The following information should be read in conjunction with the accompanying
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, 2019 (the "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 subsidiary Zedge Europe AS, 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 the results projected
in any forward-looking statement. In addition to the factors specifically noted
in the forward-looking statements, other important factors, risks and
uncertainties that could result in those differences include, but are not
limited to, those discussed under Item 1A to Part I "Risk Factors" in the 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 Form 10-K.



Overview



We offer a state-of-the-art digital publishing platform. We use this platform to
power our consumer-facing mobile personalization app, called Zedge, available in
the Google Play store and App Store, which offers an easy, entertaining and
immersive way for end-users to engage with our rich and diverse catalogue of
wallpapers, video wallpapers, stickers, ringtones, notification sounds on
Android and wallpapers, video wallpapers and ringtones, on iOS. We are evolving
by developing new, entertainment-focused apps, that will run on our publishing
platform. We secure our content from artists, both amateurs and professionals as
well as emerging and major brands. Artists have the ability to easily launch a
virtual storefront in our Zedge app where they can market and sell their content
to our user base.



Our Zedge app has been installed more than 423.9 million times, and at January
31, 2020, boasted more than 34 million monthly active users, or MAU. MAU is a
key performance indicator that captures the number of unique users that used our
Zedge app during the previous 30-day period. Our Zedge app has consistently
ranked as one of the most popular free apps in the Google Play store in the
United States. Historically, we have not made a material investment in paid user
acquisition for our Zedge app.



Our Zedge app's success stems from its ability to meet consumer demand for a
rich and diverse catalogue of both long-tail and popular content in a fun,
intuitive and user-friendly fashion that aligns with their interest in
expressing their essence in a bespoke manner, to offer reliable search and
discovery capabilities and to make relevant content recommendations to our
users. To this end, we invest heavily in both product design and development and
the underlying technology required to satisfy both our Zedge app's users' and
content contributors' expectations. Our Zedge app utilizes both user-generated
and licensed, third-party content to achieve these goals.



In March 2018, we launched Zedge Premium, a marketplace within our Zedge app
where professional creators and brands market, distribute and sell their digital
content to our consumers. Since launching Zedge Premium, we have made and
continue making material investments in optimizing our app's homepage design in
order to maximize exposure to premium content with the goal of driving sales.
Over time, we expect that Zedge Premium will contribute to a virtuous cycle
whereby it drives new consumers into our Zedge app resulting in more artist
payouts, which in turn makes the platform more attractive for artists and brands
looking to expand their reach and increase their income. In September 2017, we
closed a transaction with Freeform Development, Inc., or Freeform, and retained
their development personnel in order to accelerate the launch and development of
Zedge Premium.



In January 2019, we started offering freemium Zedge app users the ability to
convert into paying subscribers for amongst other things the ability to remove
unsolicited advertisements from our Zedge app. As of January 31, 2020, we
amassed 300,000 active subscribers. In fiscal 2020, we hope to further optimize
the offer based on user type, geography and price point as well as introduce new
subscription enhancements like content bundles and rewards.



                                       15






As of January 31, 2020, approximately 53% of our Zedge app's user base was
located in North America and Europe with a split of 26% and 27%, respectively.
Over the past several years, we have experienced a shift in our regional
customer make-up with MAU increasing in emerging markets and decreasing in
well-developed markets. In the second quarter of fiscal 2020, users in emerging
markets increased 2.6% while declined by 20.9% in well-developed economies when
compared to the same period in fiscal 2019. The downward trajectory in MAU was
exacerbated by Google Play temporarily suspending our app from their store in
late September and recommending that users uninstall the app when Google Play
Protect detected buggy code in a standard technology integration with one of our
third-party advertising partners.



This shift has negatively impacted revenue generation because well-developed
markets command materially higher advertising rates when compared to emerging
markets. MAU growth is tightly coupled with securing new users. Historically,
our high ranking in the Google Play store has been one of the primary drivers
for securing new users. Although still an important factor, we have started
dedicating resources to growth initiatives, both organic and paid. With time, we
believe that we can change our growth dynamic in well-developed markets. Aside
from targeted growth initiatives, we need to continually improve the core user
experience, test different mechanisms and content verticals that may spur growth
and capitalize on the role that Zedge Premium artists can have on driving new
users into the platform.



During the most recent quarter ended January 31, 2020, we generated more than
85% of our revenues from selling our Zedge app's advertising inventory to
advertising networks, advertising exchanges, and direct arrangements with
advertisers. Advertising networks and advertising exchanges are third-party
technology platforms that facilitate the buying and selling of media advertising
inventory from multiple ad networks. The price of advertising inventory is fixed
on an advertising network whereas the price for inventory is determined through
real-time bidding on an advertising exchange. Advertisers are attracted to our
Zedge app because of its sizable user base.



Prior to May 31, 2019, the remainder of our revenues were primarily generated
from managing and optimizing the advertising inventory of a third-party mobile
application publisher, as well as overseeing the billing, collections and
reporting related to advertising for this publisher. The agreement with this
mobile application publisher was terminated effective May 31, 2019, and we are
no longer providing these services.



Zedge Premium is our marketplace in the Zedge app where artists and brands can
market, distribute and sell their digital content to our users. The content
owner sets the price and the end user can purchase the content by paying for it
with Zedge Credits, our closed virtual currency. A user can earn Zedge Credits
when taking specific actions such as watching rewarded videos or completing
electronic surveys. Alternatively, users can buy Zedge Credits via an in-app
purchase. If a user purchases Zedge Credits, Google Play or App Store keeps 30%
of the purchase price with the remaining 70% being paid to us. When a user
purchases Zedge Premium content the artist or brand receives 70% of the actual
value of the Zedge Credits used to buy the content item as royalty and we retain
the remaining 30% as our fee, which we recognize as Other Revenue. As Zedge
Premium matures and expands, we expect it to also diversify our revenue source
mix. We had availed some of the Zedge Premium content for print-on-demand
merchandise. When a user purchased a print-on-demand item, the artist or brand
was paid 70% of the net profit, after accounting for cost-of-goods sold,
shipping and handling, credit card processing and related costs, and we
recognized Other Revenue from the remaining 30%. The print-on-demand feature was
discontinued in December 2019.



In January 2019, we started testing a subscription-based product on Android,
whereby users of our Zedge app could prepay a monthly or yearly fee to amongst
other things remove unsolicited ads when using our Zedge app. The initial
results were positive and, in the third quarter of fiscal 2019, we availed it to
our entire Android user base. We offer our Zedge users a choice of a monthly or
yearly subscription sold through the Google Play store. When a user subscribes,
he or she executes a clickthrough agreement with us outlining the terms and
conditions between us and the subscriber upon purchase of the subscription. The
Google Play store processes payments for subscriptions. During the first 12
months from sign up Google retains 30% as a fee, which fee is lowered to 15%
from month 13 and onward. Subscription revenue is a series type performance
obligation and is recognized net of sales tax amounts collected from
subscribers. Both monthly and yearly subscriptions are nonrefundable after seven
days, [and are automatically renewed at expiration date unless cancelled by
subscribers. Because of the cancellation clauses for these subscriptions, the
duration of these contracts is daily, and revenue for these contracts is
recognized on a daily ratable basis. To date, cancellation rates have been
insignificant. As of January 31, 2020, there were close to 300,000 active paid
subscribers, consisting of mostly annual Subscriptions. From launch in January
2019 through January 31, 2020, Subscriptions have generated more than $1.35
million in gross revenue.



In December 2019, we completed the beta launch of 'Shortz' our new entertainment
app offering serialized, short-form fiction delivered in a text-message format
across both Android and iOS, focusing on users in the United States, the United
Kingdom and Canada.



                                       16





Critical Accounting Policies



Our 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 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 capitalized software and technology
development costs, revenue recognition and goodwill. 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
Form 10-K.

Recently Issued Accounting Standards Not Yet Adopted

Recently issued accounting standards not yet adopted by us are more fully described in Note 14 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.





Recent Developments



On February 5, 2020, we closed a registered direct offering of 1,734,459 shares
of our Class B common stock for net proceeds of $2.16 million from both new

and
existing investors.



Key Performance Indicators



Our results of operations discussion 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 captures the number of
unique users that used our Zedge app during the previous 30-day period, which is
important to understanding the size of the user base for the Company's Zedge app
which is a driver of revenue. Changes and trends in MAU are useful for measuring
the general health of our business, gauging both present and potential
customers' experience, assessing the efficacy of product improvements and
marketing campaigns and overall user engagement. 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.



On an annual basis, MAU was down in the second quarter of fiscal 20 when
compared to the same period a year ago due in part to the Google suspension.
Conversely, ARPMAU for the same periods was up pointing to progress we have made
in extracting more value from our users. On a sequential quarterly basis, MAU
increased pointing to the positive impact that seasonal growth, marketing
initiatives and being readmitted into Google Play following the suspension has
had on our business. ARPMAU was also higher on a sequential basis due to the
continued success we have made in optimizing subscriptions, monetizing users in
emerging markets, and improving our advertising stack.



Results of Operations

Three Months and Six Months Ended January 31, 2020 Compared to Three Months and Six Months Ended January 31, 2019





                           Three months ended                                 Six months ended
                               January 31,                 Change                January 31,                Change
                            2020          2019         $           %          2020         2019         $           %
                                         (in thousands)                                    (in thousands)

Revenues                 $    2,644      $ 2,573     $   71         2.8 %   $   4,677     $ 4,954     $ (277 )      -5.6 %
Direct cost of
revenues                        308          328        (20 )      -6.1 %         636         678        (42 )      -6.2 %
Selling, general and
administrative                1,894        2,162       (268 )     -12.4 %       3,839       4,471       (632 )     -14.1 %
Depreciation and
amortization                    363          328         35        10.7 %         868         631        237        37.6 %

Income (loss) from
operations                       79         (245 )      324          nm          (666 )      (826 )      160       -19.4 %
Interest and other
income                            5           38        (33 )     -86.8 %           5          45        (40 )     -88.9 %
Net gain (loss)
resulting from foreign
exchange transactions            17          (35 )       52          nm           (39 )      (164 )      125       -76.2 %
Provision for (benefit
from) income taxes                1           (2 )        3          nm             1           1          -         0.0 %
Net income (loss)        $      100      $  (240 )   $  340          nm     $    (701 )   $  (946 )   $  245       -25.9 %






nm-not meaningful



                                       17





Revenues. Revenues increased 2.8% from $2.57 million to $2.64 million in the
three months ended January 31, 2020 compared to the same period in fiscal 2019,
primarily as a result of the successful launch of subscriptions in January 2019;
continued promotion of Zedge Premium; further optimizations in our ad stack; and
the benefit of strong ad spend during the 2019 holiday season.



Revenues decreased 5.6% from $4.95 million to $4.68 million in the six months
ended January 31, 2020 compared to the same period in fiscal 2019. The decline
in revenues was primarily due to the combination of a shift in the makeup of our
user base from well-developed markets that command relatively higher advertising
rates to emerging markets, and the loss of service revenue from managing and
optimizing the advertising operation of a third-party mobile application
publisher since June 1, 2019. While we are still assessing the impact of the
temporary Google suspension and any long-term implications, it did have an
impact on our revenues during the three months ended October 31, 2019. The
decline was partially offset by increased revenue from Zedge Premium and
subscriptions.



In the three months ended January 31, 2020, MAU in emerging markets increased
2.6% while declined by 20.9% in well-developed economies when compared to the
same period in fiscal 2019. Overall, MAU fell 6.5% to 34.3 million at January
31, 2020 from 36.7 million at January 31, 2019, partially as a result of buggy
code in a standard technology integration with one of our third-party
advertising partners resulting in Google Play temporarily suspending our app
from their store and recommending that users uninstall the app in late
September.

Notwithstanding the geographical shift and the decline in our overall MAU, revenue per monthly active user or ARPMAU, from our apps increased 21% to $0.0262 in the three months ended January 31, 2020 from $0.0217 in the same period in fiscal 2019. This can be attributable to the higher margin subscription revenue which has been our focus for growth in calendar 2019 as well as other growth initiatives under way including, among other things, unlocking more value from our users in emerging markets.


We completed the rollout of Zedge Premium in March 2018 to a segment of our
Android user base and we expanded it to 100% of our Android user base in January
2019. In the three months ended January 31, 2020 gross transaction value (the
total sales volume transacting through the platform, or "GTV") and net revenue
generated from Zedge Premium were $198,000 and $61,000 respectively. For the six
months ended January 31, 2020, GTV and net revenue generated from Zedge Premium
were $389,000 and $220,000 respectively. We are likely going to see a short-term
to medium-term decline in GTV and associated Zedge Premium revenue due to our
promotion of Shortz ahead of Zedge Premium. However, we expect to offset the
revenue impact by enabling better optimization of our advertising inventory

and
associated revenue.



In January 2019 we started offering an option by which users can remove
unsolicited advertisements from our Zedge app by paying a fee. In the three
months and six months ended January 31, 2020, we generated gross subscription
revenue of $496,000 and $838,000, respectively and recognized as subscription
revenue of $322,000 and $ 530,000 respectively. We had close to 300,000 active
subscription accounts as of January 31, 2020.

We continue to focus on topline growth strategy by testing new monetization drivers including a variety of ad units, continuing our investment in driving subscriptions in our flagship app, coin sales as well as certain growth initiatives such as improved content recommendations in order to increase revenues.





Our install count, that is the number of times the Zedge app has been installed
on devices, increased to 423.9 million at January 31, 2020 from 367.9 million a
year ago.



Direct cost of revenues. Direct cost of revenues decreased by $20,000 and
$42,000 in the three months and six months ended January 31, 2020, respectively
when compared to the same periods in fiscal 2019, primarily attributable to the
migration of our backend infrastructure to cloud-based providers. As a
percentage of revenue, direct costs in the three months and six months ended
January 31, 2020 were 11.6% and 13.6%, respectively, compared to 12.7% and 13.7%
for the same corresponding periods in fiscal 2019. Due to the fixed cost nature
of many elements of our direct cost of revenues, the increase in revenue in the
three months ended January 31, 2020 compared to the year ago period resulted in
a decrease in direct cost as a percentage of revenue in the three months ended
January 31, 2020 when compared to the same period in fiscal 2019. In the six
months ended January 31, 2020, direct costs as a percentage of revenue went down
slightly when compared to the same period in fiscal 2019.



Selling, general and administrative expense. Selling, general and administrative
expense ("SG&A") consists mainly of payroll, benefits, facilities, marketing,
content acquisition and consulting, professional fees, software licensing
("SaaS") and cost related to being a public company. SG&A expenses decreased by
$268,000 or 12.4% in the three months ended January 31, 2020 compared to the
same period in fiscal 2019. SG&A expenses decreased by $632,000 or 14.1% in the
six months ended January 31, 2020 compared to the same period in fiscal 2019.
These decreases were primarily attributable to reductions in net compensation
costs and discretionary expenses offset by higher marketing costs associated
with the approximately 30% fee we pay to Google for each subscriber, severance
payments and content acquisition expense associated with 'Shortz' which was
launched in late November 2019. As the majority of our employees are based in
Norway a stronger U.S. Dollar against NOK also contributed to the overall
decline of SG&A in the three months and six months ended January 31, 2020 when
compared to the same periods in fiscal 2019.



                                       18

Our headcount totaled 39 as of January 31, 2020 compared to 63 as of January 31, 2019, representing a 38.1% decline. The decrease in headcount can be attributable the workforce reduction plan we implemented in May 2019 and subsequent natural attritions.





Stock-based compensation expense was $198,000 and $210,000 for the three months
ended January 31, 2020 and 2019, respectively. Stock-based compensation expense
was $296,000 and $331,000 for the six months ended January 31, 2020 and 2019,
respectively. Stock-based compensation includes equity grants to employees and
consultants, as well as stock issuances to pay for board compensations and 401-K
matching contributions. Certain stock options, deferred stock unit and
restricted stock grants are more fully described in Note 6 to the Consolidated
Financial Statements included in Item 1 to Part I of this Quarterly Report

on
Form 10-Q.




Depreciation and amortization. Depreciation and amortization consist mainly of
amortization of 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. The increase in depreciation
and amortization in the three months and six months ended January 31, 2020
compared to the same periods in fiscal 2019 was primarily attributable to the
completion of six projects with an aggregate value of $1.3 million completed
during the twelve-month period ended January 31, 2020. We started amortizing
these capitalized software and technology development costs once these projects
were completed.



Net gain (loss) resulting from foreign exchange transactions. Net gain (loss)
resulting from foreign exchange transactions is comprised of gains and losses
generated from movements in NOK relative to the U.S. Dollar, including gains or
losses from our hedging activities. In the three months ended January 31, 2020
and 2019, we had gains of $17,000 and losses of $35,000 respectively, including
losses from hedging activities. In the six months ended January 31, 2020 and
2019, we had losses of $39,000 and $164,000 respectively, including losses

from
hedging activities.



Provision for income taxes. The change from a benefit to a provision for income
taxes in the three months ended January 31, 2020 compared to the corresponding
period in fiscal 2019 was primarily due to the change from a net loss in the
fiscal 2019 period to net income in the current year period and the jurisdiction
in which the income was generated, and our ability to utilize net operating
losses we holds in those jurisdictions. There is no change for the provision for
income taxes for the six months ended January 31, 2020 compared to the
corresponding periods in fiscal 2019. The tax expense consists of minimum state
taxes based on allocated net worth.



As part of the Tax Cuts and Jobs Act of 2017, Global Intangible Low-Taxed Income
inclusion (GILTI) and Foreign Derived Intangible Income (FDII) deduction became
effective on January 1, 2018.  There was no impact to income tax expense
resulting from the GILTI and FDII in light of the Company's available NOL carry
forward and its full valuation allowance.

Liquidity and Capital Resources





General



At January 31, 2020, we had cash and cash equivalents of $2.3 million and
working capital (current assets less current liabilities) of $1.2 million,
compared to $1.6 million and $1.2 million, respectively at July 31, 2019.
Additionally, we raised $2.16 million through a registered direct offering that
closed on February 5, 2020 of which $275,000 was received as of January 31,
2020, more fully described in Note 15 to the Consolidated Financial Statements
included in Item 1 to Part I of this Quarterly Report on Form 10-Q. 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
months ending January 31, 2021. We also maintain a revolving line of credit of
up to $2.5 million and a foreign exchange contract facility of up to $6.5
million with Western Alliance Bank, as discussed below in Financing Activities.



                                       19

The following tables present selected financial information for the six months ended January 31, 2020 and 2019:

© Edgar Online, source Glimpses