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)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| (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 12 months (or for such shorter period that
the registrant was required to submit and post such files).
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. ☐
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No
As of March 14, 2023, 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. Condensed Consolidated Financial Statements
ZEDGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
| January 31, | July 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade accounts receivable | ||||||||
| Prepaid expenses and other receivables | ||||||||
| 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 | $ | $ | ||||||
| Deferred acquisition payment payable | ||||||||
| Contingent consideration-current portion | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenues | ||||||||
| Total current liabilities | ||||||||
| Term loan, net of deferred financing costs | ||||||||
| Contingent consideration-long term portion | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| 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 for per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31 | January 31 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| 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 | ||||||||||||||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | - | |||||||||||
| Income from operations | ||||||||||||||||
| Interest and other income, net | ||||||||||||||||
| Net gain (loss) resulting from foreign exchange transactions | ( | ) | ( | ) | ||||||||||||
| Income before income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Changes in foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| 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 | Retained | Treasury Stock | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
| Balance – July 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance – October 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Restricted stock issuance in connection with GuruShots acquisition | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock issued for matching contributions to the 401(k) Plan | - | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance – January 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Treasury Stock | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Shares | Amount | 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||
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, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of capitalized software and technology development costs | ||||||||
| Amortization of deferred financing costs | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| 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 | ||||||||
| Final payments for asset acquisitions | ( | ) | ||||||
| Capitalized software and technology development costs | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Proceeds from term loan payable | ||||||||
| Payment of deferred financing costs | ( | ) | ||||||
| Proceeds from exercise of stock options | ||||||||
| Purchase of treasury stock in connection with share buyback program and restricted stock vesting | ( | ) | ( | ) | ||||
| Net cash provided by (used in) 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 | ||||||||
| Acquisition of Emojipedia through release of escrow funds of $ | $ | $ | ||||||
| Accounts receivable from certain Emojipedia websites collected by Seller | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
ZEDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Zedge, Inc. and its subsidiaries, GuruShots Ltd. (“GuruShots”), 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 8 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, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2023 or any other period. The balance sheet at July 31, 2022 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, 2022, 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 ended July 31, 2022).
Reportable Segments
Effective August 1, 2022, the Company revised the presentation of segment information to reflect its acquisition of GuruShots (see Note 5). As such, the Company now reports operating results through two reportable segments: Zedge App and GuruShots, as further discussed in Note 12
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 various global events. 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 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.
5
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 contract assets and contract liabilities from acquired contracts using the revenue recognition guidance in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, rather than the prior requirement to record them 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 standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended January 31, 2023, 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, 2022, that are of significance or potential significance to the Company.
Related Party Transactions
The Company was formerly a majority-owned subsidiary of IDT Corporation (“IDT”). On June 1, 2016, IDT’s interest in the Company was spun-off by IDT to IDT’s stockholders and the Company became an independent public-held company. IDT charges the Company for services it provides, and the Company charges IDT for services it provides, pursuant to a Transition Services Agreement (“TSA”).
The Company is party to a consulting agreement with Activist Artist Management, LLC (“Activist”), which assists the company in strategic business development. A member of the Company’s Board of Directors owns a significant minority stake in Activist.
Related party transactions with these related parties did not have a material impact to the consolidated balance sheets as of January 31, 2023 or July 31, 2022, or the consolidated statements of operations and comprehensive income for the three and six months ended January 31, 2023 or 2022.
Note 2—Revenue
Disaggregation of Revenue
The following table presents revenue disaggregated by segment and type (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Zedge App | (in thousands) | (in thousands) | ||||||||||||||
| Advertising revenue | $ | $ | $ | $ | ||||||||||||
| Paid subscription revenue | ||||||||||||||||
| Other revenues | ||||||||||||||||
| Total Zedge App revenue | ||||||||||||||||
| GuruShots | ||||||||||||||||
| Digital goods and services | - | |||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Contract Balances
The Company enters into contracts with its customers, which may give rise to contract liabilities (deferred revenue) and contract assets (unbilled revenue). The payment terms and conditions within the Company’s contracts vary by products or services purchased, the substantial all of which are due in less than one year. When the timing of revenue recognition differs from the timing of payments made by customers, the Company recognizes only deferred revenue (customer payment is received in advance of performance). The Company does not have unbilled revenue (its performance precedes the billing date).
6
Deferred revenues
On
April 1, 2022, the AppLovin Corporation paid the Company a one-time integration bonus of $
The Company records deferred revenues related to the unsatisfied performance obligations with respect to subscription revenue. The Company’s deferred revenue balance related to paid subscriptions was approximately $1.4 million related to approximately 654,000 active subscribers, and approximately $1.5 million, related to approximately 692,000 active subscribers as of January 31, 2023 and July 31, 2022, respectively. The amount of revenue related to subscribers recognized in the six months ended January 31, 2023 that was included in the deferred balance at July 31, 2022 was $1.1 million.
The
Company also records deferred revenues when users purchase or earn Zedge Credits. Unused Zedge Credits represent the value of the Company’s
unsatisfied performance obligation to its users. Revenue is recognized when Zedge App users use Zedge Credits to acquire Zedge Premium
content or upon expiration of the Zedge Credits upon 180 days of account inactivity. As of January 31, 2023, and July 31, 2022, the Company’s
deferred revenue balance related to Zedge Premium was approximately $
Total
deferred revenues decreased by $
Significant Judgments
The advertising networks and advertising exchanges to which the Company sell its 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 condensed consolidated statements of operations and 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 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| January 31, 2023 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
| July 31, 2022 | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration-short term | $ | $ | $ | $ | ||||||||||||
| Contingent consideration-long term | $ | $ | $ | $ | ||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
(1) – quoted prices in active markets for identical assets or liabilities
(2) – observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) – no observable pricing inputs in the market
7
Contingent Consideration
Contingent consideration related to the business combinations discussed below in Note 5 are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.
The following table provides a rollforward of the contingent consideration related to the GuruShots acquisition (in thousands):
| Balance at July 31, 2022 | $ | |||
| Change in fair value | ( | ) | ||
| Balance at January 31, 2023 | $ |
The
overall fair value of the contingent consideration decreased by $
Fair Value of Other Financial Instruments
Fair value of the outstanding foreign exchange forward contracts are marked to market price at the end of each measurement period.
The Company’s other financial instruments at January 31, 2023 and July 31, 2022 included trade accounts receivable and trade accounts payable. The carrying amounts of the trade accounts receivable and trade accounts payable 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 11). 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 operations and 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.
The outstanding contracts at January 31, 2023, were as follows:
| Settlement Date | U.S. Dollar Amount | NOK Amount | ||||||
| Feb-23 | ||||||||
| Mar-23 | ||||||||
| Apr-23 | ||||||||
| May-23 | ||||||||
| Total | ||||||||
| Settlement Date | U.S. Dollar Amount | EUR Amount | ||||||
| Feb-23 | ||||||||
| Mar-23 | ||||||||
| Apr-23 | ||||||||
| May-23 | ||||||||
| Total | ||||||||
8
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 | 2023 | 2022 | |||||||
| Derivatives not designated or not qualifying as hedging instruments | (in thousands) | |||||||||
| Foreign exchange forward contracts | $ | $ | ||||||||
| Foreign exchange forward contracts | $ | $ | ||||||||
The effects of derivative instruments on the condensed consolidated statements of operations and comprehensive income were as follows:
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||
| Amount of Gain (Loss) Recognized on Derivatives | 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Derivatives not designated or not qualifying as hedging instruments | Location of gain (loss) recognized on derivatives | (in thousands) | (in thousands) | |||||||||||||||
| Foreign exchange forward contracts | $ | $ | ( | ) | $ | ( | ) | |||||||||||
Note 5—Business Combination and Assets Acquisition
GuruShots Acquisition
On
April 12, 2022, the Company consummated the acquisition of
The
purchase price for the equity securities of GuruShots consists of approximately $
Under the SPA, the Company has agreed to make certain minimum investments in user acquisition for GuruShots in the period covered by the Earnout, subject to the acquired users generating minimum levels of Return On Ad Spend (“ROAS”) as set forth in the SPA. As of January 31, 2023, due to market conditions in the mobile/on-line gaming industry and other factors, the Company was not on track to make the minimum investment for the first annual period covered by the Earnout. Based on the data from the user acquisition investment made, the Company does not believe that the minimum ROAS would have been maintained from the additional investment.
In
addition,
The parties to the SPA have made customary representations, warranties and covenants therein. The assertions embodied in those representations and warranties were made for purposes of the SPA and are subject to qualifications and limitations agreed by the respective parties in connection with negotiating the terms of the SPA.
9
The cash purchase price and the earnout have been allocated to GuruShots’ tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as the Company obtains additional information for those estimates during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.
The Company will record measurement period adjustments based on its ongoing valuation and purchase price allocation procedures. The Company is still finalizing the valuation and purchase price allocation as it relates to the net working capital amount in the table below.
The allocation of the preliminary purchase price is as follows (in thousands):
| (Dollar Amounts in Thousands) | ||||
| Purchase price consideration: | ||||
| Cash consideration paid at close | $ | |||
| Cash contributed to escrow accounts at close | ||||
| Cash deducted from purchase price and contributed to GuruShots’ working capital | ||||
| Fair value of contingent consideration to be achieved at year 1 | ||||
| Fair value of contingent consideration to be achieved at year 2 | ||||
| Fair value of total consideration transferred | ||||
| Total purchase price, net of cash acquired | $ | |||
| Fair value allocation of purchase price: | ||||
| Cash and cash equivalents | $ | |||
| Trade accounts receivable | ||||
| Prepaid expenses | ||||
| Property and equipment, net | ||||
| Other assets (including ROU) | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Operating lease liabilities, current | ( | ) | ||
| Operating lease liabilities, noncurrent | ( | ) | ||
| Acquired intangible assets | ||||
| Goodwill | ||||
| Total purchase price | $ | |||
The
cash consideration paid includes $
The
earnout amount to be paid (up to the maximum of $
10
Identified intangible assets consist of trade names, technology and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:
| (Dollar Amounts in Thousands) | Asset Value | Useful Life | |||||
| Identified intangible assets: | |||||||
| Trade names | $ | ||||||
| Acquired developed technology | |||||||
| Customer relationships | |||||||
| Total identified intangible assets | $ | ||||||
The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the relief-from-royalty method and multi-period excess earnings. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for GuruShots over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate.
The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed.
The
Company recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. The Company believes
that the investment value of the future enhancement of the Company’s products and offerings created as a result of this acquisition
has principally contributed to a purchase price that resulted in the recognition of $
Acquisition-related
transaction costs (e.g., legal, due diligence, valuation, and other professional fees) are not included as a component of consideration
transferred but are required to be expensed as incurred. During fiscal 2022, we incurred $
Emojipedia Acquisition
The
assets purchased include emojipeida.org, a set of smaller websites, a bank of emoji related URLs 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
11
Note 6—Intangible Assets and Goodwill
The following table presents the detail of intangible assets, net as of January 31, 2023 and July 31, 2022 (in thousands):
| January 31, 2023 | July 31, 2022 | |||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
| Emojipedia.org and other internet domains acquired | $ | $ | | $ | | $ | $ | | $ | | ||||||||||||||
| Acquired developed technology | ||||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||
| Trade names | ||||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Estimated future amortization expense as of January 31, 2023 is as follows (in thousands):
| Fiscal 2023 | $ | |||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Fiscal 2026 | ||||
| Fiscal 2027 | ||||
| Thereafter | ||||
| Total | $ |
The
Company’s amortization expense for intangible assets were $
Goodwill
Changes in the carrying amount of goodwill in the six months ended January 31, 2023 are as follows (in thousands):
| Carrying Amount | ||||
| Balance at July 31, 2022 | $ | |||
| Foreign currency translation adjustments | ( | ) | ||
| Balance at January 31, 2023 | $ | |||
Note 7—Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
| January 31, | July 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued vacation | $ | $ | ||||||
| Accrued income taxes payable | ||||||||
| Accrued payroll taxes | ||||||||
| Accrued payroll and bonuses | ||||||||
| Accrued expenses | ||||||||
| Operating lease liability-current portion | ||||||||
| Derivative liability for foreign exchange contracts | ||||||||
| Due to artists | ||||||||
| Other | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
12
Note 8—Stock-Based Compensation
The 2016 Incentive Plan
On
March 23, 2022, 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
At
January 31, 2023, there were
Stock-based compensation
The Company recognizes stock-based compensation for stock-based awards, including stock options, restricted stock and DSUs based on the estimated fair value of the awards and recognized over the relevant service period and/or market conditions. The Company estimates the fair value of stock options on the measurement date using the Black-Scholes option valuation model. The Company estimates the fair value of the restricted stock and DSU’s with service conditions only using the current market price of the stock. The Company estimates the fair value of the DSU’s with both service and market conditions using the Monte Carlo Simulation valuation model.
The
Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of
options or awards, a risk-free interest rate and dividend yield. The Company recognizes stock-based compensation expense related to options
and restricted stock units on a straight-line basis over the service period of the award, which is generally
In our accompanying unaudited condensed consolidated statements of operations and comprehensive income, the Company recognized stock-based compensation expense for our employees and non-employees as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| January 31, | January 31, | |||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Stock-based compensation expense | $ | $ | % | $ | $ | % | ||||||||||||||||||
As of January 31, 2023, the Company’s unrecognized stock-based compensation expense was $0.4 million for unvested stock options, $1.0 million for DSUs and $3.0 million for unvested restricted stock including the $4 million portion of retention bonus to be paid in the Company’s Class B common stock in connection with the GuruShots acquisition.
In
the six months ended January 31, 2023 and 2022, the Company purchased
Repricing of Outstanding and Unexercised Options
On
October 20, 2022, the Board unanimously approved the repricing of all outstanding and unexercised stock options granted under the 2016
Plan that were out-of-the-money and held by current employees, executive officers, and consultants of the Company (the “Eligible
Stock Options”). Effective October 20, 2022, the exercise price of the eligible stock options was reduced to $
13
Pursuant
to the Plan, the Board, as the administrator of the Plan, has discretionary authority, exercisable on such terms and conditions that
it deems appropriate under the circumstances, to reduce the exercise price in effect for outstanding options under the Plans. In approving
the repricing, the Board considered the impact of the current exercise prices of outstanding stock options on the incentives provided
to employees and consultants, the lack of retention value provided by the outstanding stock options to employees and consultants, and
the impact of such options on the capital structure of the Company. As of October, 2022, there were
Jonathan
Reich, the Company’s Chief Executive Officer, and Yi Tsai, the Company’s Chief Financial Officer, hold Eligible Stock Options
exercisable for an aggregate of
The
option repricing resulted in incremental stock-based compensation of $
Note 9—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 rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. As such, the Company is not required to break out earnings per share by class.
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 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock options | ||||||||||||||||
| Non-vested restricted Class B common stock | ||||||||||||||||
| Deferred stock units | ||||||||||||||||
| Shares excluded from the calculation of diluted earnings per share | ||||||||||||||||
14
Note 10—Commitments and Contingencies
Commitments
In
connection with the acquisition of GuruShots, the Company has (i) committed to a retention pool of $
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.
Note 11—Term Loan and Revolving Credit Facilities
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 $
Pursuant
to the Amended Loan Agreement, the Company discontinued the existing $
Pursuant
to the Amended Loan Agreement, $
Interest
accrued under the Amended Loan Agreement is due monthly, and the Company shall make monthly interest-only payments related to the term
loan through the eighteen (18) month anniversary of the closing date. From the nineteen (19) month anniversary of the Closing Date through
the maturity date, the Company shall repay each outstanding term loan by paying the Applicable Term Advance Amortization Payment equal
to 1/12th of
15
The Amended Loan Agreement may also require early repayments if certain conditions are met. Borrowings under the Amended Loan Agreement is secured by substantially all of the assets of the Company, its subsidiaries, and certain of its affiliates.
The Amended Loan Agreement includes the following financial covenants:
| a) | Debt Service Coverage Ratio. Zedge shall maintain, at all times, a Debt Service Coverage Ratio of no less than |
| b) | Maximum Debt to EBITDA. Zedge shall maintain, at all times, a ratio of (a) indebtedness owed by Zedge to Western Alliance Bank, to (b) Zedge’s EBITDA for the trailing twelve (12) month period ended on such date of determination, shall not be greater than the amount set forth under the heading “Maximum Debt to EBITDA Ratio” as of, and for each of the dates appearing adjacent to such Maximum Debt to EBITDA Ratio”. |
| Maximum Debt to Quarter Ending | EBITDA Ratio | ||
| October 31, 2022 | |||
| January 31, 2023 | |||
| April 30, 2023 | |||
| July 31, 2023 | |||
| October 31, 2023 | |||
| January 31, 2024 | |||
| April 30, 2024 | |||
| July 31, 2024 | |||
| Thereafter |
The Amended Loan Agreement also includes customary negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default.
Note 12—Segment and Geographic Information
Segment Information
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer as of January 31, 2023. Based on the criteria established by ASC 280, Segment Reporting, the Company had one operating and reportable segment as of July 31, 2022.
Beginning in the first quarter of fiscal 2023, the Company revised the presentation of segment information to align with changes to how the Company’s CODM manages the business, allocates resources and assesses operating performance reports operating results based on two reportable segments, which are Zedge App and GuruShots.
16
The CODM evaluates the performance of each operating segment using revenue and income (loss) from operations. The following table provides information about the Company’s two reportable segments:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| January 31, | Change | January 31, | Change | |||||||||||||||||||||
| 2023 | 2022 | % | 2023 | 2022 | % | |||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Zedge App | $ | $ | - | % | $ | $ | - | % | ||||||||||||||||
| GuruShots | ||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | ||||||||||||||||||
| Segment income (loss) from operations: | ||||||||||||||||||||||||
| Zedge App | $ | $ | - | % | $ | $ | - | % | ||||||||||||||||
| GuruShots | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | - | % | $ | $ | - | % | ||||||||||||||||
nm-not meaningful
The CODM does not evaluate operating segments using asset information and, accordingly, the Company does not report asset information by segment.
Geographic Information
Net long-lived assets and total assets held outside of the United States, which are located primarily in Israel and Norway, were as follows (in thousands):
| United States | Foreign | Total | ||||||||||
| Long-lived assets, net: | ||||||||||||
| January 31, 2023 | $ | $ | $ | |||||||||
| July 31, 2022 | $ | $ | $ | |||||||||
| Total assets: | ||||||||||||
| January 31, 2023 | $ | $ | $ | |||||||||
| July 31, 2022 | $ | $ | $ | |||||||||
Note 13— 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 material changes in the Company’s operating and finance leases in the six months ended January 31, 2023, as compared to the disclosure in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2022.
Note 14—Provision for Income Taxes
The Company’s tax provision or benefit from income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate applied to year-to-date income and records the discrete tax items in the period to which they relate. In each quarter, the Company updates the estimated annual effective tax rate and makes a year-to-date adjustment to the tax provision as necessary.
The Company’s annual effective tax rate for the fiscal year ending July 31, 2023 differs from the U.S. federal statutory tax rate due to certain factors with temporary differences primarily related to equity compensation expenses.
As
of January 31, 2023, 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, Lithuania and Israel.
17
Note 15—Subsequent Events
In
December 2019, the Company launched ‘Shortz’ an entertainment app offering serialized, short-form fiction rendered in both
text-message and audio formats available across both Android and iOS. Shortz did not gain much tractions with the Company’s users,
and on March 8, 2023, the Company turned off the app and removed it from Google and Apple app stores. The Company will write off the
remaining unamortized capitalized software development costs of approximately $
On March 2, 2023, the Company entered into foreign exchange contracts as set forth below:
| Settlement Date | U.S. Dollar Amount | NOK Amount | ||||||
| Jun-23 | ||||||||
| Jul-23 | ||||||||
| Aug-23 | ||||||||
| Sep-23 | ||||||||
| Oct-23 | ||||||||
| Nov-23 | ||||||||
| Dec-23 | ||||||||
| Jan-24 | ||||||||
| Feb-24 | ||||||||
| Mar-24 | ||||||||
| Apr-24 | ||||||||
| May-24 | ||||||||
| Total | ||||||||
| Settlement Date | U.S. Dollar Amount | EUR Amount | ||||||
| Jun-23 | ||||||||
| Jul-23 | ||||||||
| Aug-23 | ||||||||
| Sep-23 | ||||||||
| Oct-23 | ||||||||
| Nov-23 | ||||||||
| Dec-23 | ||||||||
| Jan-24 | ||||||||
| Feb-24 | ||||||||
| Mar-24 | ||||||||
| Apr-24 | ||||||||
| May-24 | ||||||||
| Total | ||||||||
18
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, 2022 (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 subsidiaries, GuruShots Ltd., Zedge Europe AS and Zedge Lithuania UAB, 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 future results. Factors that may cause such differences include, but are not limited to: (1) Economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price; (2) Our ability to successfully make acquisitions and/or successfully integrate acquisitions that we have made into Zedge without incurring unanticipated costs or without being subject to other integration issues that may disrupt our existing operations; (3) Delay or failure to realize the expected synergies and benefits of the GuruShots acquisition; (4) The impact of the Covid-19 pandemic on our employees, customers, partners, and the global financial markets; and (5) Russia’s recent invasion of Ukraine, and the international community’s response. For further information regarding risks and uncertainties associated with our business, please refer to 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.
Geo-Political and Macroeconomic Conditions and the COVID-19 Pandemic
We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including but not limited to, Russia’s invasion of Ukraine, rising interest rates, actions taken to counter inflation, reduced consumer confidence, supply side disruptions, and the COVID-19 pandemic. The future and full impact that these factors may have on our business, financial condition, and results of operations is unclear. The risks related to our business are further described in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those discussed under Item 1A to Part I “Risk Factors” in the Form 10-K.
Impact of Russia’s Invasion of Ukraine
We are closely monitoring the current and potential impact on our business, our people, and our users/customers as Russia’s war with Ukraine evolves. We have taken steps to comply with applicable domestic and international regulatory restrictions on international trade and financial transactions. Revenues associated with our users/customers in Russia and Belarus are not material to our consolidated financial results, and we anticipate that blocking Russian and Belarus users/customers’ access to our mobile app and web platforms will not have a material impact on our business. Management and our Board of Directors are monitoring the regional and global ramifications of the continuing events.
Overview
Zedge, Inc. (“Zedge”) builds digital marketplaces and friendly competitive games around content that people use to express themselves. Our leading products include Zedge Ringtones and Wallpapers, a freemium digital content marketplace offering mobile phone wallpapers, video wallpapers, ringtones, and notification sounds which historically was branded as Zedge Premium, and GuruShots, a skill-based photo challenge game. Our vision is to connect creators who enjoy friendly competitions with a community of prospective consumers in order to drive commerce.
19
We are part of the ‘Creator Economy,’ where over 1 billion people create and share their content across social platforms, mobile, and video games, and content marketplaces. Within this group of individuals, over 200 million identify as creators, people who use their influence, skill, and creativity to amass an audience and monetize it. Furthermore, approximately 12% of full-time creators earn more than $50,000 per year, and 10% of influencers earn more than $100,000 per year. We view the Creator Economy as an untapped opportunity for Zedge to expand its business, especially as we execute by connecting our gamers with our marketplace.
The Zedge Ringtones and Wallpapers app (which is named “Zedge Wallpapers” in the App Store), which we refer to as our “Zedge App,” is a marketplace offering a wide array of mobile personalization content including wallpapers, video wallpapers, ringtones, and notification sounds, and is available both in Google Play and the App Store. As of January 31, 2023, our Zedge App has been installed nearly 596 million times since inception and, over the past two years, has had between 31.9 and 36.3 million monthly active users (“MAU”). MAU is a key performance indicator (“KPI”) that captures the number of unique users that used our Zedge App during the final 30 days of the relevant period. Our platform allows creators to upload content to our marketplace and avail it to our users either for free or for a price, via ‘Zedge Premium.’ In turn, our users utilize the content to personalize their phones and express their individuality.
In fiscal 2022 we introduced several new customer facing product features including ‘NFTs Made Easy’ and social and community features, all meant to improve customer engagement, MAU, and revenue growth over the long term. In addition, we migrated to a new ad mediation platform - Applovin MAX. Applovin paid us a one-time $2 million integration bonus and their performance has been on-par or better than our prior platform.
The Zedge App’s monetization stack consists of advertising revenue generated when users view advertisements when using the Zedge App or surfing our website, the in-app sale of Zedge Credits, our virtual currency, that is used to purchase Zedge Premium content, and a paid-subscription offering that provides an ad-free experience to users that purchase a monthly or annual subscription. As of January 31, 2023, we had approximately 654,000 active paying subscribers.
In late 2021, we introduced NFT functionality to a limited number of Zedge Premium creators via ‘NFTs Made Easy’. Over time we believe this product enhancement has the potential to drive significant artist growth and revenue production. ‘NFTs Made Easy’ is an eco-friendly platform that enables artists and consumers to sell and purchase NFTs within the Zedge App even though they may lack deep knowledge and proficiency in the crypto space. All transactions are made using Zedge Credits.
In April 2022, we acquired GuruShots, a recognized category leader focused on gamifying the photography vertical. GuruShots offers a platform spanning iOS, Android, and the web that provides a fun, educational and structured way for amateur photographers to compete in a wide variety of contests showcasing their photos while gaining recognition with votes, badges, and awards. We estimate that the total addressable market of amateur photographers using their smartphones to take and publicly share artistic photos is 30-40 million people per month and that the market is still in its infancy. Every month, GuruShots stages more than 345 competitions that result in players uploading in excess of 1 million photographs and casting close to 4+ billion “perceived votes”, which are calculated by multiplying the number of votes that each player casts by a weighting factor based on various factors related to that user. To improve engagement, GuruShots has adopted a set of retention dynamics focused on individual, team and community dynamics that create a sense of belonging, inspiration, recognition, improvement, and competition.
Today, GuruShots utilizes a ‘Free-to-Play’ business model that leads to strong monetization with the purchase of resources that are used to give paying players an edge while still maintaining a fair and competitive experience for all participants. Over the past six years, the monthly average paying player spend has increased in excess of 11.2% annually to more than $50.1 per player.
As we look to the future, we are advancing several initiatives that we expect will drive user growth, increase engagement, drive in-app purchases, and advance our in-game economy. Some of these include:
| ● | On-Boarding. Revamping the customer onboarding experience in order to maximize first time purchasers by immediately drawing new players into simplified photo competitions that are limited to a small audience taking place in a short time duration. |
| ● | Economy. Evolving the game economy by maturing the game’s progression mechanics and features, earn and spend dynamics, and introducing soft and premium currencies tied to resources and benefits. Furthermore, we hope to introduce an advertising layer in the monetization stack in the future. |
20
We market GuruShots to prospective players, primarily via paid user acquisition channels, and utilize a host of creative formats including static and video ads in order to promote the game. Our marketing team invests material resources in analyzing all attributes of a campaign ranging from the creative assets, offer acquisition channel, and platform (i.e., iOS, Android, and web), just to name a few, with the goal of determining whether a specific campaign is likely to yield a profitable customer. When we unearth a successful combination of these variables we scale up until we experience diminishing returns. Ultimately, we believe that the efforts we are making to advance the product coupled with the investment in user acquisition can significantly increase GuruShots’ player base.
Beyond our commitment to growing both the Zedge App and GuruShots on a standalone basis, we believe that there are many potential synergies that we can capitalize on that exist between the two businesses. Specifically, we plan to enable the ability for GuruShots players to become Zedge Premium artists and sell their photos to our audience of 30+ million MAU as standard digital images or NFTs. In addition, we look to benefit from the experience that the GuruShots team possesses and test gamifying the Zedge App. We believe that successful gamification can contribute to increasing engagement, retention, and lifetime value, all critical KPIs for our business. Longer term, we believe that there are complementary content verticals that lend themselves to gamification.
In August 2021, we acquired the assets of Emojipedia Pty Ltd (“Emojipedia”), including Emojipedia.org 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 2023, Emojipedia receives approximately 44.9 million monthly page views and has approximately 10.4 million monthly active users as of January 31, 2023 of which approximately 52% 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.
We believe that Emojipedia provides growth potential to the Zedge App, and it was immediately accretive to earnings. In the past year, we have made many changes to Emojipedia including migrating to a new ad mediation platform, redesigning the Emojipedia website, and introducing localized versions of Emojipedia in eighteen different languages aside from English. We will continue to enhance this offering and are exploring new features including a native mobile offering as well as additional monetization opportunities.
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 revenue recognition, business combination, intangible assets and goodwill, capitalized software and technology development costs, and stock-based compensation. 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.
21
Key Performance Indicators (KPIs)
Zedge App-MAU and ARPMAU
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 we define as 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 our 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 users/customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement.
ARPMAU is defined as (i) the total revenue derived from Zedge App in a monthly period, divided by (ii) MAU in that same period. ARPMAU for a particular time period longer than one month is the average ARPMAU for each month during that period. 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 decreased 11.3% in Q2 of fiscal 2023 when compared to the same period a year ago. 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, 2023, users in emerging markets represented 77% of our MAU, the same percentage from a year ago. This shift impacts our business because emerging markets do not monetize as well as well-developed markets due to lower effective cost per thousand ad impressions (“eCPM”) and lower monthly and annual subscription sales in these regions coupled with lower priced subscriptions SKUs. ARPMAU for the three months ended January 31, 2023 declined 13.0% when compared to the same period a year ago.
The following tables present the MAU – Zedge App and ARPMAU – Zedge App for the three months ended January 31, 2023 as compared to the same period a year ago:
| Three Months Ended January 31, | ||||||||||||
| (in millions, except ARPMAU - Zedge App) | 2023 | 2022 | % Change | |||||||||
| MAU- Zedge App | 32.2 | 36.3 | -11.3 | % | ||||||||
| Developed Markets MAU - Zedge App | 7.4 | 8.5 | -12.9 | % | ||||||||
| Emerging Markets MAU - Zedge App | 24.8 | 27.8 | -10.8 | % | ||||||||
| Emerging Markets MAU - Zedge App/Total MAU - Zedge App | 77 | % | 77 | % | 0.6 | % | ||||||
| ARPMAU - Zedge App | $ | 0.0523 | $ | 0.0601 | -13.0 | % | ||||||
The following charts present the MAU – Zedge App and ARPMAU – Zedge App for the consecutive eight quarters ended January 31, 2023:
 |
 |
22
GuruShots-MAPs and ARPMAP
Monthly Active Payers (“MAPs”). We define a MAP as a unique active user on the GuruShots or GuruShots.com in a month that completed at least one in-app purchase (“IAP”) during that time period. MAPs for a time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution platforms.
Average Revenue Per Monthly Active Payer (“ARPMAP”). We define ARPMAP as (i) the total revenue from IAPs derived from GuruShots and GuruShots.com in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.
The following table shows our MAP and ARPMAP for the three months ended January 31, 2023 and 2022. Please note that we acquired GuruShots on April 12, 2022, as such, information for the three months ended January 31, 2022 is presented below as pro forma and is only used for comparative purpose.
| Three Months Ended January 31, | ||||||||||||
| 2023 | 2022 | % Change | ||||||||||
| Monthly Active Payers | 7,943 | 9,333 | -14.9 | % | ||||||||
| Average Revenue per Monthly Active Payer | $ | 52.4 | $ | 61.8 | -15.2 | % | ||||||
The following charts present the MAP and ARPMAP – GuruShots for the consecutive eight quarters ended January 31, 2023:
 |
 |
Our KPIs are not based on any standardized industry methodology and are not necessarily calculated in the same manner that other companies or third parties may use to calculate these or similarly titled measures. The numbers that we use to calculate MAP and ARPMAP are derived from data that we generate internally. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.
23
Results of Operations
Three and six months ended January 31, 2023 Compared to Three and six months ended January 31, 2022
| Three Months Ended January 31, | Change | Six Months Ended January 31, | Change | |||||||||||||||||||||
| 2023 | 2022 | % | 2023 | 2022 | % | |||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Revenues | $ | 6,983 | $ | 6,915 | 1.0 | % | $ | 13,883 | $ | 12,943 | 7.3 | % | ||||||||||||
| Direct cost of revenues | 632 | 342 | 84.8 | % | 1,264 | 652 | 93.9 | % | ||||||||||||||||
| Selling, general and administrative | 5,871 | 3,106 | 89.0 | % | 11,697 | 5,838 | 100.4 | % | ||||||||||||||||
| Depreciation and amortization | 815 | 360 | 126.4 | % | 1,608 | 758 | 112.1 | % | ||||||||||||||||
| Change in fair value of contingent consideration | (1,793 | ) | - | nm | (1,943 | ) | - | nm | ||||||||||||||||
| Income from operations | 1,458 | 3,107 | -53.1 | % | 1,257 | 5,695 | -77.9 | % | ||||||||||||||||
| Interest and other income, net | 77 | 14 | 450.0 | % | 112 | 27 | 314.8 | % | ||||||||||||||||
| Net gain (loss) resulting from foreign exchange transactions | 160 | (85 | ) | nm | 84 | (95 | ) | nm | ||||||||||||||||
| Provision for income taxes | 89 | 711 | -87.5 | % | 16 | 1,247 | -98.7 | % | ||||||||||||||||
| Net income | $ | 1,606 | $ | 2,325 | -30.9 | % | $ | 1,437 | $ | 4,380 | -67.2 | % | ||||||||||||
nm-not meaningful
Revenues
The following table sets forth the composition of our revenues for the three and six months ended January 31, 2023 and 2022:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| January 31, | January 31, | |||||||||||||||||||||||
| 2023 | 2022 | % Changes | 2023 | 2022 | % Changes | |||||||||||||||||||
| Zedge App | (in thousands) | (in thousands) | ||||||||||||||||||||||
| Advertising revenue | $ | 4,630 | $ | 5,718 | -19 | % | $ | 9,120 | $ | 10,598 | -14 | % | ||||||||||||
| Paid subscription revenue | 875 | 953 | -8 | % | 1,766 | 1,913 | -8 | % | ||||||||||||||||
| Other revenues | 230 | 244 | -6 | % | 420 | 432 | -3 | % | ||||||||||||||||
| Total Zedge App revenue | 5,735 | 6,915 | -17 | % | 11,306 | 12,943 | -13 | % | ||||||||||||||||
| GuruShots | ||||||||||||||||||||||||
| Digital goods and services | 1,248 | - | nm | 2,577 | - | nm | ||||||||||||||||||
| Total revenue | $ | 6,983 | $ | 6,915 | 1 | % | $ | 13,883 | $ | 12,943 | 7 | % | ||||||||||||
nm-not meaningful
Advertising revenue. Advertising revenue decreased 19% and 14% in the three and six months ended January 31, 2023, respectively, compared to the three and six months ended January 31, 2022, primarily due to the decline in MAU in well-developed markets and lower effective advertising rates which have suffered due to the downturn in the economy.
24
Paid subscription revenue. We offer users of our Zedge app a subscription option where they can 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 United States constitutes our largest subscriber base and we generally charge $0.99 per month and $4.99 per year. Pricing in other markets is based on local conditions. We generated $0.8 million and $1.7 million in gross prepaid subscription revenue in the three and six months ended January 31, 2023 compared to $0.9 million and $1.8 million in the three and six months ended January 31, 2022. The 8% and 7% decline in gross prepaid subscription sales for the three and six months ended January 31, 2023 when compared to the same periods a year ago was primarily attributable to the decline in MAU in well-developed markets between the comparative 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, 2023 and 2022:
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | |||||||||||||||||||
| (in thousands, except revenue per subscriber and percentages) | ||||||||||||||||||||||||
| Revenues | $ | 875 | $ | 953 | -8 | % | $ | 1,766 | $ | 1,913 | $ | -8 | % | |||||||||||
| Active subscriptions net (decrease) increase | (20 | ) | (1 | ) | nm | (38 | ) | 10 | nm | |||||||||||||||
| Active subscriptions at end of period | 654 | 762 | -14 | % | 654 | 762 | -14 | % | ||||||||||||||||
| Average active subscriptions during the period | 665 | 765 | -13 | % | 674 | 762 | -12 | % | ||||||||||||||||
| Average monthly revenue per active subscription | $ | 0.44 | $ | 0.42 | 5 | % | $ | 0.44 | $ | 0.42 | $ | 5 | % | |||||||||||
Zedge Premium. Gross transaction value (the total sales volume transacting through the platform), or “GTV,” increased 0.9% and decreased 1.7% in the three and six months ended January 31, 2023 compared to the same periods a year ago. Net revenue decreased 5.0% and 2.8% respectively in the three and six months ended January 31, 2023 compared to the same periods a year ago. The decline in GTV and net revenue can be attributed to the decline in MAU in well-developed markets.
The following table summarizes Zedge Premium gross and net revenue for the three and six months ended January 31, 2023 and 2022:
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| 2023 | 2022 | % Changes | 2023 | 2022 | % Changes | |||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Zedge Premium-gross revenue (“GTV”) | $ | 438 | $ | 434 | 0.9 | % | $ | 750 | $ | 763 | -1.7 | % | ||||||||||||
| Zedge Premium-net revenue | $ | 229 | $ | 241 | -5.0 | % | $ | 416 | $ | 428 | -2.8 | % | ||||||||||||
| Gross margin | 52 | % | 56 | % | 55 | % | 56 | % | ||||||||||||||||
Digital goods and services. GuruShots recognizes revenue at the time of purchase because the overwhelming majority of users purchase game resources when they use them at a rate that exceeds the rate in which they earn them for free through participation. Game resources revenue were $1.3 million and $2.6 million for the three and six months ended January 31, 2023, respectively.
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) | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
| Direct cost of revenues | $ | 632 | $ | 342 | 84.8 | % | $ | 1,264 | $ | 652 | 93.9 | % | ||||||||||||
| As a percentage of revenues | 9.1 | % | 4.9 | % | 9.1 | % | 5.0 | % | ||||||||||||||||
25
Direct cost of revenues increased 85% and 94% in the three and six months ended January 31, 2023, respectively, compared to three and six months ended January 31, 2022. The increase in the direct cost of revenues is a result of GuruShots’ infrastructure costs and the addition of analytical tools.
As a percentage of revenue, direct cost of revenues in the three and six months ended January 31, 2023 was 9.1%, compared to 4.9% and 5.0% in the three and six months ended January 31, 2022. The higher percentages in the current year periods were primarily due to higher infrastructure costs related to the GuruShots.
Selling, general and administrative expense. Selling, general and administrative expense (“SG&A”) consists mainly of payroll and benefits, stock-based compensation expense (as discussed below), paid user acquisition expenses, third-party payment processing fee relate to in-app purchases, marketing, consulting, professional fees, software licensing (“SaaS”), recruiting fees, facilities and public company related expenses.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
| Selling, general and administrative | $ | 5,871 | $ | 3,106 | 89.0 | % | $ | 11,697 | $ | 5,838 | 100.4 | % | ||||||||||||
| As a percentage of revenues | 84.1 | % | 44.9 | % | 84.3 | % | 45.1 | % | ||||||||||||||||
SG&A expense increased 89.0% and 100.4% in the three and six months ended January 31, 2023, respectively, compared to the three and six months ended January 31, 2022. GuruShots accounted for the majority of the increase. The remaining increase can be attributed to higher compensation costs resulting from additional headcount, higher stock-based compensation as discussed below, and higher professional fees, partially offset by reductions in certain discretionary expenses.
As a percentage of revenue, SG&A expense in the three and six months ended January 31, 2023 were 84.1% and 84.3% respectively, compared to 44.9% and 45.1% in the three and six months ended January 31, 2022, primarily due to the addition of GuruShots which has higher SG&A expenses relative to its revenue base.
Global headcount as of January 31, 2023 totaled 102 (including 37 from GuruShots) compared to 64 as of January 31, 2022 with the majority of our employees currently based in Lithuania and Israel.
SG&A expense also included stock-based compensation expense including equity grants to employees and consultants, as well as stock issuances to pay for board compensations and 401(k) matching contributions. The following table summarizes stock-based compensation expense for the three and six months ended January 31, 2023 and 2022:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| January 31, | January 31, | |||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Stock-based compensation expense | $ | 788 | $ | 489 | 61.1 | % | $ | 1,378 | $ | 808 | 70.5 | % | ||||||||||||
Stock-based compensation expenses increased 61.1% and 70.5% in the three and six months ended January 31, 2023, respectively, compared to the three and six months ended January 31, 2022. The increase was primarily attributable to the amortization of the restricted stock (with a grant date fair value of $4 million) issued in connection with the GuruShots acquisition. Certain stock options, deferred stock unit and restricted stock grants 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.
Depreciation and amortization. Depreciation and amortization consist mainly of amortization of intangible assets in connection with business combination and asset acquisition as more fully described in Note 5 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q, and 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.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
| Depreciation and amortization | $ | 815 | $ | 360 | 126.4 | % | $ | 1,608 | $ | 758 | 112.1 | % | ||||||||||||
| As a percentage of revenues | 11.7 | % | 5.2 | % | 11.6 | % | 5.9 | % | ||||||||||||||||
26
Depreciation and amortization expenses increased 126% and 112% in the three and six months ended January 31, 2023, respectively, compared to the three and six months ended January 31, 2022. This increase was primarily attributable to the amortization of intangible assets related to the acquisition of GuruShots which were $467,000 and $934,000 for the three and six months ended January 31, 2023, respectively.
Interest and other income, net. Interest and other income, net in the three and six months ended January 31, 2023 increased significantly when compared to the prior periods due to higher interest rates earned on our cash balances.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
| Interest and other income, net | $ | 77 | $ | 14 | 450.0 | % | $ | 112 | $ | 27 | 314.8 | % | ||||||||||||
| As a percentage of revenues | 1.1 | % | 0.2 | % | 0.8 | % | 0.2 | % | ||||||||||||||||
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 the U.S. Dollar, including gains or losses from our hedging activities.
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||
| (in thousands) | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||
| Net gain (loss) resulting from foreign exchange transactions | $ | 160 | $ | (85 | ) | nm | $ | 84 | $ | (95 | ) | nm | ||||||||
| As a percentage of revenues | 2.3 | % | -1.2 | % | 0.6 | % | -0.7 | % | ||||||||||||
In the three and six months ended January 31, 2023, we realized gains of $185,000 and $64,000, respectively from NOK and EUR hedging activities, compared to loss of $127,000 and $117,000 in the three and six months ended January 31, 2022 due to the strengthening of the US dollar in current periods, as more fully described in Note 4 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
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) | 2023 | 2022 | % Change | 2023 | 2,022 | % Change | ||||||||||||||||
| Provision for income taxes | $ | 89 | $ | 711 | -87.5 | % | $ | 16 | $ | 1,247 | nm | |||||||||||
| As a percentage of revenues | 1.3 | % | 10.3 | % | 0.1 | % | 9.6 | % | ||||||||||||||
The Company’s tax provision or benefit from income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate applied to year-to-date income and records the discrete tax items in the period to which they relate. In each quarter, the Company updates the estimated annual effective tax rate and makes a year-to-date adjustment to the tax provision as necessary.
The Company’s annual effective tax rate for the fiscal year ending July 31, 2023 differs from the United States federal statutory tax rate due to certain factors with temporary differences primarily related to equity compensation expenses.
As of January 31, 2023, the Company had $3.5 million of deferred tax assets for which it has established a valuation allowance of $1.9 million, related to U.S. federal and state taxes and for a certain international subsidiary.
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, Lithuania and Israel.
27
Comparison of our Segment Results of Operations
The following table presents the results for our Zedge App and GuruShots segment income (loss) from operations for the three and six months ended January 31, 2023 and 2022:
| Three Months Ended January 31, | Change | Six Months Ended January 31, | Change | |||||||||||||||||||||
| 2023 | 2022 | % | 2023 | 2022 | % | |||||||||||||||||||
| Segment income (loss) from operations: | ||||||||||||||||||||||||
| Zedge App | $ | 1,563 | $ | 3,107 | -49.7 | % | $ | 2,935 | $ | 5,695 | -48.5 | % | ||||||||||||
| GuruShots | (105 | ) | - | nm | (1,678 | ) | - | nm | ||||||||||||||||
| Total | $ | 1,458 | $ | 3,107 | -53.1 | % | $ | 1,257 | $ | 5,695 | -77.9 | % | ||||||||||||
For the three and six months ended January 31, 2023, our income from operations related to the Zedge App decreased 50% and 49%, compared to the three and six months ended January 31, 2022 primarily due to lower revenue coupled with higher operating expenses. The decline in revenue was largely due to the decrease in MAU, particularly in well-developed markets. Higher operating expenses can be attributed to additional headcounts as well as our investment in the paid user acquisition in Zedge App.
For the three and six months ended January 31, 2023, our loss from operations related to the GuruShots was $1.9 million and $3.5 million, respectively, primarily due to lower revenue coupled with higher operating expenses. Lower revenue can be attributed to current macroeconomic condition which resulted in lower MAP and ARPMAP when compared to prior periods.
Liquidity and Capital Resources
General
At January 31, 2023, we had cash and cash equivalents of $17.5 million and working capital (current assets less current liabilities) of $14.2 million, compared to $17.1 million and $11.2 million, respectively, at July 31, 2022. 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 17, 2024. We also maintain a term loan and a revolving credit facility of up to $11 million in aggregate, including a foreign exchange contract facility of up to $6.5 million with Western Alliance Bank, as discussed below in Financing Activities and in Note 11 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
The following tables present selected financial information for the six months ended January 31, 2023 and 2022:
| Six Months Ended January 31, | ||||||||||||
| (in thousands) | 2023 | 2022 | $ Changes | |||||||||
| Cash flows provided by (used in): | ||||||||||||
| Operating activities | $ | 1,121 | $ | 5,679 | (4,558 | ) | ||||||
| Investing activities | (1,683 | ) | (323 | ) | (1,360 | ) | ||||||
| Financing activities | 993 | (225 | ) | 1,218 | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | (57 | ) | (23 | ) | (34 | ) | ||||||
| Increase in cash and cash equivalents | $ | 374 | $ | 5,108 | (4,734 | ) | ||||||
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 decreased $4.6 million in the six months ended January 31, 2023 to $1.1 million from $5.7 million in the six months ended January 31, 2022, primarily attributable to the net loss incurred in the current year period.
28
Changes in Trade Accounts Receivable
Gross trade accounts receivable increased $0.4 million to $2.8 million at January 31, 2023 from $2.4 million at July 31, 2022, primarily due to higher revenue in the preceding two months ended January 31, 2023 when compared to the same period ended July 31, 2022.
Investing Activities
On April 12, 2022, we acquired 100% of the outstanding equity securities of GuruShots. The purchase price consists of $18 million in cash paid at closing and contingent payments (the “Earnout”) of up to a maximum of $16.8 million, payable either in cash or Class B common stock of the Company or a combination thereof (in the Company’s discretion) payable over two years from closing subject to GuruShots achieving certain financial targets set forth in the Share Purchase Agreement (“SPA”). In connection therewith, we agreed to make certain minimum investments in user acquisition for GuruShots in the period covered by the Earnout, subject to GuruShots maintaining agreed upon levels of return on ad spend (ROAS). In addition, we committed to a retention pool of $4 million in cash and 626,242 shares of the Company Class B common stock with a fair value of $4 million or $6.39 per share for GuruShots’ founders and other employees that will be payable or vest, as applicable, over three years from April 1, 2022 based on the beneficiaries thereof remaining employed by the Company or a subsidiary.
On August 1, 2021, 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 was 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. We paid approximately half of the $1.9 million on February 1, 2022 and the remaining amount was paid on August 1, 2022.
Business combination and assets acquisition are more fully described in Note 5 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Cash used in investing activities in the fiscal years ended July 31, 2022 and 2021 also consisted 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.
Financing Activities
On October 28, 2022, we entered into an Amended Loan Agreement with Western Alliance Bank. Pursuant to the Amended Loan Agreement, Western Alliance Bank agreed to provide the Company with a new term loan facility in the maximum principal amount of $7 million for a four-year term and a $4 million revolving credit facility for a two-year term.
The Company discontinued the existing $2 million revolving credit facility under the existing Loan and Security Agreement, dated as of September 26, 2016, please see Note 11 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. As of July 31, 2022 and the time of the discontinuance, there was no outstanding balance on the revolving credit facility.
Pursuant to the Amended Loan Agreement, $2 million was advanced in a single-cash advance on October 28, 2022, with the remaining $5 million available for drawdown during twenty-four (24) months after closing. Each drawdown must be in an amount of not less than $1 million.
In the three and six months ended January 31, 2023 and 2022, we purchased 6,310 shares and 16,115 shares, respectively, of Class B common stock from employees for $17,000 and $232,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock and DSUs. In connection with the share repurchase program as discussed below, we bought back 442,000 shares for approximately $972,000 in the six months ended January 31, 2023, including commission and banking fees of approximately $11 thousand.
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.
29
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 mobile 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. 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, 2023, three customers represented 24%, 19% and 10% of our revenue. In the six months ended January 31, 2022, three customers represented 25%, 23% and 12% of our revenue. At January 31, 2023, three customers represented 29%, 25% and 10% of our accounts receivable balance. At July 31, 2022, three customers represented 47%, 17% and 16% 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, 2023, 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, 2023.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended January 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings in which we are involved are more fully described in Note 10 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
Other than the additional risk factor disclosed below, 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, 2022.
The collapse of Silicon Valley Bank may impact certain of our customers’ ability to pay money owed to the Company.
On March 10, 2023, Silicon Valley Bank (“SVB”) was shut down, followed by Signature Bank on March 12, 2023, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. Although the Company does not have any deposits at either bank, some of our current and potential advertisers and other counterparties, might have deposits with them, which may expose us to potential risks that could impact our financial position and operations. Any issues that may arise with our customers’ deposits at Silicon Valley Bank could have ripple effects that may impact our customers' ability to pay their current and/or future debts owed to the Company.
The failure of SVB may lead to advertisers defaulting on their obligations to the Company, which could impact our revenue and cash flows. Furthermore, some of our vendors may be impacted by the SVB collapse. The failure of SVB may cause vendors to face financial difficulties, which could lead to a delay or inability to deliver goods and services to the Company.
Despite the steps taken to date by U.S. agencies to protect depositors, the follow-on effects of the events surrounding the SVB collapse are unknown, could include failures of other financial institutions to which we face direct or more significant exposure, and may lead to significant disruptions to our operations, financial position, and reputation. The extent of such impacts is uncertain, and there may be greater risks that we have not yet identified. We are taking steps to identify any potential impact and minimize any disruptions to our operations. However, we cannot guarantee that we will be able to avoid any negative consequences directly or indirectly from the SVB collapse.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sales of Unregistered Securities
During the six months ended January 31, 2023, we issued 29,820 shares of our Class B common stock upon the vesting and settlement of DSUs issued under our 2016 Incentive Plan.
The foregoing issuances did not involve any underwriters, any underwriting discounts or commissions, and were covered by a Registration Statement on Form S-8 filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Act”).
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
31
The following table summarizes the share repurchase activity for the three months ended January 31, 2023:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Programs (3) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (3) | ||||||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||||||
| November 1 - 30, 2022 | 108 | $ | 2.23 | 108 | $ | 2,470 | ||||||||||
| December 1 - 31, 2022 | 132 | $ | 2.03 | 132 | $ | 2,201 | ||||||||||
| January 1 - 31, 2023 | 78 | $ | 2.19 | 78 | $ | 2,030 | ||||||||||
| Total | 318 | 318 | ||||||||||||||
| (1) | The total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards. |
| (2) | The average price paid per share includes any broker commissions. |
| (3) | In October 2021, our board of directors authorized a repurchase program of up to 1.5 million shares at a maximum of $3.0 million of our Class B common stock. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. Open market repurchases may be structured to occur in accordance with the requirements of Rule 10b-18. We may also, from time to time, enter into Rule 10b-5 trading plans to facilitate repurchases of its shares. The repurchase program does not obligate us to acquire any particular amount of our Class B common stock, has no expiration date and may be modified, suspended, or terminated at any time at our discretion. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
32
Item 6. Exhibits
| * | Filed or furnished herewith. |
33
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 17, 2023 | By: | /s/ JONATHAN REICH |
| Jonathan Reich Chief Executive Officer | ||
| March 17, 2023 | By: | /s/ YI TSAI |
| Yi Tsai Chief Financial Officer | ||
34