Zedge(ZDGE) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The company reported a widened net loss for Q3 and the nine-month period of fiscal 2019, with total assets decreasing due to reduced cash and cash equivalents, despite positive operating cash flow Consolidated Balance Sheet Summary (in thousands) | Account | April 30, 2019 | July 31, 2018 | | :--- | :--- | :--- | | Total Assets | $10,158 | $11,719 | | Cash and cash equivalents | $2,248 | $3,408 | | Total current assets | $3,892 | $5,803 | | Total Liabilities | $2,094 | $1,709 | | Total current liabilities | $2,094 | $1,709 | | Total Stockholders' Equity | $8,064 | $10,010 | Consolidated Statements of Comprehensive Loss Summary (in thousands, except per share data) | Metric | Three Months Ended April 30, 2019 | Three Months Ended April 30, 2018 | Nine Months Ended April 30, 2019 | Nine Months Ended April 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,912 | $2,551 | $6,866 | $8,255 | | Loss from operations | $(1,121) | $(339) | $(1,948) | $(1,303) | | Net loss | $(1,195) | $(309) | $(2,142) | $(1,302) | | Loss per share (Basic & Diluted) | $(0.12) | $(0.03) | $(0.21) | $(0.13) | Consolidated Statements of Cash Flows Summary (in thousands) | Activity | Nine Months Ended April 30, 2019 | Nine Months Ended April 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $471 | $784 | | Net cash used in investing activities | $(1,527) | $(1,295) | | Net cash (used in) provided by financing activities | $(29) | $216 | | Net decrease in cash and cash equivalents | $(1,160) | $(308) | Notes to Consolidated Financial Statements Key notes include the immaterial impact of Topic 606 adoption, emerging revenue streams, foreign exchange risk management, and ongoing legal proceedings - The company adopted Topic 606 (Revenue from Contracts with Customers) on August 1, 2018, using the modified retrospective method, with the impact being not material and no adjustment made to beginning retained earnings[24] Revenue Breakdown by Type (in thousands) | Revenue Type | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2019 | | :--- | :--- | :--- | | Advertising revenue | $1,670 | $6,243 | | Service revenue | $179 | $528 | | Other revenue | $63 | $95 | | Total Revenue | $1,912 | $6,866 | - Zedge Premium, a marketplace for artists, generated gross transaction value (GTV) of $0.159 million and net revenue of $0.036 million in Q3 2019, with nine-month GTV at $0.317 million and net revenue at $0.069 million[32] - Subscription services, launched in January 2019, generated $0.187 million in gross sales and recognized $0.026 million in revenue in Q3 2019, with nearly 60,000 active subscribers as of April 30, 2019[33] - The company is involved in a copyright infringement lawsuit seeking approximately $1.6 million in damages, but management believes the likelihood of material liability is remote[73] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue decline to user base shift to lower-rate emerging markets, impacting ARPMAU, while new initiatives and cost reductions aim to improve financial performance Overview Zedge, a content discovery platform with over 34 million MAU, is diversifying revenue beyond advertising with Zedge Premium and subscriptions amid a user shift to emerging markets - As of April 30, 2019, the Zedge app had more than 34 million monthly active users (MAU) and has been installed over 382 million times[91][95] - In Q3 fiscal 2019, MAU in emerging markets grew by 12.1% year-over-year, while MAU in well-developed markets declined by 16.6% year-over-year, negatively impacting revenue due to lower advertising rates[97] - The company launched Zedge Premium in March 2018 as a marketplace for artists and introduced a subscription service in January 2019 for an ad-free experience[93][94] Results of Operations Q3 fiscal 2019 saw a 25.0% revenue decrease and widened net loss, driven by declining ARPMAU and MAU in developed markets, despite new offerings and reduced SG&A expenses Financial Performance Comparison (in thousands) | Metric | Three Months Ended April 30, 2019 | Three Months Ended April 30, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $1,912 | $2,551 | -25.0% | | Loss from operations | $(1,121) | $(339) | 230.7% | | Net loss | $(1,195) | $(309) | 286.7% | - Average revenue per monthly active user (ARPMAU) decreased 25.3% to $0.0166 in Q3 2019 from $0.0222 in Q3 2018, driven by geographical MAU shifts and monetization method discontinuation[110] - The company announced a workforce reduction of approximately 12 employees (20% of workforce), expected to generate annualized savings of $0.8 million to $1.0 million[106][120] - For the nine months ended April 30, 2019, SG&A decreased by $0.992 million (12.8%) compared to the prior year, primarily due to a $0.440 million one-time cost for the Freeform acquihire and $0.372 million in severance costs in the prior period[118] Liquidity and Capital Resources Zedge maintains liquidity with $2.2 million in cash and an undrawn $2.5 million revolving credit facility, with management confident in sufficient funds for the next twelve months - At April 30, 2019, the company had cash and cash equivalents of $2.2 million and working capital of $1.8 million[126] - The company maintains a revolving credit facility of up to $2.5 million, expiring September 26, 2020, with no amounts outstanding as of April 30, 2019[133] - In August 2018, the company made a $0.250 million investment in TreSensa, Inc. for a minority equity stake and a playable ad distribution agreement[132] - The company faces customer concentration risk, with three customers accounting for 28%, 27%, and 10% of revenue for the nine months ended April 30, 2019[138] Quantitative and Qualitative Disclosures About Market Risks As a smaller reporting company, Zedge is not required to provide the information for this item - Smaller reporting companies are not required to provide the information required by this item[141] Controls and Procedures The Chief Executive Officer and Chief Financial Officer evaluated the company's disclosure controls and procedures and concluded they were effective as of April 30, 2019, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of the end of the reporting period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[142] - No changes in internal control over financial reporting occurred during the quarter ended April 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[143] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a copyright infringement lawsuit seeking approximately $1.6 million in damages, which Zedge believes has a remote likelihood of material liability, while a separate patent infringement complaint was voluntarily dismissed - The company is defending a lawsuit from Saregama India, Limited, filed in March 2014, which alleges copyright infringement and seeks approximately $1.6 million in damages, but the company believes a material liability is remote[73][145] - A patent infringement complaint filed by Tellagemini Communication LLC in October 2018 was voluntarily dismissed by the plaintiff in November 2018[74] Risk Factors The primary risk factor highlighted is the company's failure to grow its user base in well-developed economies, which generate higher revenue, leading to a negative impact on financial performance due to a user shift to lower-revenue emerging markets - A key risk is the failure to add new users in well-developed economies, which could significantly harm revenue and financial results[146] - The company has experienced a significant shift in its user base, with Monthly Active Users in well-developed economies falling 16.6% since April 2018, while increasing 12.1% in lower-revenue emerging markets, negatively impacting financial performance[146] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities, no defaults upon senior securities, and no mine safety disclosures, with the report also listing filed exhibits including CEO/CFO certifications and XBRL data files - The company reported no information for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information)[148]