The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed.

The Company recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. The Company believes that the investment value of the future enhancement of the Company’s products and offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $8.9 million of goodwill, which has been reduced by $180,000 subsequently related to accounts payable balance as of the closing date. The goodwill is deductible for tax purposes.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) are not included as a component of consideration transferred but are required to be expensed as incurred. During fiscal 2022, we incurred $860,000 of acquisition-related costs, which are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations and comprehensive income.

Emojipedia Acquisition

Pursuant to an Asset Purchase Agreement, on August 1, 2021 (“Closing”), the Company consummated the acquisition of substantially all of the assets of Emojipedia Pty Ltd, a proprietary company organized under the laws of Australia. The total purchase price of the assets was $6.7 million, of which $4.8 million was paid on August 2, 2021, $917,000 was paid on February 1, 2022, and the remaining $962,000 paid on August 2, 2022. The $4.8 million was funded into an escrow account and classified as other assets on our consolidated balance sheet as of July 31, 2021.

The assets purchased include emojipeida.org, a set of smaller websites, a bank of emoji related URLs related to the seller’s business, including World Emoji Day, the annual World Emoji Awards, and Emojitracker. The asset purchase does not qualify as a business combination under FASB ASC 805, Business Combinations, and has therefore been accounted for as an asset acquisition. The total purchase price for this acquisition was allocated to intangible assets are amortized on a straight-line basis over their estimated useful lives of fifteen years.

Note 6—Intangible Assets and Goodwill

The following table presents the detail of intangible assets, net as of January 31, 2023 and July 31, 2022 (in thousands):

	January 31, 2023						July 31, 2022
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Emojipedia.org and other internet domains acquired	$	6,711	$	671	$	6,040	$	6,711	$	447	$	6,264
Acquired developed technology		3,950		634		3,316		3,950		238		3,713
Customer relationships		7,800		623		7,177		7,800		233		7,567
Trade names		3,570		237		3,333		3,570		89		3,481
Total intangible assets	$	22,031	$	2,165	$	19,866	$	22,031	$	1,007	$	21,025

Estimated future amortization expense as of January 31, 2023 is as follows (in thousands):

Fiscal 2023	$	1,158
Fiscal 2024		2,315
Fiscal 2025		2,315
Fiscal 2026		2,315
Fiscal 2027		2,315
Thereafter		9,449
Total	$	19,866

The Company’s amortization expense for intangible assets were $1.2 million and $0.2 million for the six months ended January 31, 2023 and 2022, respectively.

Goodwill

Changes in the carrying amount of goodwill in the six months ended January 31, 2023 are as follows (in thousands):

	Carrying Amount

Balance at July 31, 2022	$	10,788
Foreign currency translation adjustments		(72	)
Balance at January 31, 2023	$	10,716

Note 7—Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

	January 31,		July 31,
	2023		2022

Accrued vacation	$	646	$	585
Accrued income taxes payable		39		169
Accrued payroll taxes		225		214
Accrued payroll and bonuses		1,654		1,084
Accrued expenses		166		262
Operating lease liability-current portion		119		142
Derivative liability for foreign exchange contracts		-		141
Due to artists		313		301
Other		12		-
Total accrued expenses and other current liabilities	$	3,174	$	2,898

Note 8—Stock-Based Compensation

The 2016 Incentive Plan

On March 23, 2022, the Company’s Board of Directors amended the Company’s 2016 Stock Option and Incentive Plan (as amended to date, the “2016 Incentive Plan”) to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 685,000 shares to an aggregate of 2,531,000 shares, including 626,000 shares for the GuruShots retention pool. This amendment was ratified by the Company’s stockholders at the Annual Meeting of Stockholders held on January 18, 2023.

On November 10, 2021, the Company’s Board of Directors amended the 2016 Incentive Plan to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 325,000 shares to an aggregate of 1,846,000 shares. This amendment was ratified by the Company’s stockholders at the Annual Meeting of Stockholders held on January 12, 2022.

At January 31, 2023, there were 421,000 shares of Class B common stock available for awards under the 2016 Incentive Plan before accounting for the 204,000 contingently issuable shares related to the deferred stock units (“DSUs”) with both service and market conditions.

Stock-based compensation

The Company recognizes stock-based compensation for stock-based awards, including stock options, restricted stock and DSUs based on the estimated fair value of the awards and 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.

In our accompanying unaudited condensed consolidated statements of operations and comprehensive income, the Company recognized stock-based compensation expense for our employees and non-employees as follows:

	Three Months Ended							Six Months Ended
	January 31,							January 31,
	2023		2022		% Change			2023		2022		% Change
	(in thousands)
Stock-based compensation expense	$	788	$	489		61.1	%	$	1,378	$	808		70.5	%

As of January 31, 2023, the Company’s unrecognized stock-based compensation expense was $0.4 million for unvested stock options, $1.0 million for DSUs and $3.0 million for unvested restricted stock including the $4 million portion of retention bonus to be paid in the Company’s Class B common stock in connection with the GuruShots acquisition.

In the six months ended January 31, 2023 and 2022, the Company purchased 6,310 shares and 16,115 shares respectively of Class B Stock from certain employees for $17,000 and $232,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock and DSUs.

Repricing of Outstanding and Unexercised Options

On October 20, 2022, the Board unanimously approved the repricing of all outstanding and unexercised stock options granted under the 2016 Plan that were out-of-the-money and held by current employees, executive officers, and consultants of the Company (the “Eligible Stock Options”). Effective October 20, 2022, the exercise price of the eligible stock options was reduced to $2.27, the closing price of its common stock on October 19, 2022. Except for the modification to the exercise price of the Eligible Stock Options, all other terms and conditions of each of the Eligible Stock Options will remain in full force and effect.

Pursuant to the Plan, the Board, as the administrator of the Plan, has discretionary authority, exercisable on such terms and conditions that it deems appropriate under the circumstances, to reduce the exercise price in effect for outstanding options under the Plans. In approving the repricing, the Board considered the impact of the current exercise prices of outstanding stock options on the incentives provided to employees and consultants, the lack of retention value provided by the outstanding stock options to employees and consultants, and the impact of such options on the capital structure of the Company. As of October, 2022, there were 532,750 stock options outstanding under the 2016 Plan, of which 191,663 outstanding stock options had exercise prices in excess of the market price of the Company’s common stock as of October 20, 2022, which is why the Board made the determination to deem all outstanding and unexercised stock options held by current employees, executive officers, and consultants as Eligible Stock Options.

Jonathan Reich, the Company’s Chief Executive Officer, and Yi Tsai, the Company’s Chief Financial Officer, hold Eligible Stock Options exercisable for an aggregate of 64,898 and 15,000 shares of the Company’s common stock, respectively.

The option repricing resulted in incremental stock-based compensation of $87,000, of which $43,000 was recorded as expense in the six months ended January 31, 2023, and $44,000 will be recognized as expense over the requisite service periods over which the Eligible Stock Options vest.

Note 9—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.

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,
	2023		2022		2023		2022
Basic weighted-average number of shares		14,087		14,297		14,208		14,289
Effect of dilutive securities:
Stock options		163		584		223		624
Non-vested restricted Class B common stock		4		68		5		72
Deferred stock units		5		22		4		22
Diluted weighted-average number of shares		14,259		14,971		14,440		15,007

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,
	2023		2022		2023		2022
Stock options		227		65		106		57
Non-vested restricted Class B common stock		617		-		617		-
Deferred stock units		228		289		228		230
Shares excluded from the calculation of diluted earnings per share		1,072		354		951		287

Note 10—Commitments and Contingencies

Commitments

In connection with the acquisition of GuruShots, the Company has (i) committed to a retention pool of $4 million in cash to be paid to the founders and employees of GuruShots that will be payable over three years from April 1, 2022 based on the beneficiaries thereof remaining employed by the Company or a subsidiary; and (ii) agreed to make certain minimum investments in user acquisition for GuruShots in the period covered by the earnout to be contingently paid to the prior owners of GuruShots subject to the acquired users generating minimum levels ROAS. As of January 31, 2023, due to market conditions in the mobile/on-line gaming industry and other factors, the Company was not on track to make the minimum investment for the first annual period covered by the Earnout. Based on the data from the user acquisition investment made, the Company does not believe that the minimum ROAS would have been maintained from the additional investment.

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 11—Term Loan and Revolving Credit Facilities

As of September 27, 2016, the Company entered into a loan and security agreement with Western Alliance Bank for a revolving credit facility of up to $2.5 million for an initial two-year term which was extended twice for another two-year term which expired September 26, 2022 and was amended on October 28, 2022 as discussed below. The revolving credit facility was secured by a lien on substantially all of the Company’s assets. Effective with the September 2020 extension, the outstanding principal amount bore interest per annum at the greater of 3.5% or the prime rate plus 1.25%. Previously the interest rate was capped at 5.0%. Interest was payable monthly and all outstanding principal and any accrued and unpaid interest was due on the maturity date of September 26, 2022. The Company was required to pay an annual facility fee of $10,000 to Western Alliance Bank. The Company was also required to comply with various affirmative and negative covenants and to maintain certain financial ratios during the term of the revolving credit facility. The covenants included a prohibition on the Company paying any dividend on its capital stock. At October 27, 2022 and July 31, 2022, there were no amounts outstanding under the revolving credit facility and the Company was in compliance with all of the covenants.

On October 28, 2022, the Company entered into an Amended and Restated Loan and Security Agreement (“Amended Loan Agreement”) with Western Alliance Bank. Pursuant to the Amended Loan Agreement, Western Alliance Bank agreed to provide the Company with a new term loan facility in the maximum principal amount of $7 million for a four-year term and a $4 million revolving credit facility for a two-year term. Amounts outstanding under the term loan and credit facility of the Amended Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 0.5%, with a Prime “floor” rate of 4.00%.

Pursuant to the Amended Loan Agreement, the Company discontinued the existing $2 million revolving credit facility under the prior version of the Loan and Security Agreement. At the time of the discontinuance, there was no outstanding balance on the revolving credit facility.

Pursuant to the Amended Loan Agreement, $2 million was advanced in a single-cash advance on October 28, 2022, with the remaining $5 million available for drawdown during twenty-four (24) months after closing. Each drawdown must be in an amount of not less than One Million Dollars ($1 million).

Interest accrued under the Amended Loan Agreement is due monthly, and the Company shall make monthly interest-only payments related to the term loan through the eighteen (18) month anniversary of the closing date. From the nineteen (19) month anniversary of the Closing Date through the maturity date, the Company shall repay each outstanding term loan by paying the Applicable Term Advance Amortization Payment equal to 1/12^th of 10% of the outstanding term loan balance plus monthly payments of accrued interest, in each case payable on the tenth (10th) day of each month. Zedge’s final payment for each Term Advance, due on the Term Loan Maturity Date, shall include all outstanding principal of and accrued and unpaid interest on such Term Advance. Once repaid, a Term Advance may not be reborrowed.

The Amended Loan Agreement may also require early repayments if certain conditions are met. Borrowings under the Amended Loan Agreement is secured by substantially all of the assets of the Company, its subsidiaries, and certain of its affiliates.

The Amended Loan Agreement includes the following financial covenants:

Debt Service Coverage Ratio. Zedge shall maintain, at all times, a Debt Service Coverage Ratio of no less than 1.25 to 1.00. This covenant shall be tested quarterly as of the end of each fiscal quarter.

Maximum Debt to EBITDA. Zedge shall maintain, at all times, a ratio of (a) indebtedness owed by Zedge to Western Alliance Bank, to (b) Zedge’s EBITDA for the trailing twelve (12) month period ended on such date of determination, shall not be greater than the amount set forth under the heading “Maximum Debt to EBITDA Ratio” as of, and for each of the dates appearing adjacent to such Maximum Debt to EBITDA Ratio”.

Maximum Debt to Quarter Ending		EBITDA Ratio
October 31, 2022		1.75 to 1.00
January 31, 2023		1.75 to 1.00
April 30, 2023		1.75 to 1.00
July 31, 2023		1.75 to 1.00
October 31, 2023		1.25 to 1.00
January 31, 2024		1.25 to 1.00
April 30, 2024		1.25 to 1.00
July 31, 2024		1.25 to 1.00
Thereafter		To be agreed upon

The Amended Loan Agreement also includes customary negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default.

As of November 16, 2016, the Company entered into a Foreign Exchange Agreement with Western Alliance Bank to allow the Company to enter into foreign exchange contracts not to exceed $5.0 million in the aggregate at any point in time under its revolving credit facility. This limit was raised to approximately $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 Western Alliance Bank, 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, 2023, there were $1.8 million of outstanding foreign exchange contracts, which reduced the available borrowing under the revolving credit facility by $180,000.

SEC Form 10-Q filed by Zedge Inc.