UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
FOR
THE QUARTERLY PERIOD ENDED
or
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
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| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Trading symbol: |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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As of March 14, 2022, the registrant had the following shares outstanding:
| Class A common stock, $.01 par value: | |
| Class B common stock, $.01 par value: |
ZEDGE, INC.
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZEDGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
(Unaudited)
| January 31, | July 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade accounts receivable, net of allowance of $ | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Deferred tax assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Due to seller of Emojipedia | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenues | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, | ( | ) | ( | ) | ||||
| Total Stockholders’ equity | ||||||||
| Total liabilities and Stockholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
ZEDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Direct cost of revenues (excluding amortization of capitalized software and technology development costs which is included below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest and other income, net | ||||||||||||||||
| Net (loss) gain resulting from foreign exchange transactions | ( | ) | ( | ) | ||||||||||||
| Income before income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net Income | ||||||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Changes in foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Total other comprehensive (loss) income | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income | $ | $ | $ | $ | ||||||||||||
| Income per share attributable to Zedge, Inc. common stockholders: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted-average number of shares used in calculation of income per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
ZEDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
| Class
A Common Stock | Class
B Common Stock | Additional Paid-in | Accumulated
Other Comprehensive | Accumulated | Treasury | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Stock | Equity | ||||||||||||||||||||||||||||
| Balance – July 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance -October 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||
| Stock issued for matching contributions to the 401(k) Plan | - | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance – January 31, 2022 | $ | | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | | |||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Treasury | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Stock | Equity | ||||||||||||||||||||||||||||
| Balance – July 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||||||
| Balance -October 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||
| Stock issued for matching contributions to the 401(k) Plan | - | |||||||||||||||||||||||||||||||||||
| Proceeds from sales of Class B Common Stock | - | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance – January 31, 2021 | $ | | $ | | $ | | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
ZEDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Six Months Ended | ||||||||
| January 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Change in assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets | ||||||||
| Trade accounts payable and accrued expenses | ||||||||
| Deferred revenue | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Capitalized software and technology development costs and purchase of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Proceeds from sales of Class B Common Stock | ||||||||
| Payment of issuance costs | ( | ) | ||||||
| Repayment of insurance premium loan payable | ( | ) | ||||||
| Proceeds from exercise of stock options | ||||||||
| Purchase of treasury stock in connection with restricted stock vesting | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash payments made for income taxes | $ | $ | ||||||
| Cash payments made for interest expenses | $ | $ | ||||||
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Acquistion of Emojipedia through release of escrow funds of $ | $ | $ | ||||||
| Accounts receivable from certain Emojipedia websites collected by Seller | $ | $ | ||||||
| Note payable issued for insurance premium financing | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
ZEDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Zedge, Inc. and its subsidiaries, Zedge Europe AS and Zedge Lithuania UAB (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended January 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2022 or any other period. The balance sheet at July 31, 2021 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2022 refers to the fiscal year ending July 31, 2022).
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ materially from the Company’s estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the global impact of the COVID-19 pandemic. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. The Company adopted this new accounting standard on August 1, 2021, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires consideration of forward-looking information to calculate credit loss estimates. These changes will result in an earlier recognition of credit losses. The Company’s financial assets held at amortized cost include accounts receivable. The amendments in ASU 2020-05 deferred the effective date for Topic 326 to fiscal years beginning after December 15, 2022. The Company will adopt the new standard effective August 1, 2023 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers. ASU 2021-08 requires an acquirer in a business combination to recognize and measure deferred revenue from acquired contracts using the revenue recognition guidance in Accounting Standards Codification Topic 606, rather than the prior requirement to record deferred revenue at fair value. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company will adopt the new standard effective August 1, 2023 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
With the exception of the standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended January 31, 2022, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021, that are of significance or potential significance to the Company.
5
Significant Accounting Policies
Other than intangible assets described below, there have been no material changes to the Company’s significant accounting policies from its Annual Report on Form 10-K for the fiscal year ended July 31, 2021.
Intangible Assets-Net
Intangible assets (see Note 16) are carried at cost, less accumulated amortization, unless a determination has been made that their value has been impaired. Intangible assets are amortized on a straight-line basis over their estimated useful lives of fifteen years. The Company reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. There have been no impairment charges recorded in the six months ended January 31, 2022 presented in the accompanying unaudited condensed consolidated financial statements.
Related Party Transactions
The Company has certain routine transactions with certain related parties. The related parties and nature of these transactions are described in Note 13 of the consolidated financial statements included in the Form 10-K for the fiscal year ended July 31, 2021.
Note 2—Revenue
Disaggregation of Revenue
The following table summarizes revenue by type of monetization mechanisms of the Zedge App and other revenues, including Emojipedia revenues. for the periods presented:
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Advertising revenue | $ | $ | $ | $ | ||||||||||||
| Paid subscription revenue | ||||||||||||||||
| Other revenues | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Contract Balances
Deferred revenues
6
Total deferred revenues decreased by $
Significant Judgments
The advertising networks and advertising exchanges to which we sell our inventory track and report the impressions and installs to Zedge and Zedge recognizes revenues based on these reports. The networks and exchanges base their payments off of those reports and Zedge independently compares the data to each of the client sites to validate the imported data and identify any differences. The number of impressions and installs delivered by the advertising networks and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.
Practical Expedients
The Company expenses the fees retained by Google Play related to subscription revenue when incurred as marketing expense because the duration of the contracts for which the Company pays commissions are less than one year. These costs are included in the selling, general and administrative expenses of the Consolidated Statements of Comprehensive Income.
Note 3—Fair Value Measurements
The following tables present the balance of assets and liabilities measured at fair value on a recurring basis:
| Level 1 (1) | Level 2 (2) | Level 3 (3) | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| January 31, 2022 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
| July 31, 2021 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
(1) –
(2) –
(3) –
Fair Value of Other Financial Instruments
The Company’s other financial instruments at January 31, 2022 and July 31, 2021 included trade accounts receivable, trade accounts payable, and due to seller of Emojipedia. The carrying amounts of the trade accounts receivable, trade accounts payable, and due to seller of Emojipedia approximated fair value due to their short-term nature.
Note 4—Derivative Instruments
The primary risk managed by the Company using derivative instruments is foreign exchange risk. Foreign exchange forward contracts are entered into as hedges against unfavorable fluctuations in the U.S. Dollar (USD) to Norwegian Kroner (NOK) and USD to Euro (EUR) exchange rates. The Company is party to a Foreign Exchange Agreement with Western Alliance Bank allowing the Company to enter into foreign exchange contracts under its revolving credit facility with the bank (see Note 9). The Company does not apply hedge accounting to these contracts, and therefore the changes in fair value are recorded in unaudited condensed consolidated statements of comprehensive income. By using derivative instruments to mitigate exposures to changes in foreign exchange rates, the Company is exposed to credit risk from the failure of the counterparty to perform under the terms of the contract. The credit or repayment risk is minimized by entering into transactions with high-quality counterparties.
7
The outstanding contracts at January 31, 2022, were as follows:
| Settlement Date | U.S. Dollar Amount | NOK Amount | ||||||
| Feb-22 | ||||||||
| Mar-22 | ||||||||
| Apr-22 | ||||||||
| May-22 | ||||||||
| Total | $ | |||||||
| Settlement Date | U.S. Dollar Amount | EUR Amount | ||||||
| Feb-22 | ||||||||
| Mar-22 | ||||||||
| Apr-22 | ||||||||
| May-22 | ||||||||
| Total | $ | |||||||
The fair value of outstanding derivative instruments recorded in the accompanying unaudited condensed consolidated balance sheets were as follows:
| January 31, | July 31, | |||||||||
| Assets and Liabilities Derivatives: | Balance Sheet Location | 2022 | 2021 | |||||||
| Derivatives not designated or not qualifying as hedging instruments | (in thousands) | |||||||||
| Foreign exchange forward contracts | $ | $ | ||||||||
The effects of derivative instruments on the consolidated statements of comprehensive income were as follows:
| Thre Months Ended January 31, |
Six Months Ended January 31, |
||||||||||||||||
| Amount of Gain (Loss) Recognized on Derivatives | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Derivatives not designated or not qualifying as hedging instruments | Location of Gain (Loss) Recognized on Derivatives |
(in thousands) | (in thousands) | ||||||||||||||
| Foreign exchange forward contracts | $ | ( |
) | $ | ( |
) | $ | ||||||||||
8
Note 5—Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
| January 31, | July 31, | |||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Accrued vacation | $ | $ | ||||||
| Accrued income taxes payable | ||||||||
| Accrued payroll taxes | ||||||||
| Accrued payroll and bonuses | ||||||||
| Operating lease liability | ||||||||
| Derivative liability | ||||||||
| Due to artists | ||||||||
| Other | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
Note 6—Stock-Based Compensation
2016 Stock Option and Incentive Plan
On November 18, 2020, the Company’s
Board of Directors amended the Company’s 2016 Stock Option and Incentive Plan (as amended to date, the “2016 Incentive Plan”)
to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional
On November 10, 2021, the Company’s
Board of Directors amended the 2016 Incentive Plan to increase the number of shares of the Company’s Class B common stock available
for the grant of awards thereunder by an additional
Stock Options
In August and October 2020,
In October 2020,
In December 2020 and January 2021, the
Compensation Committee of the Company’s Board of Directors approved grants of options to purchase an aggregate of
In October 2021,
9
In November 2021 and January 2022, the
Compensation Committee of the Company’s Board of Directors approved grants of options to purchase an aggregate of
The fair value of each grant of stock options was estimated on the respective date of grant using a Black-Scholes valuation model (“BSM”) and the assumptions in the following table. Expected volatility is based on historical volatility of the Company’s Class B common stock. The Company uses the simplified method to estimate the expected term of the stock-based payments granted due to the limited history of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
The Company used the following weighted average assumptions in its BSM pricing model:
| Six months ended January 31, | 2022 | 2021 | ||||||
| Expected term | ||||||||
| Volatility | % | % | ||||||
| Risk free interest rate | % | % | ||||||
| Dividends | ||||||||
At January 31, 2022, unrecognized compensation
expense related to unvested stock options was an aggregate of $
Deferred Stock Units (DSUs)
On September 7, 2021, the Company granted
a total of
Vesting of 30% (or 87,396) of the DSUs is based on the grantee remaining in service to the Company and will take place as to 25% on such DSUs on September 7, 2022, as to an additional 33% of such DSUs on September 7, 2023, and as to the remaining DSUs on September 7, 2024.
Vesting of the remaining 70% (or 203,924) of the DSUs is subject to continued service as well as a market condition (“DSUs with a market condition”). These DSUs will vest if the grantee remains in service to the Company and only if the aggregate market capitalization of the Company’s equity securities has reached or exceeded $451 million for five consecutive trading days between the grant date and the vest date. Subject to satisfaction of both of those conditions, 25% of such DSUs will vest on September 7, 2022, up to 58% (the 25% eligible to vest in 2022 and an additional 33%) of such DSUs will vest on September 7, 2023, and up to 100% will vest on September 7, 2024. In the event the market capitalization condition has not been met prior to a vesting date, but is met by a subsequent vesting date, all DSUs with a market condition eligible for vesting prior to that date shall vest. In the event that the market capitalization condition has not been met by September 7, 2024, the DSUs with a market condition shall expire.
The DSUs with a market condition have been valued by the Company using a Monte Carlo simulation model. The Monte Carlo simulation methodology estimates the future equity value of Zedge on a risk-neutral basis. Their mean value indication for a single DSU was $7.19 and their mean standard of error was less than 1%. Total grant date fair value for these DSUs with both service and market conditions was approximately $1.5 million. The unrecognized compensation expense is being recognized on a graded vesting method over the vesting period.
Total grant date fair value for the
remaining
At January 31, 2022, unrecognized compensation
expense related to unvested DSUs was an aggregate of $
In the six months ended January 31,
2022 and 2021, the Company purchased
10
Restricted Stock Awards
In November 2020, the Compensation Committee and
the Corporate Governance Committee of our Board of Directors approved a grant of
In October 2020, the Compensation Committee approved
a grant of
In our accompanying condensed consolidated statements
of operations and comprehensive income, we recognized stock-based compensation of $
At January 31, 2022, unrecognized compensation
expense related to unvested restricted stock awards was an aggregate of $
In the six months ended January 31, 2022 and 2021,
the Company purchased
Note 7—Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture, issuances to be made on the vesting of unvested DSUs and the exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.
The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Basic weighted-average number of shares | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options | ||||||||||||||||
| Non-vested restricted Class B common stock | ||||||||||||||||
| Deferred stock units | ||||||||||||||||
| Diluted weighted-average number of shares | ||||||||||||||||
The following shares were excluded from the dilutive earnings per share computations because their inclusion would have been anti-dilutive:
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||
| Stock options | |||||||||||||||
| Non-vested restricted Class B common stock | - | - | - | ||||||||||||
| Deferred stock units | - | ||||||||||||||
| Shares excluded from the calculation of diluted earnings per share | |||||||||||||||
Note 8—Contingencies
Legal Proceedings
The Company may from time to time be subject to other legal proceedings that arise in the ordinary course of business. Although there can be no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition.
11
Note 9—Revolving Credit Facility
As of September 27, 2016, the Company entered
into a loan and security agreement with Western Alliance Bank for a revolving credit facility of up to $
As of November 16, 2016,
Note 10—Business Segment and Geographic Information
The Company provides a content platform, worldwide, centered on self-expression, attracting both creators looking to promote their content and consumers who utilize such content to express their identity, feelings, tastes and interests. The Company’s platform enables consumers to personalize their mobile devices with mostly free, high-quality ringtones, wallpapers, home screen app icons, widgets and notification sounds. The Company conducts business as one operating segment.
Net long-lived assets and total assets, other than goodwill and investment in private company, held outside of the United States, which are located primarily in Norway, were as follows:
| United States | Foreign | Total | ||||||||||
| (in thousands) | ||||||||||||
| Long-lived assets, net: | ||||||||||||
| January 31, 2022 | $ | $ | $ | |||||||||
| July 31, 2021 | $ | $ | $ | |||||||||
| Total assets: | ||||||||||||
| January 31, 2022 | $ | $ | $ | |||||||||
| July 31, 2021 | $ | $ | $ | |||||||||
Note 11— Operating Leases
The Company has operating
leases primarily for office space. Operating lease right-of-use assets recorded and included in other assets were $
There were no other material changes in the Company’s operating and finance leases in the three and six months ended January 31, 2022, as compared to the disclosure in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021.
12
Note 12—Provision for Income taxes
The Company’s tax provision or benefit for income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Under certain circumstances where the Company is unable to make a reliable estimate of the annual effective tax rate, the accounting guidance permits the use of the actual effective tax rate for the year-to-date period.
The Company expects its overall effective tax
rate for fiscal year ending July 31, 2022 to be approximately
Comparatively for the prior period, at July 31,
2020, the Company had available net operating loss (“NOL”) carryforwards from domestic operations of approximately $
As of January 31, 2022, the Company had $
The Company is subject to taxation in the United States and certain foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdictions where the Company is subject to potential examination by tax authorities include the United States, Norway and Lithuania.
Note 13—Loans Payable
Effective August 1, 2020, the Company obtained
a loan of $
The Company obtained a loan under the Payroll
Protection Program (PPP) of the CARES Act in the amount of $
On November 25,
2020, the Company submitted the PPP Loan Forgiveness Application Form 3508EZ and on May 21, 2021, the Company was notified that such application
for the loan forgiveness had been approved and the loan, including accrued interest, had been deemed satisfied in full by the Small Business
Administration to Western Alliance Bank. The Company therefore recorded a gain of forgiveness of debt of $
Note 14—Sales of Class B Common Stock
The Company filed with the SEC a Registration
Statement on Form S-3 (the “Form S-3”) on November 30, 2020 which became effective on December 4, 2020 to facilitate capital
raising. The Registration Statement registered the issuance and sale by the Company of Class B common stock or related securities for
gross proceeds to the Company of up to $
On March 16, 2021, the Company filed a prospectus
supplement with the SEC which contemplated the sale, for a gross aggregate sale price of up to $
13
Note 15—Acquisition
Pursuant to an Asset Purchase Agreement, on August
1, 2021 (“Closing”), the Company consummated the acquisition of substantially all of the assets of Emojipedia Pty Ltd, a proprietary
company organized under the laws of Australia. The total purchase price of the assets has been determined to be $
The assets purchased include emojipeida.org, a
set of smaller websites, a bank of emoji related URLs and other assets related to the seller’s business, including World Emoji Day,
the annual World Emoji Awards, and Emojitracker. The asset purchase does not qualify as a business combination under FASB ASC 805, Business
Combinations, and has therefore been accounted for as an asset acquisition. The total purchase price for this acquisition was allocated
to intangible assets are amortized on a straight-line basis over their estimated useful lives of
The results of operations for this acquisition are included in the Company’s Consolidated Statements of Operations and Comprehensive Income since the date of the acquisition. Actual and pro forma revenue and results of operations for this acquisition have not been presented because they do not have a material impact on the consolidated results of operations.
Note 16—Intangible Assets
The following table presents the detail of intangible assets as of July 31, 2021 and January 31, 2022 (in thousands):
Estimated future amortization expense as of January 31, 2022 is as follows (in thousands):
| Remainder of fiscal 2022 | $ | |||
| Fiscal 2023 | ||||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Fiscal 2026 | ||||
| Thereafter | ||||
| Total | $ |
Note 17—Subsequent Event
On March 4, 2022, the Company entered into foreign exchange contracts as set forth below:
| Settlement Date | U.S. Dollar Amount | NOK Amount | ||||||
| Jun-22 | ||||||||
| Jul-22 | ||||||||
| Aug-22 | ||||||||
| Sep-22 | ||||||||
| Oct-22 | ||||||||
| Nov-22 | ||||||||
| Total | $ | |||||||
| Settlement Date | U.S. Dollar Amount | EUR Amount | ||||||
| Jun-22 | ||||||||
| Jul-22 | ||||||||
| Aug-22 | ||||||||
| Sep-22 | ||||||||
| Oct-22 | ||||||||
| Nov-22 | ||||||||
| Total | $ | |||||||
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 (the “Form 10-K”), as filed with the U.S. Securities and Exchange Commission (the “SEC”).
As used below, unless the context otherwise requires, the terms “the Company,” “Zedge,” “we,” “us,” and “our” refer to Zedge, Inc., a Delaware corporation and its subsidiary Zedge Europe AS, collectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in the Form 10-K. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the Form 10-K.
Overview
We own a portfolio of leading digital consumer brands that, as January 31, 2022, served 45 million monthly active users across the globe. Our portfolio consists of Zedge Ringtones and Wallpapers (“Zedge App”), Shortz and, as of the beginning of August of 2021, Emojipedia.
We operate a state-of-the-art digital publishing platform that powers Zedge App, available in the Google Play store and App Store, which offers an easy, entertaining and immersive way for end-users to engage with our rich and diverse catalogue of wallpapers, video wallpapers, ringtones, notification sounds on Android and wallpapers, video wallpapers, ringtones and custom icon packs on iOS. We secure our content from amateur and professional artists, and also from 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. That same platform powers an entertainment app called “Shortz – Chat Stories by Zedge”, which is focused on serialized, short-form, fiction stories, as a beta that runs on our publishing platform. Over the past year, we have been expanding our content catalogue, started testing audio versions of a selected number of stories, materially improved our ability to measure all types of engagement within the app, and invested a modest budget in paid user acquisition. In August of 2021, we acquired Emojipedia, the leading source of all things emoji.
Our Zedge App has been installed approximately 541 million times, and at January 31, 2022, boasted approximately 36 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 final 30 days of the relevant period. Our Zedge App has consistently ranked as one of the most popular free apps in the Google Play store in the United States. Historically, we have not made a material investment in paid user acquisition for our Zedge App.
Our Zedge App’s success stems from its ability to meet consumer demand for a rich and diverse catalogue of both long-tail and popular content in a fun, intuitive and user-friendly fashion that aligns with their interest in expressing their essence in a bespoke manner, to offer reliable search and discovery capabilities and to make relevant content recommendations to our users. To this end, we invest heavily in both product design and development and the underlying technology required to satisfy both our Zedge App’s users’ and content contributors’ expectations. Our Zedge App contains both user-generated and licensed, third-party content to achieve these goals.
In March 2018, we launched Zedge Premium, a marketplace within our Zedge App where professional creators and brands market, distribute and sell their digital content to our consumers. At launch, Zedge Premium was a “walled garden” – a separate section of the app which users needed to proactively choose to enter. In 2021, we embedded Zedge Premium content throughout the app making it far more prominent. We also introduced a new content type on iOS: custom icon packs. 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.
15
In January 2019, we started offering freemium Zedge App Android users the ability to convert into paying subscribers for, amongst other things, the ability to remove unsolicited advertisements from our Zedge App. As of January 31, 2022, we had approximately 762,000 active paid subscribers.
In December 2019, we completed the beta launch of ‘Shortz’ our new entertainment app offering serialized, short-form fiction rendered in a text-message format and more recently as audio productions available across both Android and iOS, and focusing on users in the United States, the United Kingdom and Canada and it is now available globally. New stories are added to the app regularly and we continuously improve content discovery in order to guide users to the stories that will most interest them and improve engagement.
On August 1, 2021, we acquired Emojipedia, the world’s leading authority dedicated to providing up to date and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker, which provides real time visualization of all emoji symbols used on Twitter. In January 2022 Emojipedia receives approximately 45 million monthly page views and has approximately 8.6 million monthly active users of which approximately 50% are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a voting member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Facebook and Twitter.
In December of 2021 we introduced ‘NFTs Made Easy’ to select Zedge Premium artists initially interested in selling single edition, tokenized, video wallpapers. Our all-in-one platform allows creators to self-publish, mint and sell their NFTs simply by selecting the NFT option within our self-publishing platform and without the need for them to be cryptocurrency experts or technology wizards. ‘NFTs Made Easy’ is currency agnostic and allows consumers to purchase NFTs with Zedge tokens acquired via in-app purchases, eliminating the need to set up a crypto wallet to buy cryptocurrencies. Over time we expect to expand the offering with features including features like numbered editions, drop dates and new content types.
Over the past several years, our Zedge App has experienced a continuing decline in its MAU in well-developed markets with growth of MAU in emerging markets, so that users in emerging markets represent an increasing portion of our user base. In addition, the rate of user growth in emerging markets slowed in the first half of fiscal 2022 compared to prior periods. As of January 31, 2022, users in emerging markets represented 77% of the MAU for our Zedge App compared to 73% 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 2022, users in emerging markets grew by 7.3% while users in well-developed economies declined 10.5% when compared to the same period in fiscal 2021. As of January 31, 2022, approximately 41% of our Zedge App’s user base was located in North America (20%) and Europe (including Eastern Europe, 21%), compared with 42% (North America, 20% and Europe 22%) as of July 31, 2021. The remaining 58% of the user base was primarily located in emerging markets with 27% located in India.
MAU growth is tightly coupled with new user growth. Historically, our relatively high ranking in the Google Play store has been one of the primary drivers for securing new users. Although still an important factor, we now also dedicate resources to growth initiatives, both organic and paid. We have started increasing paid user acquisition spend while monitoring results to ensure that the investment is yielding a positive return on investment. With time, we believe that we can change our growth dynamic in well-developed markets and return to more robust growth in all markets. Aside from targeted growth initiatives, we need to continually improve the core user experience, test different mechanisms and content verticals that may spur growth and capitalize on the role that Zedge Premium artists can have on driving new users into the Zedge platform.
The COVID-19 pandemic has impacted our Zedge App’s new user growth. According to Gartner, a leading research and advisory company, new smartphone sales declined 10.5% in calendar year 2020 as a result of the pandemic, negatively impacting new user growth, especially in well-developed markets. As of September 1, 2021, Gartner reported that worldwide smartphone sales grew by 10.8% year over year in the second quarter of calendar year 2021 despite supply constraints relating to COVID-19 component shortages and production disruptions; however, it is still unclear what the impact on user growth will be as vaccines become more available globally and as precautions like social distancing start to wane. The pandemic and measures implement to promote social distancing had a modest positive impact on user engagement.
In February of 2022 the Russian Federation invaded Ukraine. As a result, many governments and businesses imposed trade and economic sanctions on the Russian Federation and Belarus. Zedge has a small user base in Russia and Belarus; however, it also has a development center in Vilnius, Lithuania, which is approximately 40 kilometers from the Belarussian border. In the event that the conflict broadens to additional countries, Zedge may experience a slowdown relating to relocating personnel and/or employees being drafted into military or public service. At present, the Company is working on contingency planning to be in a position to minimize any potential interruptions.
16
During the quarters ended January 31, 2022 and 2021, we generated approximately 79% and 83%, 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 or taking a survey. Alternatively, users can buy Zedge Credits via an in-app purchase. If a user purchases Zedge Credits, Google Play or App Store keeps up to 30% of the purchase price with the remainder 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.
In January 2019, we started offering paid subscriptions to our Android users 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, Google retains up to 30% as a fee, which decreases to 15% from month 13 and beyond. As of January 31, 2022, we had approximately 762,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception in January 2019, subscriptions have generated approximately $8.5 million in gross revenue.
The COVID-19 pandemic, which has been ongoing since the third quarter of fiscal 2020, has resulted in public health responses including travel bans, restrictions, social distancing requirements, and shelter-in-place orders, which have impacted our business, operations, and financial performance in different ways. As a result of the COVID-19 pandemic, we experienced a reduction in advertiser demand in the second half of fiscal 2020. After that time, advertisers around the world increased their investment on mobile advertising. We saw continued momentum across key markets and increased advertiser demand for digital ads in general. The ongoing impact of the COVID-19 pandemic on our business and on global economic activity continues to evolve and may again in the future adversely affect our business, operations and financial 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. The key risks facing 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 ended July 31, 2021, as filed with the SEC.
Critical Accounting Policies
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the Form 10-K. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to capitalized software and technology development costs, revenue recognition, intangible assets 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
Please refer to Note 1 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
17
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) from our Zedge App. 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 main driver of our 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 2.5% in the second quarter of fiscal 2022 when compared to the same period a year ago and increased 6.1% 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 of January 31, 2022, users in emerging markets represented 77% of our MAU compared to 73% 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 sales in these regions coupled with lower priced subscriptions SKUs. However, ARPMAU for the three months ended January 31, 2022 was up approximately 22% when compared to the same period a year ago, pointing to progress we have made in extracting more revenue from our users, particularly from paid subscriptions sales and improvement in ad optimization. ARPMAU improved 12.8% on a sequential basis.
| Three Months Ended January 31, | ||||||||||||
| (in millions, except ARPMAU - Zedge App) | 2022 | 2021 | % Change | |||||||||
| MAU - Zedge App | 36.3 | 35.4 | 2.5 | % | ||||||||
| Developed Markets MAU - Zedge App | 8.5 | 9.5 | -10.5 | % | ||||||||
| Emerging Markets MAU - Zedge App | 27.8 | 25.9 | 7.3 | % | ||||||||
| Emerging Markets MAU - Zedge App/Total MAU - Zedge App | 77 | % | 73 | % | 4.9 | % | ||||||
| ARPMAU - Zedge App | $ | 0.0601 | $ | 0.0492 | 22.2 | % | ||||||
| Three Months Ended January 31, | Three Months Ended October 31, | |||||||||||
| (in millions, except ARPMAU) | 2022 | 2021 | % Change | |||||||||
| MAU - Zedge App | 36.3 | 34.2 | 6.1 | % | ||||||||
| Developed Markets MAU - Zedge App | 8.5 | 8.4 | 1.0 | % | ||||||||
| Emerging Markets MAU - Zedge App | 27.8 | 25.8 | 7.8 | % | ||||||||
| Emerging Markets MAU - Zedge App/Total MAU - Zedge App | 77 | % | 75 | % | 1.6 | % | ||||||
| ARPMAU - Zedge App | $ | 0.0601 | $ | 0.0533 | 12.8 | % | ||||||
18
The following charts present the MAU – Zedge App and ARPMAU – Zedge App for the consecutive eight quarters ended January 31, 2022:
 |
 |
| * | Please note the MAU-Zedge App graph above excludes MAU for the Emojipedia.org of approximately 8.6 million for the month of January 31, 2022. |
Results of Operations
Three and Six Months ended January 31, 2022 Compared to Three and Six Months ended January 31, 2021
| Three Months Ended January 31, | Change | Six Months Ended January 31, | Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
| Revenues | $ | 6,915 | $ | 5,314 | $ | 1,601 | 30.1 | % | $ | 12,943 | $ | 9,076 | $ | 3,867 | 42.6 | % | ||||||||||||||||
| Direct cost of revenues | 342 | 313 | 29 | 9.3 | % | 652 | 617 | 35 | 5.7 | % | ||||||||||||||||||||||
| Selling, general and administrative | 3,106 | 2,159 | 947 | 43.9 | % | 5,838 | 4,165 | 1,673 | 40.2 | % | ||||||||||||||||||||||
| Depreciation and amortization | 360 | 324 | 36 | 11.1 | % | 758 | 683 | 75 | 11.0 | % | ||||||||||||||||||||||
| Income from operations | 3,107 | 2,518 | 589 | 23.4 | % | 5,695 | 3,611 | 2,084 | 57.7 | % | ||||||||||||||||||||||
| Interest and other income, net | 14 | 5 | 9 | 180.0 | % | 27 | 5 | 22 | 440.0 | % | ||||||||||||||||||||||
| Net (loss) gain resulting from foreign exchange transactions | (85 | ) | 74 | (159 | ) | nm | (95 | ) | 34 | (129 | ) | nm | ||||||||||||||||||||
| Provision for income taxes | 711 | 319 | 392 | 122.9 | % | 1,247 | 327 | 920 | 281.3 | % | ||||||||||||||||||||||
| Net Income | $ | 2,325 | $ | 2,278 | $ | 47 | 2.1 | % | $ | 4,380 | $ | 3,323 | $ | 1,057 | 31.8 | % | ||||||||||||||||
nm—not measurable
Revenues
The following table sets forth the composition of our revenues for the three and six months ended January 31, 2022 and 2021:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||
| January 31, | January 31, | % Changes | |||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | Three Months | Six Months | ||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||||
| Advertising revenue | $ | 5,437 | $ | 4,399 | $ | 10,006 | $ | 7,385 | 24 | % | 35 | % | |||||||||||||
| Paid subscription revenue | 953 | 809 | 1,913 | 1,459 | 18 | % | 31 | % | |||||||||||||||||
| Other revenues | 525 | 106 | 1,024 | 232 | 395 | % | 341 | % | |||||||||||||||||
| Total revenues | $ | 6,915 | $ | 5,314 | $ | 12,943 | $ | 9,076 | 30 | % | 43 | % | |||||||||||||
Advertising revenue. Advertising revenue increased 24% and 35% in the three and six months ended January 31, 2022, respectively, compared to the three and six months ended January 31, 2021, primarily due to improvement in our ad optimizations and higher advertising rates.
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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 $897,000 and $1,816,000 in gross prepaid subscription in the three and six months ended January 31, 2022, respectively, compared to $952,000 and $1,816,000 in the three and six months ended January 31, 2021. The 6% decline in gross prepaid subscription sale for the three months ended January 31, 2022 when compared to the same period a year ago was due to approximately 10% decline in new installs in the well-development markets in the corresponding periods. 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.
The following table summarizes subscription revenue for the three and six months ended January 31, 2022 and 2021:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| January 31, | January 31, | |||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | |||||||||||||||||||
| (in thousands, except revenue per subscriber and percentages) | ||||||||||||||||||||||||
| Revenues | $ | 953 | $ | 809 | 18 | % | $ | 1,913 | $ | 1,459 | $ | 31 | % | |||||||||||
| Active subscriptions net additions | -1 | 102 | -100 | % | 10 | 207 | -95 | % | ||||||||||||||||
| Active subscriptions at end of period | 762 | 711 | 7 | % | 762 | 711 | 7 | % | ||||||||||||||||
| Average active subscriptions | 765 | 669 | 14 | % | 762 | 612 | 25 | % | ||||||||||||||||
| Average monthly revenue per active subscription | $ | 0.42 | $ | 0.40 | 5 | % | $ | 0.42 | $ | 0.40 | $ | 5 | % | |||||||||||
Zedge Premium. In the three and six months ended January 31, 2022, gross transaction value (the total sales volume transacting through the platform), or “GTV,” generated from Zedge Premium were $434,000 and $763,000, respectively, compared to $211,000 and $419,000 in the three and six months ended January 31, 2021. In the three and six months ended January 31, 2021 net revenue generated from Zedge Premium were $241,000 and $428,000, respectively, compared to $103,000 and $228,000 in the three and six months ended January 31, 2021. The gross and net revenue growth in Zedge Premium can be attributed to the investment we made in our new content management system as well as the landing page redesign.
Revenue from Zedge Premium, web-based advertising revenues from Emojipedia and other related sites, 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 January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||
| Direct cost of revenues | $ | 342 | $ | 313 | 9.3 | % | $ | 652 | $ | 617 | 5.7 | % | ||||||||||||
| As a percentage of revenues | 4.9 | % | 5.9 | % | 5.0 | % | 6.8 | % | ||||||||||||||||
Direct cost of revenues increased 9.3% and 5.7% in the three and six months ended January 31, 2022, respectively, compared to three and six months ended January 31, 2021. The increase in the direct cost of revenues can be attributed to the new data analytic tool provided by Google Cloud: Cloud Computing Services.
As a percentage of revenue, direct cost of revenues in three and six months ended January 31, 2021 were 4.9% and 5.0%, respectively, compared to 5.9% and 6.8%, 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 January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||
| Selling, general and administrative | $ | 3,105 | $ | 2,159 | 43.8 | % | $ | 5,838 | $ | 4,165 | 40.2 | % | ||||||||||||
| As a percentage of revenues | 44.9 | % | 40.6 | % | 45.1 | % | 45.9 | % | ||||||||||||||||
SG&A expense increased 43.8% and 40.2% in the three and six months ended January 31, 2022, respectively, compared to the three and six months ended January 31, 2021. This increase was primarily attributable to higher compensation costs resulting from additional headcount, higher stock-based compensation as discussed below, higher professional fees offset by reductions in discretionary expenses.
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As a percentage of revenue, SG&A expense in the three and six months ended January 31, 2021 were 44.9% and 45.1%, respectively, compared to 40.6% and 45.9%, in the three and six months ended January 31, 2021.
Our headcount totaled 63 as of January 31, 2022 compared to 46 as of January 31, 2021 with the majority of our employees currently based in Lithuania.
SG&A expense also included stock-based compensation expense which were $489,000 and $808,000 for the three and six months ended January 31, 2021, respectively, compared to $152,000 and $389,000 for the three and six months ended January 31, 2021. 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 Unaudited Condensed 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, and amortization of intangible assets.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||
| Depreciation and amortization | $ | 360 | $ | 324 | 11.1 | % | $ | 758 | $ | 683 | 11.0 | % | ||||||||||||
| As a percentage of revenues | 5.2 | % | 6.1 | % | 5.9 | % | 7.5 | % | ||||||||||||||||
Depreciation and amortization expenses increased approximately 11% in both three and six months ended January 31, 2022, compared to three and six months ended January 31, 2021. This increase was primarily attributable to the amortization of intangible assets related to the Emojipedia acquisition which was completed on August 1, 2021.
Interest and other income, net. Interest and other income, net in the three and six months ended January 31, 2022 increased $7,000 and $22,000 respectively when compared to the same periods in fiscal 2021 due to higher cash balance resulting from cash flows provided by operating activities and financing activities in fiscal 2021.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||
| Interest and other income, net | $ | 14 | $ | 5 | 180.0 | % | $ | 27 | $ | 5 | 440.0 | % | ||||||||||||
| As a percentage of revenues | 0.2 | % | 0.1 | % | 0.2 | % | 0.1 | % | ||||||||||||||||
Net (loss) gain 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 the U.S. Dollar, including gains or losses from our hedging activities.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||
| (in thousands) | 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||
| Net loss resulting from foreign exchange transactions | $ | (85 | ) | $ | 74 | nm | $ | (95 | ) | $ | 34 | nm | ||||||||
| As a percentage of revenues | -1.2 | % | 1.4 | % | -0.7 | % | 0.4 | % | ||||||||||||
In the three and six months ended January 31, 2021, we realized losses of $127,000 and $117,000, respectively, from NOK and EUR hedging activities, compared to gains of $92,000 and $51,000, respectively in the three and six months ended January 31, 2021.
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 January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||
| Provision for income taxes | $ | 711 | $ | 319 | 122.9 | % | $ | 1,247 | $ | 327 | 281.3 | % | ||||||||||||
| As a percentage of revenues | 10.3 | % | 6.0 | % | 9.6 | % | 3.6 | % | ||||||||||||||||
Our tax provision or benefit for income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Under certain circumstances where we are unable to make a reliable estimate of the annual effective tax rate, the accounting guidance permits the use of the actual effective tax rate for the year-to-date period.
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We expect our overall effective tax rate for fiscal year ending July 31, 2022 to be approximately 22.8%. The effective tax rate differed from the United States federal statutory tax rate of 21% due to certain factors with temporary impact primarily related to the equity compensation expenses. During the six months ended January 31, 2022, we accounted for a discrete item related to restricted stock windfall (vesting date fair market value above the grant date fair market value) which resulted in a net effective tax rate of 22.1%.
As of January 31, 2022, we had $527,000 of deferred tax assets for which it has not established a valuation allowance, related to the U.S. federal states and certain international subsidiary. The Company completed its reassessment of the ability to realize these assets and concluded that a valuation allowance was not required.
We are subject to taxation in the United States and certain foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdictions where we are subject to potential examination by tax authorities include the United States, Norway and Lithuania.
Liquidity and Capital Resources
General
At January 31, 2022, we had cash and cash equivalents of $30.0 million and working capital (current assets less current liabilities) of $26.9 million, compared to $24.9 million and $23.4 million, respectively, at July 31, 2021. 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-month period ending March 16, 2023. During fiscal 2021, we raised an aggregate of $15 million through sales of equity in At the Market offerings. 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 with Western Alliance Bank, as discussed below in Financing Activities.
The following tables present selected financial information for the six months ended January 31, 2022 and 2021:
| Six Months Ended January 31, | ||||||||
| (in thousands) | 2022 | 2021 | ||||||
| Cash flows provided by (used in): | ||||||||
| Operating activities | $ | 5,679 | $ | 3,761 | ||||
| Investing activities | (323 | ) | (401 | ) | ||||
| Financing activities | (225 | ) | 5,055 | |||||
| Effect of exchange rate changes on cash and cash equivalents | (23 | ) | 82 | |||||
| Increase in cash and cash equivalents | $ | 5,108 | $ | 8,497 | ||||
Operating Activities
Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable. Cash provided by operating activities increased $1.9 million in the six months ended January 31, 2022 to $5.7 million from $3.7 million in the six months ended January 31, 2021, primarily attributable to the higher revenues generated from our service offerings, principally advertising and paid subscription revenues.
Investing Activities
Pursuant to an Asset Purchase Agreement, on August 1, 2021 (“Closing”), we acquired substantially all of the assets of Emojipedia Pty Ltd, a proprietary company organized under the laws of Australia. The final purchase price of the assets has been determined to be $6.7 million of which $4.8 million was paid on August 2, 2021 with the remaining $1.9 million to be paid out on the six-month and twelve-month anniversary of the Closing. That $4.8 million was funded into an escrow account on July 30, 2021 and classified as other assets on our balance sheet as of July 31, 2021.
Cash used in investing activities in six months ended January 31, 2022 and 2021 consisted mostly of capitalized software and technology development costs related to various projects that we invested in specific to the various platforms on which we operate our service.
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Financing Activities
Between December 14, 2020 and January 26, 2021, we sold an aggregate of 761,906 shares of our Class B common stock at an average price of $6.5625 per share for total gross proceeds of $5 million in a registered “At the Market” offering through National Securities Corp. and H.C. Wainwright & Co, LLC as sales agents. In connection with this offering, total issuance costs were $215,000. We are using the net proceeds from this offering for general corporate purposes including organic and other growth initiatives.
In August 2020, we obtained a loan of $181,000 to finance about 82% of our directors’ and officers’ liability and cyber liability insurance policies, at an annual percentage interest rate of 3.89% to be repaid over nine equal monthly installments of $20,490 starting from September 1, 2020. We repaid approximately $100,000 in principal in the six months ended January 31, 2021.
In the six months ended January 31, 2022 and 2021, we issued 3,666 shares and 312,287 shares respectively of Class B common stock and received $7,000 and $396,000 respectively, in connection with options exercised during the period.
In the six months ended January 31, 2022 and 2021, we purchased 16,115 shares and 17,630 shares, respectively, of Class B common stock from employees for $232,000 and $26,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock and DSUs.
We maintain a credit facility of up to $2.0 million provided by Western Alliance Bank which is more fully described in Note 9 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
We do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.
Changes in Trade Accounts Receivable
Gross trade accounts receivable increased $0.7 million to $3.2 million at January 31, 2022 from $2.5 million at July 31, 2021, primarily due to higher revenue in the preceding two months ended January 31, 2022 when compared to the same period ended July 31, 2021.
Concentration of Credit Risk and Significant Customers
Historically, we have had very little or no bad debt, which is common with other platforms of our size that derive their revenue from digital advertising, as we aggressively manage our collections and perform due diligence on our customers. In addition, the majority of our revenue is derived from large, credit-worthy customers, e.g. MoPub (owned by Twitter until it was sold to AppLovin on January 3, 2022), Google, Facebook and Applovin, and we terminate our services with smaller customers immediately upon balances becoming past due. Since these smaller customers rely on us to derive their own revenue, they generally pay their outstanding balances on a timely basis.
In the six months ended January 31, 2022, three customers represented 25%, 23% and 12% of our revenue. In the six months ended January 31, 2021, three customers represented 31%, 22% and 12% of our revenue. At January 31, 2022, two customers represented 39% and 29% of our accounts receivable balance, and at July 31, 2021, two customers represented 37% and 28% of our accounts receivable balance. All of these significant customers were advertising exchanges operated by leading companies, and the receivables represent many smaller amounts due from their advertisers.
Contractual Obligations and Other Commercial Commitments
Smaller reporting companies are not required to provide the information required by this item.
Off-Balance Sheet Arrangements
At January 31, 2022, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Smaller reporting companies are not required to provide the information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2022.
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Changes in Internal Control over Financial Reporting. Other than the remediation discussed below, there were no changes in our internal control over financial reporting during the quarter ended January 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Previously Reported Material Weakness
Management previously identified a material weakness in internal control over financial reporting related to accounting for taxes, which is disclosed in Item 9A. “Controls and Procedures” of our Form 10-K for the fiscal year ended July 31, 2021. Specifically, we determined that our management review controls related to valuation allowance against deferred tax assets were ineffective.
Remediation
In order to remediate the material weakness, we designed and implemented the following internal controls:
| ● | We have historically engaged tax consultants to prepare and review the Company’s income tax provision. The tax consultants appointed a second tax partner as an independent reviewer to perform a final review of the tax provision work prepared by its engagement team. |
| ● | The chief financial officer performed a final review of the tax provision, which is performed at a more granular level than in the past, and performed at a sufficient level of precision. This review involves a detailed review of the tax provision schedules prepared by the tax consultants. This includes, among other procedures, assessing the completeness and accuracy of amounts included in the tax provision schedules, reconciling amounts in the tax provision schedules to the Company’s records, reviewing the mathematical accuracy of the schedules, understanding key fluctuations in the tax accounts, and reviewing that amounts recorded in the financial statements for income taxes reconciles to the tax provision schedules. |
We believe our material weakness related to accounting for taxes has been remediated and that our internal control processes over financial reporting are effective as January 31, 2022.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings in which we are involved are more fully described in Note 8 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There are no other material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
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Item 6. Exhibits
| * | Filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ZEDGE, INC. | ||
| March 16, 2022 | By: | /s/ JONATHAN REICH |
| Jonathan Reich | ||
| Chief Executive Officer | ||
| March 16, 2022 | By: | /s/ YI TSAI |
| Yi Tsai | ||
| Chief Financial Officer | ||
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