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," which has been launched in beta, offers serialized, short-form fiction stories delivered as text-messaging conversations and more recently as mini-podcasts. Our Zedge app has been installed approximately 482 million times, and atJanuary 31, 2021 , boasted approximately 35.4 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 ofJanuary 31, 2021 , we had approximately 711,000 active 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 ofJanuary 31, 2021 , users in emerging markets represented 73% of our MAU compared to 67% 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 second quarter of fiscal 2021, users in emerging markets grew by 12.6% while users in well-developed economies declined 15.9% when compared to the same period in fiscal 2020. As ofJanuary 31, 2021 , approximately 45% of our Zedge app's user base was located inNorth America andEurope (includingEastern Europe ) with a split of 22% and 23%, respectively, compared with 53% as ofJanuary 31, 2020 with a split of 26% and 27%, respectively. MAU growth is tightly coupled with securing new users. Historically, our relatively high ranking in theAsia Pacific ,Western Europe , andLatin America are expected to exhibit the strongest growth between 2020 and 2021 which we expect will bode well for our business. During the quarters endedJanuary 31, 2021 and 2020, we generated approximately 83% and 85%, 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,January 31, 2021 , we had approximately 711,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception inJanuary 2019 , subscriptions have generated approximately$4.7 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. We expect to grow headcount by between 15% to 20% in calendar 2021, mostly in engineering, product and design to execute on our product development roadmap. 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. The risks related to the COVID-19 pandemic on our business are further described in Part I, Item 1A - Risk Factors of the Company's Annual Report on Form 10-K for the year endedJuly 31, 2020 , as filed with theSEC . Key Performance Indicators The 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 3.2% in the second quarter of fiscal 2021 when compared to the same period a year ago and increased 9.3% 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 ofJanuary 31, 2021 , users in emerging markets represented 73% of our MAU compared to 67% 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 endedJanuary 31, 2021 was up 87.8% when compared to the same period a year ago, pointing to progress we have made in extracting more value from our users, particularly from paid subscriptions sales and improvement in ad optimization. For the same reasons, ARPMAU also increased 35.2% on a sequential basis. Three Months Ended January 31, (in millions, except ARPMAU) 2021 2020 % Change MAU 35.4 34.3 3.2 % Developed Markets MAU 9.5 11.3 -15.9 % Emerging Markets MAU 25.9 23.0 12.6 % Emerging Markets MAU/Total MAU 73 % 67 % 9.1 % ARPMAU$ 0.0492 $ 0.0262 87.8 % 16 Three Months Ended January 31, October 31, (in millions, except ARPMAU) 2021 2020 % Change MAU 35.4 32.4 9.3 % Developed Markets MAU 9.5 9.2 3.3 % Emerging Markets MAU 25.9 23.2 11.6 %
Emerging Markets MAU/Total MAU 73 % 72 %
2.2 % ARPMAU$ 0.0492 $ 0.0364 35.2 % Results of Operations Three and Six Months EndedJanuary 31, 2021 Compared to Three and Six Months EndedJanuary 31, 2020 Three months ended Six Months Ended January 31, Change January 31, Change 2021 2020 $ % 2021 2020 $ % (in thousands) (in thousands) Revenues$ 5,314 $ 2,644 $ 2,670 101 %$ 9,076 $ 4,677 $ 4,399 94 % Direct cost of revenues 313 308 5 2 % 617 636 (19 ) -3 % Selling, general and administrative 2,159 1,894 265 14 % 4,165 3,839 326 8 % Depreciation and amortization 324 363 (39 ) -11 %
683 868 (185 ) -21 %
Income (loss) from operations 2,518 79 2,439 3087 % 3,611 (666 ) 4,277 nm Interest and other income, net 5 5 - 0 % 5 5 - 0 % Net gain (loss) resulting from foreign exchange transactions 74 17 57 335 % 34 (39 ) 73 nm Provision for income taxes 319 1 318 31800 % 327 1 326 32600 %
Net Income (loss)
$ 3,323 $ (701 ) $ 4,024 nm nm-not measurable Revenues
The following table sets forth the composition of our revenues for the three and
six months ended
Three Months Ended Six Months Ended
January 31, January 31, Changes
2021 2020 2021 2020 Three Months Six Months
(in thousands) (in thousands)
Advertising revenue $ 4,399 $ 2,260 $ 7,385 $ 3,927 95 % 88 %
Paid subscription revenue 809 323 1,459 530 150 % 175 %
Other revenues 106 61 232 220 74 % 5 %
Total Revenues $ 5,314 $ 2,644 $ 9,076 $ 4,677 101 % 94 %
Advertising revenue. Advertising revenue increased 95% and 88% in the three and six months endedJanuary 31, 2021 , respectively, compared to the three and six months endedJanuary 31, 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 inJanuary 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. TheU.S. constitutes our largest subscriber base and we generally charge$0.99 per month and$4.99 per year. We generated$954,000 and$1,816,000 in gross prepaid subscription in the three and six months endedJanuary 31, 2021 , respectively, compared to$496,000 and$838,000 in the three and six months endedJanuary 31, 2020 . 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. 17
The following table summarizes subscription revenue for the three and six months
ended
Three Months Ended Six Months Ended
January 31, January 31,
2021 2020 % Change 2021 2020 % Change
(in thousands, except revenue per subscriber and percentages)
Revenues $ 809 $ 323 150 % $ 1,459 $ 530 $ 175 %
Active subscriptions net
additions 102 98 3 % 207 164 26 %
Active subscriptions at end of
period 711 298 139 % 711 298 139 %
Average active subscriptions 669 248 170 % 612 206 196 %
Average monthly revenue per
active subscription $ 0.40 $ 0.43 -7 % $ 0.40 $ 0.43 $ -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 and six months ended January 31, 2021 ,
gross transaction value (the total sales volume transacting through the
platform), or "GTV," generated from Zedge Premium were $211,000 and $419,000 ,
respectively, compared to $197,000 and $389,000 in the three and six months
ended January 31, 2020 . In the three and six months ended January 31, 2021 net
revenue generated from Zedge Premium were $103,000 and $228,000 , respectively,
compared to $61,000 and $220,000 in the three and six months ended January31, 2020.
Revenue from Zedge Premium, as well as revenues generated by Shortz, are reported under Other Revenues, and those offerings constitute potential growth drivers in the quarters to come.
Direct cost of revenues. Direct cost of revenues consists primarily of content hosting and content delivery costs.
Three Months Ended Six Months Ended
January 31, January 31,
(in thousands) 2021 2020 % Change 2021 2020 % Change
Direct cost of revenues $ 313 $ 308 1.6 % $ 617 $ 636 -3.0 %
As a percentage of revenues 5.9 % 11.6 % 6.8 % 13.6 %
Direct cost of revenues increased 1.6% and decreased 3% in the three and six
months ended January 31, 2021 , respectively, compared to three and six months
ended January 31, 2020 . The 1.6% increase in the three months ended January 31,
2021 can be attributed to a billing error in fiscal 2020 where certain charges
were not billed by one of our vendors. The 3% decrease was primarily
attributable to the migration of our backend infrastructure to cloud-based
providers, offset by the increase in revenues.
As a percentage of revenue, direct cost of revenues in three and six months
ended January 31, 2021 were 5.9% and 6.8%, respectively, compared to 11.6% and
13.6% in the three and six months ended January 31, 2020 , primarily due to
significantly higher revenue in the current periods and the fixed nature of many
of our direct cost of revenues.
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 Six Months Ended
January 31, January 31,
(in thousands) 2021 2020 % Change
2021 2020 % Change
Selling, general and administrative
8.5 %
As a percentage of revenues 40.6 % 71.6 %
45.9 % 82.1 %
SG&A expense increased 14.0% and 8.5% in the three and six months ended January
31, 2021 , respectively, compared to three and six months ended January 31, 2020 .
This increase was primarily attributable to higher compensation costs resulting
from additional headcount, higher professional fees and higher marketing costs
associated with the approximately 23.9% average fee we pay to Google for
subscription sales, offset by reductions in discretionary expenses.
As a percentage of revenue, SG&A expense in the three and six months ended
Our headcount totaled 46 as of
18
SG&A expense also included stock-based compensation expense which were $152,000
and $389,000 for the three and six months ended January 31, 2021 , respectively,
compared to $198,000 and $296,000 for the three and six months ended January 31,
2020 . Stock-based compensation includes equity grants to employees and
consultants, as well as stock issuances to pay for board compensations and
401(k) matching contributions. Certain stock options, deferred stock unit and
restricted stock grants are more fully described in Note 6 to the Consolidated
Financial Statements included in Item 1 to Part I of this Quarterly Reporton Form 10-Q.
Depreciation and amortization. Depreciation and amortization consist mainly of
amortization of capitalized software and technology development costs of our
internal developers on various projects that we invested in specific to the
various platforms on which we operate our service. We start amortizing these
capitalized software and technology development costs once these projects were
completed.
Three Months Ended Six Months Ended
January 31, January 31,
(in thousands) 2021 2020 % Change 2021 2020 % ChangeDepreciation and amortization$ 324 $ 363 -10.7 %$ 683 $ 868 -21.3 % As a percentage of revenues 6.1 % 13.7 %
7.5 % 18.6 %
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, net. Interest and other income, net in the three and
six months ended
Three Months Ended Six Months Ended
January 31 , January 31 ,(in thousands) 2021 2020 % Change 2021 2020 % Change Interest and other income, net$ 5 $ 5 0.0
%$ 5 $ 5 0.0 % As a percentage of revenues 0.1 % 0.2 % 0.1 % 0.1 % 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 and EUR relative to theU.S. Dollar, including gains or losses from our hedging activities. Three Months Ended Six Months Ended January 31, January 31, (in thousands) 2021 2020 % Change 2021 2020 % Change Net gain (loss) resulting from foreign exchange transactions$ 74 $ 17 335.3 %$ 34 $ (39 ) nm As a percentage of revenues 1.4 % 0.6 %
0.4 % -0.8 %
In the three and six months ended January 31, 2021 , we realized gains of $92,000
and $51,000 , respectively, from NOK and EUR hedging activities, compared to
gains of $20,000 and losses of $54,000 in the three and six months ended January
31, 2020 .
Provision for income taxes. The tax expense consists of federal and state taxes
based on taxable income and allocated net worth and certain income taxes payable
in foreign jurisdictions where our subsidiaries reside.
Three Months Ended Six Months Ended
January 31 , January 31 ,(in thousands) 2021 2020 % Change 2021 2020 % Change Provision for income taxes$ 319 $ 1 nm$ 327 $ 1 nm As a percentage of revenues 6.0 % 0.0 %
3.6 % 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 six months ended January 31, 2021 and for the fiscal year
ending July 31, 2021 , and reduced its effective tax rate to 7.9% for those
periods.
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.
19
Liquidity and Capital Resources
General
AtJanuary 31, 2021 , we had cash and cash equivalents of$13.6 million and working capital (current assets less current liabilities) of$13.2 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 period endingJanuary 31, 2022 . 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 six months
ended
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