UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
FOR THE QUARTERLY PERIOD ENDED
or
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ZEDGE, INC.
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ZEDGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
| April 30, | July 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade accounts receivable | ||||||||
| Prepaid expenses and other receivables | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Deferred tax assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenues | ||||||||
| Total current liabilities | ||||||||
| Term loan, net of deferred financing costs | ||||||||
| Deferred revenues--non-current | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
ZEDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except for per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Direct cost of revenues (excluding amortization of capitalized software and technology development costs which is included below) | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| Impairment of goodwill | ||||||||||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest and other income, net | ||||||||||||||||
| Net loss resulting from foreign exchange transactions | ( | ) | ( | ) | ( | ) | - | |||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Other comprehensive loss: | ||||||||||||||||
| Changes in foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) per share attributable to Zedge, Inc. common stockholders: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted-average number of shares used in calculation of income (loss) per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
ZEDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
| Class A Common Stock | Class B Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Treasury Stock | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
| Balance – July 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Balance – October 31, 2023 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Balance – January 31, 2024 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance – April 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Retained | Treasury Stock | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
| Balance – July 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Balance – October 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Restricted stock issuance in connection with GuruShots acquisition | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance – January 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Balance – April 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
ZEDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Nine Months Ended | ||||||||
| April 30, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of capitalized software and technology development costs | ||||||||
| Amortization of deferred financing costs | ||||||||
| Stock-based compensation | ||||||||
| Impairment charge of intangible assets | ||||||||
| Impairment of investment in privately-held company | ||||||||
| Write-off from impairment of goodwill | ||||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Change in assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets | ||||||||
| Trade accounts payable and accrued expenses | ||||||||
| Deferred revenue | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Final payment for asset acquisitions | ( | ) | ||||||
| Capitalized software and technology development costs | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Prepayment of term loan | ( | ) | ||||||
| Proceeds from term loan payable | ||||||||
| Payment of deferred financing costs | ( | ) | ||||||
| Proceeds from exercise of stock options | ||||||||
| Purchase of treasury stock in connection with share buyback program and stock awards vesting | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash payments made for income taxes | $ | $ | ||||||
| Cash payments made for interest expenses | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
ZEDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Zedge, Inc. builds digital marketplaces and friendly competitive games around content that people use to express themselves. Our leading products include Zedge Ringtones and Wallpapers, which we refer to as our Zedge App, a freemium digital content marketplace offering mobile phone wallpapers, video wallpapers, ringtones, and notification sounds as well as pAInt, a generative AI wallpaper maker, GuruShots, a skill-based photo challenge game, and Emojipedia, the #1 trusted source for ‘all things emoji’. Our vision is to enable and connect creators who enjoy friendly competitions with a community of prospective consumers in order to drive commerce. Except where the context clearly indicates otherwise, the terms the “Company,” “Zedge” “we,” “us” or “our” refer to Zedge, Inc. and its consolidated subsidiaries.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Zedge, Inc. and its subsidiaries: GuruShots Ltd. (“GuruShots”); Zedge Europe AS; and Zedge Lithuania UAB (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended April 30, 2024 and 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2024 or any other period. The balance sheet at July 31, 2023 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023 (the “2023 Form 10-K”), as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2023 refers to the fiscal year ended July 31, 2023).
Reportable Segments
Effective August 1, 2022, we revised the presentation
of segment information to reflect our acquisition of GuruShots. As such, we now report operating results through
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ materially from the Company’s estimates due to risks and uncertainties, including uncertainty in the economic environment due to various global events. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.
5
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The guidance in ASU 2023-07 seeks to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU require a public entity to disclose the following: significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss; an amount for other segment items by reportable segment and a description of its composition; and the title and position of the CODM and how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. This ASU requires public entities to provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods. ASU 2023-07 clarifies that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. ASU 2023-07 is a requirement for additional disclosure and is not expected to materially impact the consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09
Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The guidance in this ASU enhances the transparency and decision functionality
of income tax disclosures to provide investors information to better assess how an entity’s operations and related tax risks, tax planning
and operational opportunities affect its tax rate and prospects for future cash flow. The amendments in this ASU require public entities
to disclose the following specific categories in the rate reconciliation by both percentages and reporting currency amounts: the effect
of state and local income tax, net of federal (national) income tax, foreign tax effects, effects of changes in tax laws or rates enacted
in the current period, effects of cross-border tax laws, tax credits, changes in valuation allowances, nontaxable or nondeductible items
and changes in unrecognized tax benefits. The amendments in ASU 2023-09 also require public entities to provide additional information
for reconciling items that meet the qualitative threshold (if the effect of those reconciling items is equal to or greater than
In March 2024, the FASB issued ASU 2024-01, Compensation-Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards, which provides illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of FASB Accounting Standards Codification (FASB ASC) 718, Compensation-Stock Compensation. For public business entities, ASU 2024-01 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements not yet issued. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.
In March 2024, the FASB issued ASU 2024-02, Codification Improvements-Amendments to Remove References to the Concepts Statements, which removes references to various FASB Concepts Statements. Note that this ASU finalizes amendments proposed in Section A of Proposed ASU No. 2019-800, Codification Improvements, issued in November 2019. For public business entities, ASU 2024-02 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements not yet issued. We are currently evaluating the impact of this accounting standard, but do not expect it to have a material impact on our consolidated financial statements.
Related Party Transactions
The Company was formerly a majority-owned subsidiary of IDT Corporation (“IDT”). On June 1, 2016, IDT’s interest in the Company was spun-off by IDT to IDT’s stockholders and the Company became an independent public-held company. IDT charges the Company for services it provides, and the Company charges IDT for services it provides, pursuant to a Transition Services Agreement (“TSA”).
The Company is party to a consulting agreement with Activist Artist Management, LLC (“Activist”), which assists the Company in strategic business development. A member of the Company’s Board of Directors owns a significant minority stake in Activist.
Transactions with these related parties did not have a material impact to the consolidated balance sheets as of April 30, 2024 or July 31, 2023, or the consolidated statements of operations and comprehensive loss for the three and nine months ended April 30, 2024 and 2023.
6
Note 2—Revenue
Disaggregation of Revenue
| Three Months Ended | Nine Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Zedge Marketplace | ||||||||||||||||
| Advertising revenue | $ | $ | $ | $ | ||||||||||||
| Paid subscription revenue | ||||||||||||||||
| Other revenues | ||||||||||||||||
| Total Zedge Marketplace revenue | ||||||||||||||||
| GuruShots | ||||||||||||||||
| Digital goods and services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Contract Balances
The Company enters into contracts with its customers,
which may give rise to contract liabilities (deferred revenue) and contract assets (unbilled revenue). The payment terms and conditions
within the Company’s contracts vary by products or services purchased, substantially all of which are due in less than
Deferred revenues
On April 1, 2022, the AppLovin Corporation paid
the Company a one-time integration bonus of $
The Company also records deferred revenues when
users purchase or earn Zedge Credits. Unused Zedge Credits represent the value of the Company’s unsatisfied performance obligation
to its users. Revenue is recognized when Zedge App users use Zedge Credits to acquire Zedge Premium content or upon expiration of the
Zedge Credits upon 180 days of account inactivity (“Breakage”). As of April 30, 2024, and July 31, 2023, the Company’s
deferred revenue balance related to Zedge Premium was approximately $
The amount of deferred revenue recognized in the
nine months ended April 30, 2024 that was included in the deferred revenue balance at July 31, 2023 was $
7
Significant Judgments
The advertising networks and advertising exchanges to which the Company sells its inventory track and report the impressions and revenues to Zedge and Zedge recognizes revenues based on these reports. The networks and exchanges base their payments off of those reports and Zedge independently compares the data to each of the client sites to validate the imported data and identify any differences. The number of impressions and revenues delivered by the advertising networks and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.
Practical Expedients
The Company expenses the fees retained by Google Play and the App Store related to subscription revenue when incurred as marketing expense because the duration of the contracts for which the Company pays commissions are less than one year, except for the new lifetime subscriptions we rolled out in August 2023. These costs are included in the selling, general and administrative expenses of the condensed consolidated statements of operations and comprehensive loss.
Note 3—Fair Value Measurements
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| April 30, 2024 | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
| July 31, 2023 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange forward contracts | $ | $ | $ | $ | ||||||||||||
(1) – quoted prices in active markets for identical assets or liabilities
(2) – observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) – no observable pricing inputs in the market
Contingent Consideration
Contingent consideration related to business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.
| Balance at July 31, 2022 | $ | |||
| Change in fair value | ( | ) | ||
| Balance at April 30, 2023 | $ |
The overall fair value of the contingent consideration
decreased by $
Fair Value of Other Financial Instruments
Fair value of the outstanding foreign exchange forward contracts are marked to market price at the end of each measurement period.
The Company’s other financial instruments at April 30, 2024 and July 31, 2023 included trade accounts receivable and trade accounts payable. The carrying amounts of other assets and liabilities such as prepaid expenses, trade accounts receivable and trade accounts payable approximated fair value due to their short-term nature.
8
Note 4—Derivative Instruments
The primary risk managed by the Company using derivative instruments is foreign exchange risk. Foreign exchange forward contracts are entered into as hedges against unfavorable fluctuations in the U.S. Dollar (USD) to Norwegian Kroner (NOK) and USD to Euro (EUR) exchange rates. The Company is party to a Foreign Exchange Agreement with Western Alliance Bank (“WAB”) allowing the Company to enter into foreign exchange contracts under its revolving credit facility with the bank (see Note 10 Term Loan and Revolving Credit Facility). The Company does not apply hedge accounting to these contracts, and therefore the changes in fair value are recorded in unaudited condensed consolidated statements of operations and comprehensive loss. By using derivative instruments to mitigate exposures to changes in foreign exchange rates, the Company is exposed to credit risk from the failure of the counterparty to perform under the terms of the contract. The credit or repayment risk is minimized by entering into transactions with high-quality counterparties.
| Settlement Date | U.S. Dollar Amount | NOK Amount | ||||||
| May-24 | ||||||||
| Jun-24 | ||||||||
| Jul-24 | ||||||||
| Aug-24 | ||||||||
| Sep-24 | ||||||||
| Oct-24 | ||||||||
| Nov-24 | ||||||||
| Total | ||||||||
| Settlement Date | U.S. Dollar Amount | EUR Amount | ||||||
| May-24 | ||||||||
| Jun-24 | ||||||||
| Jul-24 | ||||||||
| Aug-24 | ||||||||
| Sep-24 | ||||||||
| Oct-24 | ||||||||
| Nov-24 | ||||||||
| Total | ||||||||
| April 30, | July 31, | |||||||||
| (in thousands) | 2024 | 2023 | ||||||||
| Assets and Liabilities Derivatives: | Balance Sheet Location | |||||||||
| Derivatives not designated or not qualifying as hedging instruments | ||||||||||
| Foreign exchange forward contracts | Other current assets | $ | $ | |||||||
| Foreign exchange forward contracts | Accrued expenses and other current liabilities | $ | $ | |||||||
9
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||
| Amount of Loss Recognized on Derivatives | 2024 | 2023 | 2024 | 2023 | ||||||||||||||
| Derivatives not designated or not qualifying as hedging instruments | Location of loss recognized on derivatives | |||||||||||||||||
| Foreign exchange forward contracts | Net loss resulting from foreign exchange transactions | $ | ( | ) | $ | ( | ) | ( | ) | $ | ( | ) | ||||||
Note 5—Intangible Assets and Goodwill
Intangible assets are initially recorded at fair
value and stated net of accumulated amortization and impairments. The Company amortizes its intangible assets that have finite lives using
either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected
to be utilized. Amortization is recorded over the estimated useful lives ranging from
During the second quarter of fiscal 2024, in connection with its company-wide strategic planning process as well as evaluating the current operating performance of its GuruShots reporting unit, including product enhancement and marketing, the Company reassessed its short-term and long-term commercial plans for this business. The Company made certain operational and strategic decisions to invest in, and increase its focus on, the long-term success of this business, which resulted in the Company significantly reducing its forecasted revenues and operating results.
As a result, the Company identified indicators
of impairment and performed an undiscounted cash flow analysis pursuant to ASC 360, Property, Plant, and Equipment - Overall, to
determine if the cash flows expected to be generated by the GuruShots business over the estimated remaining useful life of its primary
assets were sufficient to recover the carrying value of the asset group. Based on this analysis, the undiscounted cash flows were not
sufficient to recover the carrying value of the long-lived assets. As a result, the Company was required to perform Step 3 of the impairment
test and determine the fair value of the asset group. To estimate the fair value of the asset group, the Company utilized the income approach,
which is based on a discounted cash flow (DCF) analysis and calculates the fair value by estimating the after-tax cash flows attributable
to the asset group and then discounting the after-tax cash flows to present value using a risk-adjusted discount rate. Assumptions used
in the DCF require significant judgment, including judgment about appropriate discount rates, growth rates, and the amount and timing
of expected future cash flows. The forecasted cash flows were based on the Company’s most recent strategic plan and for periods beyond
the strategic plan, the Company’s estimates were based on assumed growth rates expected as of the measurement date. The Company believes
its assumptions were consistent with the plans and estimates that a market participant would use to manage the business. The discount
rate used was intended to reflect the risks inherent in future cash flow projections and was based on an estimate of the weighted average
cost of capital (WACC) of market participants relative to the asset group. The Company used a discount rate of
To record the adjustment of the carrying value
of the asset group to fair value, the Company recorded an impairment charge of $
10
| April 30, 2024 | July 31, 2023 | |||||||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Allocation of Impairment Loss | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||
| Emojipedia.org and other internet domains acquired | ||||||||||||||||||||||||||||
| Acquired developed technology | ||||||||||||||||||||||||||||
| Customer relationships | ||||||||||||||||||||||||||||
| Trade names | ||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Fiscal 2024 | $ | |||
| Fiscal 2025 | ||||
| Fiscal 2026 | ||||
| Fiscal 2027 | ||||
| Fiscal 2028 | ||||
| Thereafter | ||||
| Total | $ |
The Company’s amortization expense for intangible
assets were $
Goodwill
Goodwill represents the difference between the purchase price and the fair value of assets and liabilities acquired in a business combination. The Company reviews goodwill yearly, or more frequently whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered, for impairment by initially considering qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. Conversely, if it is determined that it is more likely than not that the fair value of the reporting unit is more than its carrying amount, it is unnecessary to perform a quantitative analysis. The Company may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis.
The Company has two reporting units and assesses impairment based upon qualitative factors and if necessary, quantitative factors. A reporting unit’s fair value is determined using the income approach and discounted cash flow models by utilizing Level 3 inputs and assumptions such as future cash flows, discount rates, long-term growth rates, market value and income tax considerations. Specifically, the value of each reporting unit is determined on a stand-alone basis from the perspective of a market participant and represents the price estimated to be received in a sale of the reporting unit in an orderly transaction between market participants at the measurement date. The Company then reconciles the values of all reporting units to the market capitalization of the Company.
The Company performs its annual goodwill impairment
tests on May 1 each year (the first day of fiscal 4th quarter) based on information available as of April 30 in accordance
with ASC 350-20-35-28. In light of a significant and sustained decline in the Company’s Class B common stock price during the six
months ended January 31, 2023, circumstances became evident that a possible goodwill impairment existed since the last annual impairment
test on May 1, 2022. The Company performed an interim impairment test during the third quarter of fiscal 2023 and concluded that the carrying
value of the GuruShots reporting unit exceeded its fair value. Accordingly, the Company recorded a non-cash goodwill impairment charge
of $
11
| (in thousands) | Carrying Amounts | |||
| Balance as of July 31, 2023 | $ | |||
| Impact of currency translation | ( | ) | ||
| Balance as of April 30, 2024 | $ | |||
| Balance as of July 31, 2022 | $ | |||
| Goodwill impairment charge | ( | ) | ||
| Impact of currency translation | ( | ) | ||
| Balance as of April 30, 2023 | $ | |||
The total accumulated impairment loss of the Company’s
goodwill as of April 30, 2024 was $
Note 6—Accrued Expenses and Other Current Liabilities
| April 30, | July 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued payroll and bonuses | $ | $ | ||||||
| Accrued vacation | ||||||||
| Accrued payroll taxes | ||||||||
| Due to artists | ||||||||
| Accrued expenses | ||||||||
| Operating lease liability-current portion | ||||||||
| Derivative liability for foreign exchange contracts | ||||||||
| Accrued income taxes payable | ||||||||
| Due to related party - IDT | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
Note 7—Stock-Based Compensation
2016 Incentive Plan
On March 23, 2022, the Company’s Board of
Directors amended the Company’s 2016 Stock Option and Incentive Plan (as amended to date, the “2016 Incentive Plan”)
to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional
At April 30, 2024, there were
Stock-based compensation
The Company recognizes stock-based compensation for stock-based awards, including stock options, restricted stock and DSUs based on the estimated fair value of the awards and recognized over the relevant service period and/or market conditions. The Company estimates the fair value of stock options on the measurement date using the Black-Scholes option valuation model. The Company estimates the fair value of the restricted stock and DSU’s with service conditions only using the current market price of the stock. The Company estimates the fair value of the DSU’s with both service and market conditions using the Monte Carlo Simulation valuation model.
12
The Black-Scholes and Monte Carlo Simulation valuation
models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend
yield. The Company recognizes stock-based compensation expense related to options and restricted stock units on a straight-line basis
over the service period of the award, which is generally
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
As of April 30, 2024, the Company’s unrecognized
stock-based compensation expense was $
In the nine months ended April 30, 2024 and 2023,
awards of restricted stock and DSUs with respect to
Restricted Stock Awards
In November 2023, the Compensation Committee and
the Corporate Governance Committee of our Board of Directors approved a grant of
Repricing of Outstanding and Unexercised Options
On October 20, 2022, the Board unanimously approved
the repricing of all then outstanding and unexercised stock options granted under the 2016 Incentive Plan with exercise prices above the
then current market value held by then current employees, executive officers, and consultants of the Company (the “Eligible Stock
Options”). Effective October 20, 2022, the exercise price of the eligible stock options was reduced to $
Pursuant to the 2016 Incentive Plan, the Compensation
Committee of the Board of Directors, as the administrator of the plan, has discretionary authority, exercisable on such terms and conditions
that it deems appropriate under the circumstances, to reduce the exercise price in effect for outstanding options under the 2016 Incentive
Plan. In approving the repricing, the Compensation Committee considered the impact of the current exercise prices of outstanding stock
options on the incentives provided to employees and consultants, the lack of retention value provided by the outstanding stock options
to employees and consultants, and the impact of such options on the capital structure of the Company. As of October 20, 2022, there were
Jonathan Reich, the Company’s Chief Executive
Officer, and Yi Tsai, the Company’s Chief Financial Officer, held Eligible Stock Options exercisable for an aggregate of
The option repricing resulted in incremental stock-based
compensation of $
13
Note 8—Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture, issuances to be made on the vesting of unvested DSUs and the exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.
The rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. As such, the Company is not required to break out earnings per share by class.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Basic weighted-average number of shares | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options | - | - | ||||||||||||||
| Non-vested restricted Class B common stock | - | - | ||||||||||||||
| Deferred stock units | - | - | ||||||||||||||
| Diluted weighted-average number of shares | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Stock options | ||||||||||||||||
| Non-vested restricted Class B common stock | ||||||||||||||||
| Deferred stock units | ||||||||||||||||
| Shares excluded from the calculation of diluted earnings per share | ||||||||||||||||
For the nine months ended April 30, 2024 and for the three and nine months ended April 30, 2023, the diluted earnings per share equals basic earnings per share because the Company incurred a net loss during those periods and the impact of the assumed exercise of stock options and vesting of restricted stock and DSUs would have been anti-dilutive.
Note 9—Commitments and Contingencies
Commitments
In connection with the acquisition of GuruShots,
the Company (i) committed to a retention pool of $
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At the end of the first quarter of fiscal 2024, the Company and the prior owners of GuruShots agreed to withdraw and settle claims related to the purchase agreement pursuant to which the Company purchased the equity of GuruShots, including any dispute about minimum user acquisition spend for GuruShots, any right of the prior owners to an earnout payment and the Company’s claim for indemnification related to alleged misrepresentations in the agreement.
Legal Proceedings
The Company may from time to time be subject to other legal proceedings that arise in the ordinary course of business. Although there can be no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition.
Note 10—Term Loan and Revolving Credit Facility
As of September 27, 2016, the Company entered into
a loan and security agreement with WAB for a revolving credit facility of up to $
Pursuant to the Amended Loan Agreement, the Company
discontinued the then existing $
Pursuant to the Amended Loan Agreement, $
Interest accrued under the Amended Loan Agreement
is due monthly, and the Company shall make monthly interest-only payments related to the term loan through the eighteen (18) month anniversary
of the closing date. From the nineteen (19) month anniversary of the Closing Date through the maturity date, the Company shall repay each
outstanding term loan by paying the Applicable Term Advance Amortization Payment equal to 1/12th of
On November 15, 2023, the Company elected to prepay
the entire principal amount of $
15
The Amended Loan Agreement may also require early repayments if certain conditions are met. Borrowings under the Amended Loan Agreement is secured by substantially all of the assets of the Company, its subsidiaries, and certain of its affiliates.
The Amended Loan Agreement includes the following financial covenants:
| a) | Debt Service Coverage Ratio. Zedge shall maintain, at all times, a Debt Service Coverage Ratio of no less than |
| b) | Maximum Debt to EBITDA. Zedge shall maintain, at all times, a ratio of (a) indebtedness owed by Zedge to WAB, to (b) Zedge’s EBITDA for the trailing twelve (12) month period ended on such date of determination, shall not be greater than the amount set forth under the heading “Maximum Debt to EBITDA Ratio” as of, and for each of the dates appearing adjacent to such Maximum Debt to EBITDA Ratio”. |
| Maximum Debt to Quarter Ending | EBITDA Ratio | |
| October 31, 2022 | ||
| January 31, 2023 | ||
| April 30, 2023 | ||
| July 31, 2023 | ||
| October 31, 2023 | ||
| April 30, 2024 | ||
| April 30, 2024 | ||
| July 31, 2024 | ||
| Thereafter | To be agreed upon |
The Amended Loan Agreement also includes customary negative covenants, subject to exceptions, which limit transfers, capital expenditures, indebtedness, certain liens, investments, acquisitions, dispositions of assets, restricted payments and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including cross defaults and a change of control default.
As of November 16, 2016, the Company entered into
a Foreign Exchange Agreement with WAB to allow the Company to enter into foreign exchange contracts not to exceed
Note 11—Segment and Geographic Information
Segment Information
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer as of April 30, 2024.
Beginning in the first quarter of fiscal 2023, the Company revised the presentation of segment information to align with changes to how the Company’s CODM manages the business, allocates resources and assesses operating performance reports operating results based on two reportable segments, which are the Zedge Marketplace and GuruShots.
16
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||||
| Zedge Marketplace | $ | $ | $ | $ | ||||||||||||
| GuruShots | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
| Segment income (loss) from operations: | ||||||||||||||||
| Zedge Marketplace | $ | $ | $ | $ | ||||||||||||
| GuruShots | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The CODM does not evaluate operating segments using asset information and, accordingly, the Company does not report asset information by segment.
Geographic Information
| United States | Foreign | Total | ||||||||||
| Long-lived assets, net: | ||||||||||||
| April 30, 2024 | $ | $ | $ | |||||||||
| July 31, 2023 | $ | $ | $ | |||||||||
| Total assets: | ||||||||||||
| April 30, 2024 | $ | $ | $ | |||||||||
| July 31, 2023 | $ | $ | $ | |||||||||
Note 12— Operating Leases
The Company has operating leases primarily for
office space. Operating lease right-of-use assets recorded and included in other assets were $
There were no material changes in the Company’s operating and finance leases in the nine months ended April 30, 2024, as compared to the disclosure regarding such leases in the Company’s 2023 Form 10-K.
Note 13—Income Taxes
The Company’s tax provision or benefit from income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate applied to year-to-date income and records the discrete tax items in the period to which they relate. In each quarter, the Company updates the estimated annual effective tax rate and makes a year-to-date adjustment to the tax provision as necessary.
The Company’s estimated annual effective tax rate for the fiscal year ending July 31, 2024 differs from the U.S. federal statutory tax rate due to certain items primarily related to stock-based compensation expense, jurisdictional mix of earnings, foreign derived intangible income deduction, global intangible low-taxed income and the change in basis differences associated with tax deductible goodwill.
As of April 30, 2024, the Company had $
The Company is subject to taxation in the United States and certain foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdictions where the Company is subject to potential examination by tax authorities include the United States, Norway, Lithuania and Israel.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023 (the “2023 Form 10-K”), as filed with the U.S. Securities and Exchange Commission (the “SEC”).
As used below, unless the context otherwise requires, the terms “the Company,” “Zedge,” “we,” “us,” and “our” refer to Zedge, Inc., a Delaware corporation and its subsidiaries, GuruShots Ltd., Zedge Europe AS and Zedge Lithuania UAB, collectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from future results. Factors that may cause such differences include, but are not limited to: (1) economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price; (2) our ability to successfully make acquisitions and/or successfully integrate acquisitions that we have made into Zedge without incurring unanticipated costs or without being subject to other integration issues that may disrupt our existing operations; (3) delay or failure to realize the expected synergies and benefits of the GuruShots acquisition; (4) the impact of the Covid-19 pandemic on our employees, customers, partners, and the global financial markets; (5) Russia’s invasion of Ukraine, and the international community’s response; and (6) recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them. For further information regarding risks and uncertainties associated with our business, please refer to Item 1A to Part I “Risk Factors” in the 2023 Form 10-K. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the 2023 Form 10-K.
Geo-Political and Macroeconomic Conditions and the COVID-19 Pandemic
We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including but not limited to, rising interest rates, actions taken to counter inflation, reduced consumer confidence, supply side disruptions, the COVID-19 pandemic, Russia’s invasion of Ukraine and the Israel-Hamas war. The future and full impact that these factors may have on our business, financial condition, and results of operations is unclear. The risks related to our business are further described in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those discussed under Item 1A to Part I “Risk Factors” in the 2023 Form 10-K.
Impact of Russia’s Invasion of Ukraine
We are closely monitoring the current and potential impact on our business, our people, and our users/customers as Russia’s war with Ukraine evolves. We have taken steps to comply with applicable domestic and international regulatory restrictions on international trade and financial transactions. Revenues associated with our users/customers in Russia and Belarus are not material to our consolidated financial results, and we anticipate that blocking Russian and Belarus users/customers’ access to our mobile app and web platforms will not have a material impact on our business. Management and our Board of Directors are monitoring the regional and global ramifications of the continuing events.
18
Impact of Israel-Hamas War
Given our operations in Israel, the impact of economic, political, geopolitical, and military conditions in the region directly affects us, including conflicts involving missile strikes, infiltrations, and terrorism. Notably, on October 7, 2023, Hamas launched attacks in southern Israel, resulting in casualties and military engagement. In addition, Hezbollah, another terrorist organization based in Lebanon has been indiscriminately shelling Israel. The extent and duration of this conflict remain uncertain, potentially involving other groups. Israel’s response led to the mobilization of reservists, affecting our workforce. Prior to this, proposed changes to Israel’s judicial system had already raised concerns about the business environment, compounded by recent events, potentially impacting foreign investment, currency fluctuations, credit ratings, interest rates, and security markets. Furthermore, regional political unrest and threats from extremist groups, notably Iran, pose additional risks. Management and our Board of Directors are closely monitoring the situation in Israel to address potential business disruptions and implications and cannot reasonably estimate the impact to the consolidated financial statements at this time.
COVID-19 Update
Although the World Health Organization declared in early May of 2023 that COVID-19 no longer constitutes a public health emergency we continue to actively monitor the COVID-19 developments and potential impact on our employees, business and operations. The effects of COVID-19 did not have a material impact on our result of operations or financial condition for the fiscal year ended July 31, 2023. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, we are not able to estimate the effects COVID-19 may have on our future results of operations or financial condition.
Overview
Zedge, Inc. (“Zedge”) builds digital marketplaces and friendly competitive games around content that people use to express themselves. Our leading products include Zedge Ringtones and Wallpapers, which we refer to as our Zedge App, a freemium digital content marketplace offering mobile phone wallpapers, video wallpapers, ringtones, and notification sounds as well as pAInt, a generative AI wallpaper maker, GuruShots, a skill-based photo challenge game, and Emojipedia, the #1 trusted source for ‘all things emoji’. Our vision is to enable and 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. Goldman Sachs Research expects the 50 million global creators to grow at a 10-20% compound annual growth rate during the next five years. Furthermore, Goldman Sachs reports that professional creators earn more than $100,000 per year. We view the Creator Economy as an opportunity for Zedge to expand its business, especially as we execute by connecting our gamers with our marketplace.
The Zedge Ringtones and Wallpapers app (which is named “Zedge Wallpapers” in the App Store), which we refer to as our “Zedge App,” offers a wide array of mobile personalization content including wallpapers, video wallpapers, ringtones, and notification sounds, and is available both in Google Play and the App Store. As of April 30, 2024, our Zedge App had been installed nearly 661 million times since inception and had 27.7 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,’ the section of our marketplace where we offer premium content (i.e., for purchase). In turn, our users utilize the content to personalize their phones and express their individuality.
In fiscal 2023, we introduced pAInt, a generative AI wallpaper maker in the Zedge App. A generative AI wallpaper maker is an implementation of artificial intelligence software that can create images from text descriptions. To interface with a generative AI image maker, a user enters a text description of the image they want to create, and the software generates an image based on that description. In addition, we upgraded Zedge+, our paid subscription offering, by bundling together an ad-free experience with value adds making the offering more compelling.
We often refer to our freemium ringtones and wallpapers, our subscription offering, the functionality for creators to market their products and ancillary offering and features both in our Zedge App and website, as our Zedge Marketplace.
The Zedge Marketplace monetization stack consists of advertising revenue generated when users view advertisements when using the Zedge App (and the related functionality under the zedge.net 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 weekly, monthly, annual or lifetime subscription. In April 2023, we introduced a subscription tier in the iOS version of the Zedge App. As of April 30, 2024, we had approximately 654,000 active subscribers.
19
In April 2022, we acquired GuruShots, a recognized category leader focused on gamifying the photography vertical. GuruShots offers a platform spanning iOS, Android, and the web that provides a fun, educational and structured way for amateur photographers to compete in a wide variety of contests showcasing their photos while gaining recognition with votes, badges, and awards. We estimate that the total addressable market of amateur photographers using their smartphones to take and publicly share artistic photos is 30-40 million people per month and that the market is still in its infancy. Every month, GuruShots stages more than 300 competitions that result in players uploading approximately 600,000 photographs and casting close to 3 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.
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:
| ● | New Gameplay Experiences. Introducing a new more casual gameplay experience that enables users to compete in short-duration photo competitions with fewer participants. |
| ● | On-Boarding. Revamping the customer onboarding experience in order to increase the number of newly acquired users who get through onboarding and to maximize first time purchasers by providing a more guided onboarding process and immediately drawing new players into simplified photo competitions that are limited in duration and number of participants. |
| ● | Economy. Evolving the game economy by introducing hard and soft currencies tied to resources and rewards and maturing the game’s progression mechanics and features, and earn and spend dynamics. |
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 27+ million MAU (as of April 30, 2024) 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 performance criteria for our business. Longer term, we believe that there are complementary content verticals that lend themselves to gamification. To this end, we have a new hybrid casual title, ‘AI Art Master,’ which is in soft-launch in the Philippines, Poland, and India, that enables players to create generative AI images and compete in themed-based competitions with these images. Based on analyzing user data and performing extensive user testing, we will determine whether to refine the user experience and scale or cease development of this title.
In August 2021, we acquired the assets of Emojipedia Pty Ltd (“Emojipedia”), including Emojipedia.org the world’s leading authority dedicated to providing up-to-date and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards. In April 2024, Emojipedia received approximately 36 million monthly page views and has approximately 10.4 million MAU as of April 30, 2024 of which approximately 55.5% are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Meta, and X, formally known as Twitter.
We believe that Emojipedia provides growth potential to the Zedge App, and it was immediately accretive to earnings post acquisition in August 2021. In the past year, we have made many changes to Emojipedia including overhauling its backend and redesigning the Emojipedia website. We will continue to enhance this offering and are exploring new features, some of which will be released before the end of the calendar year.
20
Critical Accounting Policies
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the 2023 Form 10-K. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to revenue recognition, business combination, intangible assets and goodwill, capitalized software and technology development costs, and stock-based compensation. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2023 Form 10-K.
Recently Issued Accounting Pronouncements
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.
Key Performance Indicators (KPIs)
Zedge App-MAU and ARPMAU
The presentation of our results of operations related to our Zedge App 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 we define as the number of unique users that used our Zedge App during the previous 30-day period, which is important to understanding the size of our active user base which is a main driver of our revenue. Changes and trends in MAU are useful for measuring the general health of our business, gauging both present and potential users/customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement.
ARPMAU is defined as (i) the total revenue derived from Zedge App in a monthly period, divided by (ii) MAU in that same period. ARPMAU for a particular time period longer than one month is the average ARPMAU for each month during that period. ARPMAU is valuable because it provides insight into how well we monetize our users and, changes and trends in ARPMAU are indications of how effective our monetization investments are.
MAU decreased 13.4% in the three ended April 30, 2024 when compared to the same period a year ago. Additionally, we have experienced a continuing shift in our regional customer make-up with MAU in emerging markets (particularly India) representing an increasing portion of our user base. As of April 30, 2024, users in emerging markets represented about 78.3% of our MAU, as compared to 77.5% from the same period a year ago. ARPMAU for the three months ended April 30, 2024 increased 39.7% when compared to the same period a year ago, primarily due to the increase in price per advertising impression from the same period a year ago, which was driven by increased competition for our ad inventory as well as strong year-over-year subscription revenue growth.
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The following tables present the MAU – Zedge App and ARPMAU – Zedge App for the three months ended April 30, 2024 as compared to the same period in the prior year:
| Three Months Ended April 30, | ||||||||||||
| (in millions, except ARPMAU - Zedge App) | 2024 | 2023 | % Change | |||||||||
| MAU- Zedge App | 27.7 | 32.0 | -13.4 | % | ||||||||
| Developed Markets MAU - Zedge App | 6.0 | 7.2 | -16.7 | % | ||||||||
| Emerging Markets MAU - Zedge App | 21.7 | 24.8 | -12.5 | % | ||||||||
| Emerging Markets MAU - Zedge App/Total MAU - Zedge App | 78.3 | % | 77.5 | % | 1.1 | % | ||||||
| ARPMAU - Zedge App | $ | 0.0742 | $ | 0.0531 | 39.7 | % | ||||||
The following charts present the MAU – Zedge App and ARPMAU – Zedge App for the consecutive eight fiscal quarters ended April 30, 2024:
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GuruShots-MAPs and ARPMAP
The presentation of our results of operations related to our GuruShots segment includes disclosure of two key performance indicators as discussed below:
Monthly Active Payers (“MAPs”). We define a MAP as a unique active user on the GuruShots app or GuruShots.com in a month who completed at least one in-app purchase (“IAP”) during that time period. MAPs for a time period longer than one month are the average MAPs for each month during that period. We estimate the number of MAPs by aggregating certain data from third-party attribution platforms. MAP is a key performance indicator because it shows the size of GuruShots’ active paying user base which is a main driver of GuruShots’ revenue. Changes and trends in MAP are useful for measuring the general health of GuruShots’ business, gauging both present and potential users/customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement.
Average Revenue Per Monthly Active Payer (“ARPMAP”). We define ARPMAP as (i) the total revenue from IAPs derived from GuruShots and GuruShots.com in a monthly period, divided by (ii) MAPs in that same period. ARPMAP for a particular time period longer than one month is the average ARPMAP for each month during that period. ARPMAP shows how efficiently we are monetizing each MAP.
MAP decreased 20.7% in the three months ended April 30, 2024 when compared to the same period a year ago, primarily attributable to Apple’s App Tracking Transparence (“ATT”) framework which impedes our ability to invest in paid user acquisition (“PUA”) campaigns profitably in terms of return on ad spend or (“ROAS”). As such, we continued to scale back our PUA spend for GuruShots while testing new campaigns and creatives in order to unearth attractive ROAS scaling opportunities. ARPMAP decreased 0.4% to $53.0 in the three months ended April 30, 2024 from $53.2 in the three months ended April 30, 2023.
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The following table shows our MAP and ARPMAP for the three months ended April 30, 2024 and 2023.
| Three Months Ended April 30, | ||||||||||||
| 2024 | 2023 | % Change | ||||||||||
| Monthly Active Payers | 5,408 | 6,817 | -20.7 | % | ||||||||
| Average Revenue per Monthly Active Payer | $ | 53.0 | $ | 53.2 | -0.4 | % | ||||||
The following charts present the MAP and ARPMAP – GuruShots for the consecutive eight quarters ended April 30, 2024:
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Our KPIs related to GuruShots are not based on any standardized industry methodology and are not necessarily calculated in the same manner that other companies or third parties may use to calculate these or similarly titled measures. The numbers that we use to calculate MAP and ARPMAP are derived from data that we generate internally. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring usage and engagement. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy.
Results of Operations
The following table summarizes our historical condensed consolidated statements of operations data:
| Three Months Ended April 30, | Change | Nine Months Ended April 30, | Change | |||||||||||||||||||||
| 2024 | 2023 | % | 2024 | 2023 | % | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Revenues | $ | 7,658 | $ | 6,726 | 13.9 | % | $ | 22,510 | $ | 20,609 | 9.2 | % | ||||||||||||
| Direct cost of revenues | 455 | 498 | -8.6 | % | 1,399 | 1,762 | -20.6 | % | ||||||||||||||||
| Selling, general and administrative | 6,752 | 5,016 | 34.6 | % | 18,773 | 16,713 | 12.3 | % | ||||||||||||||||
| Depreciation and amortization | 583 | 897 | -35.0 | % | 2,120 | 2,505 | -15.4 | % | ||||||||||||||||
| Impairment of intangible assets | - | - | nm | 11,958 | - | nm | ||||||||||||||||||
| Impairment of goodwill | - | 8,727 | -100.0 | % | - | 8,727 | -100.0 | % | ||||||||||||||||
| Change in fair value of contingent consideration | - | - | nm | - | (1,943 | ) | nm | |||||||||||||||||
| Loss from operations | (132 | ) | (8,412 | ) | -98.4 | % | (11,740 | ) | (7,155 | ) | 64.1 | % | ||||||||||||
| Interest and other income, net | 188 | 84 | 123.8 | % | 434 | 196 | 121.4 | % | ||||||||||||||||
| Net loss resulting from foreign exchange transactions | (80 | ) | (84 | ) | -4.8 | % | (223 | ) | - | nm | ||||||||||||||
| Income tax benefit | (137 | ) | (718 | ) | nm | (2,397 | ) | (702 | ) | 241.5 | % | |||||||||||||
| Net income (loss) | $ | 113 | $ | (7,694 | ) | nm | $ | (9,132 | ) | $ | (6,257 | ) | 45.9 | % | ||||||||||
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Comparison of Our Results of Operations for the Three and Nine months Ended April 30, 2024 and 2023
Revenues
The following table sets forth the composition of our revenues for the three and nine months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Changes | 2024 | 2023 | % Changes | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Zedge Marketplace | ||||||||||||||||||||||||
| Advertising revenue | $ | 5,461 | $ | 4,572 | 19.4 | % | $ | 15,882 | $ | 13,691 | 16.0 | % | ||||||||||||
| Paid subscription revenue | 1,122 | 832 | 34.9 | % | 3,186 | 2,598 | 22.6 | % | ||||||||||||||||
| Other revenues | 206 | 232 | -11.2 | % | 710 | 652 | 8.9 | % | ||||||||||||||||
| Total Zedge Marketplace revenue | 6,789 | 5,636 | 20.5 | % | 19,778 | 16,941 | 16.7 | % | ||||||||||||||||
| GuruShots | ||||||||||||||||||||||||
| Digital goods and services | 869 | 1,090 | -20.3 | % | 2,732 | 3,668 | -25.5 | % | ||||||||||||||||
| Total revenue | $ | 7,658 | $ | 6,726 | 13.9 | % | $ | 22,510 | $ | 20,609 | 9.2 | % | ||||||||||||
The following table summarizes our subscription revenue for the three and nine months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except revenue per subscriber and percentages) | ||||||||||||||||||||||||
| Subscription Revenue | $ | 1,122 | $ | 832 | 34.9 | % | $ | 3,186 | $ | 2,598 | 22.6 | % | ||||||||||||
| Active subscriptions net increase (decrease) | 6 | (21 | ) | nm | 7 | (59 | ) | nm | ||||||||||||||||
| Active subscriptions at end of period | 654 | 633 | 3.3 | % | 654 | 633 | 3.3 | % | ||||||||||||||||
| Average active subscriptions during the period | 652 | 643 | 1.4 | % | 651 | 663 | -1.8 | % | ||||||||||||||||
| Average monthly revenue per active subscription | $ | 0.57 | $ | 0.43 | 32.6 | % | $ | 0.54 | $ | 0.44 | 22.7 | % | ||||||||||||
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The following table presents a reconciliation of subscription billings to the most directly comparable GAAP financial measures, for each of the periods indicated. We calculate subscription billings by adding the change in subscription deferred revenue between the start and end of the period to subscription revenue recognized in the same period. Subscription billings is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the growth of the subscription-based portion of our business, which is a critical part of our business plan.
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Subscription Revenue | $ | 1,122 | $ | 832 | $ | 3,186 | $ | 2,598 | ||||||||||||||||
| Changes in subscription deferred revenue | 373 | (3 | ) | 925 | (109 | ) | ||||||||||||||||||
| Subscription Billings (Non-GAAP) | $ | 1,495 | $ | 829 | 80.3 | % | $ | 4,111 | $ | 2,489 | 65.2 | % | ||||||||||||
The following table summarizes Zedge Premium gross and net revenue for the three and nine months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Changes | 2024 | 2023 | % Changes | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Zedge Premium-gross revenue (“GTV”) | $ | 592 | $ | 410 | 44.4 | % | $ | 1,551 | $ | 1,160 | 33.7 | % | ||||||||||||
| Zedge Premium-net revenue | 202 | $ | 231 | -12.6 | % | $ | 683 | $ | 647 | 5.6 | % | |||||||||||||
| Gross margin | 34 | % | 56 | % | 44 | % | 56 | % | ||||||||||||||||
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Three Months Ended April 30, 2024 Compared to Three Months Ended April 30, 2023
For the three months ended April 30, 2024, our advertising revenue increased 19.4% compared to the same period in the prior year primarily due to the increase in price per advertising impression paid by the advertisers on our platform when compared to the same period a year ago, which was driven by increased competition for our ad inventory.
For the three months ended April 30, 2024, our subscription revenue increased 34.9% compared to the same period in the prior year primarily due to the introduction of our iOS subscription offering in April 2023 and the lifetime subscriptions for Android users we rolled out in August 2023. Both initiatives contributed to the 80.3% increase in subscription billings in the three months ended April 30, 2024 compared to the same period in the prior year.
For the three months ended April 30, 2024, our other revenue (primarily Zedge Premium net revenue) decreased 11.2% compared to the same period in the prior year primarily due to the 12.6% decrease in Zedge Premium net revenue in the current year period caused by the write-down of advanced royalties paid to certain contents creators or owners. As a result of this write-down, gross margin decreased to 34% for the three months ended April 30, 2024 from 56% for the same period in the prior year.
For the three months ended April 30, 2024, digital goods and services revenue declined 20.3% compared to the same period in the prior year primarily due to the 20.7% decrease in GuruShots’ MAP for the corresponding periods.
Nine months Ended April 30, 2024 Compared to Nine months Ended April 30, 2023
For the nine months ended April 30, 2024, our advertising revenue increased 16.0% compared to the same period in the prior year primarily due to the increase in price per advertising impression paid by the advertisers on our platform when compared to the same period a year ago, which was driven by increased competition for our ad inventory.
For the nine months ended April 30, 2024, our subscription revenue increased 22.6% compared to the same period in the prior year primarily due to our iOS subscription offering introduced in April 2023 and the lifetime subscriptions for Android users we rolled out in August 2023. Both initiatives contributed to the 65.2% increase in subscription billings in the nine months ended April 30, 2024 compared to the same period in the prior year.
For the nine months ended April 30, 2024, our other revenue increased 8.9% compared to the same period in the prior year primarily due to higher Zedge Premium net revenue resulting from higher GTV. Zedge Premium net revenue increased 5.6% in the nine months ended April 30, 2024 compared to the same period in the prior year. For the nine months ended April 30, 2024, gross margin was 44% compared to 56% for the same period in the prior year. Lower gross margin in the current period was caused by the advanced royalty write-downs discussed above.
For the nine months ended April 30, 2024, digital goods and services revenue declined 25.5% compared to the same period in the prior year primarily due to the 25.3% decrease in GuruShots’ MAP for the corresponding periods.
Direct cost of revenues. Direct cost of revenues consists primarily of content hosting and content delivery costs.
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Direct cost of revenues | $ | 455 | $ | 498 | -8.6 | % | $ | 1,399 | $ | 1,762 | -20.6 | % | ||||||||||||
| As a percentage of revenues | 5.9 | % | 7.4 | % | 6.2 | % | 8.5 | % | ||||||||||||||||
Direct cost of revenues decreased 8.6% in the three months ended April 30, 2024 compared to the same period in the prior year primarily due to the revamping of our backend infrastructure as part of the cost reduction initiatives implemented during fiscal 2023. As a percentage of revenue, direct cost of revenues in the three months ended April 30, 2024 declined to 5.9% from 7.4% for the same period in the prior year.
Direct cost of revenues decreased 20.6% in the nine months ended April 30, 2024 compared to the same period in the prior year also due to the revamping of our backend infrastructure as part of the cost reduction initiatives implemented during fiscal 2023. As a percentage of revenue, direct cost of revenues in the nine months ended April 30, 2024 declined to 6.2% from 8.5% for the same period in the prior year.
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Selling, general and administrative expense. Selling, general and administrative expense (“SG&A”) consists mainly of payroll and benefits, stock-based compensation expense (as discussed below), PUA expenses, third-party payment processing fee relate to in-app purchases, marketing, consulting, professional fees, software licensing (“SaaS”), recruiting fees, facilities and public company related expenses.
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Selling, general and administrative | $ | 6,752 | $ | 5,016 | 34.6 | % | $ | 18,773 | $ | 16,713 | 12.3 | % | ||||||||||||
| As a percentage of revenues | 88.2 | % | 74.6 | % | 83.4 | % | 81.1 | % | ||||||||||||||||
SG&A expense increased 34.6% in the three months ended April 30, 2024 compared to the same period in the prior year primarily due to higher PUA and higher compensation expenses offset by lower discretionary spends and lower stock-based compensation expense. We ramped up PUA for our Zedge App significantly but scaled back PUA spend for GuruShots in the three months ended April 30, 2024 as compared to the same period in the prior year. We expect to continue our investment in PUA for our Zedge App in the near term provided that the ROAS remains compelling. As a percentage of revenue, SG&A expense in the three months ended April 30, 2024 was 88.2% compared to 74.6% in the three months ended April 30, 2023.
SG&A expense increased 12.3% in the nine months ended April 30, 2024 compared to the same period in the prior year primarily due to higher PUA expenses offset by reductions in stock-based compensation expenses and other discretionary spends. For the nine months ended April 30, 2024 we ramped up PUA for the Zedge App significantly but scaled back PUA for GuruShots when compared to the same period in the prior year. As a percentage of revenue, SG&A expense in the nine months ended April 30, 2024 was 83.4% compared to 81.1% in the nine months ended April 30, 2023.
Global headcount as of April 30, 2024 totaled 100 (including 29 at GuruShots) compared to 96 (including 31 at GuruShots) as of April 30, 2023 with the majority of our employees currently based in Lithuania and Israel.
The following table summarizes stock-based compensation expense included in the SG&A for the three and nine months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Stock-based compensation expense | $ | 482 | $ | 578 | -16.6 | % | $ | 1,673 | $ | 1,957 | -14.5 | % | ||||||||||||
Stock-based compensation expenses decreased 16.6% in the three months ended April 30, 2024 compared to the same period in the prior year. The decrease was primarily attributable to the lower compensation expense related to the DSU grants with both service and market conditions which are recognized based on the graded vesting method. Certain stock options, deferred stock unit and restricted stock grants are more fully described in Note 7 Stock-Based Compensation to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Stock-based compensation expenses decreased 14.5% in the nine months ended April 30, 2024 compared to the same period in the prior year. The decrease was primarily attributable to the lower compensation expense related to the DSU grants with both service and market conditions which are recognized based on the graded vesting method.
Depreciation and amortization. Depreciation and amortization consist mainly of amortization of intangible assets in connection with the GuruShots and Emojipedia acquisitions 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 April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2,023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Depreciation and amortization | $ | 583 | $ | 897 | -35.0 | % | $ | 2,120 | $ | 2,505 | -15.4 | % | ||||||||||||
| As a percentage of revenues | 7.6 | % | 13.3 | % | 9.4 | % | 12.2 | % | ||||||||||||||||
Depreciation and amortization expenses decreased 35.0% in three months ended April 30, 2024 compared to the same period in the prior year primarily due to the $11.9 million impairment charge recorded in the three months ended January 31, 2024 discussed below.
Depreciation and amortization expenses decreased 15.4% in nine months ended April 30, 2024 compared to the same period in the prior year primarily due to the $11.9 million impairment charge recorded in the three months ended January 31, 2024 discussed below.
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Impairment of intangible assets. For the nine months ended April 30, 2024, we recorded an approximately $11.9 million impairment of intangible assets of our GuruShots reporting segment, as more fully described in Note 5, Intangible Assets and Goodwill, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Impairment of goodwill. For the nine months ended April 30, 2023, we recorded an approximately $8.7 million impairment of goodwill of our GuruShots reporting segment, as more fully described in Note 5, Intangible Assets and Goodwill, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Change in fair value of contingent consideration. For the nine months ended April 30, 2023, the fair value of contingent consideration were reduced by approximately $1.9 million due primarily to the decrease in the likelihood that certain contingent milestones would be achieved in connection with the GuruShots acquisition that was consummated in April 2022, please refer to Note 3, Fair Value Measurements, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Interest and other income, net.
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Interest and other income, net | $ | 188 | $ | 84 | 123.8 | % | $ | 434 | $ | 196 | 121.4 | % | ||||||||||||
| As a percentage of revenues | 2.5 | % | 1.2 | % | 1.9 | % | 1.0 | % | ||||||||||||||||
In the three months ended April 30, 2024, interest and other income, net increased by $104,000 compared to the same period in the prior year, due primarily to higher interest income earned on our cash and cash equivalents driven by an increase in interest rates and lower interest expense resulting from the $2 million prepayment of term loan in November 2023.
In the nine months ended April 30, 2024, interest and other income, net increased by $238,000 compared to the same period in the prior year, due primarily to higher interest income earned on our cash and cash equivalents and lower interest expense resulting from the $2 million prepayment of term loan in November 2023, offset by a $50,000 impairment charge related to our investment in a privately held company of which the carrying value was reduced to $0 as of October 30, 2023.
Net loss resulting from foreign exchange transactions. Net loss resulting from foreign exchange transactions is comprised of gains and losses generated from movements in NOK and EUR relative to the U.S. Dollar, including gains or losses from our hedging activities.
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Net loss resulting from foreign exchange transactions | $ | (80 | ) | $ | (84 | ) | -4.8 | % | $ | (223 | ) | $ | - | nm | ||||||||||
| As a percentage of revenues | -1.0 | % | -1.2 | % | -1.0 | % | 0.0 | % | ||||||||||||||||
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In the three months ended April 30, 2024, net loss resulting from foreign exchange transactions decreased by $4,000 compared to the same period in the prior year.
In the nine months ended April 30, 2024, net loss resulting from foreign exchange transactions was $223,000 compared to nil in the same period in the prior year.
We recognized Mark to Market (“MTM”) losses of $142,000 from NOK and EUR hedging activities and MTM gain of $19,000, respectively, as of April 30, 2024 and July 31, 2023, as more fully described in Note 4, Derivative Instruments, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
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Income tax benefit
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||||||||||
| 2024 | 2023 | % Change | 2024 | 2023 | % Change | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Income tax benefit | $ | (137 | ) | $ | (718 | ) | -80.9 | % | $ | (2,397 | ) | $ | (702 | ) | 241.5 | % | ||||||||
| As a percentage of revenues | -1.8 | % | -10.7 | % | -10.6 | % | -3.4 | % | ||||||||||||||||
In the three months ended April 30, 2024, income tax benefit decreased by $0.6 million compared to the same period in the prior year, resulting primarily from the $0.8 million increase in deferred tax assets related to the $8.7 million impairment of goodwill in the prior period.
In the nine months ended April 30, 2024, income tax benefit increased by $1.7 million compared to the same period in the prior year, resulting primarily from the $2.5 million increase in deferred tax assets related to the $11.9 million impairment loss on intangible assets in the current period, offset by the $0.8 million increase deferred tax assets related to the $8.7 million impairment of goodwill in the prior period.
Comparison of our Segment Results of Operations
The following table presents the results for our Zedge Marketplace and GuruShots segment income (loss) from operations for the three and nine months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | Change | Nine Months Ended April 30, | Change | |||||||||||||||||||||
| 2024 | 2023 | % | 2024 | 2023 | % | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Segment income (loss) from operations: | ||||||||||||||||||||||||
| Zedge Marketplace | $ | 1,197 | $ | 1,850 | -35.3 | % | $ | 4,532 | $ | 4,785 | -5.3 | % | ||||||||||||
| GuruShots | (1,329 | ) | (10,262 | ) | -87.0 | % | (16,272 | ) | (11,940 | ) | 36.3 | % | ||||||||||||
| Total loss from operations | $ | (132 | ) | $ | (8,412 | ) | -98.4 | % | $ | (11,740 | ) | $ | (7,155 | ) | 64.1 | % | ||||||||
Three Months Ended April 30, 2024 Compared to Three Months Ended April 30, 2023
For the three months ended April 30, 2024, our income from operations related to the Zedge Marketplace decreased to $1.2 million from $1.9 million for the same period in the prior year, primarily due to higher SG&A expenses incurred in the current period.
For the three months ended April 30, 2024, our loss from operations related to GuruShots was $1.3 million compared to a loss of $10.3 million for the same period in the prior year, which included impairment loss of goodwill of $8.7 million in prior year period. Excluding the effect of the impairment loss of goodwill, loss from operation related to GuruShots was $1.3 million in the three months ended April 30, 2024 compared to a loss of $1.6 million for the same period in the prior year.
Nine months Ended April 30, 2024 Compared to Nine months Ended April 30, 2023
For the nine months ended April 30, 2024, our income from operations related to the Zedge Marketplace decreased to $4.5 million from $4.8 million for the same period in the prior year, primarily due to higher SG&A expenses incurred in the current period.
For the nine months ended April 30, 2024, our loss from operations related to GuruShots was $16.3 million compared to a loss of $11.9 million for the same period in the prior year. Excluding the effect of the impairment loss intangible assets of $11.9 million in the current period and the impairment loss of goodwill of $8.7 million and the gain from the changes in fair value of contingent consideration of $1.9 million recorded in prior period, loss from operation related to GuruShots would have been $4.4 million in the nine months ended April 30, 2024 compared to $5.1 million for the same period in the prior year.
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Liquidity and Capital Resources
General
At April 30, 2024, we had cash and cash equivalents of $19.9 million and working capital (current assets less current liabilities) of $17.1 million, compared to $18.1 million and $15.8 million, respectively, at July 31, 2023. We expect that our cash and cash equivalents on hand and our cash flow from operations will be sufficient to meet our anticipated cash requirements for the twelve-month period ending June 10, 2025. We paid off a $2 million term loan in November 2023 and maintain a revolving credit facility of $4 million, including a foreign exchange contract facility of up to $7.5 million with WAB, as discussed below under Financing Activities and in Note 10, Term Loan and Revolving Credit Facility, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
The following tables present selected financial information for the nine months ended April 30, 2024 and 2023:
| Nine Months Ended April 30, | ||||||||||||
| (in thousands) | 2024 | 2023 | $ Changes | |||||||||
| Cash flows provided by (used in): | ||||||||||||
| Operating activities | $ | 5,155 | $ | 2,743 | $ | 2,412 | ||||||
| Investing activities | (1,028 | ) | (2,129 | ) | 1,101 | |||||||
| Financing activities | (2,162 | ) | 528 | (2,690 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (165 | ) | (160 | ) | (5 | ) | ||||||
| Increase in cash and cash equivalents | $ | 1,800 | $ | 982 | $ | 818 | ||||||
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 $2.4 million in the nine months ended April 30, 2024 to $5.1 million from $2.7 million in the same period in the prior year, primarily attributable to higher income from operations before accounting for the acquisition related charges and changes in assets and liabilities.
Changes in Trade Accounts Receivable
Gross trade accounts receivable increased $0.4 million to $3.3 million at April 30, 2024 from $2.9 million at July 31, 2023, primarily due to higher revenue in the preceding two months ended April 30, 2024 when compared to the same period ended July 31, 2023.
Investing Activities
On August 1, 2021, we acquired substantially all of the assets of Emojipedia Pty Ltd for approximately $6.7 million. We made the final payment of about $1.0 million on August 1, 2022.
Cash used in investing activities in the nine months ended April 30, 2024 and 2023 also consisted of capitalized software and technology development costs related to various projects that we invested in specific to the various platforms on which we operate our service.
Financing Activities
On October 28, 2022, we entered into an Amended Loan Agreement with WAB. Pursuant to the Amended Loan Agreement, WAB agreed to provide the Company with a new term loan facility in the maximum principal amount of $7 million for a four-year term and a $4 million revolving credit facility for a two-year term. In conjunction with the closing of the credit facilities, $2 million was advanced in a single-cash advance on the same day, with the remaining $5 million available for drawdown during twenty-four (24) months after closing. Each drawdown must be in an amount of not less than $1 million.
In connection with the Amended Loan Agreement, we discontinued the existing $2 million revolving credit facility under the then existing Loan and Security Agreement, dated as of September 26, 2016. At the time of the discontinuance, there was no outstanding balance on the revolving credit facility.
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On May 11, 2023, we agreed to reduce the maximum principal amount from $7 million to $2 million, please see Note 10, Term Loan and Revolving Credit Facility, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
On November 15, 2023, the Company voluntarily prepaid the entire principal amount of $2 million in accordance with the terms of the Amended Loan Agreement without incurring any prepayment penalty.
In the nine months ended April 30, 2024 and 2023, we purchased 6,328 shares and 6,310 shares, respectively of our Class B common stock from certain employees for $13,000 and $17,000 respectively, to satisfy tax withholding obligations in connection with the vesting of DSUs.
In the nine months ended April 30, 2024 and 2023, we repurchased in connection with the share repurchase program 60,206 shares and 680,594 shares respectively of our Class B common stock for $152,000 and $1.4 million respectively.
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.
Concentration of Credit Risk and Significant Customers
Historically, we have had very little or no bad debt, which is common with other platforms of our size that derive their revenue from mobile advertising, as we aggressively manage our collections and perform due diligence on our customers. In addition, the majority of our revenue is derived from large, credit-worthy customers, e.g. Google, Facebook, Vungle and AppLovin, and we terminate our services with smaller customers immediately upon balances becoming past due. Since these smaller customers rely on us to derive their own revenue, they generally pay their outstanding balances on a timely basis.
In the nine months ended April 30, 2024, two customers represented 31% and 10% of our revenue. In the nine months ended April 30, 2023, three customers represented 29%, 19% and 13% of our revenue. At April 30, 2024, two customers represented 36% and 19% of our accounts receivable balance. At July 31, 2023, two customers represented 36% and 18% of our accounts receivable balance. All of these significant customers were advertising exchanges operated by leading companies, and the receivables represent many smaller amounts due from their advertisers.
Contractual Obligations and Other Commercial Commitments
Smaller reporting companies are not required to provide the information required by this item.
Off-Balance Sheet Arrangements
At April 30, 2024, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Smaller reporting companies are not required to provide the information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level as of April 30, 2024.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended April 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings in which we are involved are more fully described in Note 9, Commitments and Contingencies, to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There are no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In October 2021, our Board of Directors authorized a repurchase program of up to 1.5 million shares of our Class B common stock at a maximum aggregate purchase price of $3.0 million. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions, subject to market conditions, applicable legal requirements and other relevant factors. Open market repurchases may be structured to occur in accordance with the requirements of Rule 10b-18. We may also, from time to time, enter into Rule 10b5-1 trading plans to facilitate repurchases of its shares. The repurchase program does not obligate us to acquire any particular amount of our Class B common stock, has no expiration date and may be modified, suspended, or terminated at any time at our discretion.
The following table summarizes the share repurchase activity for the third quarter of fiscal 2024:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share (1) | Shares Purchased as Part of Publicly Announced Programs | Dollar Value of Shares that May Yet Be Purchased Under the Program | ||||||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||||||
| February 1, 2023 to February 29, 2024 | - | $ | - | - | $ | 1,421 | ||||||||||
| March 1, 2024 to March 31, 2024 | - | $ | - | - | $ | 1,421 | ||||||||||
| April 1, 2024 - April 30, 2024 | 60 | $ | 2.52 | 60 | $ | 1,269 | ||||||||||
| Total | 60 | 60 | ||||||||||||||
| (1) | The average price paid per share includes any broker commissions. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
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Item 6. Exhibits
| * | Filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ZEDGE, INC. | ||
| June 11, 2024 | By: | /s/ JONATHAN REICH |
|
Jonathan Reich Chief Executive Officer | ||
| June 11, 2024 | By: | /s/ YI TSAI |
|
Yi Tsai Chief Financial Officer | ||
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