Zedge, Inc.: Form 10-Q for the period ended Apr 30, 2024

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, 2023 (the “2023 Form 10-K”), as filed with the U.S. Securities and Exchange Commission (the “SEC”).

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) our ability to successfully make acquisitions and/or successfully integrate acquisitions that we have made into Zedge without incurring unanticipated costs or without being subject to other integration issues that may disrupt our existing operations; (3) delay or failure to realize the expected synergies and benefits of the GuruShots acquisition; (4) the impact of the Covid-19 pandemic on our employees, customers, partners, and the global financial markets; (5) Russia’s invasion of Ukraine, and the international community’s response; and (6) recent attack by Hamas and other terrorist organizations from the Gaza Strip 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 2023 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 2023 Form 10-K.

Geo-Political and Macroeconomic Conditions and the COVID-19 Pandemic

We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including but not limited to, rising interest rates, actions taken to counter inflation, reduced consumer confidence, supply side disruptions, the COVID-19 pandemic, Russia’s invasion of Ukraine and the Israel-Hamas war. The future and full impact that these factors may have on our business, financial condition, and results of operations is unclear. The risks related to our business are further described in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those discussed under Item 1A to Part I “Risk Factors” in the 2023 Form 10-K.

Impact of Russia’s Invasion of Ukraine

We are closely monitoring the current and potential impact on our business, our people, and our users/customers as Russia’s war with Ukraine evolves. We have taken steps to comply with applicable domestic and international regulatory restrictions on international trade and financial transactions. Revenues associated with our users/customers in Russia and Belarus are not material to our consolidated financial results, and we anticipate that blocking Russian and Belarus users/customers’ access to our mobile app and web platforms will not have a material impact on our business. Management and our Board of Directors are monitoring the regional and global ramifications of the continuing events.

Impact of Israel-Hamas War

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. The extent and duration of this conflict remain uncertain, potentially involving other groups. Israel’s response led to the mobilization of reservists, affecting our workforce. Prior to this, proposed changes to 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 and cannot reasonably estimate the impact to the consolidated financial statements at this time.

COVID-19 Update

Although the World Health Organization declared in early May of 2023 that COVID-19 no longer constitutes a public health emergency we continue to actively monitor the COVID-19 developments and potential impact on our employees, business and operations. The effects of COVID-19 did not have a material impact on our result of operations or financial condition for the fiscal year ended July 31, 2023. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, we are not able to estimate the effects COVID-19 may have on our future results of operations or financial condition.

Overview

Zedge, Inc. (“Zedge”) builds digital marketplaces and friendly competitive games around content that people use to express themselves. Our leading products include Zedge Ringtones and Wallpapers, 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,’ where over 1 billion people create and share their content across social platforms, mobile, and video games, and content marketplaces. Goldman Sachs Research expects the 50 million global creators to grow at a 10-20% compound annual growth rate during the next five years. Furthermore, Goldman Sachs reports that professional creators earn more than $100,000 per year. We view the Creator Economy as an opportunity for Zedge to expand its business, especially as we execute by connecting our gamers with our marketplace.

The Zedge Ringtones and Wallpapers app (which is named “Zedge Wallpapers” in the App Store), which we refer to as our “Zedge App,” 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 April 30, 2024, our Zedge App had been installed nearly 661 million times since inception and had 27.7 million monthly active users (“MAU”). MAU is a key performance indicator (“KPI”) that captures the number of unique users that used our Zedge App during the final 30 days of the relevant period. Our platform allows creators to upload content to our marketplace and avail it to our users either for free or for a price, via ‘Zedge Premium,’ the section of our marketplace where we offer premium content (i.e., 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 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 weekly, monthly, annual or lifetime subscription. In April 2023, we introduced a subscription tier in the iOS version of the Zedge App. As of April 30, 2024, we had approximately 654,000 active subscribers.

In April 2022, we acquired GuruShots, a recognized category leader focused on gamifying the photography vertical. GuruShots offers a platform spanning iOS, Android, and the web that provides a fun, educational and structured way for amateur photographers to compete in a wide variety of contests showcasing their photos while gaining recognition with votes, badges, and awards. We estimate that the total addressable market of amateur photographers using their smartphones to take and publicly share artistic photos is 30-40 million people per month and that the market is still in its infancy. Every month, GuruShots stages more than 300 competitions that result in players uploading approximately 600,000 photographs and casting close to 3 billion “perceived votes, which are calculated by multiplying the number of votes that each player casts by a weighting factor based on various factors related to that user. To improve engagement, GuruShots has adopted a set of retention dynamics focused on individual, team and community dynamics that create a sense of belonging, inspiration, recognition, improvement, and competition.

Today, GuruShots utilizes a ‘Free-to-Play’ business model that leads to strong monetization with the purchase of resources that are used to give paying players an edge while still maintaining a fair and competitive experience for all participants.

As we look to the future, we are advancing several initiatives that we expect will drive user growth, increase engagement, drive in-app purchases, and advance our in-game economy. Some of these include:

• New Gameplay Experiences. Introducing a new more casual gameplay experience that enables users to compete in short-duration photo competitions with fewer participants.
• On-Boarding. Revamping the customer onboarding experience in order to increase the number of newly acquired users who get through onboarding and to maximize first time purchasers by providing a more guided onboarding process and immediately drawing new players into simplified photo competitions that are limited in duration and number of participants.
• Economy. Evolving the game economy by introducing hard and soft currencies tied to resources and rewards and maturing the game’s progression mechanics and features, and earn and spend dynamics.

We market GuruShots to prospective players, primarily via paid user acquisition channels, and utilize a host of creative formats including static and video ads in order to promote the game. Our marketing team invests material resources in analyzing all attributes of a campaign ranging from the creative assets, offer acquisition channel, and platform (i.e., iOS, Android, and web), just to name a few, with the goal of determining whether a specific campaign is likely to yield a profitable customer. When we unearth a successful combination of these variables we scale up until we experience diminishing returns. Ultimately, we believe that the efforts we are making to advance the product coupled with the investment in user acquisition can significantly increase GuruShots’ player base.

Beyond our commitment to growing both the Zedge App and GuruShots on a standalone basis, we believe that there are many potential synergies that we can capitalize on that exist between the two businesses. Specifically, we plan to enable the ability for GuruShots players to become Zedge Premium artists and sell their photos to our audience of 27+ million MAU (as of April 30, 2024) as standard digital images or NFTs. In addition, we look to benefit from the experience that the GuruShots team possesses and test gamifying the Zedge App. We believe that successful gamification can contribute to increasing engagement, retention, and lifetime value, all critical performance criteria for our business. Longer term, we believe that there are complementary content verticals that lend themselves to gamification. To this end, we have a new hybrid casual title, ‘AI Art Master,’ which is in soft-launch in the Philippines, Poland, and India, that enables players to create generative AI images and compete in themed-based competitions with these images. Based on analyzing user data and performing extensive user testing, we will determine whether to refine the user experience and scale or cease development of this title.

In August 2021, we acquired the assets of Emojipedia Pty Ltd (“Emojipedia”), including Emojipedia.org 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 April 2024, Emojipedia received approximately 36 million monthly page views and has approximately 10.4 million MAU as of April 30, 2024 of which approximately 55.5% 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, formally 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 and redesigning the Emojipedia website. We will continue to enhance this offering and are exploring new features, 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 2023 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, business combination, intangible assets and goodwill, capitalized software and technology development costs, and stock-based compensation. 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 2023 Form 10-K.

Recently Issued Accounting Pronouncements

Please refer to 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 13.4% in the three ended April 30, 2024 when compared to the same period a year ago. Additionally, we have experienced a continuing shift in our regional customer make-up with MAU in emerging markets (particularly India) representing an increasing portion of our user base. As of April 30, 2024, users in emerging markets represented about 78.3% of our MAU, as compared to 77.5% from the same period a year ago. ARPMAU for the three months ended April 30, 2024 increased 39.7% 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.

The following tables present the MAU – Zedge App and ARPMAU – Zedge App for the three months ended April 30, 2024 as compared to the same period in the prior year:

(in millions, except ARPMAU - Zedge App)

The following charts present the MAU – Zedge App and ARPMAU – Zedge App for the consecutive eight fiscal quarters ended April 30, 2024:

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 20.7% in the three months ended April 30, 2024 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. ARPMAP decreased 0.4% to $53.0 in the three months ended April 30, 2024 from $53.2 in the three months ended April 30, 2023.

The following table shows our MAP and ARPMAP for the three months ended April 30, 2024 and 2023.

The following charts present the MAP and ARPMAP – GuruShots for the consecutive eight quarters ended April 30, 2024:

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:

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Comparison of Our Results of Operations for the Three and Nine months Ended April 30, 2024 and 2023

Revenues

The following table sets forth the composition of our revenues for the three and nine months ended April 30, 2024 and 2023:

(in thousands, except percentages)

The following table summarizes our subscription revenue for the three and nine months ended April 30, 2024 and 2023:

(in thousands, except revenue per subscriber and percentages)

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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.

(in thousands, except percentages)

The following table summarizes Zedge Premium gross and net revenue for the three and nine months ended April 30, 2024 and 2023:

(in thousands, except percentages)

24

Three Months Ended April 30, 2024 Compared to Three Months Ended April 30, 2023

For the three months ended April 30, 2024, our advertising revenue increased 19.4% compared to the same period in the prior year primarily due to the 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 April 30, 2024, our subscription revenue increased 34.9% 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 subscriptions for Android users we rolled out in August 2023. Both initiatives contributed to the 80.3% increase in subscription billings in the three months ended April 30, 2024 compared to the same period in the prior year.

For the three months ended April 30, 2024, our other revenue (primarily Zedge Premium net revenue) decreased 11.2% compared to the same period in the prior year primarily due to the 12.6% decrease in Zedge Premium net revenue in the current year period caused by the write-down of advanced royalties paid to certain contents creators or owners. As a result of this write-down, gross margin decreased to 34% for the three months ended April 30, 2024 from 56% for the same period in the prior year.

For the three months ended April 30, 2024, digital goods and services revenue declined 20.3% compared to the same period in the prior year primarily due to the 20.7% decrease in GuruShots’ MAP for the corresponding periods.

Nine months Ended April 30, 2024 Compared to Nine months Ended April 30, 2023

For the nine months ended April 30, 2024, our advertising revenue increased 16.0% compared to the same period in the prior year primarily due to the 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 nine months ended April 30, 2024, our subscription revenue increased 22.6% compared to the same period in the prior year primarily due to our iOS subscription offering introduced in April 2023 and the lifetime subscriptions for Android users we rolled out in August 2023. Both initiatives contributed to the 65.2% increase in subscription billings in the nine months ended April 30, 2024 compared to the same period in the prior year.

For the nine months ended April 30, 2024, our other revenue increased 8.9% compared to the same period in the prior year primarily due to higher Zedge Premium net revenue resulting from higher GTV. Zedge Premium net revenue increased 5.6% in the nine months ended April 30, 2024 compared to the same period in the prior year. For the nine months ended April 30, 2024, gross margin was 44% compared to 56% for the same period in the prior year. Lower gross margin in the current period was caused by the advanced royalty write-downs discussed above.

For the nine months ended April 30, 2024, digital goods and services revenue declined 25.5% compared to the same period in the prior year primarily due to the 25.3% decrease in GuruShots’ MAP for the corresponding periods.

Direct cost of revenues. Direct cost of revenues consists primarily of content hosting and content delivery costs.

(in thousands, except percentages)

Direct cost of revenues decreased 8.6% in the three months ended April 30, 2024 compared to the same period in the prior year primarily due to the revamping of our backend infrastructure as part of the cost reduction initiatives implemented during fiscal 2023. As a percentage of revenue, direct cost of revenues in the three months ended April 30, 2024 declined to 5.9% from 7.4% for the same period in the prior year.

Direct cost of revenues decreased 20.6% in the nine months ended April 30, 2024 compared to the same period in the prior year also due to the revamping of our backend infrastructure as part of the cost reduction initiatives implemented during fiscal 2023. As a percentage of revenue, direct cost of revenues in the nine months ended April 30, 2024 declined to 6.2% from 8.5% for the same period in the prior year.

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.

(in thousands, except percentages)

SG&A expense increased 34.6% in the three months ended April 30, 2024 compared to the same period in the prior year primarily due to higher PUA and higher compensation expenses offset by lower discretionary spends and lower stock-based compensation expense. We ramped up PUA for our Zedge App significantly but scaled back PUA spend for GuruShots in the three months ended April 30, 2024 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. As a percentage of revenue, SG&A expense in the three months ended April 30, 2024 was 88.2% compared to 74.6% in the three months ended April 30, 2023.

SG&A expense increased 12.3% in the nine months ended April 30, 2024 compared to the same period in the prior year primarily due to higher PUA expenses offset by reductions in stock-based compensation expenses and other discretionary spends. For the nine months ended April 30, 2024 we ramped up PUA for the Zedge App significantly but scaled back PUA for GuruShots when compared to the same period in the prior year. As a percentage of revenue, SG&A expense in the nine months ended April 30, 2024 was 83.4% compared to 81.1% in the nine months ended April 30, 2023.

Global headcount as of April 30, 2024 totaled 100 (including 29 at GuruShots) compared to 96 (including 31 at GuruShots) as of April 30, 2023 with the majority of our employees currently based in Lithuania and Israel.

The following table summarizes stock-based compensation expense included in the SG&A for the three and nine months ended April 30, 2024 and 2023:

(in thousands, except percentages)

Stock-based compensation expenses decreased 16.6% in the three months ended April 30, 2024 compared to the same period in the prior year. The decrease was primarily attributable to the lower compensation expense related to the DSU grants with both service and market conditions which are recognized based on the graded vesting method. Certain stock options, deferred stock unit 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 14.5% in the nine months ended April 30, 2024 compared to the same period in the prior year. The decrease was primarily attributable to the lower compensation expense related to the DSU grants with both service and market conditions which are 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.

Depreciation and amortization expenses decreased 35.0% in three months ended April 30, 2024 compared to the same period in the prior year primarily due to the $11.9 million impairment charge recorded in the three months ended January 31, 2024 discussed below.

Depreciation and amortization expenses decreased 15.4% in nine months ended April 30, 2024 compared to the same period in the prior year primarily due to the $11.9 million impairment charge recorded in the three months ended January 31, 2024 discussed below.

Impairment of intangible assets. For the nine months ended April 30, 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.

Impairment of goodwill. For the nine months ended April 30, 2023, we recorded an approximately $8.7 million impairment of goodwill 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.

Change in fair value of contingent consideration. For the nine months ended April 30, 2023, the fair value of contingent consideration were reduced by approximately $1.9 million due primarily to the decrease in the likelihood that certain contingent milestones would be achieved in connection with the GuruShots acquisition that was consummated in April 2022, please refer to Note 3, Fair Value Measurements, 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.

(in thousands, except percentages)

In the three months ended April 30, 2024, interest and other income, net increased by $104,000 compared to the same period in the prior year, due primarily to higher interest income earned on our cash and cash equivalents driven by an increase in interest rates and lower interest expense resulting from the $2 million prepayment of term loan in November 2023.

In the nine months ended April 30, 2024, interest and other income, net increased by $238,000 compared to the same period in the prior year, due primarily to higher interest income earned on our cash and cash equivalents and lower interest expense resulting from the $2 million prepayment of term loan in November 2023, offset by 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 resulting from foreign exchange transactions. Net loss 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.

(in thousands, except percentages)

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In the three months ended April 30, 2024, net loss resulting from foreign exchange transactions decreased by $4,000 compared to the same period in the prior year.

In the nine months ended April 30, 2024, net loss resulting from foreign exchange transactions was $223,000 compared to nil in the same period in the prior year.

We recognized Mark to Market (“MTM”) losses of $142,000 from NOK and EUR hedging activities and MTM gain of $19,000, respectively, as of April 30, 2024 and July 31, 2023, 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.

Income tax benefit

(in thousands, except percentages)

In the three months ended April 30, 2024, income tax benefit decreased by $0.6 million compared to the same period in the prior year, resulting primarily from the $0.8 million increase in deferred tax assets related to the $8.7 million impairment of goodwill in the prior period.

In the nine months ended April 30, 2024, income tax benefit increased by $1.7 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 intangible assets in the current period, offset by the $0.8 million increase deferred tax assets related to the $8.7 million impairment of goodwill in the prior 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 nine months ended April 30, 2024 and 2023:

Three Months Ended April 30, 2024 Compared to Three Months Ended April 30, 2023

For the three months ended April 30, 2024, our income from operations related to the Zedge Marketplace decreased to $1.2 million from $1.9 million for the same period in the prior year, primarily due to higher SG&A expenses incurred in the current period.

For the three months ended April 30, 2024, our loss from operations related to GuruShots was $1.3 million compared to a loss of $10.3 million for the same period in the prior year, which included impairment loss of goodwill of $8.7 million in prior year period. Excluding the effect of the impairment loss of goodwill, loss from operation related to GuruShots was $1.3 million in the three months ended April 30, 2024 compared to a loss of $1.6 million for the same period in the prior year.

Nine months Ended April 30, 2024 Compared to Nine months Ended April 30, 2023

For the nine months ended April 30, 2024, our income from operations related to the Zedge Marketplace decreased to $4.5 million from $4.8 million for the same period in the prior year, primarily due to higher SG&A expenses incurred in the current period.

For the nine months ended April 30, 2024, our loss from operations related to GuruShots was $16.3 million compared to a loss of $11.9 million for the same period in the prior year. Excluding the effect of the impairment loss intangible assets of $11.9 million in the current period and the impairment loss of goodwill of $8.7 million and the gain from the changes in fair value of contingent consideration of $1.9 million recorded in prior period, loss from operation related to GuruShots would have been $4.4 million in the nine months ended April 30, 2024 compared to $5.1 million for the same period in the prior year.

Liquidity and Capital Resources

General

At April 30, 2024, we had cash and cash equivalents of $19.9 million and working capital (current assets less current liabilities) of $17.1 million, compared to $18.1 million and $15.8 million, respectively, at July 31, 2023. 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 June 10, 2025. We paid off a $2 million term loan in November 2023 and 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 nine months ended April 30, 2024 and 2023:

(in thousands)

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 increased $2.4 million in the nine months ended April 30, 2024 to $5.1 million from $2.7 million in the same period in the prior year, primarily attributable to higher income from operations before accounting for the acquisition related charges and changes in assets and liabilities.

Changes in Trade Accounts Receivable

Gross trade accounts receivable increased $0.4 million to $3.3 million at April 30, 2024 from $2.9 million at July 31, 2023, primarily due to higher revenue in the preceding two months ended April 30, 2024 when compared to the same period ended July 31, 2023.

Investing Activities

On August 1, 2021, we acquired substantially all of the assets of Emojipedia Pty Ltd for approximately $6.7 million. We made the final payment of about $1.0 million on August 1, 2022.

Cash used in investing activities in the nine months ended April 30, 2024 and 2023 also consisted 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

On October 28, 2022, we entered into an 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. In conjunction with the closing of the credit facilities, $2 million was advanced in a single-cash advance on the same day, 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 $1 million.

In connection with the Amended Loan Agreement, we discontinued the existing $2 million revolving credit facility under the then existing Loan and Security Agreement, dated as of September 26, 2016. At the time of the discontinuance, there was no outstanding balance on the revolving credit facility.

On May 11, 2023, we agreed to reduce the maximum principal amount from $7 million to $2 million, please see 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.

On November 15, 2023, the Company voluntarily prepaid the entire principal amount of $2 million in accordance with the terms of the Amended Loan Agreement without incurring any prepayment penalty.

In the nine months ended April 30, 2024 and 2023, we purchased 6,328 shares and 6,310 shares, respectively of our Class B common stock from certain employees for $13,000 and $17,000 respectively, to satisfy tax withholding obligations in connection with the vesting of DSUs.

In the nine months ended April 30, 2024 and 2023, we repurchased in connection with the share repurchase program 60,206 shares and 680,594 shares respectively of our Class B common stock for $152,000 and $1.4 million respectively.

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 nine months ended April 30, 2024, two customers represented 31% and 10% of our revenue. In the nine months ended April 30, 2023, three customers represented 29%, 19% and 13% of our revenue. At April 30, 2024, two customers represented 36% and 19% of our accounts receivable balance. At July 31, 2023, two customers represented 36% and 18% of our accounts receivable balance. 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 April 30, 2024, 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.

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 April 30, 2024.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended April 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There are no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2023.