10-K
1
f10k2020_zedgeinc.htm
ANNUAL REPORT
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Fiscal Year Ended July 31, 2020
or
☐ Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File
Number: 1-37782
Zedge,
Inc.
(Exact
Name of Registrant as Specified in its Charter)
(Address of Principal Executive Offices) (Zip Code)
(330)
577-3424
(Registrant’s
Telephone Number, Including Area Code)
Title of each class Trading Symbol Name of each exchange on which registered
Class B common stock, par value $0.1 per share ZDGE NYSE American
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☒
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☒
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The
aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based on the adjusted closing
price on January 31, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) of the
Class B common stock of $1.70 per share, as reported on the New York Stock Exchange, was approximately $11.0 million.
As
of October 26, 2020, the registrant had outstanding 524,775 shares of Class A common stock and 11,769,439 shares of Class B
common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The
definitive proxy statement relating to the registrant’s Annual Meeting of Stockholders, to be held January 11, 2021, is
incorporated by reference into Part III of this Form 10-K to the extent described therein.
Index
Zedge,
Inc.
TABLE
OF CONTENTS
PART I 1
Item 1. Business 1
Item 1A. Risk Factors 6
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Mine Safety Disclosures 22
Item 6. Selected Financial Data. 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risks. 34
Item 8. Financial Statements and Supplementary Data. 34
Item 9A. Controls and Procedures. 34
Item 9B. Other Information. 35
PART III 36
Item 11. Executive Compensation 36
Item 14. Principal Accounting Fees and Services 36
Item 15. Exhibits, Financial Statement Schedules. 37
SIGNATURES 39
i
PART
I
As
used in this Annual Report, unless the context otherwise requires, the terms the “Company,” “Zedge,” “we,”
“us,” and “our” refer to Zedge, Inc., a Delaware corporation, and its subsidiaries, collectively. Our
fiscal year runs from August 1 through July 31. Each reference to a fiscal year in this Annual Report refers to the fiscal year
ending in the calendar year indicated (for example, fiscal 2020 refers to the fiscal year ended July 31, 2020).
Item
1. Business
Company
Overview
We
offer a state-of-the-art digital publishing platform. We use this platform to power our consumer-facing mobile personalization
app, called Zedge, 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 and ringtones, 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 fiscal 2020, we introduced a new 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.
Our
Zedge app has been installed approximately 450 million times, and at July 31, 2020, boasted 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
previous 30-day of the relevant period. Our Zedge app has consistently ranked as one of the most popular free apps in the Google
Play store in the United States. Historically, we have not made a material investment in paid user acquisition for our Zedge app.
Our
Zedge app’s success stems from its ability to meet consumer demand for a rich and diverse catalogue of both long-tail and
popular content in a fun, intuitive and user-friendly fashion that aligns with their interest in expressing their essence in a
bespoke manner, to offer reliable search and discovery capabilities and to make relevant content recommendations to our users.
To this end, we invest heavily in both product design and development and the underlying technology required to satisfy both our
Zedge app’s users’ and content contributors’ expectations. Our Zedge app utilizes both user-generated and licensed,
third-party content to achieve these goals.
In
March 2018, we launched Zedge Premium, a marketplace within our Zedge app where professional creators and brands market, distribute
and sell their digital content to our consumers. Since launching Zedge Premium, we have made and continue making material investments
in optimizing our Zedge app’s homepage design in order to maximize exposure to premium content with the goal of driving
sales. Over time, we expect that Zedge Premium will contribute to a virtuous cycle whereby it drives new consumers into our Zedge
app resulting in more artist payouts, which in turn makes the platform more attractive for artists and brands looking to expand
their reach and increase their income.
In
January 2019, we started offering freemium Zedge app users the ability to convert into paying subscribers for amongst other things
the ability to remove unsolicited advertisements from our Zedge app. As of July 31, 2020, we had more than 504,000 active paid
subscribers. In fiscal 2021, we hope to further optimize the offer based on user type, geography and price point as well as introduce
new subscription enhancements like content bundles and rewards.
In
December 2019, we completed the beta launch of ’Shortz’ our new entertainment app offering serialized, short-form
fiction delivered in a text-message format across both Android and iOS, focusing on users in the United States, the United Kingdom
and Canada and it is now available globally.
Over
the past several years, our Zedge app has experienced a continuing decline in its MAU as well as a shift in the regional customer
make-up with MAU in emerging markets representing an increasing portion of our user base. As of July 31, 2020, users in emerging
markets represented 70% of our MAU compared to 65% a year prior. This shift has negatively impacted revenue because advertising
rates in emerging markets are materially lower than in well-developed markets. In the fourth quarter of fiscal 2020, users in
emerging markets grew by 1.4% while users in well-developed economies declined 18.6% when compared to the same period in fiscal
2019. As of July 31, 2020, approximately 50% of our Zedge app’s user base was located in North America and Europe (including
Eastern Europe) with a split of 26% and 24%, respectively, compared with 54% as of July 31, 2019 with 27% in each of North America
and Europe (including Eastern Europe).
MAU
growth is tightly coupled with securing new users. 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. With time, we believe that we can change our growth dynamic in well-developed markets. Aside
from targeted growth initiatives, we need to continually improve the core user experience, test different mechanisms and content
verticals that may spur growth and capitalize on the role that Zedge Premium artists can have on driving new users into the Zedge
platform.
1
The
COVID-19 pandemic has negatively impacted our Zedge app’s new user growth. We believe that new smartphone sales have suffered
as a result of retail business closures, negatively impacting new user growth, especially in well-developed markets. Assuming
the retail business rebounds from the COVID-19 pandemic, we expect that our Zedge app’s new user growth will also recover
and we will benefit accordingly.
During
the quarter and fiscal year ended July 31, 2020, we generated approximately 73% and 78%, 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.
Alternatively, users can buy Zedge Credits via an in-app purchase. If a user purchases Zedge Credits, Google Play or App Store
keeps 30% of the purchase price with the remaining 70% 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 a subscription-based product to Android users of our Zedge app in which the payment of a monthly
or annual fee would remove unsolicited ads when using our Zedge app. During the first 12 months after a customer’s sign
up for the subscription-based product, Google retains up to 30% as a fee, which decreases to 15% from month 13 and beyond. As
of July 31, 2020, we had more than 504,000 active paid subscribers, 89% of which had subscribed on an annual basis. During fiscal
2020, subscriptions have generated approximately $2.4 million in gross revenue.
Prior
to May 31, 2019, we generated service revenue from managing and optimizing the advertising inventory of a third-party mobile application
publisher, as well as overseeing the billing, collections and reporting related to advertising for this publisher. The agreement
with this mobile application publisher was terminated effective May 31, 2019, and we are no longer providing these services.
During
fiscal 2020, we generated revenues of $9.5 million and a loss from operations of $0.4 million, compared to revenues of $8.8 million
and a loss from operations of $2.9 million in fiscal 2019.
During
fiscal 2020, advertisements from MoPub (owned by Twitter) represented 28.8% of our revenue, advertisements from Google represented
26.1% of our revenues and advertisements from Facebook represented 7.4% of our revenues, as compared with 28.1%, 27.9% and 5.8%,
respectively, during fiscal 2019. In addition, advertisements from Ogury contributed 6.5% of our revenues during fiscal 2020,
as compared with 9.8% during fiscal 2019.
Recent
Developments
In
December 2019, we completed the beta launch of ’Shortz’ our new entertainment app offering serialized, short-form
fiction delivered in a text-message format across both Android and iOS. Although the app is available globally, our near-term
focus is on attracting users in the United States, the United Kingdom and Canada.
In
January 2019, we started offering freemium Zedge app users the ability to convert into paying subscribers for the ability to remove
unsolicited advertisements from our Zedge app. As of July 31, 2020, we had more than 504,000 paying subscribers.
In
March 2018, we completed the launch of Zedge Premium, a section of our Zedge app where consumers
are able to access a wide portfolio of professionally created content, including wallpapers, video wallpapers, exclusive ringtones,
and videos created by digital artists, photographers, illustrators, musicians and audio engineers from around the world.
2
Our
Competitive Advantage
We
believe that the following competitive strengths will drive the growth of our business:
Our
Strategy
We
believe that mobile phone users enjoy personalizing their phones with mobile personalization content. Our Zedge app provide consumers,
globally, with a rich array of high-quality personalization content used to express their essence, individuality, and voice in
an easy, entertaining and immersive fashion. Professional artists, individual creators and brands turn to our Zedge platform for
marketing and distributing their content to our consumers. Our Zedge app currently offers a rich and diverse catalogue of wallpapers,
video wallpapers, ringtones, notification sounds on Android and wallpapers, video wallpapers, app icons and ringtones, on iOS.
In the future, we may offer new content verticals and enhanced features in our Zedge app.
To
date, our Zedge app has been installed approximately 450 million times as of July 31, 2020 and has consistently ranked in the
‘Top 100’ most popular free apps in the Google Play store in the United States. The overwhelming majority of our Zedge
app’s downloads have been organic in nature without our investing in paid user-acquisition campaigns. Our Zedge app continues
to serve as a low-cost user acquisition channel.
Our
vision calls for utilizing our Zedge app’s digital publishing platform to not only continue being one of the world’s
leading mobile personalization content apps but to also use this platform to publish new stand-alone apps that extend our value
proposition in entertainment. We have engineered the platform to support an array of digital content enabling us to launch new
apps with relative ease and speed. We want to capitalize on our Zedge app’s existing large install base as well as organic
search traffic across the web and in the app stores as a low-cost user acquisition channel for these new entertainment apps. Our
goal is to ensure that these new apps are equally valuable and viable across both Android and iOS.
If
we execute our vision, we would build a network of apps which can be used for cross-promotional purposes. We identified the entertainment
market as our focal point for new apps because we believe that apps in that market:
In
fiscal 2020 we introduced the “Shortz – Chat Stories by Zedge” app, as a beta. It is our first foray in the
entertainment vertical and is dedicated to offering “Chat Stories,” which are serialized, short-form fiction delivered
in a text-message format. Every time the user clicks on their screen, he or she sees the next message in the episode.
3
Our
Zedge app’s strong position as a leading platform for personalization content that consumers use to express their essence,
individuality, and voice in an easy, entertaining and immersive fashion remains critical to our business. In order to maintain
this position, we are concentrating our efforts on the following goals:
● studying its users’ needs and enhancing our app to meet those needs;
● expanding our Zedge app’s reach by collaborating with strategic partners.
4
Our
History
In
2003, Tom Arnoy, Kenneth Sundnes and Paul Shaw launched a consumer website at www.zedge.net that people used to upload and download
ringtones.
In
December 2006, IDT Corporation acquired 90% of Zedge. Zedge Holdings, Inc. was incorporated in Delaware in 2008, and our name
was changed to Zedge, Inc. in 2016.
In
2009, we introduced the Android version of our Zedge app. The Zedge app provided ease-of-use by negating the need for customers
to first download a ringtone or wallpaper to their computer and then upload that content to their mobile phone.
We
launched the iOS version of our Zedge app in 2013, followed by launch of the Windows Mobile Zedge app in 2014.
During
2014 and 2015, our Zedge app introduced app icons, social sharing features and marketing automation capabilities, and expanded
the number of languages supported.
In
2016, IDT Corporation spun off our stock to its stockholders, and our Class B Common Stock was listed on the NYSE American with
the ticker symbol “ZDGE”.
In
March 2018, we completed the launch of Zedge Premium, our marketplace that is part of the Zedge app where artists and brands can
market, distribute and sell to our users their digital content, including wallpapers, ringtones, video wallpapers and stickers.
In
January 2019, we started testing a subscription-based product on the Android version of our Zedge app, whereby users could prepay
a monthly or yearly fee to remove unsolicited ads when using our Zedge app. As of July 31, 2020, we had more than 504,000 active
paid subscribers.
In
December 2019, we completed the beta launch of ’Shortz’, our new entertainment app offering serialized, short-form
fiction delivered in a text-message format across both Android and iOS, focusing on users in the United States, the United Kingdom
and Canada and it is now available globally.
In
August 2020, Jonathan Reich was promoted to Chief Executive Officer and Yi Tsai was promoted to Chief Financial Officer.
Our
Technology
Our
Zedge app is powered by a scalable distributed platform that is comprised of both open source and proprietary technologies centered
on content management and discovery, web and app development, data mining and analytics, deep learning, mobile content/device
compatibility, advertising and reporting. We have built a robust platform that allows us to ideate, test, and launch where warranted
by the outcome and we have embraced machine learning throughout our technology stack in order to improve content recommendations
and relevancy. From an end user’s perspective, our Zedge app’s platform minimizes response latency while maximizing
content relevancy and discoverability. We optimize our platform by utilizing systems, algorithms and heuristics that organize
our Zedge app’s content based upon real user data and that renders the content in a relevant fashion. Our infrastructure
provides a fully redundant production environment in a cloud-hosted, virtual-server environment.
Competition
Our
Zedge app faces competition across many different fronts including:
● large user base;
● large content catalogue;
● proprietary recommendation engine; and
● market ranking and longevity.
5
Intellectual
Property
Our
trademarks, copyrights, domain names, proprietary technology, knowhow and other intellectual property are vital to our success.
We seek to protect our intellectual property rights by relying on federal, state and common law rights in the United States and
other countries, as well as contractual restrictions. We enter into confidentiality and nondisclosure agreements with our employees
and business partners. The agreements we enter into with our employees also provide that all software, inventions, developments,
works of authorship and trade secrets created by them during the course of their employment are our property.
We
have been granted trademark protection for “Zedge” in the United States, European Union, United Kingdom, India and
Canada and for “Tonesync” in the European Union. We also have applied for trademark protection for “We make
phones personal”, “Tattoo your phone”, “Everything You”, “Zedge, Everything, You” and
“Shortz – Chat Stories by Zedge” in the United States as well as for copyright protection for our flagship
app, Zedge. In addition, we have registered, amongst others, the following domain names: www.zedge.net and www.zedge.com.
Employees
As
of July 31, 2020, we had 37 full-time and 2 part-time employees.
Facilities
Our
principal executive office was located in a leased premise comprising approximately 500 square feet of space in New York City,
which lease was terminated on July 15, 2020. We have moved to a virtual office because our staffs have been working remotely because
of the COVID-19 pandemic. This location housed commercial operations including sales, accounting and finance, and business development.
Our Trondheim, Norway facility, with approximately 11,500 square feet of space, accommodates our product, design and technology
teams and is under lease through 2021. We also lease a satellite development center in Vilnius, Lithuania. Our servers are hosted
in leased data centers in different geographic locations in the United States.
Item
1A. Risk Factors
Our
business, operating results or financial condition could be materially adversely affected by any of the following risks associated
with any one of our businesses, as well as the other risks highlighted elsewhere in this document, particularly the discussions
about competition. The trading price of our Class B common stock could decline due to any of these risks.
If
our Zedge app fails to attract advertisers or if its advertisers reduce their spending with us, our revenues, profitability and
prospects may be materially and adversely affected.
In
fiscal 2020, approximately 78% of our revenues were generated from our Zedge app selling advertising inventory. We anticipate
that our growth and profitability will continue to depend on our Zedge app’s ability to sell advertising inventory. Companies
that advertise via our Zedge app may choose to utilize other advertising channels or may reduce or eliminate their marketing altogether
for a variety of reasons, many of which are out of our control, including, without limitation, if the demand for mobile phone
personalization industry declines or otherwise falls out of favor with advertisers or consumers.
If
the size of the mobile advertising market does not increase from current levels, or if our Zedge app is unable to capture and
retain a sufficient share of that market, our ability to maintain or increase our current level of advertising revenues and our
revenues, profitability and prospects could be materially and adversely affected.
The
mobile advertising market may deteriorate or develop more slowly than expected, which could materially harm our business and results
of operations.
We
generate substantial majority of our revenue from our Zedge app selling advertising inventory. We anticipate that our growth and
profitability will continue to depend on our Zedge app’s ability to sell advertising inventory. Mobile connected devices,
especially smartphones, are a relatively new advertising medium. Advertisers have historically spent a smaller portion of their
advertising budgets on mobile media as compared to traditional advertising methods, such as television, newspapers, radio and
billboards, or online advertising over the internet, such as placing banner ads on websites.
Future
demand and market acceptance for mobile advertising is uncertain. Many advertisers still have limited experience with mobile advertising
and may continue to devote larger portions of their advertising budgets to more traditional offline or online personal computer-based
advertising, instead of shifting additional advertising resources to mobile advertising.
6
Further,
our advertisers’ ability to effectively target their advertising to our user’s interests may be negatively impacted
by the degree to which our privacy control measures that we have implemented or may implement in the future in connection with
regulations, regulatory actions, the user experience, or otherwise, and our advertising revenue may decrease or otherwise be curtailed
as a result. Changes to operating systems’ practices and policies, such as Apple’s upcoming iOS update specifically
related to Identifier for Advertiser (“IDFA”) changes that may also reduce the quantity and quality of the data and
metrics that can be collected or used by us and our partners. These limitations may adversely affect our advertisers’ ability
to effectively target advertisements and measure their performance, which could reduce the demand and pricing for our advertising
products and harm our business. As such, our Zedge app’s current and potential advertiser clients may ultimately find mobile
advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their
products and services, and they may even reduce their spending on mobile advertising from current levels as a result or for other
reasons.
If
the market for mobile advertising deteriorates, or develops more slowly than we expect, we may not be able to increase our revenues
or our revenues and profitability could decline materially.
We
may not be successful in diversifying our revenue mix to reduce our significant dependence on third-party advertisers.
In
fiscal 2020, approximately 78% of our revenues were generated from our Zedge app selling advertising inventory. We cannot assure
you that we will be successful in diversifying our revenue mix by identifying new revenue drivers that complement our advertising-heavy
business. Although we have had initial success in converting freemium users into paid subscribers, starting with zero in January
2019 and ending fiscal 2020 with more than 504,000, there is not guarantee that we will continue growing at this pace or how many
of our current subscribers will remain as paying subscribers. To date, Zedge Premium has taken longer to scale than we originally
anticipated, and we have not experienced the success that we anticipated by selling print-on-demand merchandise which sells at
a higher price unit price than the other digital goods that we offer. We previously thought that certain marketers would embrace
our platform as a critical distribution medium enabling us to secure a recurring set of advertisers willing to pay for sponsorships,
but this has not yet occurred and may not occur. Finally, Android users are prone to spend less money on apps than iOS users.
Even if our new initiatives are successful with our Android users, we may not able to replicate that success on iOS, especially
since we have fewer iOS users.
Our
revenues may fluctuate materially due to increases and decreases of new mobile device sales, over which we have no control.
Our
revenue may be materially negatively impacted by a decrease or slowdown in new mobile device sales. Demand for mobile devices
correlates to installs of the Zedge app and associated usage and revenue generation.
The
COVID-19 pandemic has negatively impacted our Zedge app’s new user growth. We believe that new smartphone sales have suffered
as a result of retail business closures, negatively impacting new user growth, especially in well-developed markets. Assuming
the retail business rebounds from the COVID-19 pandemic, we expect that our Zedge app’s new user growth will also recover
and we will benefit accordingly but there can no assurance of such rebound or new user growth.
If
new mobile device sales decrease or slowdown, our Zedge app will experience fewer installations which will negatively impact our
revenue and operations.
If
mobile connected devices, their operating systems or content distribution channels develop in ways that violate policies of Google
Play or the AppStore, prevent users from downloading our Zedge app or block advertising from being delivered to our Zedge app’s
users, our ability to grow our revenues, profitability and prospects may be materially and adversely affected.
Our
business model depends upon the continued compatibility between our Zedge app and the major mobile operating systems. Third parties
with whom we do not have any formal relationships control the design of mobile devices and operating systems. These parties frequently
introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers,
including but not limited to Verizon, AT&T or T-Mobile, may also impact the ability to download apps or access specified content
on mobile devices.
We
rely upon third-party distribution platforms, including the Google Play store and iTunes, for distribution of our Zedge app. The
Google Play store and iTunes are global application distribution platforms and the main distribution channels for our Zedge app.
As such, the promotion, distribution and operation of our Zedge app are subject to the respective distribution platforms’
standard terms and policies for application developers, which are very broad and subject to frequent changes and interpretation.
Furthermore, the distribution platforms may not enforce their standard terms and policies for application developers consistently
and uniformly across all applications and with all publishers.
7
For
example, in September 2019, our Zedge app was temporarily removed from Google Play because they asserted that the Zedge app violated
their malicious behavior policy. As a result, prospective Android users were prevented from installing our Zedge app, freemium
users were unable to convert into paying subscribers and existing users we unable to purchase Zedge Credits. Shortly after the
notice was issued, two of our major advertising suppliers ceased serving advertisements to our Zedge app. In addition, Google
Play sent a notification to users that had the problematic version of the app on their phone recommending that they uninstall
it. We identified the source of the problem as buggy code from a long-term, third-party advertising partner’s standard technology
integration in our app. We corrected the problem by removing the offensive code, releasing a new version of our app and our Zedge
app was reinstated after approximately 72 hours and concurrently the two major advertising suppliers resumed purchasing our advertising
inventory. We estimate the immediate financial impact of the suspension resulted in approximately $100,000 in lost revenue and
a material decline in MAU with the majority of uninstalls in emerging markets.
In
addition, if any of these providers were to limit or disable advertising on their platforms, devices or operating systems, either
because of technological constraints or because a maker of these devices, developer of these operating systems or owner of these
distribution platforms wished to impair our ability to serve ads on them, our Zedge app’s ability to generate revenues could
be significantly harmed. Also, technologies may be developed that can block the display of our Zedge app’s ads. Most of
our revenues are derived from fees paid to us by our Zedge app’s advertisers in connection with the display of ads. As a
result, ad-blocking technology could materially adversely affect our business, revenues and profitability.
We
have incurred and may continue to incur net losses and experience negative cash flow from operating activities in the future and
may not be able to obtain additional capital in a timely manner or on acceptable terms, or at all.
Our
net losses in fiscal 2020 and fiscal 2019 were $0.6 million and $3.3 million, respectively. Although our cash flow improved in
the fourth quarter of fiscal 2020 and overall in fiscal 2020 as compared to fiscal 2019, we expect to incur net losses and negative
cash flows in the future until the combination of revenue contributors including Zedge Premium, paid subscriptions and/or new
product initiatives such as Chat Stories scale and become profitable, and may need to raise additional capital to support the
continuing investment in our Zedge app, including Zedge Premium, and continue our operations.
Our
ability to achieve and maintain profitability and positive cash flow from operating activities depends on various factors, including
but not limited to, the acceptance of our Zedge app’s products and services by mobile phone users, the growth and maintenance
of our Zedge app’s user base, our Zedge app’s ability to maintain existing and obtain new advertisers, our Zedge app’s
ability to grow our revenues, the success of Zedge Premium and paid subscriptions, and the effectiveness of our new product initiatives,
selling and marketing activities as well as control our costs and expenses. We may not be able to achieve or sustain profitability
or positive cash flow from operating activities, and if we achieve positive operating cash flow, it may not be sufficient to satisfy
our anticipated capital expenditures and other cash needs. As such, we may not be able to fund our operating expenses and expenditures
and may be unable to fulfill our financial obligations as they become due, which may result in voluntary or involuntary dissolution
or liquidation proceeding of us and a total loss of your investment.
We
have limited resources and could find it difficult to raise additional capital.
We
have a limited operating history as an independent company, and no current sources of financing other than the $2.0 million credit
facility with Western Alliance Bank, which was amended in September 2020 for another two year-term expiring September 26, 2022.
We may need to raise additional capital for operations and in order for stockholders to realize increased value on our securities.
There can be no assurance that we will be able to obtain the necessary funding on commercially reasonable terms in a timely fashion
or at all. Failure to receive the funding on commercially reasonable terms, or the failure to receive funding at all, could have
a material adverse effect on our business, prospects, and financial condition and we may be unable to fulfill our financial obligations
as they become due, which may result in voluntary or involuntary dissolution or liquidation proceeding of us and a total loss
of your investment.
Our
limited operating history makes it difficult to evaluate our business and prospects and may increase your investment risk.
We
have only a limited operating history upon which you can evaluate our business and prospects. Although we have experienced revenue
growth in certain recent periods, our growth in fiscal 2020 was moderate and even declined in fiscal 2019. As part of the nascent
mobile advertising industry, we will encounter risks and difficulties frequently encountered by early-stage companies in rapidly
evolving industries, including the need to:
● offer competitive pricing to both advertisers and developers;
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● identify, attract, retain and motivate qualified personnel; and
● manage our expanding operations.
If
we do not successfully address any or all of these risks, our business, revenues and profitability could be materially adversely
affected.
If
we fail to maintain and enhance our Zedge app’s brand, or if we incur excessive expenses in this effort, our business, results
of operations and prospects may be materially and adversely affected.
We
believe that maintaining and enhancing our Zedge app’s brand and reputation important to the success of our business. Historically,
we have not made material investments in this effort. We believe that a well-recognized brand is important to increasing the number
of users and enhancing our Zedge app’s attractiveness to advertisers and business partners. Brand recognition and enhancement
may directly affect our ability to maintain our market position.
Many
factors, some of which are beyond our control, are important to maintaining and enhancing our Zedge app’s brand and may
negatively impact our app’s brand and reputation if not properly managed, such as our Zedge app’s ability to:
● distinguish it from the competition and maintain this distinction.
In
the future, we may conduct various marketing and brand promotion activities to expand our Zedge app’s brand. Some of these
may require material investment. We cannot assure you, however, that these activities will be successful or that we will be able
to achieve the brand promotion effect we expect. In addition, any negative publicity in relation to our mobile internet products
or services could harm our Zedge app’s brand and reputation.
We
have received, and expect to continue to receive, complaints from users regarding the quality of our Zedge app’s products
and services. If our app’s users’ complaints are not addressed to their satisfaction, our Zedge app’s reputation
and our market position could be significantly harmed, which may materially and adversely affect our business, revenues and profitability.
We
may not be able to continually meet our Zedge app’s user demand and retain or expand our Zedge app’s user base, and
our revenues, profitability and prospects may be materially and adversely affected.
Although
we constantly monitor and research our Zedge app’s user needs, we may be unable to meet user demand on an ongoing basis
or anticipate future user demands. A decrease in the number of users of our Zedge app’s products and services may have a
material and adverse effect on our ability to sell advertising and on our business, financial condition and results of operations.
In order to attract and retain users and remain competitive, we must continue to innovate our products and services, improve user
experience, and implement new technologies and functionalities.
The
mobile internet business is characterized by constant changes, including but not limited to rapid technological evolution, continual
shifts in user demands, frequent introductions of new products and services and constant emergence of new industry standards and
practices. As a result, our Zedge users may leave us for our competitors’ products and services more quickly than in other
sectors. Thus, our success will depend, in part, on our Zedge app’s ability to respond to these changes on a timely and
cost-effective basis, including improving and marketing our Zedge app’s existing products and services and developing and
pricing new products and services in response to evolving user needs. Our ability to successfully retain or expand our Zedge app’s
user base will depend on our ability to achieve the following, among others:
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We
cannot assure you that our existing products and services, including our Zedge app, will remain sufficiently popular with our
users. We may be unsuccessful in adding compelling new enhancements; products and services to further diversify our Zedge app’s
product offerings. Unexpected technical, commercial or operational problems could delay or prevent the introduction of one or
more of our new products or services to our Zedge app. Moreover, we cannot be sure that any of our Zedge app’s new products
and services, including Zedge Premium and our subscription service, will achieve widespread market acceptance or generate incremental
revenue the way our existing Zedge app’s products and services have. If we fail to continue to achieve sufficient user satisfaction
through our Zedge app’s products or services or our Zedge app’s products and services fail to meet our expectation
to maintain and expand its user base, our business, results of operations and financial condition will be materially and adversely
affected.
Our
marketplace for premium content, called Zedge Premium, may not yield the strategic goals and objectives that we envision, and
our revenues, profitability and prospects may be materially and adversely negatively affected.
Our
marketplace where we charge our users for premium content in our Zedge app is called Zedge Premium. Although we believe that Zedge
Premium will act as an important driver in helping our Zedge app become a leading platform for professional artists, individual
creators and brands looking to distribute their work to consumers looking for an easy, entertaining and unique way to express
their voice, individuality and essence, it’s premature to conclude this as being the case.
Thus
far, the growth of Zedge Premium has been slower than anticipated and it is too early to state with conviction that Zedge Premium
will have a materially positive impact on our business. In order to do so, we still need, among other things, to:
If
Zedge Premium fails to yield the strategic goals and objectives that we envision, our business, results of operations and financial
condition will be materially and adversely affected.
Our
Zedge app’s user base is heavily weighted to the Android operating system and our revenues and profitability may suffer
if the market demand for Android smartphones decreases.
Our
Zedge app’s user base is heavily weighted to smartphones running the Android operating system, which constituted approximately
94% of its MAU as of July 31, 2020, and most of our revenues for fiscal 2019. Any significant downturn in the overall demand for
Android smartphones or the use of Android smartphones could significantly and adversely affect the demand for our Zedge app and
would materially affect our revenues.
Although
the Android smartphone market has grown rapidly in recent years, it is uncertain whether the Android smartphone market will continue
growing at a similar rate in the future. In addition, due to the constantly evolving nature of the smartphone industry, another
operating system for smartphones may eclipse the Android operating system and result in a decline in its popularity, which would
likely adversely affect our Zedge app’s popularity. To the extent that our Zedge app continues to be operated on Android
smartphones and to the extent that our future revenues substantially depend on the use and sales of Android smartphones, our business
and financial results would be vulnerable to any downturns in the Android smartphone market.
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We
may not be able to effectively manage our Zedge app’s growth or implement our future business strategies, in which case
our business and results of operations may be materially and adversely affected.
Our
continued success depends on our ability to grow our Zedge app organically, attract new artists and establish cooperation with
strategic partners. Our Zedge app has experienced periods of rapid growth and expansion that has placed, and continues to place,
significant strain on our management and resources. We cannot assure you that these periods will recur or be sustainable. We believe
that continued growth of our Zedge app will depend on our ability to develop and enhance its products and services, attract new
artists and individual creators, grow its user base, retain existing users, continue developing innovative technologies in response
to user demand, increase brand awareness through marketing and promotional activities, react to changes in market trends, expand
into new market segments, attract new advertisers, retain existing advertisers and take advantage of the growth in the relevant
markets. We cannot assure you that our Zedge app will achieve any or all of the above.
We
may need to invest in paid user acquisition in order to grow our Zedge app’s customer base. However, we may not be able
to secure new users for our Zedge app at scale with a positive return on investment. Even if we can secure new profitable customers
for our Zedge app, these new customers may be seasonal and/or unsustainable.
To
manage our Zedge app’s growth and for us to attain and maintain profitability, we will also need to further expand, train,
manage and motivate our workforce and manage our relationships with users, consultants, business partners and advertisers. We
anticipate that we will need to implement a variety of enhanced and upgraded operational and financial systems, procedures and
controls, including the improvement of our accounting and other internal management systems. All of these endeavors involve risks
and will require substantial management efforts and skills and additional expenditures.
Our
Zedge app currently enjoys a global customer base. This geographic diversification may raise the level of difficulty in managing
our Zedge app’s growth and profitability. We cannot assure you that our current and planned personnel, systems, procedures
and controls will be adequate to support our future operations. In addition, we cannot assure you that we will be able to effectively
manage our growth or implement our future business strategies effectively, and failure to do so may materially and adversely affect
our business and results of operations.
During
the past four years, we have experienced a shift in our Zedge app’s regional customer make-up with MAU increasing in the
emerging markets and decreasing in the well-developed markets. In fiscal 2020, our Zedge app’s users in the emerging markets
grew by 1.4% while its users in the well-developed regions declined 18.6% when compared to fiscal 2019. This shift has negatively
impacted revenues because the well-developed markets command materially higher advertising rates when compared to those in the
emerging markets. Although we are investing in reversing this trend, we may not be successful in this effort which may result
in lower revenues and profitability.
Our
products may contain errors, flaws or failures that may only become apparent after their release, especially in updates to our
Zedge app. From time to time, we receive user feedback in connection with errors, flaws or failures and such errors, flaws or
failures may also come to our attention during our internal testing process. We generally have been able to resolve such errors,