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 future results. Factors that may cause such differences include, but are not limited to: (1) Economic, geopolitical and market conditions can adversely affect our business, results of operations and financial condition, including our revenue growth and profitability, which in turn could adversely affect our stock price; (2) Our ability to successfully make acquisitions and/or successfully integrate acquisitions that we have made in to Zedge without incurring unanticipated costs or without being subject to other integration issues that may disrupt our existing operations; (3) Delay or failure to realize the expected synergies and benefits of the GuruShots acquisition; (4) The impact of the Covid-19 pandemic on our employees, customers, partners, and the global financial markets; and (5) Russia's recent invasion of Ukraine, and the international community's response. For further information regarding risks and uncertainties associated with our business, please refer to Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, 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. Impact of COVID-19 In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to impact the U.S. and the world. We are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners, the risk of additional, and currently-unknown COVID-19 variations necessitating further measures to mitigate risk and seek to protect employee and vendor health and safety. We will continue to evaluate the scope and extent of the impact to our business, consolidated results of operations, and financial condition. Impact of Russia's recent invasion of Ukraine 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 spills over into other countries, Zedge may need to relocate personnel potentially resulting in a slowdown in work product generated by those personnel. At present, the Company is working on contingency planning to be in a position to minimize any potential interruptions. GuruShots has several contractors originally based in Ukraine who were inaccessible for a period of time. Most of them are now back at work and some of them have relocated to neighboring countries. As a result, there has been minimal disruption in the development work performed for GuruShots. We disabled both the Zedge app and GuruShots in Russia and Belarus resulting in a loss of that customer base and associated revenue. Finally, at the outset of the war, we changed the color of the Zedge App's icon to the colors of the Ukrainian flag as a demonstration of our solidarity with Ukraine. This change triggered a spate of users, primarily located in countries that have close ties to the Russian Federation, to either uninstall the Zedge App and/or reduce our star ranking across the various storefronts. We also updated the collateral materials in these storefronts to the color of the Ukrainian flag resulting in a decline in new installs from these same countries. 20 Overview Zedge builds marketplaces and games around digital content that people use to express themselves. Our portfolio consists of several leading digital consumer brands that, as April 30, 2022, served 41 million monthly active users across the globe. Our portfolio consists of Zedge Ringtones and Wallpapers (“Zedge App”), as of August 1, 2021, Emojipedia and, as of April 12, 2022, GuruShots. We operate a state-of-the-art digital publishing platform that powers the Zedge App, which is available in the Google Play store and App Store, and 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. In August of 2021, we acquired Emojipedia, the leading source of all things emoji and, on April 12, 2022, we acquired GuruShots, an Israeli company that operates a platform used for its competitive photography game available across iOS, Android and the web. Our Zedge App has been installed approximately 556 million times, and at April 30, 2022, served approximately 32 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; however, we have started investing more in this area. 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 November 2020 , 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 December of 2021 we introduced ‘NFTs Made Easy’ to select Zedge Premium artists 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. 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. 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 April 30, 2022, we had approximately 713,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception in January 2019, subscriptions have generated approximately $9.4 million in gross revenue. 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. Based on the limited success of Shortz with our user base, we have decided to deprioritize its development and focus our resources on other opportunities. During the quarters ended April 30, 2022 and 2021, we generated approximately 77% and 81%, respectively, of our revenues from selling our Zedge App’s advertising inventory primarily to advertising networks and advertising exchanges. 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. 21 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. 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 April 30, 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 third quarter of fiscal 2022, users in well-developed economies and emerging markets declined by 15.6% and 3.9% respectively when compared to the same period in fiscal 2021. As of April 30, 2022, approximately 41% of our Zedge App’s user base was located in North America (21%) and Europe (including Eastern Europe, 20%), compared with 42% (North America, 20% and Europe 22%) as of July 31, 2021. The remaining 59% 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. Business Combination and Asset Acquisition Emojipedia 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. GuruShots On April 12, 2022, we completed the acquisition of GuruShots (“GS”). GS, founded in 2014, is an Israeli company and the leader in the photo gaming space. It provides a fun, educational, and structured way for amateur photographers -- anyone with a cell phone -- to compete and showcase their photos, gain recognition and progress via votes, badges, and awards. GS, via its LiveOps team, posts daily competitive challenges that are voted on by the platform's Gurus and the wider community. The platform releases approximately 10 challenges daily and users upload more than1 million high-quality photos monthly. Challenges can amass more than 20,000 submissions within 36 hours of being posted. GS has developed a sophisticated gamification platform that is being used to power its photo game GS business is based on a Free-to-Play model that leads to strong monetization with the purchase of resources that are used to give competitors a competitive edge while still maintaining a fair and competitive experience for all participants. Furthermore, it has a built-in social layer with features including leaderboards, chat, and team leagues. Its uniqueness is tied to several key elements including: ● Retention Dynamics – focused on individual, team, and community dynamics that create a sense of belonging, inspiration, recognition, improvement, and competition. ● Crowd Based Voting System – allows users to vote in favor or other player’s photos in order to secure a higher ranking. Users can earn greater voting power, or “perceived votes,” by engaging in gameplay. On a monthly basis, this yields more than 4.5 billion perceived votes, a strong indication of user-engagement. 22 ● Real-Time Image Ranking – a competitive dynamic that acts as a catalyst for users to reach top ranks. To date, GS has more than 130 million ranked images. By definition these are high-quality images, otherwise, they would not be ranked. ● Gamification Dynamics – these include challenges, points, levels, achievements, and game loops. GS’s Business Model GS generates revenue by selling game resources via in-app and online purchases. Some of these resources include increasing a photograph’s exposure, access to locked game content, exchanging an image in the competition with a different image, and skipping voting sessions. GS’s User Growth and Acquisition GS’ user acquisition and growth strategy is currently focused on paid user acquisition channels including Google, Facebook, and Instagram. GS is in the early stages of testing additional user acquisition platforms. Prior to the acquisition by Zedge, GS outsourced paid user acquisition to a 3 rd party marketing agency. In the coming months, we expect to migrate many of the marketing responsibilities in-house which we believe will yield improved ROAS and ROI. In addition, we plan on investing in organic user growth initiatives including user referral programs, search engine optimization, app store optimization, etc. which are standard growth drivers for gaming apps. Finally, we expect to cross market to existing Zedge users. GS’s Product Roadmap In 2021, GS focused on improving retention with game loops focused on improving challenges and achievements. In addition, it rolled out “Leagues,” which enables team-play, and which is scaling well. GS is increasingly focusing on improving the on boarding process in order to draw more users into the competitions, introducing a set of self-learning modules that can assist users in becoming better photographers. Gamifying learning is an area that can make a material difference in engagement and monetization. GS’s Technology GS’ cloud-based platform uses machine learning ranking technology to ensure fair exposure of all photos submitted to competitions. It also employs image classification technology to suggest which competitions a photo should enter. It has a strong moderation tool that actively detects content for policy violations. In addition, the platform is self-governing with regards to flagging inappropriate and copyrighted content, as many users are quick to flag this due to the competition context. Over time the plan is to migrate GS technology to the same cloud platform that Zedge currently uses with the expectation that this will yield cost savings and simplify operations. 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, business combinations and valuing contingent considerations, recognition and impairment of 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. 23 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 our 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 decreased 7.0% in the third quarter of fiscal 2022 when compared to the same period a year ago and increased 11.6% 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 April 30, 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 April 30, 2022 was up approximately 7.8% 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 declined 13.0% on a sequential basis due to seasonality. We believe that much of the decline was caused by one-off events and estimate that a third or more of the MAU decline is attributable to a combination of uninstalls driven by our need to push a forced upgrade of the Zedge App in order to migrate to AppLovin’s Max ad mediation platform combined with losses attributable to our decision to change the color of the Zedge App's icon to the colors of the Ukrainian flag as a demonstration of our solidarity with Ukraine. This change triggered a spate of users, primarily located in countries that have close ties to the Russian Federation, to either uninstall the Zedge App and/or reduce our star ranking across the various storefronts. We also updated the collateral materials in these storefronts to the color of the Ukrainian flag resulting in a decline in new installs from these same countries. In addition, we disabled both the Zedge App and GuruShots in Russia and Belarus resulting in a loss of that customer base. Furthermore, we are accustomed to experiencing MAU declines resulting from seasonality in the business in Q3, which follows the end-of-year holiday season. Thus, we believe much of the decline was caused by [one-off events. Nonetheless, we have implemented a variety of product changes to reverse the trend, including changing our app icon and store branding in India, increasing the frequency and regularity of push notification campaigns as well as app icon changes, and continuing our rollout of social and community features. Three Months Ended April 30, (in millions, except ARPMAU - Zedge App) 2022 2021 % Change MAU- Zedge App 32.1 34.5 -7.0 % Developed Markets MAU - Zedge App 7.5 8.9 -15.7 % Emerging Markets MAU - Zedge App 24.6 25.6 -3.9 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App 77 % 73 % 5.0 % ARPMAU - Zedge App $ 0.0523 $ 0.0485 7.8 % Three Months Ended April 30, Three Months Ended January 31, (in millions, except ARPMAU) 2022 2022 % Change MAU- Zedge App 32.1 36.3 -11.6 % Developed Markets MAU - Zedge App 7.5 8.5 -11.8 % Emerging Markets MAU - Zedge App 24.6 27.8 -11.5 % Emerging Markets MAU - Zedge App/Total MAU - Zedge App 77 % 77 % 0.1 % ARPMAU - Zedge App $ 0.0523 $ 0.0601 -13.0 % 24 The following charts present the MAU – Zedge App and ARPMAU – Zedge App for the consecutive eight quarters ended April 30, 2022: * Please note the MAU-Zedge App graph above excludes MAU for both Emojipedia and GuruShots Results of Operations Three and Nine months ended April 30, 2022 Compared to Three and Nine months ended April 30, 2021 Three Months Ended April 30, Change Nine Months Ended April 30, Change 2022 2021 $ % 2022 2021 $ % (in thousands) (in thousands) Revenues $ 6,230 $ 5,252 $ 978 18.6 % $ 19,173 $ 14,328 $ 4,845 33.8 % Direct cost of revenues 401 290 111 38.3 % 1,053 907 146 16.1 % Selling, general and administrative 4,064 2,694 1,370 50.9 % 9,902 6,859 3,043 44.4 % Depreciation and amortization 423 289 134 46.4 % 1,181 972 209 21.5 % Income from operations 1,342 1,979 (637 ) -32.2 % 7,037 5,590 1,447 25.9 % Interest and other income, net 15 9 6 66.7 % 42 14 28 200.0 % Net (loss) gain resulting from foreign exchange transactions (125 ) (12 ) (113 ) 941.7 % (220 ) 21 (241 ) nm Provision for (benefit from) income taxes 429 (473 ) 902 nm 1,676 (147 ) 1,823 nm Net Income $ 803 $ 2,449 $ (1,646 ) -67.2 % $ 5,183 $ 5,772 $ (589 ) -10.2 % nm—not measurable Revenues The following table sets forth the composition of our revenues for the three and nine months ended April 30, 2022 and 2021: Three Months Ended Nine Months Ended April 30, April 30, % Changes 2022 2021 2022 2021 Three Months Nine Months (in thousands) (in thousands) Advertising revenue $ 4,526 $ 4,227 $ 14,532 $ 11,612 7 % 25 % Paid subscription revenue 910 899 2,823 2,358 1 % 20 % Other revenues 794 126 1,818 358 530 % 408 % Total revenues $ 6,230 $ 5,252 $ 19,173 $ 14,328 19 % 34 % Advertising revenue . Advertising revenue increased 7% and 25% in the three and nine months ended April 30, 2022, respectively, compared to the three and nine months ended April 30, 2021, primarily due to improvement in our ad optimizations and higher advertising rates. 25 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. Pricing in other markets is based on local conditions. We generated $931,000 and $2,747,000 in gross prepaid subscription in the three and nine months ended April 30, 2022, respectively, compared to $990,000 and $2,806,000 in the three and nine months ended April 30, 2021. The 6% decline in gross prepaid subscription sale for the three months ended April 30, 2022 when compared to the same period a year ago was primarily due to approximately 3% decline in new installs in well-development markets in the corresponding periods and a decrease in renewal rate. As of April 30, 2022, the first year renewal rate was 44% and second year renewal rate was 53%. 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 nine months ended April 30, 2022 and 2021: Three Months Ended Nine Months Ended April 30, April 30, 2022 2021 % Change 2022 2021 % Change (in thousands, except revenue per subscriber and percentages) Revenues $ 910 $ 899 1 % $ 2,823 $ 2,358 $ 20 % Active subscriptions net additions -49 42 nm -39 249 nm Active subscriptions at end of period 713 753 -5 % 713 753 -5 % Average active subscriptions 718 734 -2 % 747 652 15 % Average monthly revenue per active subscription $ 0.42 $ 0.41 2 % $ 0.42 $ 0.40 $ 5 % Gaming revenue. GuruShots sells game resources via in-app and online purchases. Some of these virtual items include increasing a photograph’s exposure, exchanging an image in the competition with a different image, and skipping voting sessions. GuruShots recognizes revenue at the time of purchase because the overwhelming majority of users only purchase game resources when they need them to progress in the game. GuruShots generated $294,000 between April 13, 2022 to April 30, 2022 which is included in Other Revenues. Zedge Premium . Gross transaction value (the total sales volume transacting through the platform), or “GTV,” increased 63% and 75% in the three and nine months ended April 30, 2022, respectively, compared to the three and nine months ended April 30, 2021. Net revenue increased 47% and 74% in the three and nine months ended April 30, 2022, respectively, compared to the three and nine months ended April 30, 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. The following table summarizes Zedge Premium gross and net revenue for the three and nine months ended April 30, 2022 and 2021: Three Months Ended Nine Months Ended April 30, April 30, % Changes 2022 2021 2022 2021 Three Months Nine Months (in thousands) (in thousands) Zedge Premium-gross revenue (“GTV”) $ 410 $ 252 $ 1,173 $ 671 63 % 75 % Zedge Premium-net revenue $ 182 $ 124 $ 610 $ 351 47 % 74 % Revenue from Zedge Premium, web-based advertising revenues from Emojipedia and other related sites, as well as revenues generated by Shortz, are reported under Other Revenues, and those offerings constitute potential growth drivers in the quarters to come. Integration bonus. On April 1, 2022, we received a one-time integration bonus of $2 million from AppLovin Corporation for migrating to their mediation platform. This amount is being amortized over an initial estimated service period of 24 months which is also included in Other Revenues. Direct cost of revenues . Direct cost of revenues consists primarily of content hosting and content delivery costs. Three Months Ended April 30, Nine Months Ended April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Direct cost of revenues $ 401 $ 290 38.3 % $ 1,053 $ 907 16.1 % As a percentage of revenues 6.4 % 5.5 % 5.5 % 6.3 % Direct cost of revenues increased 38.3% and 16.1% in the three and nine months ended April 30, 2022, respectively, compared to three and nine months ended April 30, 2021. The increase in the direct cost of revenues can be attributed to utilizing a new data analytics tool provided by Google’s Cloud Computing Services and the inclusion of GuruShots’ infrastructure costs. 26 As a percentage of revenue, direct cost of revenues in three and nine months ended April 30, 2022 were 6.4% and 5.5%, respectively, compared to 5.5% and 6.3%, in the three and nine months ended April 30, 2021, primarily due to significant higher revenue in the nine-month 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 GuruShots’ operating expenses, payroll, benefits, recruiting fees, facilities, marketing, consulting, professional fees, software licensing (“SaaS”), M&A related expenses and public company related expenses. Three Months Ended April 30, Nine Months Ended April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Selling, general and administrative $ 4,064 $ 2,694 50.9 % $ 9,902 $ 6,859 44.4 % As a percentage of revenues 65.2 % 51.3 % 51.6 % 47.9 % SG&A expense increased 50.9% and 44.4% in the three and nine months ended April 30, 2022, respectively, compared to the three and nine months ended April 30, 2021. This increase was primarily attributable to transaction costs of $860,000 related to the GuruShots acquisition, higher compensation costs resulting from additional headcount, higher stock-based compensation as discussed below, higher professional fees and offset by reductions in discretionary expenses. As a percentage of revenue, SG&A expense in the three and nine months ended April 30, 2022 were 65.2% and 51.6%, respectively, compared to 51.3% and 47.9%, in the three and nine months ended April 30, 2021. Excluding costs related to the GuruShots acquisition SG&A expense as a percentage of revenue in the three and nine months ended April 30, 2021 would have been 53.3% and 47.2%. Our headcount (including 30 added through the GS acquisition) totaled 93 as of April 30, 2022 compared to 52 as of April 30, 2021 with the majority of our employees currently based in Lithuania. SG&A expense also included stock-based compensation expense including equity grants to employees and consultants, as well as stock issuances to pay for board compensations and 401(k) matching contributions. Certain stock options, deferred stock unit and restricted stock grants are more fully described in Note 8 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 intangible assets and capitalized software and technology development costs of our internal developers on various projects that we invested in specific to the various platforms on which we operate our service. Three Months Ended April 30, Nine Months Ended April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Depreciation and amortization $ 423 $ 289 46.4 % $ 1,181 $ 972 21.5 % As a percentage of revenues 6.8 % 5.5 % 6.2 % 6.8 % Depreciation and amortization expenses increased approximately 46.4% and 21.5% in the three and nine months ended April 30, 2022, compared to three and nine months ended April 30, 2021. This increase was primarily attributable to the amortization of intangible assets related to the acquisition of GuruShots and Emojipedia. Interest and other income, net. Interest and other income, net in the three and nine months ended April 30, 2022 increased $6,000 and $28,000 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 April 30, Nine Months Ended April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Interest and other income, net $ 15 $ 9 66.7 % $ 42 $ 14 200.0 % As a percentage of revenues 0.2 % 0.2 % 0.2 % 0.1 % 27 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 April 30, Nine Months Ended April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Net (loss) gain resulting from foreign exchange transactions $ (125 ) $ (12 ) nm $ (220 ) $ 21 nm As a percentage of revenues -2.0 % -0.2 % -1.1 % 0.1 % In the three and nine months ended April 30, 2021, we realized losses of $154,000 and $271,000, respectively, from NOK and EUR hedging activities, compared to gains of $16,000 and $67,000, respectively in the three and nine months ended April 30, 2021 due to the strengthening of the US dollars in current periods, as more fully described in Note 4 to the unaudited condensed consolidated financial statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q. 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 April 30, Nine Months Ended April 30, (in thousands) 2022 2021 % Change 2022 2021 % Change Provision for (benefit from) income taxes $ 429 $ (473 ) nm $ 1,676 $ (147 ) nm As a percentage of revenues 6.9 % -9.0 % 8.7 % -1.0 % 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. We expect our overall effective tax rate for fiscal year ending July 31, 2022 to be approximately 25.7 %. 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 nine months ended April 30, 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 24.4%. As of April 30, 2022, we had $560,000 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 April 30, 2022, we had cash and cash equivalents of $17.1 million and working capital (current assets less current liabilities) of $6.4 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 June 14, 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 nine months ended April 30, 2022 and 2021: Nine Months Ended April 30, (in thousands) 2022 2021 $ Changes Cash flows provided by (used in): Operating activities $ 11,314 $ 7,737 $ 3,577 Investing activities (18,807 ) (593 ) (18,214 ) Financing activities (225 ) 12,518 (12,743 ) Effect of exchange rate changes on cash and cash equivalents (95 ) 142 (237 ) (Decrease) increase in cash and cash equivalents $ (7,813 ) $ 19,804 $ (27,617 ) 28 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 $3.6 million in the nine months ended April 30, 2022 to $11.3 million from $7.7 million in the nine months ended April 30, 2021, primarily attributable to the higher revenues generated from our service offerings, principally advertising, paid subscription revenues and a $2 million integration bonus received from AppLovin. Investing Activities On April 12, 2022, we acquired 100% of the outstanding equity securities of GuruShots. The purchase price consists of $18 million in cash paid at closing and contingent payments (the “Earnout”) of up to a maximum of $16.8 million, payable either in cash or Class B common stock of the Company or a combination thereof (in the Company’s discretion) payable over two years from closing subject to GS achieving certain financial targets set forth in the SPA. In connection therewith, we agreed to make certain minimum investments in user acquisition for GS in the period covered by the Earnout, subject to GS maintaining agreed upon levels of return on ad spend (ROAS). In addition, we committed to a retention pool of $4 million in cash and issued 626,242 shares of the Company Class B common stock with a fair value of $4 million or $6.39 per share for GuruShots’ founders and other employees that will be payable or vest, as applicable, over three years from closing based on the beneficiaries thereof remaining employed by the Company or a subsidiary. On August 1, 2021, 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. We paid approximately half of the $1.9 million on February 1, 2022. 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. Business combination and assets acquisition are more fully described in Note 5 to the unaudited condensed consolidated financial statements the included in Item 1 to Part I of this Quarterly Report on Form 10-Q. Cash used in investing activities in nine months ended April 30, 2022 and 2021 also consisted of capitalized software and technology development costs related to various projects that we invested in specific to the various platforms on which we operate our service. Financing Activities 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 nine months ended April 30, 2021. In the nine months ended April 30, 2022 and 2021, we issued 3,666 shares and 497,252 shares respectively of Class B common stock and received $7,000 and $819,000 respectively, in connection with options exercised during the period. In the nine months ended April 30, 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 11 to the 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. 29 Changes in Trade Accounts Receivable Gross trade accounts receivable increased $0.2 million to $2.7 million at April 30, 2022 from $2.5 million at July 31, 2021, primarily due to the inclusion of GS’ accounts receivable. Concentration of Credit Risk and Significant Customers Historically, we have had very little or no bad debt, which is common with other platforms of our size that derive their revenue from mobile advertising, as we aggressively manage our collections and perform due diligence on our customers. In addition, the majority of our revenue is derived from large, credit-worthy customers, e.g. 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 nine months ended April 30, 2022, three customers represented 29%, 19% and 13% of our revenue. In the nine months ended April 30, 2021, three customers represented 31%, 22% and 12% of our revenue. At April 30, 2022, two customers represented 40% and 19% 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 April 30, 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.