ZEDGE, INC. 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 endedJuly 31, 2019 (the "Form 10-K"), as filed with theU.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 toZedge, Inc. , aDelaware 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 theSEC 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 theApp 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 436 million times, and atApril 30, 2020 , boasted approximately 29 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 thethe United States . Historically, we have not made a material investment in paid user acquisition for our Zedge app. Our legacy 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. InMarch 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 InJanuary 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 ofApril 30, 2020 , we amassed 394,000 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. 17 InDecember 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 inthe United States , theUnited Kingdom andCanada and is now available globally.
As of
Over the past several years, we have experienced a continuing decline in our MAU as well as a shift in the regional customer make-up with MAU in emerging markets representing an increasing portion of our user base. As ofApril 30, 2020 , users in emerging markets represented 69% of our MAU compared to 63% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. MAU growth is tightly coupled with securing new users. Historically, our relatively high ranking in theApril 30, 2020 , we generated approximately 72% 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. 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,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. InJanuary 2019 , we started testing a subscription-based product on Android, whereby users of our Zedge app could pay 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 Google Play. When a user subscribes, they execute a clickthrough agreement with us outlining the terms and conditions between us and them upon purchase of the subscription.April 30, 2020 , there were close to 394,000 active paid subscribers, consisting of mostly annual subscriptions. From launch inJanuary 2019 throughApril 30, 2020 , subscriptions have generated approximately$2 million in gross revenue. Prior toMay 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 effectiveMay 31, 2019 , and we are no longer providing these services. 18 Critical Accounting Policies Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted inthe United States of America , orU.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.
COVID-19 The COVID-19 pandemic has resulted in public health responses including travel bans, restrictions, social distancing requirements, and shelter-in place orders, which have negatively impacted our business, operations and financial performance. While we saw a significant decrease in advertising spend when the pandemic became global in March, we have experienced a stabilizing daily advertising revenue and continuing improvement in our subscriptions sales inMay 2020 .
In light of the current operating and economic environment, the Company has shifted resources and priorities to increase focus on generating incremental revenue at the expense of delivering new product. We imposed a temporary hiring freeze and lowered our discretionary spend to preserve cash for mission critical projects. We have responded quickly and decisively to the challenges presented by the pandemic in order to ensure the continuity of our service. Given the unprecedented uncertainty and rapidly shifting market conditions of the business environment, we cannot reasonably estimate the full impacts of the COVID-19 pandemic on our future financial and operational results. Our past results may not be indicative of our future performance, and historical trends in revenue, income (loss) from operations, net income (loss), and net income (loss) per share may differ materially. For example, to the extent the pandemic continues to disrupt economic activity globally, it could continue to adversely affect our business, operations and financial results through prolonged decreases in advertising spend, credit deterioration of our customers, depressed economic activity, or declines in capital markets, including volatility of our stock price. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and there may be developments outside our control requiring us to adjust our operating plan. As such, given the unprecedented uncertainty around the duration and severity of the impact on market conditions and the business environment, we cannot reasonably estimate the full impacts of the COVID-19 pandemic on our operating results in the future. 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. MAU was down in the third quarter of fiscal 2020 when compared to the same period a year ago and the sequential second quarter. A portion of this decline was likely a consequence of a drop in new phone sales resulting from retail business closures. This negatively impacted app installs and engagement which are typical user behavior patterns when consumers purchase a new handset. Over the past several years, we have experienced a continuing shift in the regional customer make-up with MAU in emerging markets representing an increasing portion of our user base. As ofApril 30, 2020 , users in emerging markets represented 69% of our MAU compared to 63% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. Conversely, ARPMAU for the same periods was up 32.8% when compared to the same period a year ago, pointing to progress we have made in extracting more value from our users, particularly from subscriptions. ARPMAU declined 16.2% on a sequential basis due to higher advertising spend during the holiday season in second quarter coupled with the impact from COVID-19 in third quarter. 19 Results of Operations
Three Months and Nine months Ended
Three months ended Nine months ended
April 30, Change April 30, Change
2020 2019 $ % 2020 2019 $ %
(in thousands) (in thousands)Revenues$ 2,079 $ 1,912 $ 167 8.7 %$ 6,756 $ 6,866 $ (110 ) -1.6 % Direct cost of revenues 289 353 (64 ) -18.1 % 925 1,031 (106 ) -10.3 % Selling, general and administrative 1,569 2,289 (720 ) -31.5 % 5,408 6,761 (1,353 ) -20.0 % Depreciation and amortization 348 391 (43 ) -11.0 % 1,216 1,022 194 19.0 % Loss from operations (127 ) (1,121 ) 994 -88.7 % (793 ) (1,948 ) 1,155 -59.3 % Interest and other income 2 3 (1 ) -33.3 % 7 48 (41 ) -85.4 % Net loss resulting from foreign exchange transactions (200 ) (72 ) (128 ) 177.8 % (239 ) (236 ) (3 ) 1.3 % Provision for income taxes - 5 (5 ) nm 1 6 (5 ) -83.3 % Net loss$ (325 ) $ (1,195 ) $ 870 -72.8 %$ (1,026 ) $ (2,142 ) $ 1,116 -52.1 % nm-not meaningful Revenues. Revenues increased 8.7% from$1.91 million to$2.08 million in the three months endedApril 30, 2020 compared to the same period in fiscal 2019, primarily due to an almost six-fold increase in paid subscribers, partially offset by the loss of$179,000 in service revenue associated with managing ad operations for a third-party mobile app publisher, which was discontinued effectiveMay 31, 2019 . On a sequential basis, revenue decreased 21.4% compared to the second fiscal quarter due to the impact that COVID-19 had on advertising budgets, lower new handset sales in the third quarter and the benefit of strong ad spend during the 2019 holiday season in second quarter. Revenues decreased 1.6% from$6.87 million to$6.76 million in the nine months endedApril 30, 2020 compared to the same period in fiscal 2019. The slight 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 discussed above, partially offset by the strong growth in subscriptions. In the three months endedApril 30, 2020 , MAU declined by 28.7 and 7.6% % in well-developed economies and emerging markets, respectively, when compared to the same period in fiscal 2019. Overall, MAU fell 15.4% to 28.8 million atApril 30, 2020 from 34.0 million atApril 30, 2019 , primarily as a result of lower new handsets sales globally due to COVID-19 impact. Notwithstanding the geographical shift and the decline in our overall MAU, revenue per monthly active user or ARPMAU, from our apps increased 32.8% to$0.0220 in the three months endedApril 30, 2020 from$0.0166 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 fiscal 2020 and, to a lesser extent, the decline in MAU which increases the impact of certain revenue on this metric. 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 inMarch 2018 to a segment of our Android user base and we expanded it to 100% of our Android user base inJanuary 2019 . In the three months endedApril 30, 2020 gross transaction value (the total sales volume transacting through the platform, or "GTV") and net revenue generated from Zedge Premium were$150,000 and$123,000 respectively. In the nine months endedApril 30, 2020 , GTV and net revenue generated from Zedge Premium were$538,000 and$342,000 respectively. The high margin can be attributed to Zedge Credits expirations. In the three months and nine months endedApril 30, 2020 , we recognized$62,000 and$124,000 in revenue from breakage upon expiration of Zedge Credits. 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 and the redesign of our app's homepage which will enable improvements in content discovery and recommendations, social and community features and the potential for new content genres. Until this effort is completed, Zedge Premium GTV and associated revenue will likely face pressure. However, we have been able to offset some of the revenue impact by enabling better optimization of our advertising inventory and associated revenue. InJanuary 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 nine months endedApril 30, 2020 , we generated gross subscription revenue of$684,000 and$1.5 million , respectively and recognized as subscription revenue of$455,000 and$ 984,000 respectively. We had close to 394,000 active subscription accounts as ofApril 30, 2020 . 20 InDecember 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 inthe United States , theUnited Kingdom andCanada . Revenue from Shortz were immaterial during the three months and nine months endedApril 30, 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 total number of times the Zedge app has been
installed on devices, increased to 436.3 million at
Direct cost of revenues.Direct cost of revenues consists primarily of content hosting and content delivery costs which decreased by$64,000 and$106,000 in the three months and nine months endedApril 30, 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 nine months endedApril 30, 2020 were 13.9% and 13.7%, respectively, compared to 18.5% and 15.0% 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 endedApril 30, 2020 compared to the year ago period resulted in a decrease in direct cost as a percentage of revenue in the three months endedApril 30, 2020 when compared to the same period in fiscal 2019. In the nine months endedApril 30, 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$720,000 or 31.5% in the three months endedApril 30, 2020 compared to the same period in fiscal 2019. SG&A expenses decreased by$1.4 million or 20.0% in the nine months endedApril 30, 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 26% weighted fee we pay toDecember 2019 . As the majority of our employees are based inNorway a strongerU.S. Dollar against NOK also contributed to the overall decline of SG&A in the three months and nine months endedApril 30, 2020 when compared to the same periods in fiscal 2019. Our headcount totaled 39 as ofApril 30, 2020 compared to 61 as ofApril 30, 2019 , representing a 36% decline. The decrease in headcount can be attributable the workforce reduction plan we implemented inMay 2019 and subsequent natural attritions. Stock-based compensation expense was$102,000 and$118,000 for the three months endedApril 30, 2020 and 2019, respectively. Stock-based compensation expense was$397,000 and$449,000 for the nine months endedApril 30, 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. We started amortizing these capitalized software and technology development costs once these projects were completed. The fluctuation in depreciation and amortization expenses in any given periods can be attributed to the numbers of projects being amortized during those periods, as we removed fully amortized projects and added newly completed projects in the amortization pool. 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 relative to theU.S. Dollar, including gains or losses from our hedging activities. In the three months endedApril 30, 2020 and 2019, we had losses of$200,000 and$72,000 respectively, including losses from hedging activities. In the nine months endedApril 30, 2020 and 2019, we had losses of$239,000 and$236,000 respectively, including losses from hedging activities. TheU.S. Dollar surged to a historic high against NOK inMarch 2020 primarily due to the plunging oil price caused by the economic slowdown associated with COVID-19. As a result, we suffered significant loss on our foreign currency exchange contracts including an unrealized loss of$148,000 as ofApril 30, 2020 . As one of the world's largest oil exporters, oil has become an important element of the economy ofNorway and as such Norwegian NOK is strongly tied to oil prices which dropped significantly inMarch 2020 . 21
Provision for income taxes.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 onJanuary 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. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding years. The Company has evaluated the new tax provisions of related to the CARES Act and determined them as being immaterial.
Liquidity and Capital Resources
General AtApril 30, 2020 , we had cash and cash equivalents of$4.6 million and working capital (current assets less current liabilities) of$3.1 million , compared to$1.6 million and$1.2 million , respectively atJuly 31, 2019 . 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 endingApril 30, 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 withWestern Alliance Bank , as discussed below in Financing Activities.
The following tables present selected financial information for the nine months
ended
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