Zedge, Inc. 10-Q

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, 2021 (the “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 subsidiary Zedge Europe AS, collectively. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from 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 the Form 10-K. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the Form 10-K. Overview We own a portfolio of leading digital consumer brands that, as January 31, 2022, served 45 million monthly active users across the globe. Our portfolio consists of Zedge Ringtones and Wallpapers (“Zedge App”), Shortz and, as of the beginning of August of 2021, Emojipedia. We operate a state-of-the-art digital publishing platform that powers Zedge App, available in the Google Play store and App Store, which offers an easy, entertaining and immersive way for end-users to engage with our rich and diverse catalogue of wallpapers, video wallpapers, ringtones, notification sounds on Android and wallpapers, video wallpapers, ringtones and custom icon packs on iOS. We secure our content from amateur and professional artists, and also from emerging and major brands. Artists have the ability to easily launch a virtual storefront in our Zedge App where they can market and sell their content to our user base. 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 our 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. In August of 2021, we acquired Emojipedia, the leading source of all things emoji. Our Zedge App has been installed approximately 541 million times, and at January 31, 2022, boasted approximately 36 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 contains 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. 15 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 January 31, 2022, we had approximately 762,000 active paid subscribers. In December 2019, we completed the beta launch of ‘Shortz’ our new entertainment app offering serialized, short-form fiction rendered in a text-message format and more recently as audio productions available across both Android and iOS, and focusing on users in the United States, the United Kingdom and Canada and it is now available globally. New stories are added to the app regularly and we continuously improve 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. In January 2022 Emojipedia receives approximately 45 million monthly page views and has approximately 8.6 million monthly active users of which approximately 50% are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a voting member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Facebook and Twitter. In December of 2021 we introduced ‘NFTs Made Easy’ to select Zedge Premium artists initially interested in selling single edition, tokenized, video wallpapers. Our all-in-one platform allows creators to self-publish, mint and sell their NFTs simply by selecting the NFT option within our self-publishing platform and without the need for them to be cryptocurrency experts or technology wizards. ‘NFTs Made Easy’ is currency agnostic and allows consumers to purchase NFTs with Zedge tokens acquired via in-app purchases, eliminating the need to set up a crypto wallet to buy cryptocurrencies. Over time we expect to expand the offering with features including features like numbered editions, drop dates and new content types. Over the past several years, our Zedge App has experienced a continuing decline in its MAU in well-developed markets with growth of MAU in emerging markets, so that users in emerging markets represent an increasing portion of our user base. In addition, the rate of user growth in emerging markets slowed in the first half of fiscal 2022 compared to prior periods. As of January 31, 2022, users in emerging markets represented 77% of the MAU for our Zedge App compared to 73% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. In the second quarter of fiscal 2022, users in emerging markets grew by 7.3% while users in well-developed economies declined 10.5% when compared to the same period in fiscal 2021. As of January 31, 2022, approximately 41% of our Zedge App’s user base was located in North America (20%) and Europe (including Eastern Europe, 21%), compared with 42% (North America, 20% and Europe 22%) as of July 31, 2021. The remaining 58% of the user base was primarily located in emerging markets with 27% located in India. 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. We have started increasing 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 and return to more robust growth in all 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. In February of 2022 the Russian Federation invaded Ukraine. As a result, many governments and businesses imposed trade and economic sanctions on the Russian Federation and Belarus. Zedge has a small user base in Russia and Belarus; however, it also has a development center in Vilnius, Lithuania, which is approximately 40 kilometers from the Belarussian border. In the event that the conflict broadens to additional countries, Zedge may experience a slowdown relating to relocating personnel and/or employees being drafted into military or public service. At present, the Company is working on contingency planning to be in a position to minimize any potential interruptions. 16 During the quarters ended January 31, 2022 and 2021, we generated approximately 79% and 83%, 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. 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 January 31, 2022, we had approximately 762,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception in January 2019, subscriptions have generated approximately $8.5 million in gross revenue. The COVID-19 pandemic, which has been ongoing since the third quarter of fiscal 2020, has resulted in public health responses including travel bans, restrictions, social distancing requirements, and shelter-in-place orders, which have impacted our business, operations, and financial performance in different ways. As a result of the COVID-19 pandemic, we experienced a reduction in advertiser demand in the second half of fiscal 2020. After that time, advertisers around the world increased their investment on mobile advertising. We saw continued momentum across key markets and increased advertiser demand for digital ads in general. The ongoing impact of the COVID-19 pandemic on our business and on global economic activity continues to evolve and may again in the future adversely affect our business, operations and financial results. Our past results may not be indicative of our future performance, and historical trends in revenue, income (loss) from operations, net income (loss), and net income (loss) per share may differ materially. The key risks facing our business are further described in Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the year ended July 31, 2021, as filed with the SEC. 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 Form 10-K. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to capitalized software and technology development costs, revenue recognition, intangible assets and goodwill. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. Recently Issued Accounting Standards Not Yet Adopted Please refer to Note 1 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. 17 Key Performance Indicators The presentation of our results of operations includes disclosure of two key performance indicators - Monthly Active Users (MAU) and Average Revenue Per Monthly Active User (ARPMAU) from our Zedge App. MAU is a key performance indicator that captures the number of unique users that used our Zedge App during the previous 30-day period, which is important to understanding the size of the user base for the Company’s Zedge App which is a main driver of our revenue. Changes and trends in MAU are useful for measuring the general health of our business, gauging both present and potential customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement. ARPMAU is valuable because it provides insight into how well we monetize our users and, changes and trends in ARPMAU are indications of how effective our monetization investments are. MAU increased 2.5% in the second quarter of fiscal 2022 when compared to the same period a year ago and increased 6.1% on a sequential basis. Over the past several years, we have experienced a continuing shift in our regional customer make-up with MAU in emerging markets representing an increasing portion of our user base. As of January 31, 2022, users in emerging markets represented 77% of our MAU compared to 73% a year prior. This shift impacts our business because emerging markets do not monetize as well as well-developed markets due to lower eCPMs and lower monthly and annual subscription sales in these regions coupled with lower priced subscriptions SKUs. However, ARPMAU for the three months ended January 31, 2022 was up approximately 22% when compared to the same period a year ago, pointing to progress we have made in extracting more revenue from our users, particularly from paid subscriptions sales and improvement in ad optimization. ARPMAU improved 12.8% on a sequential basis. Three Months Ended January 31, (in millions, except ARPMAU - Zedge App) 2022 2021 % Change MAU - Zedge App 36.3 35.4 2.5 % Developed Markets MAU - Zedge App 8.5 9.5 -10.5 % Emerging Markets MAU - Zedge App 27.8 25.9 7.3 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App 77 % 73 % 4.9 % ARPMAU - Zedge App $ 0.0601 $ 0.0492 22.2 % Three Months Ended January 31, Three Months Ended October 31, (in millions, except ARPMAU) 2022 2021 % Change MAU - Zedge App 36.3 34.2 6.1 % Developed Markets MAU - Zedge App 8.5 8.4 1.0 % Emerging Markets MAU - Zedge App 27.8 25.8 7.8 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App 77 % 75 % 1.6 % ARPMAU - Zedge App $ 0.0601 $ 0.0533 12.8 % 18 The following charts present the MAU – Zedge App and ARPMAU – Zedge App for the consecutive eight quarters ended January 31, 2022: * Please note the MAU-Zedge App graph above excludes MAU for the Emojipedia.org of approximately 8.6 million for the month of January 31, 2022. Results of Operations Three and Six Months ended January 31, 2022 Compared to Three and Six Months ended January 31, 2021 Three Months Ended January 31, Change Six Months Ended January 31, Change 2022 2021 $ % 2022 2021 $ % (in thousands) (in thousands) Revenues $ 6,915 $ 5,314 $ 1,601 30.1 % $ 12,943 $ 9,076 $ 3,867 42.6 % Direct cost of revenues 342 313 29 9.3 % 652 617 35 5.7 % Selling, general and administrative 3,106 2,159 947 43.9 % 5,838 4,165 1,673 40.2 % Depreciation and amortization 360 324 36 11.1 % 758 683 75 11.0 % Income from operations 3,107 2,518 589 23.4 % 5,695 3,611 2,084 57.7 % Interest and other income, net 14 5 9 180.0 % 27 5 22 440.0 % Net (loss) gain resulting from foreign exchange transactions (85 ) 74 (159 ) nm (95 ) 34 (129 ) nm Provision for income taxes 711 319 392 122.9 % 1,247 327 920 281.3 % Net Income $ 2,325 $ 2,278 $ 47 2.1 % $ 4,380 $ 3,323 $ 1,057 31.8 % nm—not measurable Revenues The following table sets forth the composition of our revenues for the three and six months ended January 31, 2022 and 2021: Three Months Ended Six Months Ended January 31, January 31, % Changes 2022 2021 2022 2021 Three Months Six Months (in thousands) (in thousands) Advertising revenue $ 5,437 $ 4,399 $ 10,006 $ 7,385 24 % 35 % Paid subscription revenue 953 809 1,913 1,459 18 % 31 % Other revenues 525 106 1,024 232 395 % 341 % Total revenues $ 6,915 $ 5,314 $ 12,943 $ 9,076 30 % 43 % Advertising revenue . Advertising revenue increased 24% and 35% in the three and six months ended January 31, 2022, respectively, compared to the three and six months ended January 31, 2021, primarily due to improvement in our ad optimizations and higher advertising rates. 19 Paid subscription revenue . We rolled out a subscription-based product on Android in January 2019, whereby users of our Zedge app could pay a monthly or annual fee to remove unsolicited ads when using our Zedge app. We employ a regional pricing strategy in order to improve conversions. The U.S. constitutes our largest subscriber base and we generally charge $0.99 per month and $4.99 per year. We generated $897,000 and $1,816,000 in gross prepaid subscription in the three and six months ended January 31, 2022, respectively, compared to $952,000 and $1,816,000 in the three and six months ended January 31, 2021. The 6% decline in gross prepaid subscription sale for the three months ended January 31, 2022 when compared to the same period a year ago was due to approximately 10% decline in new installs in the well-development markets in the corresponding periods. We expect that from time to time the prices of our subscription in each country/region may change and we may test other plan and price variations. The following table summarizes subscription revenue for the three and six months ended January 31, 2022 and 2021: Three Months Ended Six Months Ended January 31, January 31, 2022 2021 % Change 2022 2021 % Change (in thousands, except revenue per subscriber and percentages) Revenues $ 953 $ 809 18 % $ 1,913 $ 1,459 $ 31 % Active subscriptions net additions -1 102 -100 % 10 207 -95 % Active subscriptions at end of period 762 711 7 % 762 711 7 % Average active subscriptions 765 669 14 % 762 612 25 % Average monthly revenue per active subscription $ 0.42 $ 0.40 5 % $ 0.42 $ 0.40 $ 5 % Zedge Premium . In the three and six months ended January 31, 2022, gross transaction value (the total sales volume transacting through the platform), or “GTV,” generated from Zedge Premium were $434,000 and $763,000, respectively, compared to $211,000 and $419,000 in the three and six months ended January 31, 2021. In the three and six months ended January 31, 2021 net revenue generated from Zedge Premium were $241,000 and $428,000, respectively, compared to $103,000 and $228,000 in the three and six months ended January 31, 2021. The gross and net revenue growth in Zedge Premium can be attributed to the investment we made in our new content management system as well as the landing page redesign. Revenue from Zedge Premium, web-based advertising revenues from Emojipedia and other related sites, as well as revenues generated by Shortz, are reported under Other Revenues, and those offerings constitute potential growth drivers in the quarters to come. Direct cost of revenues . Direct cost of revenues consists primarily of content hosting and content delivery costs. Three Months Ended January 31, Six Months Ended January 31, (in thousands) 2022 2021 % Change 2022 2021 % Change Direct cost of revenues $ 342 $ 313 9.3 % $ 652 $ 617 5.7 % As a percentage of revenues 4.9 % 5.9 % 5.0 % 6.8 % Direct cost of revenues increased 9.3% and 5.7% in the three and six months ended January 31, 2022, respectively, compared to three and six months ended January 31, 2021. The increase in the direct cost of revenues can be attributed to the new data analytic tool provided by Google Cloud: Cloud Computing Services. As a percentage of revenue, direct cost of revenues in three and six months ended January 31, 2021 were 4.9% and 5.0%, respectively, compared to 5.9% and 6.8%, in the three and six months ended January 31, 2020, primarily due to significantly higher revenue in the current periods and the fixed nature of many of our direct cost of revenues. Selling, general and administrative expense . Selling, general and administrative expense (“SG&A”) consists mainly of payroll, benefits, recruiting fees, facilities, marketing, content acquisition costs, consulting, professional fees, software licensing (“SaaS”) and public company related expenses. Three Months Ended January 31, Six Months Ended January 31, (in thousands) 2022 2021 % Change 2022 2021 % Change Selling, general and administrative $ 3,105 $ 2,159 43.8 % $ 5,838 $ 4,165 40.2 % As a percentage of revenues 44.9 % 40.6 % 45.1 % 45.9 % SG&A expense increased 43.8% and 40.2% in the three and six months ended January 31, 2022, respectively, compared to the three and six months ended January 31, 2021. This increase was primarily attributable to higher compensation costs resulting from additional headcount, higher stock-based compensation as discussed below, higher professional fees offset by reductions in discretionary expenses. 20 As a percentage of revenue, SG&A expense in the three and six months ended January 31, 2021 were 44.9% and 45.1%, respectively, compared to 40.6% and 45.9%, in the three and six months ended January 31, 2021. Our headcount totaled 63 as of January 31, 2022 compared to 46 as of January 31, 2021 with the majority of our employees currently based in Lithuania. SG&A expense also included stock-based compensation expense which were $489,000 and $808,000 for the three and six months ended January 31, 2021, respectively, compared to $152,000 and $389,000 for the three and six months ended January 31, 2021. Stock-based compensation includes equity grants to employees and consultants, as well as stock issuances to pay for board compensations and 401(k) matching contributions. Certain stock options, deferred stock unit and restricted stock grants are more fully described in Note 6 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Depreciation and amortization . Depreciation and amortization consist mainly of amortization of 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, and amortization of intangible assets. Three Months Ended January 31, Six Months Ended January 31, (in thousands) 2022 2021 % Change 2022 2021 % Change Depreciation and amortization $ 360 $ 324 11.1 % $ 758 $ 683 11.0 % As a percentage of revenues 5.2 % 6.1 % 5.9 % 7.5 % Depreciation and amortization expenses increased approximately 11% in both three and six months ended January 31, 2022, compared to three and six months ended January 31, 2021. This increase was primarily attributable to the amortization of intangible assets related to the Emojipedia acquisition which was completed on August 1, 2021. Interest and other income, net. Interest and other income, net in the three and six months ended January 31, 2022 increased $7,000 and $22,000 respectively when compared to the same periods in fiscal 2021 due to higher cash balance resulting from cash flows provided by operating activities and financing activities in fiscal 2021. Three Months Ended January 31, Six Months Ended January 31, (in thousands) 2022 2021 % Change 2022 2021 % Change Interest and other income, net $ 14 $ 5 180.0 % $ 27 $ 5 440.0 % As a percentage of revenues 0.2 % 0.1 % 0.2 % 0.1 % Net (loss) gain resulting from foreign exchange transactions . Net loss resulting from foreign exchange transactions is comprised of gains and losses generated from movements in NOK and EUR relative to the U.S. Dollar, including gains or losses from our hedging activities. Three Months Ended January 31, Six Months Ended January 31, (in thousands) 2022 2021 % Change 2022 2021 % Change Net loss resulting from foreign exchange transactions $ (85 ) $ 74 nm $ (95 ) $ 34 nm As a percentage of revenues -1.2 % 1.4 % -0.7 % 0.4 % In the three and six months ended January 31, 2021, we realized losses of $127,000 and $117,000, respectively, from NOK and EUR hedging activities, compared to gains of $92,000 and $51,000, respectively in the three and six months ended January 31, 2021. Provision for income taxes . The tax expense consists of federal and state taxes based on taxable income and allocated net worth and certain income taxes payable in foreign jurisdictions where our subsidiaries reside. Three Months Ended January 31, Six Months Ended January 31, (in thousands) 2022 2021 % Change 2022 2021 % Change Provision for income taxes $ 711 $ 319 122.9 % $ 1,247 $ 327 281.3 % As a percentage of revenues 10.3 % 6.0 % 9.6 % 3.6 % Our tax provision or benefit for income taxes for interim periods has generally been determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Under certain circumstances where we are unable to make a reliable estimate of the annual effective tax rate, the accounting guidance permits the use of the actual effective tax rate for the year-to-date period. 21 We expect our overall effective tax rate for fiscal year ending July 31, 2022 to be approximately 22.8%. The effective tax rate differed from the United States federal statutory tax rate of 21% due to certain factors with temporary impact primarily related to the equity compensation expenses. During the six months ended January 31, 2022, we accounted for a discrete item related to restricted stock windfall (vesting date fair market value above the grant date fair market value) which resulted in a net effective tax rate of 22.1%. As of January 31, 2022, we had $527,000 of deferred tax assets for which it has not established a valuation allowance, related to the U.S. federal states and certain international subsidiary. The Company completed its reassessment of the ability to realize these assets and concluded that a valuation allowance was not required. We are subject to taxation in the United States and certain foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdictions where we are subject to potential examination by tax authorities include the United States, Norway and Lithuania. Liquidity and Capital Resources General At January 31, 2022, we had cash and cash equivalents of $30.0 million and working capital (current assets less current liabilities) of $26.9 million, compared to $24.9 million and $23.4 million, respectively, at July 31, 2021. We expect that our cash and cash equivalents on hand and our cash flow from operations will be sufficient to meet our anticipated cash requirements for the twelve-month period ending March 16, 2023. During fiscal 2021, we raised an aggregate of $15 million through sales of equity in At the Market offerings. We also maintain a revolving line of credit of up to $2.0 million and a foreign exchange contract facility of up to $6.5 million with Western Alliance Bank, as discussed below in Financing Activities. The following tables present selected financial information for the six months ended January 31, 2022 and 2021: Six Months Ended January 31, (in thousands) 2022 2021 Cash flows provided by (used in): Operating activities $ 5,679 $ 3,761 Investing activities (323 ) (401 ) Financing activities (225 ) 5,055 Effect of exchange rate changes on cash and cash equivalents (23 ) 82 Increase in cash and cash equivalents $ 5,108 $ 8,497 Operating Activities Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable. Cash provided by operating activities increased $1.9 million in the six months ended January 31, 2022 to $5.7 million from $3.7 million in the six months ended January 31, 2021, primarily attributable to the higher revenues generated from our service offerings, principally advertising and paid subscription revenues. Investing Activities Pursuant to an Asset Purchase Agreement, on August 1, 2021 (“Closing”), we acquired substantially all of the assets of Emojipedia Pty Ltd, a proprietary company organized under the laws of Australia. The final purchase price of the assets has been determined to be $6.7 million of which $4.8 million was paid on August 2, 2021 with the remaining $1.9 million to be paid out on the six-month and twelve-month anniversary of the Closing. That $4.8 million was funded into an escrow account on July 30, 2021 and classified as other assets on our balance sheet as of July 31, 2021. Cash used in investing activities in six months ended January 31, 2022 and 2021 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. 22 Financing Activities Between December 14, 2020 and January 26, 2021, we sold an aggregate of 761,906 shares of our Class B common stock at an average price of $6.5625 per share for total gross 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 are using 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. We repaid approximately $100,000 in principal in the six months ended January 31, 2021. In the six months ended January 31, 2022 and 2021, we issued 3,666 shares and 312,287 shares respectively of Class B common stock and received $7,000 and $396,000 respectively, in connection with options exercised during the period. In the six months ended January 31, 2022 and 2021, we purchased 16,115 shares and 17,630 shares, respectively, of Class B common stock from employees for $232,000 and $26,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock and DSUs. We maintain a credit facility of up to $2.0 million provided by Western Alliance Bank which is more fully described in Note 9 to the Unaudited Condensed Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. 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. Changes in Trade Accounts Receivable Gross trade accounts receivable increased $0.7 million to $3.2 million at January 31, 2022 from $2.5 million at July 31, 2021, primarily due to higher revenue in the preceding two months ended January 31, 2022 when compared to the same period ended July 31, 2021. 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 until it was sold to AppLovin on January 3, 2022), Google, Facebook 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 six months ended January 31, 2022, three customers represented 25%, 23% and 12% of our revenue. In the six months ended January 31, 2021, three customers represented 31%, 22% and 12% of our revenue. At January 31, 2022, two customers represented 39% and 29% of our accounts receivable balance, and at July 31, 2021, two customers represented 37% and 28% 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 January 31, 2022, 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.