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 497 million times, and atApril 30, 2021 , boasted approximately 34.5 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 paid subscriptions which, amongst other things, removed unsolicited advertisements from our Zedge app. As ofApril 30, 2021 , we had approximately 753,000 active subscribers. Beginning 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. 16 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 ofApril 30, 2021 , users in emerging markets represented 74% of our MAU compared to 69% a year prior. This shift impacts our business because emerging markets do not monetize as well as well-developed markets due to lower eCPMs and lower monthly and annual subscription rates in these regions coupled with lower priced subscriptions SKUs (Stock Keeping Unit). In the third quarter of fiscal 2021, users in emerging markets grew by 29.3% while users in well-developed economies declined 1.2% when compared to the same period in fiscal 2020. As ofApril 30, 2021 , approximately 43% of our Zedge app's user base was located inNorth America andEurope (includingEastern Europe ) with a split of 21% and 22%, respectively, compared with 51% as ofApril 30, 2020 with a split of 25% and 26%, respectively. MAU growth is tightly coupled with securing new users. Historically, our relatively high ranking in theApril 30, 2021 and 2020, we generated approximately 80% and 72%, 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 paid subscriptions which amongst other things removed unsolicited advertisements from our Zedge app. During the first 12 months after a customer's sign up for the subscription-based product,April 30, 2021 , we had approximately 753,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception inJanuary 2019 , subscriptions have generated approximately$5.7 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. 17
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 inMarch 2020 , our daily advertising revenue has experienced a strong recovery sinceJuly 2020 throughApril 2021 . 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 19.8% in the third quarter of fiscal 2021 when compared to the same period a year ago and decreased 2.6% 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 ofApril 30, 2021 , users in emerging markets represented 74% of our MAU compared to 69% a year prior. This shift impacts our business because emerging markets do not monetize as well as well-developed markets due to lower eCPMs and lower monthly and annual subscription rates in these regions coupled with lower priced subscriptions SKUs. However, ARPMAU for the three months endedApril 30, 2021 was up 121% 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. ARPMAU decreased slightly on a sequential basis. Three Months Ended April 30, (in millions, except ARPMAU) 2021 2020 % Change MAU 34.5 28.8 19.8 % Developed Markets MAU 8.9 9.0 -1.2 % Emerging Markets MAU 25.6 19.8 29.3 % Emerging Markets MAU/Total MAU 74 % 69 % 7.9 % ARPMAU$ 0.0485 $ 0.0220 120.5 % 18 Three Months Ended April 30, January 31, (in millions, except ARPMAU) 2021 2021 % Change MAU 34.5 35.4 -2.6 % Developed Markets MAU 8.9 9.5 -6.4 % Emerging Markets MAU 25.6 25.9 -1.2 % Emerging Markets MAU/Total MAU 74 % 73 % 1.4 % ARPMAU$ 0.0485 $ 0.0492 -1.4 % Results of Operations
Three and Nine months Ended
Three months ended Nine Months Ended April 30, Change April 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands) (in thousands) Revenues$ 5,252 $ 2,079 $ 3,173 153 %$ 14,328 $ 6,756 $ 7,572 112 % Direct cost of revenues 290 289 1 0 % 907 925 (18 ) -2 % Selling, general and administrative 2,694 1,569 1,125 72 % 6,859 5,408 1,451 27 % Depreciation and amortization 289 348 (59 ) -17 % 972 1,216 (244 ) -20 % Income (loss) from operations 1,979 (127 ) 2,106 nm 5,590 (793 ) 6,383 nm Interest and other income, net 9 2 7 350 % 14 7 7 100 % Net gain (loss) resulting from foreign exchange transactions (12 ) (200 ) 188 -94 % 21 (239 ) 260 nm Provision for income taxes 44 - 44 nm 370 1 369 nm Net Income (loss)$ 1,932 $ (325 ) $ 2,257 nm$ 5,255 $ (1,026 ) $ 6,281 nm nm - not measurable Revenues
The following table sets forth the composition of our revenues for the three and
nine months ended
Three Months Ended Nine Months Ended April 30, April 30, Changes 2021 2020 2021 2020 Three Months Nine Months (in thousands) (in thousands) Advertising revenue$ 4,227 $ 1,501 $ 11,612 $ 5,428 182 % 114 % Paid subscription revenue 899 455 2,358 985 98 % 139 % Other revenues 126 123 358 343 2 % 4 % Total Revenues$ 5,252 $ 2,079 $ 14,328 $ 6,756 153 % 112 % Advertising revenue. Advertising revenue increased 182% and 114% in the three and nine months endedApril 30, 2021 , respectively, compared to the three and nine months endedApril 30, 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 or$4.99 per year. We generated$990,000 and$2,806,000 in gross prepaid subscription in the three and nine months endedApril 30, 2021 , respectively, compared to$684,000 and$1,522,000 in the three and nine months endedApril 30, 2020 . We expect that, based on research and testing we undertake, from time to time, the prices of our subscription in each country/region may change and we may test other
plan and price variations. 19
The following table summarizes subscription revenue for the three and nine
months ended
Three Months Ended Nine Months Ended April 30, April 30, 2021 2020 % Change 2021 2020 % Change (in thousands, except revenue per subscriber and percentages) Revenues$ 899 $ 455 98 %$ 2,358 $ 985 $ 139 % Active subscriptions net additions 42 101 -58 % 249 266 -6 % Active subscriptions at end of period 753 399 89 % 753 399 89 % Average active subscriptions 734 348 111 % 652 254 157 % Average monthly revenue per active subscription$ 0.41 $ 0.44 -6 %$ 0.40 $ 0.43 $ -7 % Zedge Premium. We completed the initial 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 and nine months endedApril 30, 2021 , gross transaction value (the total sales volume transacting through the platform), or "GTV," generated from Zedge Premium were$252,000 and$671,000 , respectively, compared to$150,000 and$539,000 in the three and nine months endedApril 30, 2020 . In the three and nine months endedApril 30, 2021 net revenue generated from Zedge Premium were$124,000 and$352,000 , respectively, compared to$123,000 and$343,000 in the three and nine months ended April
30, 2020.
Revenue from Zedge Premium, as well as revenues generated by Shortz, are reported under Other Revenues, and those offerings constitute potential growth drivers in the quarters to come.
Direct cost of revenues.Direct cost of revenues consists primarily of content hosting and content delivery costs.
Three Months Ended Nine Months Ended April 30, April 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Direct cost of revenues$ 290 $ 289 0.3 %$ 907 $ 925 -1.9 % As a percentage of revenues 5.5 % 13.9 % 6.3 % 13.7 %
Direct cost of revenues increased 0.3% and decreased 1.9% in the three and nine months endedApril 30, 2021 , respectively, compared to three and nine months endedApril 30, 2020 . As a percentage of revenue, direct cost of revenues in three and nine months endedApril 30, 2021 were 5.5% and 6.3%, respectively, compared to 13.9% and 13.7% in the three and nine months endedApril 30, 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 Nine Months Ended April 30, April 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Selling, general and administrative$ 2,694 $ 1,569 71.7 %$ 6,859 $ 5,408 26.8 % As a percentage of revenues 51.3 % 75.5 % 47.9 % 80.0 % SG&A expense increased 71.7% and 26.8% in the three and nine months endedApril 30, 2021 , respectively, compared to three and nine months endedApril 30, 2020 . This increase was primarily attributable to higher compensation costs resulting from additional headcount and bonus accrual, higher payroll taxes resulting from option exercise activities as discussed below, higher professional fees and higher marketing costs associated with the approximately 23.4% average fee we pay toApril 30, 2020 , as a result, SG&A expenses related to our Norwegian operations for that period were lower when expressed in US dollar term and contributed in part to the overall year over year increases in our SG&A expenses.
As a percentage of revenue, SG&A expense in the three and nine months ended
20
Our headcount totaled 52 as of
SG&A expense also included stock-based compensation expense which was$98,000 and$487,000 for the three and nine months endedApril 30, 2021 , respectively, compared to$102,000 and$397,000 for the three and nine months endedApril 30, 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 Report
on Form 10-Q.
Holders exercised option to purchase 312,287 and 497,252 shares of Class B common stock, respectively, in the three and nine months endedApril 30, 2021 as compared to 0 and 29,917 shares in the three and nine months endedApril 30, 2020 . In connection with these option exercises and the resulting net gains, we incurred approximately$258,000 and$382,000 in payroll taxes in the three and nine months endedApril 30, 2021 as compared to$0 and$6,000 in the three and nine months endedApril 30, 2020 . Depreciation and amortization. Depreciation and amortization consist mainly of amortization of capitalized software and technology development costs of our internal developers on various projects that we invested in specific to the various platforms on which we operate our service. We start amortizing these capitalized software and technology development costs once these projects were completed. Three Months Ended Nine Months Ended April 30, April 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Depreciation and amortization$ 289 $ 348 -17.0 %$ 972 $ 1,216 -20.1 % As a percentage of revenues 5.5 % 16.7 % 6.8 % 18.0 %
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 nine months endedApril 30, 2021 increased$7,000 and$7,000 , respectively, when compared to the same periods in fiscal 2020 due to higher cash balance resulting from cash flows provided by operating activities and financing activities in the current periods. Three Months Ended Nine Months Ended April 30, April 30, (in thousands) 2021 2020 % Change
2021 2020 % Change Interest and other income, net$ 9 $ 2 350.0 %$ 14 $ 7 100.0 % As a percentage of revenues 0.2 % 0.1 % 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 Nine Months Ended April 30, April 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Net gain (loss) resulting from foreign exchange transactions$ (12 ) $ (200 ) -94.0 %$ 21 $ (239 ) nm As a percentage of revenues -0.2 % -9.6 % 0.1 % -3.5 % In the three and nine months endedApril 30, 2021 , we realized gains of$16,000 and$67,000 , respectively, from NOK and EUR hedging activities, compared to losses of$273,000 and$327,000 in the three and nine months endedApril 30, 2020 for the reason stated above. Provision for income taxes.The tax expense consists of federal and state taxes based on taxable income and allocated net worth and certain income taxes payable in foreign jurisdictions where our subsidiaries reside. Three Months Ended Nine Months Ended April 30, April 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Provision for income taxes$ 44 $ - nm$ 370 $ 1 nm As a percentage of revenues 0.8 % 0.0 % 2.6 % 0.0 % 21 AtJuly 31, 2020 , we had availableU.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 nine months endedApril 30, 2021 and for the fiscal year endingJuly 31, 2021 , and reduce our effective tax rate to 6.6% for those periods. OnMarch 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 AtApril 30, 2021 , we had cash and cash equivalents of$24.9 million and working capital (current assets less current liabilities) of$22.9 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 endingApril 30, 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 nine months
ended
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