ZEDGE, INC. 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 endedJuly 31, 2021 (the "Form 10-K"), as filed with theU.S. Securities and Exchange Commission (the "SEC"). As used below, unless the context otherwise requires, the terms "the Company," "Zedge," "we," "us," and "our" refer toZedge, Inc. , aDelaware corporation and its subsidiary Zedge Europe AS, collectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words "believes," "anticipates," "expects," "plans," "intends," and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from 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 in to 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 ofUkraine , and the international community's response. For further information regarding risks and uncertainties associated with our business, please refer to Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, those discussed under Item 1A to Part I "Risk Factors" in the Form 10-K. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with theSEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the Form 10-K. Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to impact theU.S. and the world. We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners, the risk of additional, and currently-unknown COVID-19 variations necessitating further measures to mitigate risk and seek to protect employee and vendor health and safety. We will continue to evaluate the scope and extent of the impact to our business, consolidated results of operations, and financial condition.
Impact of
In February of 2022, theRussian Federation invadedUkraine . As a result, many governments and businesses imposed trade and economic sanctions on theRussian Federation andBelarus . Zedge has a small user base inRussia andBelarus ; however, it also has a development center inVilnius, Lithuania , which is approximately 40 kilometers from the Belarussian border. In the event that the conflict spills over into other countries, Zedge may need to relocate personnel potentially resulting in a slowdown in work product generated by those personnel. At present, the Company is working on contingency planning to be in a position to minimize any potential interruptions. GuruShots has several contractors originally based inUkraine who were inaccessible for a period of time. Most of them are now back at work and some of them have relocated to neighboring countries. As a result, there has been minimal disruption in the development work performed for GuruShots. We disabled both the Zedge app and GuruShots inRussia andBelarus resulting in a loss of that customer base and associated revenue. Finally, at the outset of the war, we changed the color of the Zedge App's icon to the colors of the Ukrainian flag as a demonstration of our solidarity withUkraine . This change triggered a spate of users, primarily located in countries that have close ties to theRussian Federation , to either uninstall the Zedge App and/or reduce our star ranking across the various storefronts. We also updated the collateral materials in these storefronts to the color of the Ukrainian flag resulting in a decline in new installs from
these same countries.
20
Overview
Zedge builds marketplaces and games around digital content that people use to express themselves. Our portfolio consists of several leading digital consumer brands that, asApril 30, 2022 , served 41 million monthly active users across the globe. Our portfolio consists of Zedge Ringtones and Wallpapers ("Zedge App"), as ofAugust 1, 2021 , Emojipedia and, as ofApril 12, 2022 , GuruShots. We operate a state-of-the-art digital publishing platform that powers the Zedge App, which is available in theApp Store , and offers an easy, entertaining and immersive way for end-users to engage with our rich and diverse catalogue of wallpapers, video wallpapers, ringtones, notification sounds on Android and wallpapers, video wallpapers, ringtones and custom icon packs on iOS. We secure our content from amateur and professional artists, and also from emerging and major brands. Artists have the ability to easily launch a virtual storefront in our Zedge App where they can market and sell their content to our user base. In August of 2021, we acquired Emojipedia, the leading source of all things emoji and, onApril 12, 2022 , we acquired GuruShots, an Israeli company that operates a platform used for its competitive photography game available across iOS, Android and the web. Our Zedge App has been installed approximately 556 million times, and atApril 30, 2022 , served approximately 32 million monthly active users, or MAU. MAU is a key performance indicator that captures the number of unique users that used our Zedge App during the final 30 days of the relevant period. Our Zedge App has consistently ranked as one of the most popular free apps in thethe United States . Historically, we have not made a material investment in paid user acquisition for our Zedge App; however, we have started investing more in this area.
Our Zedge App's success stems from its ability to meet consumer demand for a rich and diverse catalogue of both long-tail and popular content in a fun, intuitive and user-friendly fashion that aligns with their interest in expressing their essence in a bespoke manner, to offer reliable search and discovery capabilities and to make relevant content recommendations to our users. To this end, we invest heavily in both product design and development and the underlying technology required to satisfy both our Zedge App's users' and content contributors' expectations. Our Zedge App contains both user-generated and licensed, third-party content to achieve these goals. InMarch 2018 , we launched Zedge Premium, a marketplace within our Zedge App where professional creators and brands market, distribute and sell their digital content to our consumers. At launch, Zedge Premium was a "walled garden" - a separate section of the app which users needed to proactively choose to enter. InNovember 2020 , we embedded Zedge Premium content throughout the app making it far more prominent. We also introduced a new content type on iOS: custom icon packs. Over time, we expect that Zedge Premium will contribute to a virtuous cycle whereby it drives new consumers into our Zedge App resulting in more artist payouts, which in turn makes the platform more attractive for artists and brands looking to expand their reach and increase their income. In December of 2021 we introduced 'NFTs Made Easy' to select Zedge Premium artists interested in selling single edition, tokenized, video wallpapers. Our all-in-one platform allows creators to self-publish, mint and sell their NFTs simply by selecting the NFT option within our self-publishing platform and without the need for them to be cryptocurrency experts or technology wizards. 'NFTs Made Easy' is currency agnostic and allows consumers to purchase NFTs with Zedge tokens acquired via in-app purchases, eliminating the need to set up a crypto wallet to buy cryptocurrencies. Over time we expect to expand the offering with features including features like numbered editions, drop dates and new content types. InJanuary 2019 , we started offering freemium Zedge App Android users the ability to convert into paying subscribers for, amongst other things, the ability to remove unsolicited advertisements from our Zedge App. During the first 12 months after a customer's sign up for the subscription-based product,April 30, 2022 , we had approximately 713,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception inJanuary 2019 , subscriptions have generated approximately$9.4 million in gross revenue. InDecember 2019 , we completed the beta launch of 'Shortz' our new entertainment app offering serialized, short-form fiction rendered in a text-message format and more recently as audio productions available across both Android and iOS, and focusing on users inthe United States , theUnited Kingdom andCanada and it is now available globally. Based on the limited success of Shortz with our user base, we have decided to deprioritize its development and focus our resources on other opportunities. During the quarters endedApril 30, 2022 and 2021, we generated approximately 77% and 81%, respectively, of our revenues from selling our Zedge App's advertising inventory primarily to advertising networks and advertising exchanges. Advertising networks and advertising exchanges are third-party technology platforms that facilitate the buying and selling of media advertising inventory from multiple ad networks. The price of advertising inventory is fixed on an advertising network whereas the price for inventory is determined through real-time bidding on an advertising exchange. Advertisers are attracted to our Zedge App because of its sizable user base. 21
In our Zedge Premium marketplace, the content owner sets the price and the user can purchase the content by paying for it with Zedge Credits, our closed virtual currency. A user can earn Zedge Credits when taking specific actions such as watching a rewarded video or taking a survey. Alternatively, users can buy Zedge Credits via an in-app purchase. If a user purchases Zedge Credits,App Store keeps up to 30% of the purchase price with the remainder being paid to us. When a user purchases Zedge Premium content, the artist or brand receives 70% of the actual value of the Zedge Credits used to buy the content item as a royalty and we retain the remaining 30% as our fee, which we recognize as revenue. As Zedge Premium matures and expands, we expect to also diversify
our revenue source mix. Over the past several years, our Zedge App has experienced a continuing decline in its MAU in well-developed markets with growth of MAU in emerging markets, so that users in emerging markets represent an increasing portion of our user base. In addition, the rate of user growth in emerging markets slowed in the first half of fiscal 2022 compared to prior periods. As ofApril 30, 2022 , users in emerging markets represented 77% of the MAU for our Zedge App compared to 73% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. In the third quarter of fiscal 2022, users in well-developed economies and emerging markets declined by 15.6% and 3.9% respectively when compared to the same period in fiscal 2021. As ofApril 30, 2022 , approximately 41% of our Zedge App's user base was located inNorth America (21%) andEurope (includingEastern Europe , 20%), compared with 42% (North America , 20% andEurope 22%) as ofJuly 31, 2021 . The remaining 59% of the user base was primarily located in emerging markets with 27% located inIndia . MAU growth is tightly coupled with new user growth. Historically, our relatively high ranking in the
Business Combination and Asset Acquisition
Emojipedia OnAugust 1, 2021 , we acquired Emojipedia, the world's leading authority dedicated to providing up to date and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker, which provides real time visualization of all emoji symbols used on Twitter. InJanuary 2022 Emojipedia receives approximately 45 million monthly page views and has approximately 8.6 million monthly active users of which approximately 50% are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a voting member of theUnicode Consortium , the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Facebook and Twitter. GuruShots OnApril 12, 2022 , we completed the acquisition of GuruShots ("GS"). GS, founded in 2014, is an Israeli company and the leader in the photo gaming space. It provides a fun, educational, and structured way for amateur photographers -- anyone with a cell phone -- to compete and showcase their photos, gain recognition and progress via votes, badges, and awards. GS, via its LiveOps team, posts daily competitive challenges that are voted on by the platform's Gurus and the wider community. The platform releases approximately 10 challenges daily and users upload more than1 million high-quality photos monthly. Challenges can amass more than 20,000 submissions within 36 hours of being posted. GS has developed a sophisticated gamification platform that is being used to power its photo game GS business is based on a Free-to-Play model that leads to strong monetization with the purchase of resources that are used to give competitors a competitive edge while still maintaining a fair and competitive experience for all participants. Furthermore, it has a built-in social layer with features including leaderboards, chat, and team leagues.
Its uniqueness is tied to several key elements including:
? Retention Dynamics - focused on individual, team, and community dynamics that
create a sense of belonging, inspiration, recognition, improvement, and competition.
? Crowd Based Voting System - allows users to vote in favor or other player's
photos in order to secure a higher ranking. Users can earn greater voting
power, or "perceived votes," by engaging in gameplay. On a monthly basis, this
yields more than 4.5 billion perceived votes, a strong indication of
user-engagement.
22
? Real-Time Image Ranking - a competitive dynamic that acts as a catalyst for
users to reach top ranks. To date, GS has more than 130 million ranked images.
By definition these are high-quality images, otherwise, they would not be
ranked.
? Gamification Dynamics - these include challenges, points, levels, achievements,
and game loops. GS's Business Model GS generates revenue by selling game resources via in-app and online purchases. Some of these resources include increasing a photograph's exposure, access to locked game content, exchanging an image in the competition with a different image, and skipping voting sessions.
GS's User Growth and Acquisition
GS' user acquisition and growth strategy is currently focused on paid user acquisition channels including Google, Facebook, and Instagram. GS is in the early stages of testing additional user acquisition platforms. Prior to the acquisition by Zedge, GS outsourced paid user acquisition to a 3rd party marketing agency. In the coming months, we expect to migrate many of the marketing responsibilities in-house which we believe will yield improved ROAS and ROI. In addition, we plan on investing in organic user growth initiatives including user referral programs, search engine optimization, app store optimization, etc. which are standard growth drivers for gaming apps. Finally, we expect to cross market to existing Zedge users. GS's Product Roadmap In 2021, GS focused on improving retention with game loops focused on improving challenges and achievements. In addition, it rolled out "Leagues," which enables team-play, and which is scaling well. GS is increasingly focusing on improving the on boarding process in order to draw more users into the competitions, introducing a set of self-learning modules that can assist users in becoming better photographers. Gamifying learning is an area that can make a material difference in engagement and monetization. GS's Technology
GS' cloud-based platform uses machine learning ranking technology to ensure fair exposure of all photos submitted to competitions. It also employs image classification technology to suggest which competitions a photo should enter. It has a strong moderation tool that actively detects content for policy violations. In addition, the platform is self-governing with regards to flagging inappropriate and copyrighted content, as many users are quick to flag this due to the competition context. Over time the plan is to migrate GS technology to the same cloud platform that Zedge currently uses with the expectation that this will yield cost savings and simplify operations. Critical Accounting Policies
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted inthe United States of America , orU.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the Form 10-K. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management's most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to capitalized software and technology development costs, revenue recognition, business combinations and valuing contingent considerations, recognition and impairment of intangible assets and goodwill. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.
Recently Issued Accounting Standards Not Yet Adopted
Please refer to Note 1 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
23
Key Performance Indicators
The presentation of our results of operations includes disclosure of two key performance indicators - Monthly Active Users (MAU) and Average Revenue Per Monthly Active User (ARPMAU) from our Zedge App. MAU is a key performance indicator that captures the number of unique users that used our Zedge App during the previous 30-day period, which is important to understanding the size of the user base for 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 customers' experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement. ARPMAU is valuable because it provides insight into how well we monetize our users and, changes and trends in ARPMAU are indications of how effective our monetization investments are. MAU decreased 7.0% in the third quarter of fiscal 2022 when compared to the same period a year ago and increased 11.6% on a sequential basis. Over the past several years, we have experienced a continuing shift in our regional customer make-up with MAU in emerging markets representing an increasing portion of our user base. As ofApril 30, 2022 , users in emerging markets represented 77% of our MAU compared to 73% a year prior. This shift impacts our business because emerging markets do not monetize as well as well-developed markets due to lower eCPMs and lower monthly and annual subscription sales in these regions coupled with lower priced subscriptions SKUs. However, ARPMAU for the three months endedApril 30, 2022 was up approximately 7.8% when compared to the same period a year ago, pointing to progress we have made in extracting more revenue from our users, particularly from paid subscriptions sales and improvement in ad optimization. ARPMAU declined 13.0% on a sequential basis due to seasonality. We believe that much of the decline was caused by one-off events and estimate that a third or more of the MAU decline is attributable to a combination of uninstalls driven by our need to push a forced upgrade of the Zedge App in order to migrate to AppLovin's Max ad mediation platform combined with losses attributable to our decision to change the color of the Zedge App's icon to the colors of the Ukrainian flag as a demonstration of our solidarity withUkraine . This change triggered a spate of users, primarily located in countries that have close ties to theRussian Federation , to either uninstall the Zedge App and/or reduce our star ranking across the various storefronts. We also updated the collateral materials in these storefronts to the color of the Ukrainian flag resulting in a decline in new installs from these same countries. In addition, we disabled both the Zedge App and GuruShots inRussia andBelarus resulting in a loss of that customer base. Furthermore, we are accustomed to experiencing MAU declines resulting from seasonality in the business in Q3, which follows the end-of-year holiday season. Thus, we believe much of the decline was caused by [one-off events. Nonetheless, we have implemented a variety of product changes to reverse the trend, including changing our app icon and store branding inIndia , increasing the frequency and regularity of push notification campaigns as well as app icon changes, and continuing our rollout of social and community features. Three Months Ended April 30, (in millions, except ARPMAU - Zedge App) 2022 2021 % Change MAU- Zedge App 32.1 34.5 -7.0 % Developed Markets MAU - Zedge App 7.5 8.9 -15.7 % Emerging Markets MAU - Zedge App 24.6 25.6 -3.9 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App 77 % 73 % 5.0 % ARPMAU - Zedge App$ 0.0523 $ 0.0485 7.8 % Three Months Ended Three Months Ended April 30, January 31, (in millions, except ARPMAU) 2022 2022 % Change MAU- Zedge App 32.1 36.3 -11.6 % Developed Markets MAU - Zedge App 7.5 8.5 -11.8 % Emerging Markets MAU - Zedge App 24.6 27.8 -11.5 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App
77 % 77 % 0.1 %
ARPMAU - Zedge App $ 0.0523 $ 0.0601 -13.0 %
24
The following charts present the MAU - Zedge App and ARPMAU - Zedge App for the
consecutive eight quarters ended
[[Image Removed]] [[Image Removed]]
* Please note the MAU-Zedge App graph above excludes MAU for both Emojipedia and
GuruShots Results of Operations Three and Nine months endedApril 30, 2022 Compared to Three and Nine months endedApril 30, 2021 Three Months Ended Nine Months Ended April 30, Change April 30, Change 2022 2021 $ % 2022 2021 $ % (in thousands) (in thousands)
Revenues$ 6,230 $ 5,252 $ 978 18.6 %$ 19,173 $ 14,328 $ 4,845 33.8 % Direct cost of revenues 401 290 111 38.3 % 1,053 907 146 16.1 % Selling, general and administrative 4,064 2,694 1,370 50.9 % 9,902 6,859 3,043 44.4 % Depreciation and amortization 423 289 134 46.4 % 1,181 972 209 21.5 % Income from operations 1,342 1,979 (637 ) -32.2 % 7,037 5,590 1,447 25.9 % Interest and other income, net 15 9 6 66.7 % 42 14 28 200.0 % Net (loss) gain resulting from foreign exchange transactions (125 ) (12 ) (113 ) 941.7 % (220 ) 21 (241 ) nm Provision for (benefit from) income taxes 429 (473 ) 902 nm 1,676 (147 ) 1,823 nm Net Income$ 803 $ 2,449 $ (1,646 ) -67.2 %$ 5,183 $ 5,772 $ (589 ) -10.2 % nm-not measurable Revenues
The following table sets forth the composition of our revenues for the three and
nine months ended
Three Months Ended Nine Months Ended
April 30, April 30, % Changes
2022 2021 2022 2021 Three Months Nine Months
(in thousands) (in thousands)
Advertising revenue $ 4,526 $ 4,227 $ 14,532 $ 11,612 7 % 25 %
Paid subscription revenue 910 899 2,823 2,358 1 % 20 %
Other revenues 794 126 1,818 358 530 % 408 %
Total revenues $ 6,230 $ 5,252 $ 19,173 $ 14,328 19 % 34 %
Advertising revenue. Advertising revenue increased 7% and 25% in the three and nine months endedApril 30, 2022 , respectively, compared to the three and nine months endedApril 30, 2021 , primarily due to improvement in our ad optimizations and higher advertising rates. 25 Paid subscription revenue. We rolled out a subscription-based product on Android inJanuary 2019 , whereby users of our Zedge app could pay a monthly or annual fee to remove unsolicited ads when using our Zedge app. We employ a regional pricing strategy in order to improve conversions. TheU.S. constitutes our largest subscriber base and we generally charge$0.99 per month and$4.99 per year. Pricing in other markets is based on local conditions. We generated$931,000 and$2,747,000 in gross prepaid subscription in the three and nine months endedApril 30, 2022 , respectively, compared to$990,000 and$2,806,000 in the three and nine months endedApril 30, 2021 . The 6% decline in gross prepaid subscription sale for the three months endedApril 30, 2022 when compared to the same period a year ago was primarily due to approximately 3% decline in new installs in well-development markets in the corresponding periods and a decrease in renewal rate. As ofApril 30, 2022 , the first year renewal rate was 44% and second year renewal rate was 53%. 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 nine
months ended
Three Months Ended Nine Months Ended
April 30, April 30,
2022 2021 % Change 2022 2021 % Change
(in thousands, except revenue per subscriber and percentages)
Revenues $ 910 $ 899 1 % $ 2,823 $ 2,358 $ 20 %
Active subscriptions
net additions -49 42 nm -39 249 nm
Active subscriptions
at end of period 713 753 -5 % 713 753 -5 %
Average active
subscriptions 718 734 -2 % 747 652 15 %
Average monthly
revenue per active
subscription $ 0.42 $ 0.41 2 % $ 0.42 $ 0.40 $ 5 %
Gaming revenue. GuruShots sells game resources via in-app and online purchases.
Some of these virtual items include increasing a photograph's exposure,
exchanging an image in the competition with a different image, and skipping
voting sessions. GuruShots recognizes revenue at the time of purchase because
the overwhelming majority of users only purchase game resources when they need
them to progress in the game. GuruShots generated $294,000 between April 13,
2022 to April 30, 2022 which is included in Other Revenues.
Zedge Premium. Gross transaction value (the total sales volume transacting
through the platform), or "GTV," increased 63% and 75% in the three and nine
months ended April 30, 2022 , respectively, compared to the three and nine months
ended April 30, 2021 . Net revenue increased 47% and 74% in the three and nine
months ended April 30, 2022 , respectively, compared to the three and nine months
ended April 30 , 2021.The gross and net revenue growth in Zedge Premium can be
attributed to the investment we made in our new content management system as
well as the landing page redesign.
The following table summarizes Zedge Premium gross and net revenue for the three
and nine months ended
Three Months Ended Nine Months Ended
April 30, April 30, % Changes
2022 2021 2022 2021 Three Months Nine Months
(in thousands) (in thousands)
Zedge Premium-gross
revenue ("GTV") $ 410 $ 252 $ 1,173 $ 671 63 % 75 %
Zedge Premium-net
revenue $ 182 $ 124 $ 610 $ 351 47 % 74 %
Revenue from Zedge Premium, web-based advertising revenues from Emojipedia and other related sites, as well as revenues generated by Shortz, are reported under Other Revenues, and those offerings constitute potential growth drivers in
the quarters to come. Integration bonus. OnApril 1, 2022 , we received a one-time integration bonus of$2 million from AppLovin Corporation for migrating to their mediation platform. This amount is being amortized over an initial estimated service period of 24 months which is also included in Other Revenues.
Direct cost of revenues.Direct cost of revenues consists primarily of content hosting and content delivery costs.
Three Months Ended Nine Months Ended
April 30, April 30,
(in thousands) 2022 2021 % Change 2022 2021 % Change
Direct cost of
revenues $ 401 $ 290 38.3 % $ 1,053 $ 907 16.1 %
As a percentage of
revenues 6.4 % 5.5 % 5.5 % 6.3 %
Direct cost of revenues increased 38.3% and 16.1% in the three and nine months
ended April 30, 2022 , respectively, compared to three and nine months ended
April 30, 2021 . The increase in the direct cost of revenues can be attributed to
utilizing a new data analytics tool provided by Google 's Cloud Computing
Services and the inclusion of GuruShots' infrastructure costs.
26
As a percentage of revenue, direct cost of revenues in three and nine months
ended April 30, 2022 were 6.4% and 5.5%, respectively, compared to 5.5% and
6.3%, in the three and nine months ended April 30, 2021 , primarily due to
significant higher revenue in the nine-month periods and the fixed nature of
many of our direct cost of revenues.
Selling, general and administrative expense. Selling, general and administrative
expense ("SG&A") consists mainly of GuruShots' operating expenses, payroll,
benefits, recruiting fees, facilities, marketing, consulting, professional fees,
software licensing ("SaaS"), M&A related expenses and public company related
expenses.
Three Months Ended Nine Months Ended
April 30, April 30,
(in thousands) 2022 2021 % Change 2022 2021 % Change
Selling, general and
administrative $ 4,064 $ 2,694 50.9 % $ 9,902 $ 6,859 44.4 %
As a percentage of
revenues 65.2 % 51.3 % 51.6 % 47.9 %
SG&A expense increased 50.9% and 44.4% in the three and nine months ended April
30, 2022 , respectively, compared to the three and nine months ended April 30,
2021 . This increase was primarily attributable to transaction costs of $860,000
related to the GuruShots acquisition, higher compensation costs resulting from
additional headcount, higher stock-based compensation as discussed below, higher
professional fees and offset by reductions in discretionary expenses.
As a percentage of revenue, SG&A expense in the three and nine months ended
April 30, 2022 were 65.2% and 51.6%, respectively, compared to 51.3% and 47.9%,
in the three and nine months ended April 30, 2021 . Excluding costs related to
the GuruShots acquisition SG&A expense as a percentage of revenue in the three
and nine months ended April 30, 2021 would have been 53.3% and 47.2%.
Our headcount (including 30 added through the GS acquisition) totaled 93 as of
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. 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 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 Nine Months Ended
April 30, April 30,
(in thousands) 2022 2021 % Change 2022 2021 % Change
Depreciation and
amortization $ 423 $ 289 46.4 % $ 1,181 $ 972 21.5 %
As a percentage of
revenues 6.8 % 5.5 % 6.2 % 6.8 %
Depreciation and amortization expenses increased approximately 46.4% and 21.5%
in the three and nine months ended April 30, 2022 , compared to three and nine
months ended April 30, 2021 . This increase was primarily attributable to the
amortization of intangible assets related to the acquisition of GuruShots and
Emojipedia.
Interest and other income, net.Interest and other income, net in the three and nine months endedApril 30, 2022 increased$6,000 and$28,000 respectively when compared to the same periods in fiscal 2021 due to higher cash balance resulting from cash flows provided by operating activities and financing activities in fiscal 2021. Three Months Ended Nine Months Ended April 30, April 30, (in thousands) 2022 2021 % Change
2022 2021 % Change Interest and other income, net$ 15 $ 9 66.7 %$ 42 $ 14 200.0 % As a percentage of revenues 0.2 % 0.2 % 0.2 % 0.1 % 27 Net (loss) gain resulting from foreign exchange transactions. Net loss resulting from foreign exchange transactions is comprised of gains and losses generated from movements in NOK and EUR relative to theU.S. Dollar, including gains or losses from our hedging activities. Three Months Ended Nine Months Ended April 30, April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Net (loss) gain resulting from foreign exchange transactions$ (125 ) $ (12 ) nm$ (220 ) $ 21 nm As a percentage of revenues -2.0 % -0.2 % -1.1 % 0.1 % In the three and nine months endedApril 30, 2021 , we realized losses of$154,000 and$271,000 , respectively, from NOK and EUR hedging activities, compared to gains of$16,000 and$67,000 , respectively in the three and nine months endedApril 30, 2021 due to the strengthening of the US dollars in current periods, as more fully described in Note 4 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Provision for income taxes. The tax expense consists of federal and state taxes based on taxable income and allocated net worth and certain income taxes payable in foreign jurisdictions where our subsidiaries reside. Three Months Ended Nine Months Ended April 30, April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Provision for (benefit from) income taxes$ 429 $ (473 ) nm$ 1,676 $ (147 ) nm As a percentage of revenues 6.9 % -9.0 % 8.7 % -1.0 % Our tax provision or benefit for income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Under certain circumstances where we are unable to make a reliable estimate of the annual effective tax rate, the accounting guidance permits the use of the actual effective tax rate for the year-to-date period. We expect our overall effective tax rate for fiscal year endingJuly 31, 2022 to be approximately 25.7 %. The effective tax rate differed fromthe United States federal statutory tax rate of 21% due to certain factors with temporary impact primarily related to the equity compensation expenses. During the nine months endedApril 30, 2022 , we accounted for a discrete item related to restricted stock windfall (vesting date fair market value above the grant date fair market value) which resulted in a net effective tax rate of 24.4%. As ofApril 30, 2022 , we had$560,000 of deferred tax assets for which it has not established a valuation allowance, related to theU.S. federal states and certain international subsidiary. The Company completed its reassessment of the ability to realize these assets and concluded that a valuation allowance was not required.
We are subject to taxation in
Liquidity and Capital Resources
General AtApril 30, 2022 , we had cash and cash equivalents of$17.1 million and working capital (current assets less current liabilities) of$6.4 million , compared to$24.9 million and$23.4 million , respectively, atJuly 31, 2021 . We expect that our cash and cash equivalents on hand and our cash flow from operations will be sufficient to meet our anticipated cash requirements for the twelve-month period endingJune 14, 2023 . During fiscal 2021, we raised an aggregate of$15 million through sales of equity in At the Market offerings. We also maintain a revolving line of credit of up to$2.0 million and a foreign exchange contract facility of up to$6.5 million withWestern Alliance Bank , as discussed below in Financing Activities.
The following tables present selected financial information for the nine months
ended
© Edgar Online, source
