Good afternoon and welcome to Zedge’s Third Fiscal Quarter 2022 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Brian Siegel.

Thank you, Matthew. In today’s presentation, Jonathan Reich, Chief Executive Officer; and Yi Tsai, Zedge’s Chief Financial Officer, will discuss Zedge’s financial and operational results for the third fiscal quarter ended on April 30, 2022. Any forward-looking statements made during this conference call either in the prepared remarks or in the question-and-answer session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties disclosed in the reports and bench files periodically with the U.S. Securities and Exchange Commission. Zedge assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that Zedge earnings release is available on the Investor Relations page of the website. The earnings release has also been filed on Form 8-K with the SEC. I would like to now turn over the conference to Mr. Jonathan Reich. Jonathan?

Thank you, Brian, and thank you all for joining us today. Good afternoon. Welcome to Zedge’s earnings conference call for the third quarter of fiscal year 2022, which ended April 30, 2022. I am Jonathan Reich, CEO of Zedge, and with me is our Chief Financial Officer, Yi Tsai, who will provide additional insight into our financial performance. We will then be happy to take your questions. Zedge builds marketplaces and games around digital content that people use to express themselves. Our leading products are the GuruShots photography game and Zedge’s premium digital content marketplace, which today offers mobile phone wallpapers, video wallpapers, ring tones and notification sounds. We also own Emojipedia, a website that is the leading source of information about emojis. In total, our products serve over 40 million users during May. Our company is positioned at the intersection of two major growth trends in consumer tech, casual gaming and the creator economy. Today, most smartphone users have become amateur content creators, sharing their photos, illustrations, memes and videos to express themselves and gain social validation. In addition, they value friendly competition and garner popularity and recognition from their online community. Many of these creators are talented enough to attract a meaningful following and monetize their content. This is what’s known as the creator economy, a market that has grown massively over the last 5 years. We aim to bring creators into our ecosystem to compete with each other while improving their skills and also offer them the opportunity to earn money. Our game provides competitive photo challenges in a peer community and our marketplace allows this community to share and monetize its content. Our existing base of over 40 million users is an attractive value proposition to talented creators. This synergy between gaming and marketplace unlocks additional…

Thank you, Jonathan. I want to remind last on the call that our fiscal year ends July 31 and last, our third quarter ended on April 30. Please note that this quarter included approximately 2 weeks of GuruShots result. Also, we switched from reporting EBITDA to adjusted EBITDA this quarter. In light of the GuruShots transaction, we added expenses such as professional services and stock-based compensation. Our press release supplemental table has been adjusted historically to account for this change. Moving to our third quarter results, now defined as the number of unique users that opened our Zedge app during the last 30 days of the period, decreased 7% to $32.1 million for April 2022 versus $34.5 million last April. Total revenue in the third quarter was $6.2 million, a 19% increase from last year. Ad revenue and subscription revenue growth rate were constrained due to the lower amount number. Other revenue, which includes revenue from our emerging products, including Zedge premium, Emojipedia and GuruShots, was $0.8 million. GuruShots added $300,000 during the final few weeks of the quarter. Also note that our auditor determines the $2 million payment from AppLovin on April 1 should be classified as revenue and amortize monthly over a 2-year period, which increased our revenue by less than $100,000 this quarter. Zedge premium gross transaction value or GTV net is the total sales volume transacted through our marketplace, increased 63% to $410,000, reflecting increased sales and ASP from our NFT MAU EV platform. Active subscription were down 5% versus last year as new subscription sales did not offset churn. Overall, ad now $0.52 had an increase of 8% year-over-year, driven by better advertising performance and slightly higher subscription revenue versus last year. This year, operating expenses increased by 49%, leading to a 32% decrease in…

Thank you. [Operator Instructions] Your first question is coming from Allen Klee from Maxim Group. Your line is live.

Yes. Good morning. Congratulations on the results. First question, the decline in the number of active users, what do you believe was behind that and remind us why you think you can turn that around?

Hi, Allen. Thanks so much for the good wishes. So, as I commented, there are a couple of moving pieces here, including seasonality. Our Q3 corresponds to the period of February, March, April, coming out of the holiday season, which is our Q2 November, December, January. And we are accustomed to seeing a decline during that period of time. In addition to that, as you recall, we were required to migrate our ad mediation platform because MoPub, our previous provider was deprecating their platform after AppLovin made their acquisition. That deprecation occurred at the end of March, and that required us to push a forced upgrade of our app to all users globally. And that usually triggers losing users. And then finally, our supporting the Ukrainians in the Russian war caused us to do two things. One was that we had updated the OnDeck app icon for anyone that had – or that had Zedge on their phone, we changed the color of the icon from our corporate color purple to the colors of the Ukrainian flag, mainly blue and yellow. And we also had updated the collateral material in all of the storefronts to follow that color aesthetic as well. We estimate that the force upgrade, coupled with the efforts around Ukraine as well as losing users in Russia and Belarus accounted for at least one-third of the decline. And the efforts that we have underway in terms of reversing that decline are focused on releasing our social and community features, which as the playbook unfold as we expect, will drive engagement. Unfortunately, that feature set has to be pushed out a quarter because our developers were hard at work on completing the migration to AppLovin. And I will close by saying that we were paid a $2 million fee by AppLovin in order to migrate their platform. As Yi described, that will be amortized over we believe the next 24 months or so. But for that $2 million, coupled with the fact that AppLovin is actually outperforming MoPub, we are confident that we made the right decision.

Thank you. So, you – I thought I heard - so the advertising rate did not decline per number of viewers. It was just that you had less viewers is more – and these other factors is the way to think of that. Is that correct what I – the way I described it.

Yes. So, we actually – we have seen that advertising rates had increased on a – since we made that change. So, we are pretty happy with that, at least what we saw in this past quarter.

Great. And then – you made some comments on GuruShots, and I am not sure I caught everything. So, if you could maybe go over this again. You said I thought I heard – so GuruShots closed on April 12th. I think I heard you say that it added $300,000 in revenue and it had a $240,000 loss. Maybe if you could tell me what that - does that loss mean net income or adjusted EBITDA. But then you also mentioned that, that loss included something related to intangibles and one-time bonuses. So, could you review that again, so I could get a sense of what a more an ongoing type of loss would be? And also when you said there was a $740,000 one-time expense I assume that’s separate from the GuruShots stuff that I just said. Thank you.

Sure. Yes, I think that the best thing is I am going to have Yi provide you with that detail. Yi, do you want to take that?

Sure. Hi Allen. So, with $249,000 operating loss, actually, the net loss, it includes $93,000 of amortization of intangible and $67,000 of retention bonus that was expensed for a partial month of April. So, before these two items, the loss is about $90,000 or so.

And I apologize. I didn’t – the $93,000 amortization of intangibles, that will be an ongoing cost…?

So, if you look down to the future, the acquisition allocate of $15 million to intangible and it’s been amortized within 5 years to 12 years. So, average per year is about $1.9 million. And then the retention [dollars] (ph), if you recall, it would be amortized over the next 3 years. So, each year would be $2.6 million. So in all, will be about $4.5 million pretax. In terms of non-cash, I mean four out of the [eight] (ph) will be cash, but most of it will be a non-cash item.

And how – I am so sorry, the one – the retention bonus, how much was that again?

It was $8 million, will be vested over the next 36 months.

But how much was it for the fiscal third quarter?

Fiscal third quarter, it’s only the $60,000, $70,000 for the cash bonus. And in the non-cash equity comp, it was $111,000, including the equity comp that we added back.

Great. Okay. Thank you so much.

And with respect to the expenses, it’s just due diligence expense or advisory expenditures as well as all the accounting fee related to the pro forma disclosure preparation, the AAC, AL5, all those work we would outsource due to the constraint of our finance department. And those are just one-time and then we book it all in Q3.

Yes. So, the quarter had around $740,000 of one-time expenses.

Correct.

Okay. That’s great. Thank you. So, what I heard you guys say about NFTs was very impressive in terms of – let me just make sure did I hear this right that the users have purchased around 30% of the NFTs that are offered and the average price around $20. How many – you say 30% of what was offered? How much was offered? And so I think if we know that, then we can get a perspective from how much GuruShots could theoretically add to that?

I am sorry, I don’t have that number handy right now, but I will get back to you.

Okay. But I think last quarter, let’s see if I – you said something, I can’t find it in front of me. It’s something like 600 NFTs were sold. It was a very small number, I think and unless I am mixing things up. So – because you just started so far?

That’s correct. And it is a small number. And I also want to point out, our NFT offering today is really very rudimentary. Remember, it’s only one content type, and it is one-of-a-kind limited edition, not numbered editions. It doesn’t have a lot of feature and functionality that will be forthcoming, I guess somewhere in the next four weeks to eight weeks, and we will continue to add feature sets through the end of the year.

And right now, there is not a secondary market. Is that true for selling?

Users can ultimately take their NFTs and offer them on another platform like OpenSea. But within our products, there is not as of yet a secondary market, that’s correct. Within our ecosystem, that is correct.

Okay. So, I mean I am just thinking about this, if there is 1 million potential pictures from GuruShots a month. So, that’s like $3 million a quarter. If you – if 5% went over to the marketplace, and you got $20 for that and excluding secondary sales, that would be like – that would be $3 million of revenue in a quarter. If I did the simple math, right, I mean I don’t know what the – but that seems like that particular synergy could be very high. Is that the way to – and then secondary sales could be even more, but is that the way to think about it, or tell me what you think here.

Yes. I think that the arithmetic is correct, but it’s going to take time to accelerate and penetration rates that can yield a healthy revenue number. Remember, we are early into this, and we are improving our product. We also are going to need to work through the conversion funnel for the GuruShots artists and so on and so forth. But thematically, the expectation is that, that self-selected group of high-quality photographers will contribute to revenue growth within the overall Zedge ecosystem. And when compared to the alternative, which would have been having to go out and actively solicit artists without even knowing if they have high quality and so on and so forth. We think that the GuruShots alternative is a much better alternative because we can generate revenue from the GuruShots players. And then we can offer those players that are interested in opportunity to make money and generate money for us and its more money for us at the same point in time. So, it gets to be a virtuous cycle, if you will.

Got it. And I think I heard you say that you thought that GuruShots could get to high-double digits revenue? I guess revenue growth rate over – maybe you could tell me what you said. I thought it was over an 18-month period. And then get to EBITDA positive. And then I am assuming that, that revenue is excluding which we just talked about on NFTs, it’s just – or does it include that? Is it…

So, what we said was our goal to be EBITDA positive in give or take around 24 months. And I think longer term, we believe that GuruShots on a standalone basis can generate very attractive double-digit revenue as you had formulated in your question. Yi, do you have anything that you want to add to that?

No, I think you sum it up well.

And I don’t know, but do you have the number in terms of what we sold on NFTs?

Yes. I think the $20, we sold about 1,200 pieces.

1,200 pieces. Got it. Thank you.

[Operator Instructions] This concludes our question-and-answer session and conference call. Thank you for attending today’s presentation. You may now disconnect.