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, 2022
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 $0.01 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, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter) of the Class B common
stock of $7.56 per share, as reported on the New York Stock Exchange, was approximately $91 million.
As of November 10, 2022, the registrant had outstanding 524,775 shares
of Class A common stock and 14,357,131 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 18, 2023, 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 9
Item 1B. Unresolved Staff Comments 42
Item 2. Properties 42
Item 3. Legal Proceedings 42
Item 4. Mine Safety Disclosures 42
Item 6. [Reserved] 44
Item 7A. Quantitative and Qualitative Disclosures about Market Risks. 59
Item 8. Financial Statements and Supplementary Data. 59
Item 9A. Controls and Procedures. 60
Item 9B. Other Information. 61
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 61
PART III 62
Item 11. Executive Compensation 62
Item 14. Principal Accounting Fees and Services 62
Item 15. Exhibits, Financial Statement Schedules. 63
SIGNATURES 65
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 2022 refers to the fiscal year ended July 31, 2022).
Item
1. Business
Company
Overview
Zedge
builds digital marketplaces and friendly competitive games around content that people use to express themselves. Our leading products
include Zedge Ringtones and Wallpapers, a freemium digital content marketplace offering mobile phone wallpapers, video wallpapers, ringtones,
and notification sounds which historically was branded as Zedge Premium, and GuruShots, a skill-based photo challenge game. Our vision
is to connect creators who enjoy friendly competitions with a community of prospective consumers in order to drive commerce.
We
are part of the ‘Creator Economy,’ where over 1 billion people create and share their content across social platforms, mobile,
and video games, and content marketplaces. Within this group of individuals, over 200 million identify as creators, people who use their
influence, skill, and creativity to amass an audience and monetize it. Furthermore, approximately 12% of full-time creators earn more
than $50,000 per year, and 10% of influencers earn more than $100,000 per year. We view the Creator Economy as an untapped opportunity
for Zedge to expand its business, especially as we execute by connecting our gamers with our marketplace.
The
Zedge Ringtones and Wallpapers app (which is named “Zedge Wallpapers” in the App Store), which we refer to as our “Zedge
App,” is a marketplace offering a wide array of mobile personalization content including wallpapers, video wallpapers, ringtones,
and notification sounds, and is available both in Google Play and the App Store. As of July 31, 2022, our Zedge App has been installed
nearly 569 million times since inception and, over the past two years, has had between 32.0 and 36.3 million monthly active users (“MAU”).
MAU is a key performance indicator (“KPI”) that captures the number of unique users that used our Zedge App during the final
30 days of the relevant period. Our platform allows creators to upload content to our marketplace and avail it to our users either for
free or for a price, via ‘Zedge Premium.’ In turn, our users utilize the content to personalize their phones and express
their individuality.
In
fiscal 2022 we introduced several new customer facing product features including ‘NFTs Made Easy’ and social and community
features, all meant to improve customer engagement, MAU, and revenue growth over the long term. In addition, due to developments outside
of our control, we migrated to a new ad mediation platform - Applovin MAX -, which monopolized internal resources and delayed the completion
of other product initiatives we had planned for in fiscal 2022. Applovin paid us a one-time $2 million integration bonus and their performance
has been on-par or better than our prior platform. Following the transition, work resumed on the delayed development and most have been
rolled out as of September 30, 2022.
The
Zedge App’s monetization stack consists of advertising revenue generated when users view advertisements when using the Zedge App
or surfing our website, the in-app sale of Zedge Credits, our virtual currency, that is used to purchase Zedge Premium content, and a
paid-subscription offering that provides an ad-free experience to users that purchase a monthly or annual subscription. As of July 31,
2022, we had 692,000 active paying subscribers.
In
late 2021 we introduced NFT functionality to a limited number of Zedge Premium creators via ‘NFTs Made Easy’. Over time we
believe this product enhancement has the potential to drive significant artist growth and revenue production. ‘NFTs Made Easy’
is an eco-friendly platform that enables artists and consumers to sell and purchase NFTs within the Zedge App even though they may lack
deep knowledge and proficiency in the crypto space. All transactions are made using Zedge Credits.
1
In
April 2022, we acquired GuruShots Ltd (“GuruShots”) a recognized category leader focused on gamifying the photography vertical.
GuruShots offers a platform spanning iOS, Android, and the web that provides a fun, educational and structured way for amateur photographers
to compete in a wide variety of contests showcasing their photos while gaining recognition with votes, badges, and awards. We estimate
that the total addressable market of amateur photographers using their smartphones to take and publicly share artistic photos is 30-40
million people per month and that the market is still in its infancy. Every month, GuruShots stages more than 300 competitions that result
in players uploading in excess of 1 million photographs and casting close to 4.5+ billion “perceived votes,” which are calculated
by multiplying the number of votes that each player casts by a weighting factor based on various factors related to that user. To improve
engagement, GuruShots has adopted a set of retention dynamics focused on individual, team and community dynamics that create a sense
of belonging, inspiration, recognition, improvement, and competition.
Today,
GuruShots utilizes a ‘Free-to-Play’ business model that leads to strong monetization with the purchase of resources that
are used to give paying players an edge while still maintaining a fair and competitive experience for all participants. Over the past
six years, the monthly average paying player spend has increased in excess of 14% annually to more than $55 per player.
As
we look to the future, we are advancing several initiatives that we expect will drive user growth, increase engagement, drive in-app
purchases, and advance our in-game economy. Some of these include:
We market GuruShots to prospective players, primarily via paid user
acquisition channels, and utilize a host of creative formats including static and video ads in order to promote the game. Our marketing
team invests material resources in analyzing all attributes of a campaign ranging from the creative assets, offer acquisition channel,
and platform (i.e., iOS, Android, and web), just to name a few, with the goal of determining whether a specific campaign is likely to
yield a profitable customer. When we unearth a successful combination of these variables we scale up until we experience diminishing returns.
Ultimately, we believe that the efforts we are making to advance the product coupled with the investment in user acquisition can significantly
increase GuruShots’ player base.
Beyond
our commitment to growing both the Zedge App and GuruShots on a standalone basis, we believe that there are many potential synergies
that we can capitalize on that exist between the two businesses. Specifically, we plan to enable the ability for GuruShots players to
become Zedge Premium artists and sell their photos to our audience of 30+ million MAU as standard digital images or NFTs. In addition,
we look to benefit from the experience that the GuruShots team possesses and test gamifying the Zedge App. We believe that successful
gamification can contribute to increasing engagement, retention, and lifetime value, all critical KPIs for our business. Longer term,
we believe that there are complementary content verticals that lend themselves to gamification.
In
August 2021, we acquired Emojipedia Pty Ltd (“Emojipedia”), the world’s leading authority dedicated to providing up-to-date
and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker,
which provides real time visualization of all emoji symbols used on Twitter. Emojipedia receives approximately 46.4 million monthly page
views and has approximately 7.6 million monthly active users of which approximately 45.19% are located in well-developed markets. It
is the top resource for all things emoji, offering insights into data and cultural trends. As a voting member of the Unicode Consortium,
the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Facebook,
and Twitter.
2
We
believe that Emojipedia provides growth potential to the Zedge App, and it was immediately accretive to earnings. In the past year, we
have made many changes to Emojipedia including migrating to a new ad mediation platform, redesigning the Emojipedia website, and introducing
localized versions of Emojipedia in Spanish, French, German, Italian, and Portuguese. We will continue to enhance this offering and are
exploring new features including a native mobile offering as well as additional monetization opportunities.
Our
Strategy
Our
vision is to connect creators who enjoy friendly competitions with a community of prospective consumers in order to drive commerce.
Our
Strategic Flywheel
Our
long-term strategy calls for creating a flywheel that leverages the synergies of a “gaming and marketplace” dynamic across
our portfolio, engaging communities of consumers with content that can function on a multitude of online and mobile platforms including
social networks, messaging, and gaming. This is unlike the existing dynamic that many gaming platforms offer to players, who can create
and sell virtual goods that are valuable only within the context of that particular ecosystem. Although the foundation of our strategy
is currently centered around the Zedge App and GuruShots, over time we expect to expand into other content verticals that have relevance
beyond gameplay.
Using
our current products as an example, GuruShots is a skill-based game that attracts creators (mainly, amateur photographers) with friendly
photo competitions in which they compete to gain recognition and pedigree. We believe that adding the ability to sell their content to
the Zedge App’s 30+ million MAU is an attractive benefit that enables players not only to have fun, but also to earn money while
doing so. This dual purpose will likely improve user growth, engagement, retention, and monetization while simultaneously expanding our
relevance to a broader community interested in high-quality photographs. If our assumptions are correct, we will have a flywheel that
drives the aforementioned KPIs while also enabling us to expand into new verticals (through internal development or acquisition), gamify
them, and add new content to our marketplace.
Executing
this strategy calls for concentrating our efforts on the following goals:
○ studying our users’ needs and enhancing our products to meet those needs;
○ expanding our reach by collaborating with strategic partners.
3
Our
Competitive Advantages
We
believe that the following competitive strengths will drive the growth of our business:
4
5
Competition
We
face competition in all aspects of our business and especially from other digital marketplaces and gaming companies. In running our business,
we need to account for:
○ large user base;
○ large content catalog;
○ recognized and well-respected brands;
○ proprietary recommendation engine; and
○ market ranking and longevity.
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.
6
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 the 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, a section of our marketplace where artists can launch a virtual store and market,
distribute, and sell their digital content, including wallpapers, video wallpapers, ringtones, and notification sounds to our users.
In
January 2019, we started offering freemium Zedge App Android users the ability to convert into paying subscribers in exchange for removing
unsolicited advertisements from our Zedge App. As of July 31, 2022, we had approximately 692,000 active subscribers. In fiscal 2023,
we expect to launch subscriptions on iOS.
In
August 2020, Jonathan Reich was promoted to Chief Executive Officer, and Yi Tsai was promoted to Chief Financial Officer.
On
August 1, 2021, we acquired Emojipedia, the world’s leading authority dedicated to providing up-to-date and well-researched emoji
definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker, which provides real
time visualization of all emoji symbols used on Twitter.
On
December 14, 2021, we launched ‘NFTs Made Easy’ an NFT offering for artists and consumers that provides ease of use and negates
the need for cryptocurrency experience and know-how. An artist only needs to upload their content as they normally would in the Zedge
Premium Creator’s Portal, check the NFT option, and Zedge handles the rest seamlessly, from minting to gas fees. Additionally, consumers
can buy the NFTs simply by using Zedge Credits purchased in their local currency.
On April 12, 2022, we acquired GuruShots, a recognized category leader
that fuses photography with mobile gaming. GuruShots, headquartered in Israel, offers a platform spanning iOS, Android, and the web that
gamifies photography by providing a fun, educational, and structured way for amateur photographers - essentially anyone with a mobile
phone - to compete in a wide variety of contests showcasing their photos while gaining recognition with votes, badges, and awards. On
a monthly basis, GuruShots users currently cast close to 4.5 billion “perceived votes” in more than 300 competitions. GuruShots
currently generates revenue from selling digital resources that, if used skillfully, can provide additional visibility to competitors’
photographs, a critical factor in securing votes for competitive ranking.
7
Our
Technology
Our
eco-system 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 platform minimizes response latency while maximizing content relevancy and discoverability. We optimize
our platform by utilizing systems, algorithms, and heuristics that organize our content based on real user data and that renders the
content in a relevant fashion. With GuruShots, we have added open source and proprietary technologies around gamification, including
ranking algorithms that ensure fair exposure to all content in a competition, and real-time voting/ranking functionality at scale. Our
infrastructure provides a fully redundant production environment in a cloud-hosted, virtual-server environment.
Intellectual
Property
Our
trademarks, copyrights, domain names, proprietary technology, know-how, 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,
“Tonesync” in the European Union and the United Kingdom, “We Make Phones Personal,” and “Zedge, Everything
You” in the United States and a stylized “D” logo in the European Union and the United Kingdom. We also have applied
for trademark protection for “Tattoo your phone,” and “NFTs Made Easy” in the United States, a stylized “D”
logo in the United States, Canada and India, 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, and Australia, and trademark registrations for “World Emoji Day”
in the United States and the United Kingdom. We also acquired the following domain name registrations: www.emojipedia.com and www.emojipedia.org.
On
April 12, 2022, we acquired GuruShots Ltd. As part of this acquisition, we acquired, all intellectual property rights associated with,
and encompassed within the GuruShots mobile and web-based applications, including the following domain name: GuruShots.com. In addition,
we have applied for trademark protection for “GuruShots” in the United States, and have filed copyright applications for
the GuruShots mobile and web-based applications.
Human
Capital
Our
headcount totaled 93 as of July 31, 2022, including 32 added from the GuruShots acquisition.
8
Facilities
As
a result of the COVID-19 pandemic, we ceased having a physical office in the United States in 2020. Yet, we still address commercial
operations including accounting and finance, and business development from the New York area. In 2021, our Norwegian operations moved
into a smaller Trondheim, Norway facility, with approximately 3,800 square feet of space, accommodates our product, design, and technology
teams, and is under lease through March 2024. In May of 2022, we entered into a one-year sublease agreement for approximately 2,300 square
feet of space for our team in Vilnius, Lithuania. We lease 1,550 square feet of space in Tel Aviv, Israel that accommodates the GuruShots
team. That lease is due to expire in October 2024. 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.
Risk
Factor Summary
Our
business operations are subject to numerous risks and uncertainties, including those outside of our control, that could cause our business,
financial condition or operating results to be harmed, including, but not limited to, risks regarding the following:
9
● Zedge may be unable to successfully integrate GuruShots into Zedge
10
RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
Certain
of our offerings, including GuruShots’ participation in gallery exhibitions, are sensitive to consumer spending and economic conditions.
Consumer
purchases of discretionary retail items and specialty retail products, as well as participation in gallery events, may be adversely affected
by national and regional economic, market and other conditions such as employment levels, salary and wage levels, the availability of
consumer credit, inflation, high interest rates, high tax rates, high fuel prices, the threat of a pandemic or other health crisis (such
as COVID-19) and consumer confidence with respect to current and future economic, market and other conditions. Consumer purchases may
decline during recessionary periods or at other times when unemployment is higher or disposable income is lower. Consumer willingness
to make discretionary purchases may decline, may stall or may be slow to increase due to national and regional economic conditions. GuruShots
derives revenues form arranging for certain of its users to display their photographs in art galleries. There remains considerable uncertainty
and volatility in the national and global economy. Further or future slowdowns or disruptions in the economy, market and other conditions
could adversely affect us and our business strategy. We may not be able to sustain or increase our current net sales if there is a decline
in consumer spending.
The
market prices of many digital assets, including NFTs, have experienced significant declines in recent periods and may continue to do
so. Further declines in the market prices of digital assets, could have a material adverse effect on our NFTs Made Easy offering, our
financial performance, and results of our operations.
The
market prices of many digital assets, including NFTs, experienced significant declines in the fourth quarter of 2021 and to date in 2022.
Despite the increased popularity of NFTs in 2021, sales volumes of NFTs declined consistently throughout 2022, dropping by as much as
60% in the third quarter of 2022 as compared to the previous quarter, according to some market analysts. Further declines in the market
prices of digital assets, could have a material adverse effect on our NFTs Made Easy offerings, our financial performance, and results
of our operations.
The
value of NFTs is uncertain and may subject us to unforeseeable risks.
We
allow our creators to offer NFTs for sale. NFTs are unique, one-of-a-kind, or limited series, digital assets made possible by certain
digital asset network protocols. Because of their non-fungible nature, NFTs introduce digital scarcity and have become popular as online
“collectibles,” similar to physical rare collectible items, such as trading cards or art. Like real world collectibles, the
value of NFTs may be prone to “boom and bust” cycles as popularity increases and subsequently subsides. If any of these bust
cycles were to occur, it could adversely affect the value of certain of our future strategies.
The
prices of digital assets are extremely volatile, and such volatility may have a material adverse effect on our NFTs Made Easy offering.
The
market prices of many digital assets, including NFTs, have experienced extreme volatility in recent periods and may continue to do so.
For instance, there were steep increases in the value of certain digital assets over the course of 2017, and multiple market observers
asserted that digital assets were experiencing a “bubble.” These increases were followed by steep drawdowns throughout 2018
in digital asset trading prices. These drawdowns notwithstanding, digital asset prices, increased significantly again during 2019, decreased
significantly again in the first quarter of 2020 amidst broader market declines as a result of the novel coronavirus outbreak and increased
significantly again over the remainder of 2020 and the first quarter of 2021. Digital asset prices continued to experience significant
and sudden changes throughout 2021 followed by steep drawdowns in the fourth quarter of 2021 and to date in 2022.
Decreases
in the price of even a single other digital asset may cause volatility in the entire digital asset industry and may affect the value
of other digital assets, including our NFTs Made Easy offering. For example, a security breach or any other incident or set of
circumstances that affects purchaser or user confidence in a well-known digital asset may affect the industry as a whole and may also
cause the price of other digital assets, including NFTs, to fluctuate.
Extreme
volatility may persist and the value of NFTs may significantly decline in the future without recovery. Moreover, digital asset platforms
are relatively new and the digital asset markets may still be experiencing a bubble or may experience a bubble again in the future. For
example, in the first half of 2022, each of Celsius Network, Voyager Digital Ltd., and Three Arrows Capital declared bankruptcy, resulting
in a loss of confidence in participants of the digital asset ecosystem and negative publicity surrounding digital assets more broadly.
Extreme
volatility in the future could have a material adverse effect on the value of NFTs Made Easy offering. Furthermore, negative perception,
a lack of stability and standardized regulation in the digital asset economy may reduce confidence in the digital asset economy and may
result in greater volatility in the price of NFTs and other digital assets, including a depreciation in value.
11
We
offer a suite of freemium apps and we may not be successful in adding new users or in retaining existing users, or if our users decrease
their level of engagement with our products or do not make optional purchases of tokens, resources, or content, or convert into paying
subscribers and renew their paid subscriptions our revenue, financial results and business may be significantly harmed.
The
size of our user base and our users’ level of engagement and paid conversion are fundamental to our success. Our financial performance
has been and will continue to be dependent by our ability to successfully add new users, retain and engage existing users and convert
them into paying users and/or subscribers. Over the past several years, we have experienced periods of growth and contraction, as well
as a shift of users from well developed markets to emerging markets and we expect that the size of our user base will fluctuate over
time. If consumers and/or creators do not perceive our products as useful, effective, entertaining, reliable, and/or trustworthy, we
may not be able to attract or keep users or otherwise maintain or increase the frequency and duration of their engagement or the percentage
of users that are converted into paying subscribers. There is no guarantee that we will not experience a decline in our user base or
engagement levels. User engagement can be difficult to measure, particularly as we introduce new and different products and services
and as various privacy regulations evolve. Any number of factors can negatively affect user growth, engagement and conversion, including:
● users lose confidence in how we utilize user data and/or or privacy policy;
● users cease making in-app purchases or in paying for subscriptions;
● inability to offer relevant content to our users;
● poor support for our users and creators;
12
Certain
of these factors have, at various times, negatively impacted user and creator growth, MAU and engagement. If we are unable to maintain
or increase our user base and user engagement, our revenue and financial results may be materially adversely affected.
We
may not experience growth or engagement in certain geographic locations due to local factors.
We
may not experience rapid user growth or continued engagement in countries that have unreliable telecommunications infrastructure or in
countries where mobile and internet usage are expensive. Any decrease in user growth or engagement may have a material and adverse impact
on our popularity, revenue, business, reputation, financial condition, and results of operations.
We
may not be successful in acquiring a sufficient number of users that become purchasers or retain existing users who generate profitable
revenue for our apps.
Revenues
of freemium apps and websites typically rely on a small percentage of users that convert into paying users by making in-app purchases
of digital goods and/or paid subscriptions; however, the vast majority of users play for free or only occasionally make purchases or
opt-in for paid subscription. Accordingly, only a small percentage of our users are paying users. In addition, a small portion of paying
users generate a disproportionate percentage of revenue. Because of this, it is imperative for us to both retain these valuable customers
and to maintain or increase their spend over time. In fiscal 2022, we experienced a 3.7% decline in in-app purchases and paid subscriptions.
Conversely, over the past six years, GuruShots has successfully increased the compounded annual growth rate of monthly spending per paying
player by around 14%. There can be no assurance that we will be able to continue to retain paying users or that paying users will maintain
or increase their spending. We may experience a net decline in paying players resulting in a decrease in revenue resulting in a materially
adverse outcome for our business and financial results.
We
may not manage our in-app economy well and as a result, disincentivize users from making in-app purchases. Any failure to do so could
adversely affect our business, financial condition, and results of operations.
Our
apps are available to players for free and each brand generates a material portion of its revenue by selling digital goods and/or paid
subscriptions. The perceived value of these digital goods and/or paid subscriptions can be impacted by various factors including their
price, discounting policies, etc. If we fail to manage our economy well we risk confusing or upsetting users to the point that they reduce
their purchases which could negatively hurt the business.
If
we fail to attract advertisers or if advertisers reduce their spend with us, our revenues, profitability and prospects may be materially
and adversely affected.
In
fiscal 2022, approximately 76% of our revenues (excluding GuruShots) were generated from 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 digital brands 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.
13
The
digital advertising market may deteriorate or develop more slowly than expected, which could materially harm our business and results
of operations.
We
generate the substantial majority of our revenue from selling advertising inventory. We anticipate that our growth and profitability
will continue to depend on our ability to sell advertising inventory across some if not all of 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.
A
material amount of our revenue is generated from a limited number of geographies and third-party advertising demand partners. Any change
to this mix could result in negatively impacting our business, financial condition, and results of operations.
In fiscal 2022, revenue from well developed economies accounted for
approximately 73% of our total revenues and 83% of our total revenues were generated by four advertising demand partners. While our end
users are located around the world, the revenue is generated in the United States from our advertising partners. During the past five
years, we have experienced a shift in our Zedge App’s regional customer make-up with the percentage of our total MAU from emerging
markets increasing, while the portion from well-developed markets is decreasing. In fiscal 2022, 77% our Zedge App’s users were
located in emerging markets with 23% of users in well-developed regions compared to 75% and 24% respectively in fiscal 2021. India comprised
28% of our MAU as of July 31, 2022. This shift has negatively impacted revenues because well-developed markets command materially higher
advertising rates when compared to those in 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. Although, GuruShots’ and Emojipedia’s user bases are
more heavily weighted to well-developed economies, we are still exposed to the impact of a shift in our Zedge App’s user base toward
emerging markets.
Three
advertising demand partners, mainly, Google, Facebook and Applovin were responsible for 63% of overall revenue in fiscal 2022. If any
of these advertising demand partners were to alter their spend on our digital properties the outcome could result in lowering revenues
and profitability.
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Our
apps’ 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
apps’ user base is heavily weighted to smartphones running the Android operating system, which constituted approximately 96% of
our MAU (excluding Emojipedia) as of July 31, 2022, and most of our revenues for fiscal 2022. 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 products
and services 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 apps’ popularity. To the extent that our products and services continue operating 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 successful in diversifying our revenue mix in order to reduce our significant dependence on third-party advertisers.
In
fiscal 2022, approximately 80% of our revenues excluding GuruShots were generated from advertising sales. 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 the Zedge App had initial success in converting freemium users into paid subscribers, starting with zero in January 2019 and
ending fiscal 2021 with approximately 752,000, we ended fiscal 2022 with 692,000 subscribers, an 8% decline and there is no guarantee
that we will be successful in improving subscriber base growth or in maintaining our current subscriber base. To date, Zedge Premium
has taken longer to scale than we originally anticipated, and our ‘NFTs Made Easy’ offering is still in the early stages
of development. Furthermore, we are still integrating GuruShots and have not achieved its expected growth trajectory or realized synergies
between GuruShots and our legacy operations. Finally, Android users constitute approximately 96% of our overall MAU and are prone to
spend less money in apps than iOS and web users. Even if our new initiatives are successful on one platform we may not be able to replicate
that success across other platforms.
Our
revenues may fluctuate materially due to increases and decreases of new mobile device sales, or other factors, 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 highly
correlates to installs of our apps and associated usage and revenue generation.
Initially
the COVID-19 pandemic negatively impacted new user growth. New smartphone sales suffered as a result of retail business closures, negatively
impacting new user growth, especially in well-developed markets. Any e-retail business rebound will be subject to many factors including
the state of the global and local economies.
If
new mobile device sales decrease or slowdown, our products and services will likely experience fewer installations which will negatively
impact our revenue and operations.
We
rely on third-party platforms, such as the iOS App Store, Facebook, and Google Play Store, to distribute our apps and collect revenues
generated on these platforms. If these platforms adopt policies including those relating to advertising, privacy, or monetization that
are counter to our strategy it could result in materially and adversely affecting our business.
Our
products and services depend on mobile app stores and other third parties such as data center service providers, as well as third party
payment aggregators, computer systems, internet transit providers and other communications systems and service providers. Our mobile
applications are almost exclusively accessed through and depend on the Google Play store and Apple’s App Store. While our mobile
applications are generally free to download, we offer our users the opportunity to make in-app purchases and/or purchase paid subscriptions.
In certain instances, we determine the prices at which these items and subscriptions are sold. These purchases are processed by Google’s
and Apple’s in-app payment and subscription systems. As of July 31, 2022 we paid Google and Apple, approximately 16% of the revenue
we generated across their respective platforms. Our cashflow may be negatively impacted if either platform changes that timing of their
payments to us. While we do not anticipate any interruption in their distribution platforms or ability to accept customer payments, any
such disruptions, even temporary, may have material impacts on our business and operations.
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We
are subject to the standard policies and terms of service of third-party platforms, which govern the marketing, promotion, distribution,
content and operation of our apps on their platforms. Each platform provider has the discretion to make changes to its operating system,
payment services, manner in which their mobile operating system operates as well as change and interpret the terms and conditions of
its developer policies. These changes may be harmful to our business and result in a negative outcome. 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.
Such
changes could:
● make our products and services inaccessible or limit their accessibility;
● impose changes in the way in which we monetize our users;
● limit the scope of feature enhancements or new features;
and Apple are able to terminate our distribution agreements with them, without cause, with 30 days prior written notice (to the extent
allowed by applicable local law). They also may terminate our agreements with them immediately (unless a longer period is required by
applicable law) under certain circumstances, including upon our uncured breach of such agreements. To the extent that they or any other
third party platform provider on which we rely make such changes or terminates our agreements with them, our business, financial condition
and results of operations could be materially adversely affected.
A
platform provider may also change its fee structure to our disadvantage, change how we are able to advertise on the platform, limit how
user information is made available to developers, curtail how personal information is used for advertising purposes, or restrict how
users can share information with their friends on the platform or across platforms. For example, in April 2021 Apple released iOS 14
which started requiring users to opt in to share their IDFA with app developers, on an app-by-app basis. As a consequence, the ability
of advertisers to accurately target and measure their advertising campaigns at the user level become significantly more difficult typically
resulting in higher user acquisition costs.
If
we violate, or a platform provider believes we have violated, its terms of service, the platform provider reserves the right to limit
or cease access to their platform. If we are unable to maintain a productive working relationship with any platform distribution and
access to our products and services could also be curtailed or permanently disabled. This is especially true in instances where we are
dependent on single source providers for their respective services. Any limitation or discontinuation of access to any platform could
significantly reduce our ability to distribute and/or provide access to our products to users and would like result in materially and
adversely affecting our business, financial condition and results of operations.
Our