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, 2023
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. ☐
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023 (the last business
day of the registrant’s most recently completed second fiscal quarter) of the Class B common stock of $2.20 per share, as reported
on the New York Stock Exchange, was approximately $27 million.
As of October 27, 2023, the registrant had outstanding
524,775 shares of Class A common stock and 13,829,798 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 17, 2024, 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 8
Item 1B. Unresolved Staff Comments 41
Item 2. Properties 41
Item 3. Legal Proceedings 41
Item 4. Mine Safety Disclosures 41
Item 6. [Reserved] 43
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 60
Item 8. Financial Statements and Supplementary Data 60
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
2023 refers to the fiscal year ended July 31, 2023).
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 as well
as pAInt, a generative AI wallpaper maker, GuruShots, a skill-based photo challenge game, and Emojipedia, the #1 trusted source for ‘all
things emoji’. Our vision is to enable and 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.
According to Linktree, over 200 million identify as creators, people who use their influence, skill, and creativity to amass an audience
and monetize it. Furthermore, TechCrunch reports that 12% of full-time creators earn more than $50,000 per year, while Influencer Hub
reports 10% of influencers earn more than $100,000 per year. We view the Creator Economy as an 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,” offers 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, 2023, our Zedge App has been installed nearly 621 million times since inception and, over the past two
fiscal years, has had between 30.8 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,’
the section of our marketplace where we offer premium content (i.e., for purchase). In turn, our users utilize the content to personalize
their phones and express their individuality.
In fiscal 2023, we introduced pAInt, a generative
AI wallpaper maker in the Zedge App. A generative AI wallpaper maker is an implementation of artificial intelligence software that can
create images from text descriptions. To interface with a generative AI image maker, a user enters a text description of the image they
want to create, and the software generates an image based on that description. In addition, we upgraded Zedge+, our paid subscription
offering by bundling together an ad-free experience with value adds making the offering more compelling.
In fiscal 2022 we introduced several new customer
facing product features and social and community features, all meant to improve customer engagement, MAU, and revenue growth over the
long term.
The Zedge Marketplace’s monetization stack
consists of advertising revenue generated when users view advertisements when using the Zedge App (and the related functionality under
the zedge.net website), the in-app (or web-based) 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.
In April 2023, we introduced a subscription tier in the iOS version of the app. As of July 31, 2023, we had 638,000 active paying subscribers.
In late 2021 we introduced NFT functionality
to a limited number of Zedge Premium creators via ‘NFTs Made Easy’. All NFT Made Easy transactions are made using Zedge Credits.
1
We often refer to our freemium ringtones and
wallpapers, our subscription offering, the functionality for creators to market their products and ancillary offering and features, both
in our Zedge App and website as our Zedge Marketplace.
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 750,000 thousand
photographs and casting close to 4 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 seven years, the monthly average paying player spend
has increased in excess of 11.6% annually to more than $51.3 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. In July 2023, Emojipedia received approximately
45 million monthly page views and has approximately 9.7 million monthly active users as of July 31, 2023 of which approximately 50.3%
are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends.
As a member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji
creators including Apple, Google, Meta, and X, formerly known as 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 provide tools that enable easy
and high-quality digital content creation, connect the creators together with friendly competitions and expose the content to communities
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 content creation, gaming and marketplaces by empowering consumers with easy-to-use content creation utilities
whose output can be used to engage across a multitude of online and mobile platforms including social networks, messaging, and gaming
as well as for commerce purposes. 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 Marketplace 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 Zedge Marketplace’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 strategy is 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;
3
○ expanding our reach by collaborating with strategic partners.
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.
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.
6
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, 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, 2023, we had approximately 638,000 active subscribers. In April 2023, we introduced a subscription tier in the iOS
version of the app.
In August 2020, Jonathan Reich was promoted to
Chief Executive Officer, and Yi Tsai was promoted to Chief Financial Officer.
In August 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.
In December 2021, we introduced NFT functionality
to a limited number of Zedge Premium creators via ‘NFTs Made Easy’. All NFT Made Easy transactions are made using Zedge Credits.
In April 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 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.
In December 2022, we introduced ‘pAInt’
our generative AI wallpaper maker within the Zedge App. pAInt enables users to create high quality images by typing a brief description
of what they are interested in and tuning with different style types. In parallel with the introduction of pAInt we also rolled out another
in-app currency used for creating wallpapers.
Our Technology
Our eco-system is powered by a scalable distributed
platform that comprises both open source and proprietary technologies centered on content management and discovery, web and app development,
data science and analytics, deep learning, mobile content/device compatibility, advertising/marketing tech, and reporting. We have built
a robust platform that allows us to ideate, test, analyze, and launch where warranted by the outcome and we have embraced machine learning,
including AI, throughout our technology stack in order to improve content creation, recommendations and relevancy. From an end user’s
perspective, our platform minimizes response latency while factoring in cost and focuses on key areas including content creation, 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, and a personal competition recommendations system based on users’ photos and historical activity. Our infrastructure
provides a fully redundant production environment in a cloud-hosted, virtual-server environment.
7
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, “We Make Phones Personal,” and “Zedge,
Everything You,” “Tattoo Your Phone,” “Shortz – Chat Stories By Zedge,” and “NFTs Made Easy” in
United States and a stylized “D” logo in the European Union, United Kingdom and United States. We also have applied for
trademark protection for “AI Art Battles (& Design),” “pAInt,” and “Zedge pAInt” in the United
States, a stylized “D” logo in 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 obtained trademark registrations for “GuruShots”
in the United States, applied for trademark protection for “GuruShots in Canada, India, the European Union and the United Kingdom,
and have obtained copyright registrations for the GuruShots mobile and web-based applications.
Human Capital
Our headcount totaled 94 as of July 31, 2023,
including 29 added from the GuruShots acquisition.
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
4,900 square feet of space, accommodates our product, design, and technology teams, and is under lease through March 2027. 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
1,600 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:
8
● Zedge may be unable to successfully integrate GuruShots into Zedge
9
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.
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 on 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;
10
● inability to offer relevant content to our users;
● poor support for our users and creators;
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 subscriptions. 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 2023, we experienced an 8% decline in paid subscriptions. Conversely, over the past seven years, GuruShots has successfully
increased the compounded annual growth rate of monthly spending per paying player by around 11.6%. There can be no assurance that we
will be able to continue to retain paying users, grow or maintain subscription levels 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.
11
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 2023, approximately 81% 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.
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 Privacy Sandbox which is meant
to make current tracking mechanisms obsolete, and block covert tracking techniques, like fingerprinting 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.
12
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 2023, revenue from well developed economies
accounted for approximately 78% of our total revenues and 51% of our total revenues were generated by three 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 2023, 78% of our Zedge App’s
users were located in emerging markets with 22% of users in well-developed regions compared to 77% and 23% respectively in fiscal 2022.
India comprised 28% of our MAU as of July 31, 2023. 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,
Vungle and AppLovin were responsible for 51% of overall revenue in fiscal 2023. 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.
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, 2023, and most of our revenues for fiscal 2023. 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 2023, approximately 76% 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 2022 with approximately 692,000,
we ended fiscal 2023 with 638,000 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.
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.
13
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, Meta, 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, 2023 we paid Google and Apple up to 30% of the revenue we generated across their respective platforms. Our cashflow may
be negatively impacted if either platform changes the 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.
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;
14
Google 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 becomes 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 business depends on the availability of mobile
app stores and other third party platforms and any outages that these parties experience will likely have a negative impact on our business,
financial condition, results of operations or reputation.
If technologies designed to block the display
of advertisements are adopted en masse, or if web browsers limit or block behavioral targeting technologies our revenues may be adversely
affected.
Our digital products and services 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.
Activities of our advertiser clients and/or
users could damage our reputation or give rise to legal claims against us.
Our advertisers and/or users may not comply with
international or domestic laws, including, but not limited to, laws and regulations relating to mobile communications. Failure of our
advertisers and/or users to comply with laws or our policies could damage our reputation and expose us to liability under these laws.
We may also be liable to third parties for content in the advertisements or content we deliver or distribute if the artwork, text or
other content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory,
unfair and deceptive, or otherwise in violation of applicable laws. Although we generally receive assurance from our advertising partners
and users that their advertisements and content, respectively, are lawful and that they have the right to use any copyrights, trademarks
or other intellectual property included in an advertisement or content, and although we are normally indemnified by the advertisers,
a third party or regulatory authority may still file a claim against us. Any such claims could be costly and time consuming to defend
and could also hurt our reputation within the mobile advertising industry. Further, if we are exposed to legal liability, we could be
required to pay substantial fines or penalties, redesign our business methods, discontinue some of our services or otherwise expend significant
resources.
We may not be able to continually meet our
users’ expectations 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’ expectations, 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, digital goods
and resources, and subscriptions 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.
15
The internet business is characterized by constant
changes, including but not limited to rapid technological evolution, continual shifts in user expectations, frequent introductions of
new products and services and constant emergence of new industry standards and practices. As a result, our 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:
We cannot assure you that our existing products
and services, will remain sufficiently popular with our users. We may be unsuccessful in adding compelling new features and 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 will achieve widespread market acceptance or generate incremental revenue the way our existing products and services
have. If we fail in earning 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.
Zedge Premium, the section of our marketplace
where we offer premium content (i.e., for purchase), may not yield the strategic goals and objectives that we envision.
Although we believe that Zedge Premium will act
as an important driver in helping our platform 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.
16
Although Zedge Premium’s gross transaction
revenue has shown modest growth 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:
● effectively market and convert GuruShots’ players into Zedge Premium artists;
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.
We may fail to develop popular new features or
expand into new verticals, successfully, negatively impacting our ability to attract new users or retain existing users, which could
negatively impact our business, financial condition, and result of operations.
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
various digital brands and associated reputation is 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 users, artists, 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,