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 digital brands including our Zedge app and Emojipedia
fail 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 2021, approximately 80% 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 ability to
sell our advertising inventory. Companies that advertise with us 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 digital advertising market does not increase from
current levels, or if our Zedge app and/or Emojipedia website are 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.
7
The digital 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
and from our Emojipedia website selling advertising inventory. We anticipate that our growth and profitability will continue to depend
on our ability to sell advertising inventory across our digital brands.
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.
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 deprecating the Identifier for Advertisers (“IDFA”) and Google’s expected deprecation of “tracking
cookies” 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 digital property’s current
and potential advertiser clients may ultimately find digital 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 2021, approximately 80% 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 2021 with approximately 752,000, there is no 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 in 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.
Initially the COVID-19 pandemic has negatively impacted our Zedge app’s
new user growth. New smartphone sales 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.
8
If mobile connected devices, their operating systems or content
distribution channels develop in ways that violate policies of Google Play or the App Store, 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 Apple’s App Store, for distribution of our Zedge app. The Google Play store and Apple’s App Store 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.
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.
Certain material functions related to our business depend on
a single supplier to carry out our business, and the inability to do business with this supplier could have a materially adverse effect
on our business and financial results.
We depend on Google and its affiliated companies for multiple material
functions related to our business, including advertising on our Zedge app and certain cloud services, and we expect to expand the services
provided by Google in fiscal 2022. If the services of Google that we depend on were unavailable, or available only in decreased capacity
or at less advantageous terms, this could result in interruptions to our ability to provide certain services, could cause reduction in
service and/or quality as the function is transitioned to an alternate provider, if an alternate provider is available, or could increase
our cost, which we may not be able to pass along to customers. Accordingly, any of these events could materially and negatively impact
our business, our revenues, our profits, and our relationships with customers.
If technologies designed to block the display of advertisements
or if in the future web browsers limit or block behavioral targeting technologies. our revenues may be adversely affected.
Our apps and Emojipedia may suffer negative consequences, including
a material reduction of revenue, with mass adoption of website ad blocking technologies or other technologies that limit the ability to
personalize advertisements, including, without limitation, if the price for this advertising inventory declines.
Although we had positive cash flow from operating activities
and net earnings in fiscal 2021, we had previously incurred, and may once again 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 income in fiscal 2021 was $8.2 million compared to net loss
of $0.6 million in and fiscal 2020. Our ability to maintain profitability and positive cash flow from operating activities depends on
various factors, including but not limited to, the acceptance of our products and services by mobile phone and internet users, the growth
and maintenance of our user base, our ability to maintain existing and obtain new advertisers, our 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 sustain profitability or positive cash flow from operating activities, and any
such positive cash flow 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 out of cash flows, which would require us to utilize debt or equity financing
which we may not be able to secure or which we may only secure on terms that are not favorable, which, which may result in significant
dilution or voluntary or involuntary dissolution or liquidation proceeding of us and a total loss of your investment.
9
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 experienced impressive year-over-year revenue growth of 107% in fiscal 2021 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;
§ 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 various brands, 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 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
and respected brand is important to increasing the number of users and enhancing our 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 various brands and may negatively impact our brand and reputation if not properly managed, such as our 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 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, websites or services could harm our brand and reputation.
10
We have received, and expect to continue to receive, complaints from
users regarding the quality of our products and services. If our users’ complaints are not addressed to their satisfaction, our
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 users’ demands
and retain or expand our user base, and our revenues, profitability and prospects may be materially and adversely affected.
Although we constantly monitor and research our users’ demands,
we may be unable to meet them on an ongoing basis or anticipate future user needs. A decrease in the number of users engaging with our
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 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 ability to respond to these changes in
a timely and cost-effective basis, including improving and marketing our 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 user base will depend on our
ability to achieve the following, among others:
§ attract and retain writers and actors for Shortz;
We cannot assure you that our existing products and services, including
our Zedge app and Emojipedia, will remain sufficiently popular with our users. We may be unsuccessful in adding compelling new enhancements;
products and services to further diversify these 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 users. Moreover, we cannot be sure that any of our new
products and services, including Zedge Premium, our subscription offering, Shortz or Emojipedia, 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 products or services or if our products and services fail to meet our expectation to maintain and expand
our 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.
11
Zedge Premium’s gross transaction revenue has been growing slowly,
but it is still 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 96% of its MAU as of July 31, 2021, and most of our revenues for
fiscal 2021. 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.
We may not be able to effectively manage our 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 each of the properties
in our brand portfolio.
We may not be capable of growing our Zedge apps 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 not be successful in increasing the number of users that engage
with Emojipedia, maintain our relationship with various content partners like Google, Twitter and Apple or sustain our high rankings with
the leading search engines including Google. We believe the Emojipedia’s continued success depends on our ability to invest in product
initiatives like localization, provide newsworthy and value-added information and capture the changes that are taking place in the industry
in a timely fashion. In the event that we are not successful in some or all of these areas we may not be able to retain our customers
and advertisers.
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We may need to invest in paid user acquisition in order to grow our
Zedge’s customer base. However, we may not be able to secure new users at scale with a positive return on investment. Even if we
can secure new profitable customers 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 and Emojipedia currently enjoy a global customer base.
This geographic diversification may raise the level of difficulty in managing their future 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 five 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
2021, our Zedge app’s users in the emerging markets grew by 16.1% while its users in the well-developed regions declined 11.5% when
compared to fiscal 2020. India comprised 25% of our MAU as of July 31, 2021. 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, flaws or failures in a timely manner, but we cannot assure you that we will be able to detect and
resolve all of them effectively or in a timely manner. Errors, flaws or failures in our services and products, including our Zedge app,
may adversely affect user experience and cause our users to stop using our services and products, which could materially and adversely
affect our business and results of operations.
We may not be able to convert freemium users into paying subscribers
or maintain paying subscribers for more than a year.
Much of our growth in our Zedge’s app’s MAU since January
2019 is attributable to offering a paid subscription option which is weighted to securing annual prepaid subscriptions. In addition, approximately,
45% of annual subscribers have renewed their subscription for a second year while approximately 60% of those subscribers have renewed
their subscription for a third year. Depending on the success of our product, the evolution of subscriptions and items beyond our control
users may opt not to convert into paying subscribers and/or paying subscribers may choose not to renew their subscriptions. Either of
these would adversely impact the business. During the second half of fiscal 2021, active subscription numbers were flat as new subscriptions
were offset by cancellations during the period. This trend may continue into future periods.
We do not have long-term agreements with our advertisers, and
we may be unable to retain existing advertisers, attract new advertisers or replace departing advertisers with advertisers that can provide
comparable revenues to us, in which case our business and results of operations may be materially and adversely affected.
In fiscal 2021, approximately 80% 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 ability to
effectively sell and optimize our advertising inventory. Our success requires us to maintain and expand our current advertiser relationships
and to develop new relationships.
Our contracts with our Zedge app’s and Emojipedia’s advertising
partners generally do not include long-term obligations requiring them to purchase our inventory and are cancelable upon short or no notice
and without penalty. Furthermore, the majority of our advertisers buy our inventory via third-party platforms and bidding exchanges that
own the relationship with the advertiser. As a result, we may have limited visibility as to our future advertising revenue streams.
We cannot assure you that advertisers will continue to purchase our
inventory, or that we will be able to replace, in a timely or effective manner, departing advertisers with new advertisers that generate
comparable revenue. If one or more major advertisers representing a significant portion of our business decide to materially reduce its
advertising spend with us or cease purchasing our Zedge app’s advertising inventory, our revenues and profitability could be significantly
reduced.
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Furthermore, MoPub, a fully owned division of Twitter, has been our
ad mediation platform for the past ten years and is in the process of being purchased by AppLovin a provider of advanced tools for mobile
app developers to grow their businesses by automating and optimizing the marketing and monetization of their apps. In the event that this
transaction closes it is possible that MoPub’s mediation platform will be deprecated requiring us to migrate to a different mediation
platform. This will not only require resource and time investment, which may slow down are ability to deliver other product initiatives
but may also negatively impact the demand for and pricing of our advertising inventory.
Our products face competition in all aspects of its business.
If our Zedge app fails to compete effectively or if its reputation is damaged, our business, financial condition and results of operations
may be materially and adversely affected.
Although our Zedge app is currently a leading platform for smartphone
personalization end Emojipedia is a leading provider for emoji related content and information, we cannot guarantee that either of these
properties will be able to maintain their leadership position. Both of these properties face potential competition from other internet
companies, app developers and smartphone manufacturers, and new market entrants may also emerge. If we are not able to differentiate our
products from that of our competitors, drive value for our customers, and/or effectively align our resources with our goals and objectives,
we may not be able to compete effectively against our competitors. Our failure to compete effectively against any of the foregoing competitive
threats could materially and adversely harm our business. Increased competition may result in new products and offerings which may in
turn require us to take actions to retain and attract our users and advertisers in such a fashion which would lower our gross margins.
If we fail to compete effectively, our market share would decrease and our results from operations, revenues and profits would be materially
and adversely affected.
Our Zedge app in the midst of expanding beyond mobile phone personalization
and focusing on becoming a distribution platform for professional artists, individual creators and brands interested in offering their
content to consumers that are looking for an easy, entertaining and unique way of using this content to express their voice, individuality
and essence. We aspire to have our Zedge app be the destination that smartphone users turn to when looking for mobile optimized, digital
content. If we are unsuccessful in meeting our goal, our brand may suffer resulting in diluting our value proposition, losing MAU and
having lower revenues and profits.
If we are not able to effectively compete in any aspect of our business
or if our reputation is harmed by rumors or allegations regarding our business or business practices, our overall user base may decline,
making it less attractive to advertisers. We may be required to spend additional resources to further increase our brand recognition and
promote our products and services, and such additional spending could adversely affect our profitability.
If we fail to keep up with rapid technological changes in the
internet and smartphone industries and adapt our products and services accordingly, our results of operations and future growth may be
adversely affected.
The internet and smartphone industries are characterized by rapid and
innovative technological changes. Our future success will depend, in part, on our ability to respond to fast changing technologies, adapt
our products and services to evolving industry standards and improve the performance, functionality and reliability of our products and
services. Our failure to continue to adapt to such changes could harm our business. If we are slow to develop products and services that
are compatible with smartphones, or if the products and services we develop are not widely accepted and used by smartphone users, we may
not be able to capture a significant share of this important market. In addition, the widespread adoption of new internet, networking
or telecommunications technologies or other technological changes for smartphones could require substantial expenditures to modify or
adapt our products, services or infrastructure. If we fail to keep up with rapid and innovative technological changes to remain competitive,
our future growth may be materially and adversely affected and our results of operations could be materially and adversely affected.
14
Our international operations and availability expose us to additional
risks that could harm our business, operating results and financial condition.
In addition to uncertainty about our ability to continue expanding
and monetizing internationally, there are additional risks inherent in doing business internationally, including:
§ stringent local labor laws and regulations;
§ strict and unclear laws around data privacy;
§ longer payment cycles;
§ credit risk and higher levels of payment fraud;
§ profit repatriation restrictions and foreign currency exchange restrictions;
§ geopolitical events, including natural disasters, acts of war and terrorism;
§ import or export regulations;
§ antitrust and competition regulations;
§ potentially adverse tax developments;
§ seasonal volatility in business activity and local economic conditions;
§ economic uncertainties relating to European sovereign and other debt;
§ laws, regulations or rulings that block or limit access to our products;
We are subject to numerous and sometimes conflicting U.S. and foreign
laws and regulations that increase our cost of doing business. Violations of these complex laws and regulations that apply to our international
operations could result in damages, awards, fines, litigation, criminal actions, sanctions, or penalties against us, our officers or our
employees, prohibitions on the conduct of our business and our ability to offer products and services, and damage to our reputation. Although
we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees,
contractors, or agents will not violate our policies or that our policies will be sufficient. These risks inherent in our international
operations and expansion increase our costs of doing business internationally and could result in material harm to our business, operating
results, and financial condition.
15
Companies and governmental agencies may restrict access to our
website or mobile apps, or the internet generally, which could lead to the loss or slower growth of our user base, in which case our business
and results of operations may be materially and adversely affected.
In order to grow our business, users need to access the internet and,
in particular, our digital products. Companies and governmental agencies could block access to our websites and apps or the internet generally.
For example, in 2013 the Indian courts issued orders restraining internet service providers from providing access to various internet
domains including ours. Access to our Zedge app through any mode was blocked in many parts of India from February 2013 until August 2019
as discussed more fully in the Legal Proceedings section below and there can be no guaranties that this will not recur or happen elsewhere.
If companies or governmental entities block or limit access to our Zedge app or otherwise adopt policies restricting access to our advertiser’s
products and services our business could be negatively impacted resulting in a loss or slow-down of user growth and/or revenues.
Our core values of focusing on our users and acting for the
long-term may conflict with the short-term interests of our business.
One of our core values is a focus on our users’ experience, which
we believe is essential to our success and serves the best, long-term interests of us and our stockholders. Therefore, we have made, in
the past and/or may make in the future, significant investments or changes in strategy that we think will benefit our users, even if our
decision negatively impacts our operating results in the short term. In addition, our philosophy of prioritizing our users may cause disagreements
or negatively impact our relationships with advertisers or other third parties. Our decisions may not result in the long-term benefits
that we expect, in which case the success of our business and operating results could be materially harmed.
We had a material weakness in our internal control over financial
reporting as of July 31, 2021, and if we fail to maintain an effective system of internal controls over financial reporting we may not
be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting
which could have a negative effect on the trading price of our stock.
We are required to establish and maintain adequate internal controls
over financial reporting that provide reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements in accordance with generally accepted accounting principles. Likewise, we are required, on a quarterly basis, to
evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented
or detected on a timely basis.
In this Annual Report on Form 10-K for the year ended July 31, 2021,
we reported that we had a material weakness related to the valuation allowance against deferred tax assets (see Item 9A Control and
Procedures in this Annual Report on Form 10-K). Notwithstanding the material weakness described above, we have performed additional
analyses and other procedures to enable management to conclude that our financial statements included in this Form 10-K fairly present,
in all material respects, our financial condition and results of operations as of and for the year ended July 31, 2021. Remediation of
these weaknesses had not yet been completed, and therefore these deficiencies continued to exist as of November 3, 2021. Management and
our Audit Committee will monitor remedial measures and the effectiveness of our internal controls and procedures.
While we aim to work diligently to ensure a robust internal control
that is devoid of significant deficiencies and material weaknesses, given the complexity of the accounting rules, we may, in the future,
identify additional significant deficiencies or material weaknesses in our disclosure controls and procedures and internal control over
financial reporting. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their
implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting
obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results
of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial
reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404. The existence of a
material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause
us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to
a decline in our stock price. See Item 9A Controls and Procedures for a further discussion of our assessment of our internal controls
over financial reporting.
Although we believe that our remediation efforts will strengthen our
internal controls over financial reporting and address the concern that gave rise to the material weakness as of July 31, 2021, we cannot
be certain that our expanded knowledge and revised internal control practices will ensure that we maintain adequate internal control over
our financial reporting in future periods. Any failure to maintain such internal controls could adversely impact our ability to report
our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete
understanding of our operations. Likewise, if our financial statements are not filed on a timely basis as required by the Securities and
Exchange Commission and The New York Stock Exchange, we could face severe consequences from those authorities. In either case, there could
result a material adverse effect on our business. Inferior internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price of our stock.
Legal proceedings or allegations of impropriety could have a
material adverse impact on our reputation, results of operations, financial condition and liquidity.
We have been, and may be in the future, subject to allegations or lawsuits
by entities claiming that we engage in unethical, fraudulent or otherwise inappropriate business practices. Any such lawsuit or allegation,
with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong-doing
by any key member of our management team could harm our reputation and user base and distract our management from our day-to-day operations.
We cannot assure you that we will not be subject to lawsuits or allegations in the future. When we can make a reasonable estimate of the
liability relating to pending litigation and determine that an adverse liability resulting from such litigation is probable, we will record
a related contingent liability. As additional information becomes available, we will assess the potential liability and revise estimates
as appropriate.
In fiscal years 2020 and 2021, we did not record any contingent liabilities
relating to pending litigation. When we record or revise our estimates of contingent liabilities in the future, the amount of our estimates
may be inaccurate due to the inherent uncertainties relating to litigation. In addition, the outcomes of actions we institute against
third parties may not be successful or favorable to us. Litigations and allegations against us may also generate negative publicity that
significantly harms our reputation, which may materially and adversely affect our user base and our ability to attract publishers and
advertisers. In addition to the related cost, managing and defending litigation and related indemnity obligations can significantly divert
management’s and the board of directors’ attention from operating our business. We may also need to pay damages or settle
the litigation with a substantial amount of cash or equity. All of these could have a material adverse impact on our business, results
of operation and cash flows.
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A variety of new and existing U.S. and foreign government laws
and regulations could subject us to claims, judgments, monetary liabilities and other remedies, and to limitations on our business practices,
in which case our business and results of operations may be materially and adversely affected.
We are subject to numerous U.S. and foreign laws and regulations covering
a wide variety of subject matters. New laws and regulations, changes in existing laws and regulations or the interpretation of them, our
introduction of new products, or an extension of our business into new areas, could increase our future compliance costs, make our products
and services less attractive to our users, or cause us to change or limit our business practices. We may incur substantial expenses to
comply with laws and regulations or defend against a claim that we have not complied with them. Further, any failure on our part to comply
with any relevant laws or regulations may subject us to significant civil or criminal liabilities, penalties, taxes, fees, costs and negative
publicity.
The application of existing domestic and international laws and regulations
to us relating to issues such as user privacy and data protection, security, defamation, pricing, advertising, taxation, gambling, sweepstakes,
promotions, consumer protection, accessibility, content regulation, quality of services, law enforcement demands, telecommunications,
mobile, and intellectual property ownership and infringement in many instances is unclear or unsettled. Further, the application to us
or our subsidiaries of existing laws regulating or requiring licenses for certain businesses of our advertisers can be unclear. U.S. export
control laws and regulations also impose requirements and restrictions on exports to certain nations and persons and on our business.
Internationally, we may also be subject to laws regulating our activities in foreign countries and to foreign laws and regulations that
are inconsistent from country to country.
On July 16, 2020, rulings from the Court of Justice of the European
Union invalidated the EU-U.S. Privacy Shield as a lawful means for transferring personal data from the European Economic Area, or the
EEA, or the United Kingdom to the United States The court upheld that the Standard Contractual Clauses, or SCCs, can act as a valid transfer
mechanism for personal data transfer, but that additional measures may be required to ensure adequate protection of personal data. To
rely on SCCs, a data exporter must verify that the jurisdiction in which the data importer is based offers adequate protection for personal
data. Data exporters may also need to put in place additional measures to deal with any risks associated with data transfer, such as technical
controls and additional contractual obligations on how to manage onward transfers and compelled disclosures to public authorities. Undertaking
such assessments and implementing additional measures could restrict our business operations and require us to incur additional costs
for compliance.
Following the United Kingdom’s exit from the EU, the provisions
of the EU General Data Protection Regulation 2016/679, or GDPR, have been incorporated directly into UK law as the “UK GDPR”.
In practice, there is little change to the core data protection principles, rights and obligations under UK data protection law. On June
28 2021, the EU approved the United Kingdom’s adequacy decision, meaning data can continue to flow between the United Kingdom and
EEA as it did prior to Brexit, in most circumstances. There is a possibility that the United Kingdom may adopt regulations that diverge
from the EU and that require a different compliance regime and that carry different penalties in the event of a breach which could increase
our future compliance costs.
In addition to the actual and potential changes to laws and regulations
described elsewhere in these Risk Factors, compliance with privacy and data security regulations, particularly within the EU, is likely
to require ongoing investment and changes in how we operate. For example, in May 2018 the EU implemented the GDPR, whose goal is to provide
a uniform standard for data protection and privacy for all individuals in the EU and EEA, including both end-users and employees. GDPR
compliance required us to invest a considerable amount of resources in fiscal 2018 in addition to adopting new operational procedures
in order to assure ongoing compliance. In 2018, California passed the California Consumer Privacy Act, or CCPA, which is a privacy law
that provides consumers significant rights over the use of their personal information, including the right to object to the “sale”
of their personal information. Amendments to the CCPA under the California Privacy Rights Act which will take effect in 2023 expand some
of the CCPA rights to residents to restrict the use of certain information. These rights may restrict our ability to use personal information
in connection with our business operations. The CCPA also provides a private right of action for security breaches. Colorado and Virginia
have passed privacy bills similar to the CCPA which will go into effect in 2023. Washington, Massachusetts and other states have introduced
privacy bills and the U.S. Congress is debating federal privacy legislation, which if passed, may restrict our business operations and
require us to incur additional costs for compliance. While we carefully consider the compliance mandates of the GDPR and CCPA, it is possible
that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict
with other rules or our business practices.
In addition, the Digital Millennium Copyright Act, or DMCA, has provisions
that limit, but do not necessarily eliminate, our liability for hosting user-generated materials that infringe copyrights, so long as
we comply with the statutory requirements in the DMCA. Also, Section 230 of the Communications Decency Act, or CDA, provides immunity
from liability for providers of an interactive computer service who publish defamatory information provided by users of the service. While
the immunity provisions of the DMCA and the CDA are well established, there are regular cases seeking to limit the application of such
immunity. Various U.S. and international laws restrict the distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from minors. In the area of data protection, every state has passed
a law requiring notification, and at times, the provision of identity theft protection, to users when there is a security breach for personal
data. We face similar risks and costs as our products and services are offered in international markets and may be subject to additional
regulations.
In many, but not all, territories outside of the United States there
are laws similar to the DMCA which exempt us from copyright infringement liability that may arise due to hosting user-uploaded materials.
In some countries, particularly in Europe and the APAC region, these laws are being readjusted and new - at times burdensome - constraints
are being imposed onto service providers.
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In June 2019, the European Union’s Directive on Copyright in
the Digital Single Market, or the Directive, came into effect, and each of the European Union’s member were supposed to have implemented
the Directive by June 2021. To date seven EU Member States (including Germany, the Netherlands, Croatia, Malta, France, Italy and Hungary).
Directive Article 17 removes the shield of the current ‘hosting
exemption’, enshrined in the E-Commerce Directive, and replaces it with a principle of full liability where “online content
sharing service providers” (“OCSSPs”) are concerned. This means that OCSSPs will be liable for copyright-protected material
uploaded by users and must obtain authorization (i.e., a licence) from the relevant rightsholders. However, Article 17 effectively creates
a new liability exemption regime for OCSSPs (albeit a more onerous one than is currently provided by the E-Commerce Directive) under which
OCSSPs will not be liable for the copyright-protected works that they communicate to the public provided that they cooperate with rightholders
by:
§ making best efforts to obtain the necessary authorization (i.e., a licence);
The article also extends any
licenses granted to OCSSPs to their users, as long as those users are not acting “on
a commercial basis”.
Although we have invested and continue to invest in systems and resources,
which are intended to ensure that we are compliant with the requirements of the GDPR. CCPA, DMCA, the Directive and other U.S. and international
laws relating to, among other things, materials that infringe on copyrights and contain other objectionable content, our systems may not
be sufficient or we may unintentionally err and fail to comply with these laws and regulations which could expose us to claims, judgments,
monetary liabilities and other remedies, and to limitations on our business practices which could materially adversely affect our business
and financial results.
If we are unable to license, acquire or otherwise obtain access
to compelling content and services at reasonable cost or if we do not develop or commission compelling content of our own, the number
of users of our Zedge app may not grow as anticipated, or may decline, or users’ level of engagement with our Zedge app may decline,
all or any of which could materially harm our business and operating results.
Our future success depends, in part, on our ability to aggregate and
host compelling content and deliver that content to our users via our products. We achieve this when users upload their own user-generated
content to our Zedge app, when artists, individual creators and brands upload their licensed content to our Zedge app, or when we create
content or enter into business partnerships with content owners and distribute this content on our Zedge app. For Shortz, we typically
commissioning the content by paying a small upfront fee and sharing in the future revenues with the author of that content. In Emojipedia’s
case, we usually receive new emojis from the content owner while paying authors to write articles on our blog.
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We believe that users value high-quality content. As such, we may need
to make substantial payments to third parties from whom we license or acquire such content or from whom we have create this content on
our behalf. Our ability to maintain and build relationships with such third-party providers may become important to our success. As competition
for compelling content increases both domestically and internationally, our partners may alter business terms under which they avail their
content and services to us and potential providers may not offer their content or services to us at all, or may offer them on terms that
are not agreeable to us. A change in these commercial terms could harm our operating results and financial condition. Further, much of
the content that we acquire may only be available on a non-exclusive basis allowing competitors the ability of offering this content to
our disadvantage.
We may be subject to intellectual property infringement claims or other
allegations, which could require us to pay substantial statutory penalties or other damages and fines, remove relevant content, enter
into license agreements which may not be available on commercially reasonable terms or could result in our being barred from third-party
distribution platforms, which could harm our business and competitive position.
There may be owners of technology patents, copyrights, trademarks,
trade secrets and content, who assert claims against us. If a claim of infringement is brought against us, we may be required to pay substantial
penalties or other damages and fines, remove relevant content, enter into license agreements that may not be available on commercially
reasonable terms or at all or be barred from any of the third-party distribution platforms. Even though the allegations or claims could
be baseless, our defense against any of these allegations or claims would be both costly and time-consuming and could significantly divert
the efforts and resources of our management and other personnel.
If we are unable to attract and retain highly qualified employees,
we may not be able to grow effectively.
Our ability to compete and grow depends in large part on the efforts
and talents of our employees. Such employees, particularly product managers, designers and engineers, are in high demand, and we devote
significant resources to identifying, hiring, training, successfully integrating and retaining these employees. The loss of employees
or the inability to hire additional skilled employees as necessary could result in significant disruptions to our business, and the integration
of replacement personnel could be time-consuming and expensive and cause additional disruptions to our business.
At the end of the first quarter of fiscal 2017, we implemented a modest
reduction in workforce, primarily in Norway. This action may have impacted employee morale and led, or may lead, to higher rates of voluntary
attrition compared to prior years. If we are unable to retain and attract qualified employees, particularly in critical areas of operations
such as engineering, we may not achieve our strategic goals and our business and operations could be harmed.
In August of 2018 we opened a development center in Vilnius, Lithuania
in order to diversify our talent pool with a qualified and more affordable talent base. If we are unable to recruit and retain well qualified
candidates at an attractive rate or manage them well, our business will struggle to meet its development goals and objectives. We were
successful in ramping up the recruitment and hiring in fiscal 2020 and ended the fiscal year with a team of 16 engineers product managers,
operations professionals and designers. In August 2020, we moved to a serviced office space which provides maximum flexibility during
the pandemic. In March 2021 our Trondheim, Norway office executed a new lease for a smaller location which we moved into in April. In
fiscal 2021 we adopted a “remote-first” work policy that enables employees to work from home unless they are needed in the
office. This policy has been well received by employees.
We believe that two critical components of our success are our ability
to retain our best people by preserving our culture and maintaining competitive compensation practices. As we continue to grow rapidly,
and we develop the infrastructure of a public company, we may find it difficult to maintain our entrepreneurial, execution-focused culture.
In addition, some of our employees are able to receive material proceeds from sales of our equity in the public markets, which may reduce
their motivation to continue to work for us.
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We may not be able to prevent others from unauthorized use of
our intellectual property, which could materially harm our business and competitive position.
We regard our trademarks, service marks, patents, domain names, trade
secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and patent law,
trade secret protection and confidentiality and license agreements with our employees and others to protect our proprietary right. As
of July 31, 2021, we have registered, amongst others, the following domain names: www.zedge.net and www.zedge.com. In addition, 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 and the United Kingdom, and “We Make Phones Personal” and “Shortz –
Chat Stories by Zedge” in the United States, and have obtained a copyright registration for our flagship app, Zedge. In addition,
we have registered, amongst others, the following domain names: www.zedge.net and www.zedge.com.
On August 1, 2021, we acquired Emojipedia. As part of this acquisition,
we acquired trademark registrations for “Emojipedia” in the United States, the European Union, the United Kingdom, China and
Australia, and trademark registrations for “World Emoji Day” in the United States and United Kingdom. We also acquired the
following domain name registrations: www.emojipedia.com and www.emojipedia.org.
Monitoring unauthorized use of our intellectual property rights is
difficult and costly, and we cannot be certain that we can effectively prevent misappropriation of our intellectual property, particularly
in countries where the laws may not protect our proprietary rights as fully as in the United States. From time to time, we may have to
resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources
and may not be successful.
In addition, it is often difficult to create and enforce intellectual
property rights in certain international markets. Patents, trademarks and service marks may also be invalidated, circumvented, or challenged.
Trade secrets are difficult to protect, and our trade secrets may be leaked or otherwise become known or be independently discovered by
others. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach. Even where adequate and relevant
laws exist it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a court judgment
or an arbitration award delivered in another jurisdiction, and accordingly, we may not be able to effectively protect our intellectual
property rights or enforce agreements in such countries
We rely on third parties to provide the technologies necessary
to deliver content, advertising, and services to our users, and any change in the licensing terms, costs, availability, or acceptance
of these formats and technologies could materially adversely affect our business.
Our service and hosting providers may experience downtime from time
to time, which may negatively affect our brand and user perception of the reliability of our service. Any scheduled or unscheduled interruption
of our Zedge app could result in an immediate, and possibly substantial, loss of revenues. Although we seek to reduce the possibility
of disruptions or other outages, our websites and apps may be disrupted by problems relating either to our own technology or third-party
technology that is used for them. Our systems may be vulnerable to damage or interruption from telecommunication failures, power loss,
computer attacks or viruses, earthquakes, floods, fires, terrorist attacks and similar events. Parts of our system are not fully redundant
or backed up, and our disaster recovery planning may not be sufficient for all eventualities. Despite any precaution we may take, the
occurrence of a natural disaster or other unanticipated problems at our hosting facilities could result in lengthy interruptions in the
availability of our products. Any interruption in the ability of users to access our websites or apps could reduce our future revenues,