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, 2020 (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 Zedge is a leading app developer focusing on mobile phone personalization and entertainment. "Zedge Wallpapers and Ringtones" our flagship app is all about personal identity. We're the hub for self-expression used by millions for mobile phone personalization, social content and fandom art. Our app enables consumers to showcase who they are, what they like, and amplify their persona. Zedge Premium, our marketplace, enables content creators, ranging the gamut from world class celebrities to emerging artists, to display their talent and sell their content to our users. "Shortz - Chat Stories by Zedge" offers serialized, short-form fiction stories delivered as text-messaging conversations and soon to be available as mini-podcasts. Our apps run on our flexible and proven state-of-the-art digital publishing platform. Our Zedge app has been installed approximately 465 million times, and atOctober 31, 2020 , boasted approximately 32.4 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 of the relevant 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 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 Zedge 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 ofOctober 31, 2020 , we had approximately 609,000 active paid subscribers. In fiscal 2021, 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. 14 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 it is now available globally. Over the past several years, our Zedge app has experienced a decline in its MAU, with modest increases in certain periods, 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 ofOctober 31, 2020 , users in emerging markets represented 72% of our MAU compared to 66% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. In the first quarter of fiscal 2021, users in emerging markets grew by 17.8% while users in well-developed economies declined 8.0% when compared to the same period in fiscal 2020. As ofOctober 31, 2020 , approximately 48% of our Zedge app's user base was located inNorth America andEurope (includingEastern Europe ) with a split of 23% and 25%, respectively, compared with 53% as ofOctober 31, 2019 evenly split betweenNorth America andEurope (includingEastern Europe ). MAU growth is tightly coupled with securing new users. Historically, our relatively high ranking in theOctober 31, 2020 and 2019, we generated approximately 79% and 82%, respectively, 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. In our Zedge Premium marketplace, the content owner sets the price and the 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 a rewarded video. 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 a royalty and we retain the remaining 30% as our fee, which we recognize as revenue. As Zedge Premium matures and expands, we expect to also diversify our revenue source mix. InJanuary 2019 , we started offering a subscription-based product to Android users of our Zedge app in which the payment of a monthly or annual fee would remove unsolicited ads when using our Zedge app. During the first 12 months after a customer's sign up for the subscription-based product,October 31, 2020 , we had approximately 609,000 active paid subscribers, 90% of which had subscribed on an annual basis. Since inception inJanuary 2019 , subscriptions have generated approximately$3.8 million in gross revenue. 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. 15
Recently Issued Accounting Standards Not Yet Adopted
Recently issued accounting standards not yet adopted by us are more fully described in Note 13 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, our daily advertising revenue has experienced a strong recovery sinceJuly 2020 . We responded quickly and decisively to the challenges presented by the pandemic in order to ensure the long-term continuity of our service. Initially, we shifted resources and priorities and focused on streamlining our back-end infrastructure and specifically redesigning our content management system in order to better control costs while simultaneously establishing a scalable foundation for new growth initiatives, even at the expense of new product initiatives. At the outset of the pandemic, we instituted a hiring freeze which has subsequently been relaxed and we are starting to invest in new products, features, and enhancements.
Given the unprecedented uncertainty and rapidly shifting market conditions of the business environment, we cannot reasonably estimate the full impact of the COVID-19 pandemic on our future financial and operational results. At this point it is unclear whether variables including the economy, unemployment, retail sales, and advertising budgets, or capital markets, including volatility of our stock price will impact our business. 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.
Key Performance Indicators Our presentation of our results of operations 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 increased 9.1% in the first quarter of fiscal 2021 when compared to the same period a year ago and increased slightly on a sequential basis. Over the past several years, we have experienced a continuing shift in our regional customer make-up with MAU in emerging markets representing an increasing portion of our user base. As ofOctober 31, 2020 , users in emerging markets represented 72% of our MAU compared to 66% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. However, ARPMAU for the three months endedOctober 31, 2020 was up 73.3% when compared to the same period a year ago, pointing to progress we have made in extracting more value from our users, particularly from paid subscriptions sales and improvement in ad optimization. For the same reasons, ARPMAU also increased 28.2% on a sequential basis. Three Months Ended October 31, % (in millions, except ARPMAU) 2020 2019 Change MAU 32.4 29.7 9.1 % Developed Markets MAU 9.2 10.0 -8.0 % Emerging Markets MAU 23.2 19.7 17.8 % Emerging Markets MAU/Total MAU 72 % 66 % 8.0 % ARPMAU$ 0.0364 $ 0.021 73.3 % 16 Three Months Ended October 31, July 31, % (in millions, except ARPMAU) 2020 2020 Change MAU 32.4 31.9 1.6 % Developed Markets MAU 9.2 9.6 -4.2 % Emerging Markets MAU 23.2 22.3 4.0 %
Emerging Markets MAU/Total MAU 72 % 70 % 2.4 %
ARPMAU$ 0.0364 $ 0.0284 28.2 % Results of Operations Three Months EndedOctober 31, 2020 Compared to Three Months EndedOctober 31, 2019 Three months ended October 31, Change 2020 2019 $ % (in thousands) Revenues $ 3,762 $ 2,033$ 1,729 85.0 % Direct cost of revenues 304 328 (24 ) -7.3 %
Selling, general and administrative 2,006 1,945 61 3.1 % Depreciation and amortization 359 505 (146 ) -28.9 % Income (loss) from operations 1,093 (745 ) 1,838 nm Interest and other income (expense), net 1 - 1 nm Net loss resulting from foreign exchange transactions (41 ) (56 ) 15 26.8 % Provision for income taxes 8 - 8 nm Net Income (loss) $ 1,045 $ (801 )$ 1,846 nm nm-not measurable Revenues
The following table sets forth the composition of our revenues for the three
months ended
Three Months Ended October 31, % of total Revenue
2020 2019 Changes Q1'21 Q1'20
(in thousands)Advertising revenue $ 2,986 $ 1,667 79.1 % 79.4 % 82.0 % Paid subscription revenue 650 207
214.0 % 17.3 % 10.2 %
Other revenues 126 159 -20.8 % 3.3 % 7.8 %
Total Revenues $ 3,762 $ 2,033 85.0 % 100.0 % 100.0 %
Advertising revenue. Advertising revenue increased 79.1% in the three months
ended October 31, 2020 compared to the same period in fiscal 2020 primarily due
to improvement in our ad optimizations and higher advertising rates.
Paid subscription revenue. We rolled out a subscription-based product on Android
in January 2019 , whereby users of our Zedge app could pay a monthly or annual
fee to remove unsolicited ads when using our Zedge app. We employ a regional
pricing strategy in order to improve conversions. The U.S. constitutes our
largest subscriber base and we generally charge $0.99 per month and $4.99 per
year. We generated $862,000 and $342,000 in gross prepaid subscription sales
consisting of both monthly and annual subscriptions for the three months ended
October 31, 2020 and 2019, respectively. We expect that from time to time the
prices of our subscription in each country/region may change and we may test
other plan and price variations.
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Revenue from Shortz and Zedge Premium are included under Other Revenue, and those offerings constitute potential growth drivers in the quarters to come.
The following table summarizes subscription revenue for the three months endedOctober 31, 2020 and 2019. As of Three Months Ended Change October 31, October 31, 2020 2019 Q1'21 vs. Q1'20 (in thousands, except revenue per subscriber and percentages) Revenues $ 650 $ 207 $ 443 214 % Paid net subscriber additions 105 66 40 60 % Paid subscriber at end of period 609 200 410 205 % Average paid subscribers 554 165 389 236 % Average monthly revenue per paid subscriber $ 0.39 $
0.42 $ -0.03 -7 %
Zedge Premium. We completed the initial 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 October 31, 2020 , gross
transaction value (the total sales volume transacting through the platform), or
"GTV," and net revenue generated from Zedge Premium were $208,000 and $125,000 ,
respectively. In the three months ended October 31, 2019 , GTV and net revenue
generated from Zedge Premium were $192,000 and $159,000 , respectively. Net
revenue includes breakage related to expired Zedge Credits.
Direct cost of revenues. Direct cost of revenues consists primarily of content hosting and content delivery costs.
Three Months Ended October 31, Change
(in thousands) 2020 2019 Q1'21 vs. Q1'20
Direct cost of revenues $ 304 $ 328 $ (24 ) -7.3 %
As a percentage of revenues 8.1 % 16.1 %
Direct cost of revenues decreased by
As a percentage of revenue, direct cost of revenues in three months ended
Selling, general and administrative expense. Selling, general and administrative
expense ("SG&A") consists mainly of payroll, benefits, recruiting fees,
facilities, marketing, content acquisition costs, consulting, professional fees,
software licensing ("SaaS") and public company related expenses.
Three Months Ended October 31, Change
(in thousands) 2020 2019 Q1'21 vs. Q1'20Selling, general and administrative $ 2,006 $
1,945$ 61 3.1 % As a percentage of revenues 53.3 % 95.7 % SG&A expenses increased by$61,000 or 3.1% in the three months endedOctober 31, 2020 compared to the same period in fiscal 2020. This increase was primarily attributable to higher stock-based compensation (see discussion below), higher professional fees and higher marketing costs associated with the approximately 26% average fee we pay toOctober 31, 2020 from 95.7% in the same period in fiscal 2020, primarily resulting from 85% year over year revenue growth.
Our headcount totaled 42 as of
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SG&A expenses also included stock-based compensation expense which was $237,000
and $98,000 for the three months ended October 31, 2020 and 2019, respectively.
This increase was primarily related to the extension of the expiration date of
options to purchase approximately182,000 shares of Class B Common Stock held by
one of our executive officers, from October 31, 2021 to May 31, 2026 and certain
other equity grants as more fully described in Note 6 to the Consolidated
Financial Statements included in Item 1 to Part I of this Quarterly Reporton 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.
Three Months Ended October 31, Change
(in thousands) 2020 2019 Q1'21 vs. Q1'20
Depreciation and amortization $ 359 $ 505 $ (146 ) -28.9 %
As a percentage of revenues 9.5 % 24.8 %
The comparison of depreciation and amortization expenses in any given periods can be attributed to the number of projects being amortized during those periods, as we removed fully amortized projects and added newly completed projects in the amortization pool.
Interest and other income (expense), net. The increase in interest and other income (expenses), net in the three months endedOctober 31, 2020 when compared to the same period in fiscal 2020 was primarily due to the increase in our cash and cash equivalents position during the period. Three Months Ended October 31, Change (in thousands) 2020 2019 Q1'21 vs. Q1'20 Interest and other income (expense), net $ 1 $
- $ 1 nm As a percentage of revenues 0.0 % 0.0 % 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 theU.S. Dollar, including gains or losses from our hedging activities. Three Months Ended October 31, Change (in thousands) 2020 2019 Q1'21 vs. Q1'20 Net loss resulting from foreign exchange transactions $ (41 ) $ (56 )$ 15 26.8 % As a percentage of revenues -1.1 % -2.8 %
In the three months ended
Provision for income taxes. The tax expense consists of minimum state taxes based on allocated net worth and certain income taxes payable in foreign jurisdictions where our subsidiary resides.
Three Months Ended October 31, Change
(in thousands) 2020 2019 Q1'21 vs. Q1'20
Provision for income taxes $ 8 $ - $ 8 nm
As a percentage of revenues 0.2 % 0.0 %
At July 31, 2020 , we had available U.S. federal and state net operating loss
("NOL") carryforwards from domestic operations of approximately $5.6 million and
$5.9 million , respectively, to offset future taxable income, we also had
available NOL carryforwards of approximately $433,000 to offset future foreign
taxable income. We expect to utilize these NOL carryforwards to offset the
taxable income for the three months ended October 31, 2020 and for the fiscal
year ending July 31, 2021 , and reduced its effective tax rate to 0% for those
periods.
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On March 27, 2020 , the 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 tax years. Most of these
provisions are either not applicable or have no material effect on the Company.
Liquidity and Capital Resources
General AtOctober 31, 2020 , we had cash and cash equivalents of$6.3 million and working capital (current assets less current liabilities) of$5.3 million , compared to$5.1 million and$3.9 million , respectively atJuly 31, 2020 . 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 endingOctober 31, 2021 . We also maintain a revolving line of credit of up to$2.0 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 three months
ended
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