ZEDGE, INC. This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words "believes," "anticipates," "expects," "plans," "intends" and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I "Risk Factors" in this Annual Report. The forward-looking statements are made as of the date of this Annual 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 theSecurities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.
OverviewZedge, 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, andGuruShots Ltd ("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. 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. 44 The Zedge Ringtones and Wallpapers app (which is named "Zedge Wallpapers" in theApp 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 inApp Store . As ofJuly 31, 2022 , our Zedge App has been installed nearly 569 million times since inception and, over the past two years, has had between 32.0 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, due to developments outside of our control, we migrated to a new ad mediation platform - Applovin MAX -, which monopolized internal resources and delayed the completion of other product initiatives we had planned for in fiscal 2022. Applovin paid us a one-time$2 million integration bonus and their performance has been on-par or better than our prior platform. Following the transition, work resumed on the delayed development and most have been rolled out as ofSeptember 30, 2022 . 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 ofJuly 31, 2022 , we had 692,000 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. InApril 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 300 competitions that result in players uploading in excess of 1 million photographs and casting close to 4.5+ 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 14% annually to more than$55 per player. 45 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.
? Subscriptions. Introducing value-adds that we can bundle into a subscription.
For example, we started testing a feed of short and engaging instructional
videos that offer players techniques for improving their photographs. If users
engage with this content, we expect to bundle it into a paid subscription.
? 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. 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. InAugust 2021 , we acquiredEmojipedia Pty Ltd ("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. Emojipedia receives approximately 46.4 million monthly page views and has approximately 7.6 million monthly active users of which approximately 45.19% 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. 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 Spanish, French, German, Italian, and Portuguese. We will continue to enhance this offering and are exploring new features including a native mobile offering as well as additional monetization opportunities. 46 Reportable Segments
Our business consists of one reportable segment.
CRITICAL ACCOUNTING POLICIES Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted inthe United States of America , orU.S. GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue 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 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. See Note 1 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for a complete discussion of our significant accounting policies. Revenue Recognition. We generate revenue from the following sources: (1) Advertising; (2) Paid Subscriptions and (3) Zedge Premium and Others, and (4) following the GuruShots acquisition, from selling in game resources ("Resources") to enhance user's in-game rate of progress and game experience. The substantial majority of our revenue is generated from selling its advertising inventory ("Advertising Revenue") to advertising networks, advertising exchanges, and direct arrangements with advertisers. Our monthly and yearly subscriptions allow users to prepay a fixed fee to remove unsolicited advertisements from its Android Zedge App although we are working on adding additional capabilities to subscriptions including offering subscriptions to iOS Zedge App users. In Zedge Premium, we receive 30% as a fee when users purchase licensed content using Zedge Credits or unlock licensed content by watching a video or taking a survey on Zedge Premium. Advertising Revenue: We generate the bulk of our revenue from selling our Zedge App's advertising inventory to advertising networks and advertising exchanges and direct sales to advertisers.
? Advertising Networks. An advertising network is a third-party relationship
where buyers of advertising inventory go to purchase either specific targeted
inventory or a large scale of inventory at a set price. Advertising Networks
serve as an indirect source of advertising fill to a variety of branded ad
campaigns and performance-based ad campaigns.
? Advertising Exchanges. An advertising exchange is similar to an advertising
network, except that the exchange typically bids in real-time for inventory.
Advertisers may utilize an exchange when looking for scale or specific
audiences, and accept that the price will vary based on when and how much
volume of inventory they wish to buy.
? Direct Sales to Advertisers. In prior periods, we sold, and currently retain
the ability to sell, advertising directly to advertisers through contractual
relationships. These relationships historically offered higher than average
pricing than realized from sales via advertising networks or advertising
exchanges. We had no direct sales of advertising during fiscal 2022 and 2021
and have no current expectation that this will represent a material portion of
its sales in the near term.
We recognize advertising revenue as advertisements are delivered to users
through impressions or ad views (depending on the terms agreed upon with the
advertiser). For in-app display ads, in-app offers, engagement advertisements
and other advertisements, our performance obligation is satisfied over the life
of the relevant contract (i.e., over time), with revenue being recognized as
advertising units are delivered, which is Zedge's performance obligation. The
advertiser may compensate the Company on a cost-per-impression, cost-per-click,
cost-per-action basis.
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Paid Subscription Revenue: Beginning in January 2019 , we started offering
monthly and yearly paid subscription services sold through Google Play. When a
customer subscribes, they execute a clickthrough agreement with Zedge outlining
the terms and conditions between Zedge and the subscriber. Google Play processes
subscription prepayment on Zedge's behalf, and retains up to 30% as its fee.
Paid subscription revenue is recognized net of sales tax amounts collected from
subscribers. Google Play collects and pays applicable sales tax on behalf of
Zedge when there is an obligation to pay. Both monthly and yearly subscriptions
are nonrefundable after a period of seven days. Paid subscriptions are
automatically renewed at expiration unless cancelled by subscribers (e.g., that
the customer can cancel at any time, will not receive any refund however will
remain entitled to receive the ad free service until the end of their
subscription period). The duration of these contracts is daily, and revenue for
these contracts is recognized on a daily ratable basis. The payment terms for
subscriptions sold through Google Play is net 30 days after month-end.
Zedge Premium: Zedge Premium is our marketplace where artists and brands can
market, distribute and sell their digital content to Zedge's users. The content
owner sets the price and the end 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 rewarded videos or completing
electronic surveys. Alternatively, users can buy Zedge Credits with an in-app
purchase. If a user purchases Zedge Credits (ranging from 500 credits for $0.99
to 700,000 credits for $999.99 ), Google Play or iTunes retains 30% of the
purchase price as its fee. When a user purchases Zedge Premium content using
Zedge Credits, the artist or brand receives 70% of the actual revenue after the
Google Play or iTunes fee ("Royalty Payment") and we receive the remaining 30%,
which is recognized as revenue.
Virtual goods used for online game: GuruShots generates substantially all of its
revenues from selling virtual goods (or Resources) to its users. GuruShots
distributes its game to the end customer through mobile platforms such as Apple
and Google. Through these platforms, users can download the free-to-play game
and can purchase virtual goods which are redeemed in the game to enhance their
game-playing experience.
Players can pay for their virtual item purchases through various widely accepted
payment methods offered in the game. Payments from players for virtual goods are
required at the time of purchase, are non-cancellable and relate to
non-cancellable contracts that specify the Company's obligations and cannot be
redeemed for cash nor exchanged for anything other than virtual goods within the
GuruShots' game. The purchase price is a fixed amount which reflects the
consideration that GuruShots expects to be entitled to receive in exchange for
use of virtual goods by its customers. The platform providers collect proceeds
from the game players and remit the proceeds to GuruShots after deducting their
respective platform fees. Sales and other taxes collected from customers on
behalf of governmental authorities are accounted for on a net basis and are not
included in revenues or operating expenses. GuruShots' performance obligation is
to display the virtual goods in game play based upon the nature of the virtual
item.
GuruShots categorizes its virtual goods as consumable. GuruShots sells only
consumable virtual goods. Consumable virtual goods represent items that can be
consumed by a specific player action and do not provide the player any
continuing benefit following consumption. GuruShots has determined through a
review of game play behavior that players generally do not purchase additional
virtual goods until their existing virtual goods balances have been
substantially consumed. This review includes an analysis of game players'
historical play behavior, purchase behavior, and the amounts of virtual goods
outstanding. Based upon this analysis, GuruShots has estimated the rate at which
virtual item is consumed during game play. Accordingly, revenue is recognized
once the virtual goods are sold. GuruShots monitors its analysis of customer
play behavior on a quarterly basis.
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As discussed above, GuruShots concluded that revenue related to the promise of enhancing users' gaming experience through Resource purchases should be recognized ratably over the period of benefit period (i.e. the period over which the enhanced gaming experience is provided). However, for practical reasons, GuruShots does not defer the portion of revenue attributable to future uses of Resources as of any given balance sheet date. This is due to the duration of the enhanced gaming experience that is provided being, in substantially all of the cases, and applying the portfolio approach (as GuruShots reasonably expects that the effects on the financial statements of applying ASC 606 guidance to the portfolio would not differ materially from applying ASC 606 guidance to the individual contracts), a very short time frame ranging from a few hours to less than two weeks. Therefore, the result of recognizing the related revenues at the point in time which user first consumes the respective resource would yield a result that is not substantially different then ratable recognition over the period of benefit. Accordingly, revenue is recognized once the virtual goods are sold.
Gross Versus Net Revenue Recognition
We report revenue on a gross or net basis based on management's assessment of whether we act as a principal or agent in the transaction. To the extent we act as the principal, revenue is reported on a gross basis. To the extent that we act as an agent, we report revenue on a net basis. The determination of whether we act as a principal or an agent in a transaction is based on an evaluation of whether we control the good or service prior to transfer to the customer. We generally report our advertising revenue net of amounts due to agencies and brokers because we are not the primary obligor in the relevant arrangements, we do not finalize the pricing, and we do not establish or maintain a direct relationship with the advertiser. Certain advertising arrangements that are directly between us and advertisers are recognized on a gross basis equal to the price paid to us by the customer since we are the primary obligor and we determine the price. Any third-party costs related to such direct relationships are recognized as direct cost of revenues. GuruShots is primarily responsible for providing the virtual goods, has control over the content and functionality of games and has the discretion to establish the virtual goods' prices. Therefore, GuruShots is the principal and, accordingly revenues are recorded on a gross basis. Payment processing fees paid to platform providers are recorded within selling, general and administrative expenses.
We report subscription revenue gross of the fee retained by
Business Combinations and Contingent Liabilities
The Company accounts for business combination using the acquisition method of accounting. The Company allocates the purchase price of the acquisition to the tangible and intangible assets acquired and liabilities assumed and contingent considerations based on their estimated fair values at the acquisition dates. The excess of the purchase price over those fair values is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of income and comprehensive income. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made. For contingent consideration, we update these estimates and the related fair value of contingent consideration using a Monte Carlo simulation at each reporting period based on the estimated probability of achieving the earn-out targets and applying a discount rate that measures the risk associated with the expected contingent payments. Changes in the fair value can result from changes pertaining to the achievement of the defined milestones and changes in assumed discount rates. Changes in the fair value of contingent consideration are recorded in our consolidated statements of income and comprehensive incomes. As ofJuly 31, 2022 , the contingent consideration for GuruShots associated with revenue milestones endingMarch 31, 2024 amounted to$1.9 million , of which$0.2 million is included in current liabilities and$1.7 million is included in
long
term liabilities.
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Intangible Assets-Net
Intangible assets are carried at cost, less accumulated amortization, unless a
determination has been made that their value has been impaired. Intangible
assets are amortized on a straight-line basis over their estimated useful lives
of between five to fifteen years. The Company reviews identifiable amortizable
intangible assets to be held and used for impairment whenever events or changes
in circumstances indicate that the carrying value of the assets may not be
recoverable. Determination of recoverability is based on the lowest level of
identifiable estimated undiscounted cash flows resulting from use of the asset
and its eventual disposition. Measurement of any impairment loss is based on the
excess of the carrying value of the asset over its fair value. There were no
impairment charges recorded in the fiscal year ended July 31, 2022 and 2021
presented in the accompanying audited consolidated financial statements.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized. Goodwill is
reviewed annually (or more frequently under certain conditions) for impairment
using a fair value approach. We perform our annual or interim goodwill
impairment test by comparing the fair value of the relevant reporting unit with
its carrying amount. We would recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit's fair value; however, the
loss recognized would not exceed the total amount of goodwill allocated to that
reporting unit. Additionally, we consider income tax effects from any
tax-deductible goodwill on the carrying amount of our reporting unit when
measuring the goodwill impairment loss, if applicable. We estimate the fair
value of our reporting unit using the market approach.
We have the option to perform a qualitative assessment to determine whether it
is necessary to perform the quantitative goodwill impairment test. However, we
may elect to perform the quantitative goodwill impairment test even if no
indications of a potential impairment exist.
For our annual impairment tests in fiscal years 2022 and 2021, our estimated
fair value exceeded our carrying value, therefore, no impairment charge was
required. Calculating the fair value of the reporting unit requires significant
estimates and assumptions by management. Should our estimates or assumptions
regarding the fair value of our reporting unit prove to be incorrect, we may be
required to record impairment of goodwill in future periods and such impairment
could be material.
Capitalized software and technology development costs
Software and technology development activities generally fall into three stages:
1 Planning Stage activities include developing a project or business plan
that outlines the goals for the content distribution platform or newproduct or service; determining the functionality; identifying hardware and
software applications that will achieve functionality, security, and
traffic flows; and selecting the internal resources that will be assigned
to the project as well as the external vendors where applicable.
2 Application and Infrastructure Development Stage activities focus on
acquiring or developing hardware and software to operate a content
distribution platform or new product and service; and
3 Post-Implementation/Operating Stage activities address training,
administration, maintenance, and all other activities to operate an
existing content distribution platform or new product or service.
During the Planning Stage, we charge all costs to expense as incurred.
During the Application and Infrastructure Development Stage, we begin to
capitalize costs when the project has been properly authorized and we determine
that completion is probable. If a project is subsequently cancelled prior to
placement in service, costs that have been capitalized to date will be reviewed
for potential impairment. Capitalization ceases no later than the point at which
a computer software project is substantially complete and ready for its intended
use. Amortization, which is generally over three years, begins for each project
when the code is ready for use, whether or not it is actually placed in service
at that time (an exception being if the project's functionality completely
depends on the completion of another project, in which case, amortization begins
when that other project is ready for use).
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During the Post-Implementation/Operation Stage, we expense training costs and
maintenance costs as incurred. However, upgrades and enhancements, defined as
modifications to existing internal-use software that result in additional
functionality (modifications to enable the software to perform tasks that it was
previously incapable of performing, normally requiring new software
specifications and perhaps a change to all or part of the existing software
specifications) are treated as though they were new projects, and are assessed
utilizing the same stages and criteria on a project-by-project basis. As such,
internal costs incurred for upgrades and enhancements are expensed or
capitalized based on the requirements noted above, while costs incurred for
maintenance are expensed as incurred. These projects are tracked individually,
such that the beginning and ending of the capitalization can be appropriately
established, as well as the amounts capitalized therein.
Amortization of these costs is included in depreciation and amortization in the statement of comprehensive income.
Stock-Based Compensation The Company recognizes compensation expense for all of its grants of stock-based awards based on the estimated fair value on the grant date. Compensation cost for awards is recognized using the straight-line method over the vesting period or the graded vesting method if awards with market or performance conditions include graded vesting features or if an award includes both a service condition and a market or performance condition. Stock-based compensation is included in selling, general and administrative expense.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as ofJuly 31, 2022 . Impact of COVID-19 The full impact of the COVID-19 pandemic is inherently uncertain at the time of this report. The COVID-19 pandemic resulted in various travel restrictions and mandates and greater uncertainty in global financial markets. Our advertisers and subscribers, and our business and operations, have been and may continue to be affected by the COVID-19 pandemic, variants and responsive government restrictions. For so long as the COVID-19 pandemic persists, restrictions and policies implemented by governments and companies may continue to have negative implications on business and consumer spending, the supply chain, production of goods, demand for goods, transportation, the labor market, the global capital markets and the global economy, and could result in inflation, recession and prolonged economic downturn. A negative impact on our advertisers and subscribers may cause them to cut back on ad buying on our platform or purchasing our subscriptions and other products offerings. Any of these conditions or actions may have a negative impact on our future results of operations, liquidity, and financial condition. We are unable to predict the full impact that the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic, the actions that may be taken by government authorities across theU.S. or other countries, the impact to our customers, partners, and suppliers, and other factors described in the section titled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K.
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.
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Key Performance Indicators
Our results of operations discussion includes disclosure of two key performance
indicators - Monthly Active Users (MAU) and Average Revenue Per Monthly Active
User (ARPMAU). MAU is a key performance indicator that captures the number of
unique users that used our Zedge App in the last thirty days of the relevant
period, which is important to understanding the size of the user base for our
Zedge App which is a significant driver of revenue. Changes and trends in MAU
are useful for measuring the general health of our business, gauging both
present and potential customers' experience, assessing the efficacy of product
improvements and marketing campaigns and overall user engagement. ARPMAU is
valuable because it provides insight into how well we monetize our users and the
changes and trends in ARPMAU are indications of how effective our monetization
investments are.
As ofJuly 31, 2022 MAU declined 7.0% year over year primarily to attrition in both developed markets and emerging markets. Additionally, we have experienced a continuing shift in the regional customer make-up with MAU in emerging markets (particularlyIndia ) representing an increasing portion of our user base. As ofJuly 31, 2022 , users in emerging markets represented 77% of our MAU compared to 75% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. ARPMAU was up 11.4% for the three months endedJuly 31, 2022 when compared to the same period a year ago, pointing to progress we have made in generating more value from our users, particularly from subscriptions. Three Months Ended July 31, (in millions, except ARPMAU - Zedge App) 2022 2021 % Change MAU- Zedge App 32.0 34.4 -7.0 % Developed Markets MAU - Zedge App 7.3 8.5 -14.1 % Emerging Markets MAU - Zedge App 24.7 25.9 -4.6 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App 77 %
75 % 2.9 % ARPMAU - Zedge App$ 0.0558 $ 0.0501 11.4 % [[Image Removed]] [[Image Removed]] 52 RESULTS OF OPERATIONS The following table sets forth our consolidated statements of operations data for the fiscal year endedJuly 31, 2022 compared to the fiscal year endedJuly 31, 2021 : Year Ended July 31, Change 2022 2021 $ % (in thousands) Revenues$ 26,545 $ 19,569 $ 6,976 35.6 % Direct cost of revenues 1,641 1,194 447 37.4 %
Selling, general and administrative 15,061 9,311 5,750 61.8 % Depreciation and amortization 1,966 1,261 705 55.9 % Change in fair value of contingent consideration (3,961 ) - (3,961 ) nm Income from operations 11,838 7,803 4,035 51.7 % Interest and other income, net 49 245 (196 ) -80.0 % Net loss resulting from foreign exchange transactions (281 ) (2 ) (279 ) nm Provision for (benefit from) income taxes 1,892 (202 ) 2,094 nm Net Income$ 9,714 $ 8,248 $ 1,466 17.8 % nm-not meaningful
The following table sets forth the composition of our revenues for the fiscal
years ended
Fiscal Year Ended
July 31, % Changes % of total Revenue
2022 2021 YoY FY'22 FY'21
(in thousand)Advertising revenue$ 18,883 $ 15,741 20 % 71.1 % 80.4 % Virtual items used for online game 1,673 -
NM 6.3 % 0.0 % Paid subscription revenue 3,741 3,311 13 % 14.1 % 16.9 % Other revenues 2,248 517 335 % 8.5 % 2.6 % Total revenues$ 26,545 $ 19,569 36 % 100.0 % 100.0 % Advertising revenue. Advertising revenue increased 20% from$15.7 million in fiscal 2021 to$18.9 million in fiscal 2022 primarily due to improvements in our ad stack and higher advertising rates. Paid subscription revenue. We rolled out a subscription-based product on Android inJanuary 2019 , whereby users of our Zedge App can pay a monthly or annual fee to remove unsolicited ads when using our Zedge App. In general, pricing of our monthly subscriptions in theU.S. is$0.99 per month and$4.99 for yearly subscription with different pricing for users in other countries.$3.6 million and$3.8 million in gross prepaid subscription sales consisting of both monthly and annual subscriptions for the fiscal years endedJuly 31, 2022 and 2021 respectively. We expect that, based on research and testing we undertake, from time to time, the prices of our subscription in each country/region may change and we may test other plan and price variations. Our active subscription numbers decreased by 8% fromJuly 31, 2021 toJuly 31, 2022 primarily due to the new subscriptions not offsetting churn. However, despite this reduction, our average number of active subscribers during the 2022 fiscal year increased
by 9% from the 2021 fiscal year.
The following table summarizes subscriptions and subscription revenue for the
fiscal years ended
As of/Years Ended
7/31/2022 7/31/2021 % Change
(in thousands,except revenue per subscriber and
percentages)
Revenues$ 3,741 $ 3,311 $ 13 % Active subscriptions net (decrease) increase (60 ) 248 nm Active subscriptions at end of period 692 752 -8 % Average Active subscriptions 736 678 9 % Average monthly revenue per Active subscriptions$ 0.42 $
0.41 $ 2 %
53
nm-not meaningful
Virtual goods used for online game. GuruShots sells virtual goods that enable
extra abilities for the user throughout the game via in-app and online
purchases. 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. The $1.7 million revenue was earned in the period from the April
2022 closing of the purchase of GuruShots through July 31, 2022 .
Zedge Premium. Zedge Premium gross revenue and net revenue grew 60% and 62% year
over year primarily due to the landing page redesign that make premium content
more visible to our users. The following table summarizes Zedge Premium gross
and net revenue for the fiscal year ended July 31, 2022 and 2021.
Fiscal Year Ended July 31, % Changes
2022 2021 YoY
(in thousands)
Zedge Premium-gross revenue ("GTV") $ 1,509 $ 946 60 % Zedge Premium-net revenue $ 827$ 509 62 %
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$2 million from AppLovin Corporation for migrating to their mediation platform. This amount is being amortized over an initial estimated service period of 24 months which is also included in Other Revenues.
Direct cost of revenues. Direct cost of revenues consists primarily of content hosting, content serving and filtering, data analytic tools and marketing automation services.
Fiscal year ended July 31,
(in thousands) 2022 2021 % Change
Direct cost of revenues
6.2 % 6.1 %
Direct cost of revenues increased 37.4% in fiscal 2022 to
As a percentage of revenue, direct cost of revenues in fiscal 2022 were 6.2% and flat when compared to 6.1% in fiscal 2021.
54
Selling, general and administrative expense. Selling, general and administrative
expense ("SG&A") consists mainly of payroll, benefits, facilities, marketing,
consulting, professional fees, software licensing ("SaaS") and public company
related expenses.
Fiscal year ended July 31,
(in thousands) 2022 2021 % ChangeSelling, general and administrative$ 15,061 $ 9,311
61.8 % As a percentage of revenues 56.7 % 47.6 % SG&A expense increased 62% in fiscal 2022 to$15.1 million from$9.3 million in fiscal 2021. This increase was primarily attributable to incremental SG&A from consolidating GuruShots' operating results for the period fromApril 13, 2022 toJuly 31, 2022 . Compensation costs, stock-based compensation as discussed below, higher professional and consulting fees also contributed in part to the increase in SG&A year over year. Our headcount totaled 93 as ofJuly 31, 2022 , including GuruShots personnel, compared to 53 as ofJuly 31, 2021 . The majority of our employees are based
inLithuania andIsrael . 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 13 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our stock-based compensation.
The following table summarizes stock-based compensation expense for the fiscal
year ended
Fiscal year ended July 31,
(in thousands) 2022 2021 % Change
Stock-based compensation expense $ 1,936
Stock-based compensation expense increased$1.3 million or 197 % in fiscal 2022 to$1.9 million from$0.6 million in fiscal 2021 primarily due to deferred stock units (DSUs) granted to Company employees and restricted stock the Company committed to issue in connection with the GuruShots acquisition. Depreciation and amortization. Depreciation and amortization expense consists mainly of amortization of intangible assets related to the GuruShots and Emojipedia acquisitions, 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 mobile app service. Fiscal year ended July 31, (in thousands) 2022 2021 % Change
Depreciation and amortization
7.4 % 6.4 %
Depreciation and amortization expense increased
55
Contingent Consideration Fair Value Change. During fiscal 2022, we recorded a$4 million net benefit related to the change in fair value of our contingent consideration liabilities incurred, from$5.9 million to$1.9 million , associated with the acquisition of GuruShots inApril 2022 . The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved. The decrease in fair value of the contingent consideration was due primarily to the decrease in the likelihood that certain contingent milestones would be achieved. Interest and other income, net. The decrease in interest and other income, net in fiscal 2022 when compared to fiscal 2021 was primarily due to the PPP loan forgiveness of$218,000 in fiscal 2021. See Note 18 to the Consolidated Financial Statements in this Annual Report for further details. Fiscal year ended July 31, (in thousands) 2022 2021 % Change
Interest and other income, net $ 49
0.2 % 1.3 %
Net loss resulting from foreign exchange transactions. Net loss resulting from
foreign exchange transactions is comprised of gains and losses generated from
movements in Norwegian Krone ("NOK") and Euros ("EUR") relative to the U.S.
Dollar, including gains or losses from our currency hedging activities.
Fiscal year ended July 31,
(in thousands) 2022 2021 % ChangeNet loss resulting from foreign exchange transactions $ (281 )
$ (2 ) nm As a percentage of revenues -1.1 % 0.0 % nm-not meaningful
In fiscal 2022 and 2021, we incurred losses of
Provision for (benefit from) income taxes. During fiscal 2022, we had pretax income of about$11.6 million of which we accrued$1.9 million in income tax expenses, an effective tax rate of 16.3% which is lower than the statutory rate primarily due to the$4.0 million change in fair value of contingent consideration. During fiscal 2021, we had pretax income of about$8 million which enabled us to utilize all the federal net operating loss (NOL) carry forward and portions of the NOL carry forward from states and other foreign jurisdiction. Combined with the release of the valuation allowance of$477,000 , this resulted in an income tax benefit of$202,000 for the fiscal year endedJuly 31, 2021 , an effective income tax of (2.5%). Fiscal year ended July 31, (in thousands) 2022 2021 % Change
Provision for (benefit from) income taxes$ 1,892 $
(202 ) nm
As a percentage of revenues 7.1 % -1.0 %
nm-not meaningful
56
LIQUIDITY AND CAPITAL RESOURCES
General AtJuly 31, 2022 , we had cash and cash equivalents of$17.1 million and working capital (current assets less current liabilities) of$11.2 million . We currently expect that our cash and cash equivalents on hand, and our cash flow from operations will be sufficient to meet our anticipated cash requirements for the twelve months following issuance of this annual report on Form 10-K. During fiscal 2021, we raised$15 million through sales of Class B common stock in
At the Market offerings.
OnOctober 28, 2022 , we entered into an Amended Loan Agreement withWestern 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$7,000,000 for a four-year term and a$4,000,000 revolving credit facility for a two-year term. The Company discontinued the existing$2,000,000 revolving credit facility under the existing Loan and Security Agreement, dated as ofSeptember 26, 2016 (See Note 16). At each ofJuly 31, 2021 ,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,$2,000,000 was advanced in a single-cash advance on the closing date (October 28, 2022 ), with the remaining$5,000,000 available for drawdown during twenty-four (24) months after closing. Each drawdown must be in an amount of not less than$1,000,000 .
The following tables present selected financial information for the
twelve months ended
Fiscal year ended July 31,
(in thousands) 2022 2021 $ Changes
Cash flows provided by (used in):
Operating activities $ 11,492 $ 10,130 1,362
Investing activities (18,950 ) (5,479 ) (13,471 )
Financing activities (223 ) 15,101 (15,324 )
Effect of exchange rate changes on cash and cash
equivalents (142 ) 45 (187 )
(Decrease) increase in cash and cash equivalents
19,797 (27,620 )
Operating Activities
Our cash flow from operations varies significantly from quarter to quarter and
from year to year, depending on our operating results and the timing of
operating cash receipts and payments, specifically trade accounts receivable and
trade accounts payable. Cash provided by operating activities increased $1.4
million to $11.5 million in fiscal 2022 from $10.1 million in fiscal 2021,
primarily attributable to the higher revenues generated from our service
offerings, primarily advertising and paid subscription revenue.
Changes in Trade Accounts Receivable
Gross trade accounts receivables were$2.4 million and$2.5 million atJuly 31, 2022 and 2021 respectively. Our cash collections in fiscal 2022 and fiscal 2021 were$26.0 million and$18.4 million , respectively. Investing Activities
OnApril 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 closing based on the beneficiaries thereof remaining employed by the Company or a subsidiary. 57 OnAugust 1, 2021 , we acquired substantially all of the assets ofEmojipedia Pty Ltd , a proprietary company organized under the laws ofAustralia . The final purchase price of the assets has been determined to be$6.7 million of which$4.8 million was paid onAugust 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 onFebruary 1, 2022 with the remaining amount due onAugust 1, 2022 . That$4.8 million was funded into an escrow account onJuly 30, 2021 and classified as other assets on our balance sheet as ofJuly 31, 2021 . Business combination and assets acquisition are more fully described in Note 6 to the Consolidated Financial Statements in Item 8 of this annual report on
Form 10-K for further details. Cash used in investing activities in the fiscal years endedJuly 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 BetweenDecember 14, 2020 andJanuary 26, 2021 , we sold 761,906 shares of our Class B common stock at an average price of$6.5625 per share for total proceeds of$5 million in a registered "At the Market" offering through National Securities Corp. andH.C. Wainwright & Co, LLC as sales agents. In connection with this offering, total issuance costs were$215,000 . We intend to use the net proceeds from this offering for general corporate purposes including organic and other growth initiatives. OnMarch 16, 2021 , we filed a prospectus supplement with theSEC which contemplates the sale, for a gross aggregate sale price of up to$10,000,000 , of shares of our Class B common stock, from time to time in "at-the-market offerings" pursuant to an At Market Issuance Sales Agreement with National Securities Corporation andMaxim Group LLC dated as ofMarch 16, 2021 . ThroughJune 11, 2021 we sold 663,686 shares at an average price of$15.0674 per share for total proceeds of$10 million in this offering. Total issuance costs were$350,000 . We intend to use the net proceeds from this offering for general corporate purposes including organic and other growth initiatives. InAugust 2020 , we obtained a loan of$181,000 to finance about 82% of our directors' and officers' liability and cyber liability insurance policies, at an annual percentage interest rate of 3.89% to be repaid over nine equal monthly installments of$20,490 starting fromSeptember 1, 2020 . This loan was repaid in full as ofJuly 31, 2021 . OnApril 22, 2020 , we received$218,000 in proceeds from a PPP loan fromWestern Alliance Bank , which was administered by theSmall Business Administration and established under the CARES Act. OnNovember 25, 2020 , we submitted the PPP Loan Forgiveness Application Form 3508EZ and onMay 21, 2021 , we were notified that such application for the loan forgiveness has been approved and the loan, including accrued interest, has been deemed satisfied in full by theSmall Business Administration toWestern Alliance Bank . Please see Note 18 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. We received proceeds of$8,631 from the exercise of stock options in fiscal 2022 in connection with which we issued 5,166 shares of our Class B common stock. We received proceeds of$873,261 from the exercise of stock options in fiscal 2021 in connection with which we issued 559,840 shares of our Class B common stock.
In fiscal 2022 and 2021, we purchased 16,115 shares and 17,630 shares,
respectively, of Class B common stock from employees for
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.
58
Concentration of Credit Risk and Significant Customers
Historically, we have had very little or no bad debt, which is common with other platforms of our size that derive their revenue from digital advertising, as we aggressively manage our collections and perform due diligence on our customers. In addition, the majority of our revenue is derived from large, credit-worthy customers, e.g. MoPub (owned by Twitter and sold to AppLovin inJanuary 2022 ),July 31, 2022 , two customers represented 28% and 15% of the Company's revenue. In the fiscal year endedJuly 31, 2021 , three customers represented 30%, 22% and 12% of the Company's revenue. AtJuly 31, 2022 , three customers represented 41%, 17% and 16% of the Company's accounts receivable balance and atJuly 31, 2021 , two customers represented 37% and 28% of the Company's accounts receivable balance. All of these significant customers are advertising exchanges operated by leading companies, and the receivables represent many smaller amounts due from advertisers.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
In connection with the acquisition of GuruShots, the Company has (i) committed to a retention pool of$4 million in cash to be paid to the founders and employees of GuruShots that will be payable over three years from closing of the acquisition based on the beneficiaries thereof remaining employed by the Company or a subsidiary; and (ii) agreed to make certain minimum investments in user acquisition for GuruShots in the period covered by the earnout to be contingently paid to the prior owners of GuruShots subject to GuruShots maintaining agreed upon levels of return on ad spend (ROAS).
OFF-BALANCE SHEET ARRANGEMENTS
AtJuly 31, 2022 , we did not have any "off-balance sheet arrangements," as defined in relevantSEC 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, other than the following: In connection with our Spin-Off onJune 1, 2016 , we and IDT entered into various agreements prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with IDT after the Spin-Off, and a Tax Separation Agreement, which sets forth the responsibilities of us and IDT with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, among other things, we indemnify IDT and IDT indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, IDT indemnifies us from all liability for taxes of ours and any of our subsidiaries or relating to our business with respect to taxable periods ending on or before the Spin-Off, and we indemnify IDT from all liability for taxes of ours and any of our subsidiaries or relating to our business accruing after the Spin-Off. Notwithstanding the foregoing, we are responsible for, and IDT has no obligation to indemnify us for, any tax liability of ours resulting from an audit, examination or other proceeding related to any tax returns that relate solely to us and our subsidiaries regardless of whether such tax return relates to a period prior to or following the Spin-Off.
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