Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain
the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar
words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially
from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements,
other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed
under Item 1A to Part I “Risk Factors” in this Annual Report. The forward-looking statements are made as of the date of this
Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report
and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in Item 8 of this Annual Report.
We operate a state-of-the-art digital publishing platform that powers
Zedge Ringtones and Wallpapers, available in the Google Play store and App Store, which offers an easy, entertaining and immersive way
for end-users to engage with its rich and diverse catalogue of wallpapers, video wallpapers, ringtones, notification sounds on Android
and wallpapers, video wallpapers, ringtones and custom icon packs on iOS. We secure our content from amateur and professional artists,
and also from emerging and major brands. Artists have the ability to easily launch a virtual storefront in our Zedge app where they can
market and sell their content to our user base. That same platform powers an entertainment app called “Shortz – Chat Stories
by Zedge”, which is focused on serialized, short-form, fiction stories, as a beta that runs on Zedge’s publishing platform.
Over the past year, we have been expanding our content catalogue, started testing audio versions of a selected number of stories, materially
improved our ability to measure all types of engagement within the app, and invested a modest budget in paid user acquisition. Finally,
in August of 2021, we acquired Emojipedia, the leading source of all things emoji.
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Our Zedge app has been installed approximately 511 million times, and
at July 31, 2021, boasted approximately 34.4 million monthly active users, or MAU. MAU is a key performance indicator that captures the
number of unique users that used our Zedge app during the final 30 days of the relevant period. Our Zedge app has consistently ranked
as one of the most popular free apps in the Google Play store in the United States. Historically, we have not made a material investment
in paid user acquisition for our Zedge app.
Our Zedge app’s success stems from its ability to meet consumer
demand for a rich and diverse catalogue of both long-tail and popular content in a fun, intuitive and user-friendly fashion that aligns
with their interest in expressing their essence in a bespoke manner, to offer reliable search and discovery capabilities and to make relevant
content recommendations to our users. To this end, we invest heavily in both product design and development and the underlying technology
required to satisfy both our Zedge app’s users’ and content contributors’ expectations. Our Zedge app utilizes both
user-generated and licensed, third-party content to achieve these goals.
In March 2018, we launched Zedge Premium, a marketplace within our
Zedge app where professional creators and brands market, distribute and sell their digital content to our consumers. At launch, Zedge
Premium was a “walled garden” – a separate section of the app which users needed to proactively choose to enter. In 2021,
we embedded Zedge Premium content throughout the app making it far more prominent. We also introduced a new content type on iOS: custom
icon packs. Over time, we expect that Zedge Premium will contribute to a virtuous cycle whereby it drives new consumers into our Zedge
app resulting in more artist payouts, which in turn makes the platform more attractive for artists and brands looking to expand their
reach and increase their income.
In January 2019, we started offering freemium Zedge app Android users
the ability to convert into paying subscribers for, amongst other things, the ability to remove unsolicited advertisements from our Zedge
app. As of July 31, 2021, we had approximately 752,000 active subscribers. In fiscal 2022, we expect to launch subscriptions on iOS.
In December 2019, we completed the beta launch of ‘Shortz’
our new entertainment app offering serialized, short-form fiction delivered in a text-message format and more recently as audio productions
across both Android and iOS, and focusing on users in the United States, the United Kingdom and Canada and it is now available globally.
New stories are added to the app each week, and as the content catalog expands, we are regularly improving content discovery in order
to guide users to the stories that will most interest them and improve engagement.
On August 1, 2021, we acquired Emojipedia, the world’s leading
authority dedicated to providing up to date and well-researched emoji definitions, information, and news as well as World Emoji Day and
the annual World Emoji Awards, and Emojitracker, which provides real time visualization of all emoji symbols used on Twitter. Emojipedia
receives approximately 50 million monthly page views and has approximately 9 million monthly active users of which approximately 50% are
located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a
voting member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji
creators including Apple, Google, Facebook and Twitter.
Over the past several years, our Zedge app has experienced a continuing
decline in its MAU as well as a shift in the regional customer make-up with MAU in emerging markets representing an increasing portion
of our user base. As of July 31, 2021, users in emerging markets represented 75% of our MAU compared to 70% a year prior. This shift has
negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. In the
fourth quarter of fiscal 2021, users in emerging markets grew by 16.1% while users in well-developed economies declined by 11.5% when
compared to the same period in fiscal 2020. As of July 31, 2021, approximately 42% of our Zedge app’s user base was located in North
America (20%) and Europe (including Eastern Europe, 22%), compared with 50% (North America, 24% and Europe 26%) as of July 31, 2020. The
remaining 58% of the user base was primarily located in emerging markets with 25% located in India.
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MAU growth is tightly coupled with new user growth. Historically, our
relatively high ranking in the Google Play store has been one of the primary drivers for securing new users. Although still an important
factor, we now also dedicate resources to growth initiatives, both organic and paid. In fiscal 2022, we expect to increase our paid user
acquisition spend while monitoring results to ensure that the investment is yielding a positive return on investment. With time, we believe
that we can change our growth dynamic in well-developed markets. Aside from targeted growth initiatives, we need to continually improve
the core user experience, test different mechanisms and content verticals that may spur growth and capitalize on the role that Zedge Premium
artists can have on driving new users into the Zedge platform.
The COVID-19 pandemic has impacted our Zedge app’s new user growth.
According to Gartner, a leading research and advisory company, new smartphone sales declined 10.5% in calendar year 2020 as a result of
the pandemic, negatively impacting new user growth, especially in well-developed markets. As of September 1, 2021, Gartner reported that
worldwide smartphone sales grew by 10.8% year over year in the second quarter of calendar year 2021 despite supply constraints relating
to COVID-19 component shortages and production disruptions; however, it is still unclear what the impact on user growth will be as vaccines
become more available globally and as precautions like social distancing start to wane. The pandemic and measures implement to promote
social distancing had a modest positive impact on user engagement.
During the quarter and fiscal year ended July 31, 2021, we generated
approximately 81% and 80%, respectively, of our revenues from selling our Zedge app’s advertising inventory to advertising networks,
advertising exchanges, and direct arrangements with advertisers. Advertising networks and advertising exchanges are third-party technology
platforms that facilitate the buying and selling of media advertising inventory from multiple ad networks. The price of advertising inventory
is fixed on an advertising network whereas the price for inventory is determined through real-time bidding on an advertising exchange.
Advertisers are attracted to our Zedge app because of its sizable user base.
In our Zedge Premium marketplace, the content owner sets the price
and the user can purchase the content by paying for it with Zedge Credits, our closed virtual currency. A user can earn Zedge Credits
when taking specific actions such as watching a rewarded video or taking a survey. Alternatively, users can buy Zedge Credits via an in-app
purchase. If a user purchases Zedge Credits, Google Play or App Store keeps up to 30% of the purchase price with the remainder being paid
to us. When a user purchases Zedge Premium content, the artist or brand receives 70% of the actual value of the Zedge Credits used to
buy the content item as a royalty and we retain the remaining 30% as our fee, which we recognize as revenue. As Zedge Premium matures
and expands, we expect to also diversify our revenue source mix.
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In January 2019, we started offering paid subscriptions to our Android
users which amongst other things removed unsolicited advertisements from our Zedge app. During the first 12 months after a customer’s
sign up for the subscription-based product, Google retains up to 30% as a fee, which decreases to 15% from month 13 and beyond. As of
July 31, 2021, we had approximately 752,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception in January
2019, subscriptions have generated approximately $6.7 million in gross revenue.
Reportable Segments
Our business consists of one reportable segment.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as
the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s
most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.
Our critical accounting policies include those related to capitalized software and technology development costs, revenue recognition and
goodwill. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under
the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1 to the Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K for a complete discussion of our significant accounting policies.
Capitalized software and technology development costs
Software and technology development activities generally fall into
three stages:
During the Planning Stage, we charge all costs to expense as incurred.
During the Application and Infrastructure Development Stage, we begin
to capitalize costs when the project has been properly authorized and we determine that completion is probable. If a project is subsequently
cancelled prior to placement in service, costs that have been capitalized to date will be reviewed for potential impairment. Capitalization
ceases no later than the point at which a computer software project is substantially complete and ready for its intended use. Amortization,
which is generally over three years, begins for each project when the code is ready for use, whether or not it is actually placed in service
at that time (an exception being if the project’s functionality completely depends on the completion of another project; then, amortization
begins when that other project is ready for use).
During the Post-Implementation/Operation Stage, we expense training
costs and maintenance costs as incurred. However, upgrades and enhancements, defined as modifications to existing internal-use software
that result in additional functionality (modifications to enable the software to perform tasks that it was previously incapable of performing,
normally requiring new software specifications and perhaps a change to all or part of the existing software specifications) are treated
as though they were new projects, and are assessed utilizing the same stages and criteria on a project-by-project basis. As such, internal
costs incurred for upgrades and enhancements are expensed or capitalized based on the requirements noted above, while costs incurred for
maintenance are expensed as incurred. These projects are tracked individually, such that the beginning and ending of the capitalization
can be appropriately established, as well as the amounts capitalized therein.
Amortization of these costs is included in depreciation and amortization
in the Statement of Comprehensive Income (Loss).
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Revenue Recognition.
We generate revenue from three sources: (1) Advertising; (2) Paid Subscriptions
and (3) Zedge Premium and Other. The substantial majority of our revenue is generated from selling our advertising inventory (“Advertising
Revenue”) to advertising networks and advertising exchanges, and through direct arrangements with advertisers. Our monthly and annual
subscriptions allow users to prepay a fixed fee to remove unsolicited advertisements from our Android Zedge app although we are working
on adding additional capabilities to subscriptions including offering subscriptions to iOS Zedge App users. In Zedge Premium, we retain
30% as fee when users purchase licensed content using Zedge Credits or unlock licensed content by watching a video or taking a survey
on Zedge Premium.
Advertising Revenue: We generates the bulk of our revenue
from selling our Zedge app’s advertising inventory to advertising networks and advertising exchanges and direct sales to advertisers.
We recognize advertising revenue as advertisements are delivered to
users through impressions or ad views (depending on the terms agreed upon with the advertiser). For in-app display ads, in-app offers,
engagement advertisements and other advertisements, our performance obligation is satisfied over the life of the relevant contract (i.e.,
over time), with revenue being recognized as advertising units are delivered. The advertiser may compensate us on a cost-per-impression,
cost-per-click, or cost-per-action basis.
Paid Subscription Revenue: Beginning in January 2019,
we started offering monthly and annual paid subscription services sold through Google Play. When a customer subscribes, they execute a
clickthrough agreement with Zedge outlining the terms and conditions of the subscription. Google Play processes subscription prepayment
on Zedge’s behalf, and retains up to 30% as its fee. Paid subscription revenue is a series type performance obligation and is recognized
net of sales tax amounts collected from subscribers. Both monthly and yearly subscriptions are nonrefundable after a period of 7 days.
Paid subscriptions are automatically renewed at expiration unless cancelled by subscribers. The enforceable rights in monthly and yearly
subscription contracts are the service period. Because of the cancellation clauses for these subscriptions, the duration of these contracts
is daily, and revenue for these contracts is recognized on a daily ratable basis. The payment terms for subscriptions sold through Google
Play is net 30 days after month-end.
Zedge Premium: Zedge Premium is our marketplace where
artists and brands can market, distribute and sell their digital content to Zedge’s users. The content owner sets the price and
the user can purchase the content by paying for it with Zedge Credits, our closed virtual currency. A user can earn Zedge Credits when
taking specific actions such as watching rewarded videos or completing electronic surveys. Alternatively, users can buy Zedge Credits
with an in-app purchase. If a user purchases Zedge Credits (ranging from 500 credits for $0.99 to 14,000 credits for $19.99), Google Play
or iTunes retains up to 30% of the purchase price as its fee. When a user purchases Zedge Premium content, the artist or brand receives
70% of the actual revenue (“Royalty Payment”) and the Company receives the remaining 30%, which is recognized as revenue.
Gross Versus Net Revenue Recognition
We report revenue on a gross or net basis based on management’s
assessment of whether we act as a principal or agent in the transaction. To the extent we act as the principal, revenue is reported on
a gross basis unless we are unable to determine the amount on a gross basis, in which case we report revenue on a net basis. The determination
of whether we act as a principal or an agent in a transaction is based on an evaluation of whether we control the good or service prior
to transfer to the customer.
We generally report our advertising revenue net of amounts due to agencies
and brokers because we are not the primary obligor in the relevant arrangements, we do not finalize the pricing, and we do not establish
or maintain a direct relationship with the advertiser. Any advertising arrangements that are directly between us and advertisers would
be recognized on a gross basis equal to the price paid to us by the customer since we are the primary obligor and we determine the price.
Any third-party costs related to such direct relationships are recognized as direct cost of revenues.
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We report subscription revenue gross of the fee retained by Google
Play, as the subscriber is our customer in the contract and we control the service prior to the transfer to the subscriber.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized.
Goodwill is reviewed annually (or more frequently under certain conditions) for impairment using a fair value approach. We perform our
annual or interim goodwill impairment test by comparing the fair value of the relevant reporting unit with its carrying amount. We would
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the
loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Additionally, we consider income tax effects
from any tax-deductible goodwill on the carrying amount of our reporting unit when measuring the goodwill impairment loss, if applicable.
We estimate the fair value of our reporting unit using the market approach.
We have the option to perform a qualitative assessment to determine
whether it is necessary to perform the quantitative goodwill impairment test. However, we may elect to perform the quantitative goodwill
impairment test even if no indications of a potential impairment exist.
For our annual impairment tests in fiscal years 2021 and 2020, our
estimated fair value exceeded our carrying value, therefore, no impairment charge was required. Calculating the fair value of the reporting
unit requires significant estimates and assumptions by management. Should our estimates or assumptions regarding the fair value of our
reporting unit prove to be incorrect, we may be required to record impairment of goodwill in future periods and such impairment could
be material.
RECENT ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
Recently issued accounting standards not yet adopted by us are more
fully described in Note 1 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
COVID
The COVID-19 pandemic has resulted in public health responses including
travel bans, restrictions, social distancing requirements, and shelter-in place orders, which have negatively impacted our business, operations
and financial performance. While we saw a significant decrease in advertising spend when the pandemic became global in March 2020, our
daily advertising revenue has experienced a strong recovery since July 2020 through July 2021.
We responded quickly and decisively to the challenges presented by
the pandemic in order to ensure the long-term continuity of our service. Initially, we shifted resources and priorities and focused on
streamlining our back-end infrastructure and specifically redesigning our content management system in order to better control costs while
simultaneously establishing a scalable foundation for new growth initiatives, even at the expense of new product initiatives. At the outset
of the pandemic, we instituted a hiring freeze which has subsequently been relaxed and we are starting to invest in new products, features,
and enhancements. We grew our headcount by 36% from 39 at July 31, 2020 to 53 at July 31, 2021, mostly in engineering, product and design
to execute on our product development roadmap.
Given the unprecedented uncertainty and rapidly shifting market conditions
of the business environment, we cannot reasonably estimate the full impact of the COVID-19 pandemic on our future financial and operational
results. At this point it is unclear whether variables including the economy, unemployment, retail sales, and advertising budgets, or
capital markets, including volatility of our stock price will impact our business. We continue to monitor the rapidly evolving situation
and guidance from international and domestic authorities, including federal, state and local public health authorities, and there may
be developments outside our control requiring us to adjust our operating plan.
Key Performance Indicators
Our results of operations discussion include disclosure of two
key performance indicators - Monthly Active Users (MAU) and Average Revenue Per Monthly Active User (ARPMAU). MAU is a key
performance indicator that captures the number of unique users that used our Zedge app in the last thirty days of the relevant
period, which is important to understanding the size of the user base for our Zedge app which is a significant driver of revenue.
Changes and trends in MAU are useful for measuring the general health of our business, gauging both present and potential
customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement.
ARPMAU is valuable because it provides insight into how well we monetize our users and the changes and trends in ARPMAU are
indications of how effective our monetization investments are.
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As of July 31, 2021 MAU, was up 7.8% year over year primarily attributed
to higher user engagement. Over the past several years, we have experienced a continuing shift in the regional customer make-up with MAU
in emerging markets (particularly India) representing an increasing portion of our user base. As of July 31, 2021, users in emerging markets
represented 75% of our MAU compared to 70% a year prior. This shift has negatively impacted revenue because advertising rates in emerging
markets are materially lower than in well-developed markets.
ARPMAU was up 76.3% for the three months ended July 31, 2021 when compared
to the same period a year ago, pointing to progress we have made in generating more value from our users, particularly from subscriptions.
Three months ended July 31,
Developed Markets MAU 8.5 9.6
Emerging Markets MAU/Total MAU 75 % 70 %
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RESULTS OF OPERATIONS
The following table set forth our consolidated statements of operations
data for the fiscal year ended July 31, 2021 compared to the fiscal year ended July 31, 2020:
(in thousands) Change
Net loss resulting from foreign exchange transactions (2 ) (152 ) 150 -98.7 %
Provision for (benefit from) income taxes (202 ) 15 (217 ) nm
nm-not meaningful
The following table sets forth the composition of our revenues for
the fiscal years ended July 31, 2021 and 2020:
Fiscal Year Ended
July 31, Changes % of total Revenue
(in thousands)
Advertising revenue.Advertising revenue increased
112% from $7.4 million in fiscal 2020 to $15.7 million in fiscal 2021 primarily due to improvements in our ad stack and higher advertising
rates.
Paid subscription revenue. We rolled out a subscription-based
product on Android in January 2019, whereby users of our Zedge app can pay a monthly or annual fee to remove unsolicited ads when using
our Zedge app. In general, pricing of our monthly subscriptions in the US is $0.99 per month and $4.99 for yearly subscription with different
pricing for users in other countries. Google Play processes subscription prepayment on Zedge’s behalf, and retains up to 30% as
its fee. We generated $3.8 million and $2.4 million in gross prepaid subscription sales consisting of both monthly and annual subscriptions
for the fiscal years ended July 31, 2021 and 2020 respectively. We expect that, based on research and testing we undertake, from time
to time, the prices of our subscription in each country/region may change and we may test other plan and price variations.
The following table summarizes subscription revenue for the fiscal
years ended July 31, 2021 and 2020.
As of/Years Ended % Change
(in thousands, except revenue per subscriber and percentages)
Average monthly revenue per active subscription $ 0.41 $ 0.43 $ (0.02 ) -5 %
Zedge Premium. We completed the initial rollout of Zedge
Premium in March 2018 to a segment of our Android user base and we expanded it to 100% of our Android user base in January 2019. In fiscal
2021, gross transaction value (the total sales volume transacting through the platform), or “GTV,” and net revenue generated
from Zedge Premium were $945,000 and $509,000, respectively. In fiscal 2020, GTV and net revenue generated from Zedge Premium were $728,000
and $459,000 respectively. Net revenue includes breakage related to expired Zedge Credits.
We continue to focus on topline growth strategy by testing new monetization
drivers including a variety of ad units, in-app purchases of Zedge Credits, our virtual currency. as well as certain growth initiatives
such as new content vertical in our app and/or new app. Additionally, we may pursue synergistic acquisitions from time to time to complement
organic growth, although we can provide no assurance that any such acquisitions will be consummated.
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Direct cost of revenues. Direct cost of revenues consists
primarily of content hosting and content delivery costs.
Fiscal year ended July 31, Change
As a percentage of revenues 6.1 % 12.6 %
Direct cost of revenues decreased by 0.1% in fiscal 2021 to $1.194
million from $1.195 million in fiscal 2020, primarily attributable to the residual savings from the migration of our backend infrastructure
to cloud-based providers.
As a percentage of revenue, direct cost of revenues in fiscal 2021
were 6.1% as compared to 12.6.% in fiscal 2020 due primarily to the 107% increase of our revenue in fiscal 2021.
Selling, general and administrative expense. Selling,
general and administrative expense (“SG&A”) consists mainly of payroll, benefits, facilities, marketing, content acquisition
costs, consulting, professional fees, software licensing (“SaaS”) and public company related expenses.
Fiscal year ended July 31, Change
As a percentage of revenues 47.6 % 75.1 %
SG&A expenses increased $2.2 million or 31.0 % in fiscal 2020 to
$9.3 million from $7.1 million in fiscal 2020. This increase was primarily attributable to compensation costs resulting from additional
headcount, higher professional and consulting fees and higher marketing fees we pay to Google for subscription sales, offset by reductions
in discretionary expenses such as rent and travel expenses.
Our headcount totaled 53 as of July 31, 2021 compared to 39 as of July
31, 2020, with the majority of our employees currently based in Lithuania.
SG&A expenses also included non-cash stock-based compensation expense
of $523,000 and $402,000 in fiscal 2021 and 2020, respectively. We also opted to use Class B common stock to pay a portion of our Board
of Directors’ compensation and to fund 401(k) matching contributions that aggregated to $129,000 and $90,000 in fiscal 2021 and
2020, respectively. See Note 12 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our stock-based
compensation.
Depreciation and amortization. Depreciation and
amortization expense consists mainly of amortization of capitalized software and technology development costs of our internal developers
on various projects that we invested in specific to the various platforms on which we operate our mobile app service.
Fiscal year ended July 31, Change
As a percentage of revenues 6.4 % 16.6 %
Depreciation and amortization expense decreased $0.3 million or 19.6
% in fiscal 2020 to $1.3 million from $1.6 million in fiscal 2020. The comparison of depreciation and amortization expenses in any given
periods can be attributed to the number of projects being amortized during those periods, as we removed fully amortized projects and added
newly completed projects in the amortization pool.
Interest and other income, net. The increase in interest
and other income, net in fiscal 2021 when compared to fiscal 2020 was primarily due to the PPP loan forgiveness of $218,000 in fiscal
2021. See Note 17 to the Consolidated Financial Statements in this Annual Report for further details.
Fiscal year ended July 31, Change
As a percentage of revenues 1.3 % 0.1 %
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 currency hedging activities.
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Fiscal year ended July 31, Change
As a percentage of revenues 0.0 % -1.6 %
In fiscal 2021 and 2020, we incurred losses of $18,000 and $218,000,
respectively, from NOK and EUR hedging activities.
Provision for (benefit from) income taxes. During
fiscal 2021, we had pretax income of about $8 million which enabled us to utilize all the federal NOL carry forward and portions of the
NOL carry forward from states and other foreign jurisdiction. Combined with the release of the valuation allowance of $477,000, this resulted
in an income tax benefit of $202,000 for the fiscal year ended July 31, 2021, an effective income tax of (2.5%).
Fiscal year ended July 31, Change
Provision for (benefit from) income taxes $ (202 ) $ 15 $ (217 ) nm
As a percentage of revenues -1.0 % 0.2 %
On March 27, 2020, the CARES Act was signed into law. The
Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold
for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and
the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. Most
of these provisions are either not applicable or have no material effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
General
At July 31, 2021, we had cash and cash equivalents of $24.9 million
and working capital (current assets less current liabilities) of $23.4 million. We currently expect that our cash and cash equivalents
on hand, and our cash flow from operations will be sufficient to meet our anticipated cash requirements for the twelve months ending July
31, 2022. During fiscal 2021, we raised $15 million through sales of equity in At the Market offerings. We also maintain a revolving line
of credit of up to $2.0 million and a foreign exchange contract facility of up to $6.5 million with Western Alliance Bank, as discussed
below in Financing Activities.
The following tables present selected financial information for the
twelve months ended July 31, 2021 and 2020:
Fiscal year ended July 31,
Cash flows provided by (used in):
Investing activities (5,479 ) (759 )
Effect of exchange rate changes on cash and cash equivalents 45 (30 )
Increase in cash and cash equivalents $ 19,797 $ 3,502
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 $8.0 million to $10.1 million in
fiscal 2021 from $2.1 million in fiscal 2020, primarily attributable to the higher revenues generated from our service offerings, primarily
advertising and paid subscription revenue.
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Investing Activities
On August 1, 2021, we acquired Emojipedia for up to $7.0 million including
initial cash payment of $4.8 million, with the balance to be determined based on an incentive structure linked to EBITDA generated from
emojipedia.org during the four month period following the closing of the acquisition and paid out on the six-month and twelve month anniversaries
of the closing. Given the closing occurred on Sunday, we deposited $4.8 million into an escrow account on July 30, 2021 which was classified
as other assets on our balance sheet as of July 31, 2021. See Note 19 to the Consolidated Financial Statements in Item 8 of this Annual
Report on Form 10-K.
Cash used in other investing activities in fiscal 2021 and fiscal 2020
consisted mostly of capitalized software and technology development costs related to various projects that we invested in specific to
the various platforms on which we operate our service.
Financing Activities
Between December 14, 2020 and January 26, 2021, we sold 761,906 shares
of our Class B common stock at an average price of $6.5625 per share for total proceeds of $5 million in a registered “At the Market”
offering through National Securities Corp. and H.C. Wainwright & Co, LLC as sales agents. In connection with this offering, total
issuance costs were $215,000. We intend to use the net proceeds from this offering for general corporate purposes including organic and
other growth initiatives.
On March 16, 2021, we filed a prospectus supplement with the SEC which
contemplates the sale, for a gross aggregate sale price of up to $10,000,000, of shares of our Class B common stock, from time to time
in “at-the-market offerings” pursuant to an At Market Issuance Sales Agreement with National Securities Corporation and Maxim
Group LLC dated as of March 16, 2021. Through June 11, 2021 we sold 663,686 shares at an average price of $15.0674 per share for total
proceeds of $10 million in this offering. Total issuance costs were $350,000. We intend to use the net proceeds from this offering for
general corporate purposes including organic and other growth initiatives.
In August 2020, we obtained a loan of $181,000 to finance about 82%
of our directors’ and officers’ liability and cyber liability insurance policies, at an annual percentage interest rate of
3.89% to be repaid over nine equal monthly installments of $20,490 starting from September 1, 2020. This loan was repaid in full as of
July 31, 2021.
On April 22, 2020, we received $218,000 in proceeds from a PPP loan
from Western Alliance Bank, which was administered by the Small Business Administration and established under the CARES Act. On November
25, 2020, we submitted the PPP Loan Forgiveness Application Form 3508EZ and on May 21, 2021, we were notified that such application for
the loan forgiveness has been approved and the loan, including accrued interest, has been deemed satisfied in full by the Small Business
Administration to Western Alliance Bank. Please see Note 17 to the Consolidated Financial Statements in Item 8 of this Annual Report on
Form 10-K.
On February 5, 2020, we closed a registered direct offering of 1,734,459
shares of its Class B common stock for net proceeds of $2.1 million from both new and existing investors. See Note 19 to the Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K.
In July 2019, we obtained a loan of $140,000 to finance about 85% of
various insurance policies, at an annual percentage interest rate of 4.79% to be repaid over nine equal monthly installments of $15,976.20
starting from September 1, 2019. We repaid this loan in full as of July 31, 2020.
We received proceeds of $873,261 from the exercise of stock options
in fiscal 2021 in connection with which we issued 559,840 shares of our Class B common stock. We received proceeds of $11,571 from the
exercise of stock options in fiscal 2020 in connection with which we issued 86,197 shares of our Class B common stock.
We maintain a credit facility of up to $2.0 million provided by Western
Alliance Bank which is more fully described in Note 15 to the Consolidated Financial Statements included in Item 8 of this annual report
on Form 10-K.
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.
38
Changes in Trade Accounts Receivable
Gross trade accounts receivables were $2.5 million and $1.4 million
at July 31, 2021 and 2020 respectively. Our cash collections in fiscal 2021 and fiscal 2020 were $18.4 million and $9.2 million, respectively.
Concentration of Credit Risk and Significant Customers
Historically, we have had very little or no bad debt, which is common
with other platforms of our size that derive their revenue from digital advertising, as we aggressively manage our collections and perform
due diligence on our customers. In addition, the majority of our revenue is derived from large, credit-worthy customers, e.g. MoPub (owned
by Twitter), Google and Facebook, 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 fiscal year ended July 31, 2021, three customers represented
30%, 22% and 12% of the Company’s revenue, and in the fiscal year ended July 31, 2020, two customers represented 29% and 26% of
the Company’s revenue. At July 31, 2021, two customers represented 37% and 28% of the Company’s accounts receivable balance
and at July 31, 2020, two customers represented 35% and 32% of the Company’s accounts receivable balance. All of these significant
customers were advertising exchanges operated by leading companies, and the receivables represent many smaller amounts due from 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 July 31, 2021, 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, other than the following.
In connection with our Spin-Off, we and IDT entered into various agreements
prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship
with IDT after the Spin-Off, and a Tax Separation Agreement, which sets forth the responsibilities of us and IDT with respect to, among
other things, liabilities for federal, state, local and foreign taxes for periods before and including the Spin-Off, the preparation and
filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to Separation and
Distribution Agreement, among other things, we indemnify IDT and IDT indemnifies us for losses related to the failure of the other to
pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation
Agreement, among other things, IDT indemnifies us from all liability for taxes of ours and any of our subsidiaries or relating to our
business with respect to taxable periods ending on or before the Spin-Off, and we indemnify IDT from all liability for taxes of ours and
any of our subsidiaries or relating to our business accruing after the Spin-Off. Notwithstanding the foregoing, we are responsible for,
and IDT has no obligation to indemnify us for, any tax liability of ours resulting from an audit, examination or other proceeding related
to any tax returns that relate solely to us and our subsidiaries regardless of whether such tax return relates to a period prior to or
following the Spin-Off.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risks.
Smaller reporting companies are not required to provide the information
required by this item.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of the Company and the report
of the independent registered public accounting firm thereon starting on page F-1 are included herein.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
Item 9A. 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 Annual Report on Form 10-K. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 31, 2021
other than the restatement as disclosed below.
Consideration of Restatement
In light of the restatement discussed in Note 1 to the consolidated
financial statements included in Item 1 to Part I of the Quarterly Report on Form 10-Q/A filed on November 5, 2021, our principal
executive and principal financial officers reevaluated the effectiveness of our disclosure controls and procedures as of July 31, 2021,
including whether the error identified was the result of a material weakness in our internal control over financial reporting. As part
of this assessment, we reconsidered whether our existing disclosure controls and procedures over the evaluation of the valuation allowance
against deferred tax assets, which has been outsourced to an outside accounting firm since fiscal 2018, were operating effectively. Based
on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures
related to the valuation allowance were not effective as of July 31, 2021. We are considering remedial actions and expect to implement
them in the near future.
39
Report of Management on Internal Control over Financial Reporting
We, the management of Zedge, Inc. and subsidiaries (the “Company”),
are responsible for establishing and maintaining adequate internal control over financial reporting of the Company.
The Company’s internal control over financial reporting is defined
in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision
of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s
financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes
those policies and procedures that:
Management has assessed the effectiveness of the Company’s internal
control over financial reporting as of July 31, 2021. In making this assessment, the Company’s management used the criteria established
in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial
reporting, as prescribed above, as of July 31, 2021. Based on our evaluation, our principal executive officer and principal financial
officer concluded that the Company’s internal control over financial reporting was not effective due to the existence of the material
weakness as described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Notwithstanding the material weakness described below, we have performed
additional analyses and other procedures to enable management to conclude that our consolidated financial statements included in this
Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for
the periods presented.
Deficiency in our Internal Control Over Financial Reporting
Based on an evaluation of the effectiveness of the design and operation
of its controls and procedures conducted by the Company’s management, including the Company’s Chief Executive Officer and
Chief Financial Officer, the Company has concluded that, due to the below material weakness in financial reporting, these controls and
procedures were not effective as of July 31, 2021.
We have identified the following material weakness in our controls:
Remediation
The Company’s management plans to take steps to remediate the
material weakness identified above and improve internal control over financial reporting. Remediation of these weaknesses had not yet
been completed, and therefore these deficiencies continued to exist as of November 5, 2021. Management and our Audit Committee will monitor
remedial measures and the effectiveness of our internal controls and procedures. Notwithstanding the material weakness described above,
we have performed additional analyses and other procedures to enable management to conclude that our financial statements included in
this Form 10-K fairly present, in all material respects, our financial condition and results of operations as of and for the year ended
July 31, 2021.
This Annual Report on Form 10-K does not include an attestation report
of our independent registered public accounting firm regarding internal control over financial reporting because as a smaller reporting
company we are not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
during the fourth quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information.
40
PART III
Item 10. Directors and Executive Officers of the Registrant, and
Corporate Governance
The following is a list of our directors and executive officers along
with the specific information required by Rule 14a-3 of the Securities Exchange Act of 1934:
Executive Officers
Jonathan Reich – Chief Executive Officer and President
Yi Tsai – Chief Financial Officer and Treasurer
Michael Jonas –Executive Chairman
Directors
Michael Jonas, Chairman of the Board
Howard Jonas, Vice Chairman of the Board
Mark Ghermezian
Elliot Gibber
Paul Packer
Gregory Suess
The remaining information required by this Item will be contained in
our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days
after July 31, 2021, and which is incorporated by reference herein.
Corporate Governance
We have included as exhibits to this Annual Report on Form 10-K certificates
of our Chief Executive Officer and Chief Financial Officer certifying the quality of our public disclosure.
We make available free of charge through the investor relations page
of our web site (investor.zedge.net ) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial
owners of more than 10% of our equity, as soon as reasonably practicable after such reports are electronically filed with the Securities
and Exchange Commission. We have adopted codes of business conduct and ethics for all of our employees, including our principal executive
officer, principal financial officer and principal accounting officer. Copies of the codes of business conduct and ethics are available
on our web site.
Our web site and the information contained therein or incorporated
therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange
Commission.
Item 11. Executive Compensation
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July
31, 2021, and which is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July
31, 2021, and which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July
31, 2021, and which is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July
31, 2021, and which is incorporated by reference herein.
41
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Report:
Consolidated Financial Statements covered
by Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedule.
All schedules have been omitted since
they are either included in the Notes to Consolidated Financial Statements or not required or not applicable.
The exhibits listed in paragraph (b) of
this item are filed, furnished, or incorporated by reference as part of this Form 10-K.
Certain of the agreements filed as
exhibits to this Form 10-K contain representations and warranties by the parties to the agreements that have been made solely for the
benefit of the parties to the agreement. These representations and warranties:
Accordingly, these representations and
warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other
time. Investors should not rely on them as statements of fact.
42
(b) Exhibits.
Exhibit Number Description of Exhibits
3.1(1) Third Amended and Restated Certificate of Incorporation of Zedge, Inc.
3.2(2) Second Amended and Restated By-Laws of Zedge, Inc.
10.1(4) 2016 Stock Option and Incentive Plan, as Amended and Restated
10.2(1) Transition Services Agreement
10.3(1) Tax Separation Agreement
10.7(1) Form of ISO Stock Option Agreement
10.8(1) Form of Nonqualified Stock Option Agreement
10.9(1) Form of Restricted Stock Agreement
21.01* Subsidiaries of the Registrant
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
* filed herewith.
(1) Incorporated by reference to Form 10-12G/A, filed June 1, 2016.
(2) Incorporated by reference to Form 10-K, filed October 28, 2019