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:
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RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Certain of our offerings 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 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. 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, coins, 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.
We expect that the size of our user base will fluctuate or decline in one or more markets from time to 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 or
remain 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 retention, growth, engagement and conversion, including if:
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● we fail to combat inappropriate or abusive activity on our platforms;
● we are unable to offer relevant content to our users;
● we fail to provide adequate 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 or limited
in regular accessibility. Any decrease in user retention, growth or engagement may have a material and adverse impact on our popularity,
revenue, business, reputation, financial condition, and results of operations.
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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 2024, 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 9.9%. 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, but not limited to, their price, discounting policies,
promotional strategies, market competition, user reviews, and user engagement levels. 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 are unable to compete for advertisers
or if advertisers reduce their spend with us, our revenues, profitability and prospects may be materially and adversely affected.
In fiscal 2024, approximately 79% of our revenues
(excluding GuruShots) were generated from selling advertising inventory. We generally enter into arrangements with the major programmatic
advertising networks to monetize our advertising inventory. We need to maintain good relationships with these advertising networks to
provide us with a sufficient inventory of advertisements. Online advertising, including through mobile applications, is an intensely competitive
industry. Many large companies, such as Applovin, Meta and Google, invest significantly in data analytics to make their properties and
platforms more attractive to advertisers. Our advertising revenue is primarily a function of the number and hours of engagement of our
free users and our ability to provide innovative advertising products that are relevant to our users, maintain or increase user engagement
and satisfaction with our products, and enhance returns and add incremental gains for our advertising partners. If our relationship with
any advertising partners terminates for any reason, or if the commercial terms of our relationships are changed or do not continue to
be renewed on favorable terms, or if we cannot source high-quality ads consistent with our brand or product experience, we would need
to qualify new advertising partners, which could negatively impact our revenues, at least in the short term.
In addition, internet-connected devices and operating
systems controlled by third parties increasingly contain features that allow device users to disable functionality that allows for the
delivery of advertising on their devices or reduce the ability to provide personalized or targeted advertising, which results in less
valuable ads. Device and browser manufacturers may include or expand these features as part of their standard device specifications. For
example, when Apple announced that UDID, a standard device identifier used in some applications, was being superseded and would no longer
be supported, application developers were required to update their apps to utilize alternative device identifiers such as universally
unique identifier, or, more recently, identifier-for-advertising, which simplifies the process for Apple users to opt out of behavioral
targeting. Furthermore, laws and regulations may also make it more difficult to deliver personalized or targeted advertising or impose
requirements that result in more users making elections to block our ability to deliver targeted ads. If users do not elect to participate
in functionality that supports the delivery of targeted advertising on their devices, our ability to deliver effective advertising campaigns
could suffer, which could cause our business, financial condition, or operating results to be adversely affected.
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.
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The digital advertising market may deteriorate,
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.
Future demand 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,
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 2024, revenue from well developed economies
accounted for approximately 80% of our total revenues and 69% of our total advertising 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 2024, 79% of our Zedge
App’s users were located in emerging markets with 21% of users in well-developed regions compared to 78% and 22% respectively in
fiscal 2023. India comprised 30% of our MAU as of July 31, 2024. 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 69% of overall advertising revenue in fiscal 2024. 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.
In addition, on April 24, 2024 President Joe Biden signed a bill that
would ban TikTok in the United States if ByteDance, TikTok’s Chinese owner, didn’t sell the platform to a non-Chinese owner
within nine months. Although TikTok is challenging the legality of this bill in court it is unclear if they will prevail. The negative
impact of a TikTok ban could be material impacting advertising and ecommerce. In light of TikTok running ads in Zedge’s platform
a ban could negatively impact revenue.
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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, 2024, and most of our revenues for fiscal 2024. 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 2024, approximately 79% 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 2023 with approximately 647,000, we ended fiscal
2024 with 669,000 subscribers, a 3.4% increase 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.
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 cloud infrastructure and service providers,
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 from these stores, 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, 2024 we paid Google and Apple up to 30% of the revenue we generated
across their respective platforms for processing fees. Our revenues and earnings could be negatively impacted should Google or Apple decide
to impose higher processing fees. Further, 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.
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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;
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.
Furthermore, both Apple and Google have broad
discretion to make changes to their operating systems or payment services or change the manner in which their mobile operating systems
function and their respective terms and conditions applicable to the distribution of our applications, including the amount of, and requirement
to pay, certain fees associated with purchases required to be facilitated by Apple and Google through our applications, and to interpret
their respective terms and conditions in ways that may limit, eliminate or otherwise interfere with our products, our ability to distribute
our applications through their stores, our ability to update our applications, including to make bug fixes or other feature updates or
upgrades, the features we provide, the manner in which we market our in-app products, our ability to access native functionality or other
aspects of mobile devices, and our ability to access information about our users that they collect. To the extent either or both of them
do so, our business, financial condition and results of operations could be materially adversely affected.
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For example, pursuant to Google’s policy
whereby only Google Play’s in-app billing system could be used for transactions in its store, we were mandated to stop the provision
of non-native payment options to our users on Android during 2021, which caused disruptions for users and led to a decline in Paying Users.
Since announcing this policy in 2020, following industry pushback and country-specific regulations Google has introduced in select markets
the option of “user choice billing,” which allows eligible developers to offer users an additional billing system alongside
Google Play’s billing system, and in the European Economic Area the option for eligible developers to offer users an alternative
to Google Play’s billing system. We are exploring such solutions on a country-by-country basis. However, as these solutions are
in their infancy, they may evolve following subsequent regulatory mandates or organically at Google’s behest, and as such we will
need to be ready to continuously adapt to such changes. Any deadlines imposed on developers by future iterations of Google’s policy
will require prompt and active development, and failure to do so may result in the discontinuation of the provision of alternative billing
methods to our users.
Similarly, Apple is experiencing industry pushback
and country-specific regulations. In response to a recent antitrust lawsuit, Apple now allows all digital apps in the United States to
include a link to the developer’s website to process payments for in-app purchases. Additionally, in the EU, pursuant to the Digital
Markets Act, all major app store operators such as Google and Apple will be forced to introduce more country-specific billing policies
that allow developers to offer alternative billing methods, and it is expected that other markets may follow suit. Further complicating
this landscape, a recent ruling by the United States District Court for the Northern District of California in Epic Games v. Google
mandates that Google must open its Android app store to third-party competitors for three years, from November 1, 2024 through November
1, 2027, which will likely foster increased competition and could lead to changes in fee structures and app distribution practices.
Should we choose to explore such policy initiatives
for the benefit of our business and our users, we may potentially become subject to highly nuanced, country-specific billing policies
and commissions of major app store operators, we may need to devote more resources and time in creating and managing separate app bundles
for each country in which we want to offer alternative billing options, which could become burdensome, and/or we could become subject
to higher commissions overall. Furthermore, changes to billing options may cause a disruption to the user journey, which could cause a
decrease in paying user conversion rates. Alternatively, choosing not to explore such policy initiatives could present a risk of missed
opportunity. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.
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.
Technologies have been developed, and will likely
continue to be developed, that can block the display of advertisements on our digital products and services. We 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. We generate
substantially all of our revenue from advertising, and ad-blocking technologies may prevent the display of certain advertisements appearing
on our platform, which could harm our business, operating results, and financial condition. Existing ad-blocking technologies that have
not been effective on our platform may become effective as we make certain platform changes, and new ad-blocking technologies may be developed
in the future.
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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.
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:
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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.
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:
● expand the digital content types we offer to include more types of creators
● 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.
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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,
are important to maintaining and enhancing our various brands and may negatively impact our brand and reputation if not properly managed,
such as our ability to:
● distinguish us from the competition and maintain this distinction.
In the future, we may conduct various marketing
and brand promotion activities to expand our brand. Some of these may require material investment. We cannot assure you, however, that
these activities will be successful or that we will be able to achieve the brand promotion effect we expect. In addition, any negative
publicity in relation to our mobile internet products, websites or services could harm our brand and reputation.
We have received, and expect to continue to receive,
complaints from users regarding the quality of our products and services. If our users’ complaints are not addressed to their satisfaction,
our reputation and our market position could be significantly harmed, which may materially and adversely affect our business, revenues
and profitability.
In addition, despite our ongoing efforts to prevent
violation of our user guidelines, problematic content on our platforms, including but not limited to, low-quality user-generated content,
socially unacceptable material, and other violations of our guidelines could affect the quality of our services and offerings and the
manner in which they are viewed by our users or potential users. This could harm our reputation and negatively impact user participation
of our various platforms.
RISKS RELATED TO FINANCIAL AND ACCOUNTING MATTERS
Our limited operating history makes it difficult
to evaluate our business with past results not necessarily being indicative for future operating results and may increase your investment
risk.
We have only a limited operating history, especially
with respect to Emojipedia and GuruShots, upon which you can evaluate our business and prospects. Although we experienced impressive year-over-year
revenue growth of 36% and 107% in fiscal 2022 and 2021 respectively, our growth in fiscal 2020 was moderate and even declined in fiscal
2019. Impacting the growth figures in fiscal 2023 as compared to fiscal 2024 is the inclusion of GuruShots for all of fiscal 2023 as compared
to only the final three and a half months of fiscal 2022. We have encountered and will encounter risks and difficulties frequently experienced
by early-stage companies in rapidly evolving industries, like mobile apps, digital marketplaces and gaming, including the need to:
● accurately forecast our revenue and plan our operating expenses;
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● hire, integrate, and retain key personnel;
● comply with existing and new laws and regulations applicable to our business;
● establish and expand our various digital brands;
● offer competitive economics to advertisers and users alike;
● identify, attract, retain and motivate new users and artists; and
● manage our expanding operations.
If we do not successfully address any or all of
these risks, our business, revenues and profitability could be materially adversely affected.
Although we had positive cash flow from operating
activities fiscal 2023 and 2024, we had previously incurred, and may once again incur, net losses and experience negative cash flow from
operating activities in the future and may not be able to obtain additional capital in a timely manner or on acceptable terms, or at all.
Our net loss in fiscal 2024 was $9.2 million,
our net loss in fiscal 2023 was $6.1 million. Our ability to maintain profitability and positive cash flow from operating activities depends
on various factors, including but not limited to, the acceptance of our products and services by mobile phone and internet users, the
growth and maintenance of our user base, user acquisition spend and associated return, our ability to maintain existing and obtain new
advertisers, our ability to grow our revenues, the success of each of our digital brands as measured by their respective key performance
indicators, the effectiveness of our new product initiatives, selling and marketing activities as well as control our costs and expenses.
We may not be able to sustain profitability or positive cash flow from operating activities, and any such positive cash flow may not be
sufficient to satisfy our anticipated capital expenditures and other cash needs. As such, we may not be able to fund our operating expenses
and expenditures out of cash flows, which would require us to utilize debt or equity financing which we may not be able to secure or which
we may only secure on terms that are not favorable, which may result in significant dilution or voluntary or involuntary dissolution or
liquidation proceeding of us and a total loss of your investment.
Changes in accounting principles or their application
could result in accounting charges or effects which could adversely affect our operating results and prospects.
We prepare consolidated financial statements in
accordance with accounting principles generally accepted in the United States. The accounting for our business is subject to change based
on how the business model evolves, interpretation of various accounting principles, enforcement of existing or new regulations, and changes
in policies, rules, regulations, and interpretations, of accounting and financial reporting requirements of the SEC or other regulatory
agencies. A change in any of these principles or in their interpretations or application to our business, may have a significant effect
on our reported results, as well as our processes and related controls, and may retroactively affect previously reported periods, which
may negatively impact our financial statements our business prospects. It is difficult to predict the impact of future changes to accounting
principles and accounting policies over financial reporting, any of which could adversely affect our results of operations and financial
condition and could require significant investment in systems and personnel.
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If our estimates or judgments relating to our
critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could suffer and lower
the expectations of equity analysts and investors, resulting in a decline in the market price of our common stock.
Our preparation of financial statements in conformity
with generally accepted accounting principles in the United States requires us to make certain estimates and assumptions that affect the
reported amount of assets and liabilities and the disclosure of contingent liabilities as of the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. For example, we make certain assumptions about the interpretation
of these principles and accounting treatment of our useful lives of tangible and intangible assets, fair value of contingent consideration,
and allowance for credit losses. If these assumptions turn out to be incorrect, the outcomes may be materially higher or lower than expected
for current and future periods, which could have a material adverse effect on our reported earnings. We base estimates and assumptions
on historical experience, research, and on other factors that we believe to be reasonable and in accordance with generally accepted accounting
principles in the United States, the results of which form the basis for making judgments about the carrying values of assets, liabilities,
equity, revenue and expenses that are not accessible from alternative sources. We also may make estimates regarding activities for which
the accounting treatment is still evolving. Actual results may differ from those estimates. If our assumptions change or if actual circumstances
differ from our assumptions, our operating results may be adversely affected and could negatively impact investors, resulting in a decline
in the market price of our common stock.
Changes in tax laws, tax rates or tax rulings,
or the examination of our tax positions, could materially affect our financial condition, effective tax rate, future profitability and
results of operations.
Tax laws may change as new laws are passed and
new interpretations of the law are issued or applied. Our existing corporate structure and intercompany arrangements have been implemented
in a manner that we believe comply with current prevailing tax laws. However, the tax positions that we take advantage of could be undermined
due to changing tax laws, both in the United States and in other applicable jurisdictions, including Norway, Lithuania, and Israel. In
addition, the tax authorities in the United States and other jurisdictions in which we operate regularly examine income and other tax
returns and we expect that they may examine our income and other tax returns. The ultimate outcome of these examinations may not benefit
our business.
Our effective tax rate for fiscal 2024 was 19.3%
compared with 7.0% for fiscal 2023. In general, changes in applicable U.S. federal and state and foreign tax laws and regulations, or
their interpretation and application, including the possibility of retroactive effect, could affect our tax expense.
Over the last several years, the Organization
for Economic Cooperation and Development (the “OECD”) has been working on a Base Erosion and Profits Shifting Project that
would change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which
we operate. In this regard, the OECD has proposed policies aiming to modernize global tax systems, including a country-by-country 15%
minimum effective tax rate (“Pillar Two”) for multinational companies. Numerous countries have enacted, or are in the process
of enacting, legislation to implement the Pillar Two model rules with a subset of the rules becoming effective during our fiscal year
ending July 31, 2025, and the remaining rules becoming effective for our fiscal year ending July 31, 2026, or in later periods. At this
point in time, we do not expect material tax impacts associated with Pillar Two rules in the countries where we operate for the fiscal
year ending July 31, 2025. As these rules continue to evolve with new legislation and guidance, we will continue to monitor and account
for the enactment of Pillar Two rules in the countries where we operate, and the potential impacts such rules may have on our effective
tax rate and cash flows in future years.
Effective January 1, 2022, pursuant to the Tax
Cuts and Jobs Act of 2017, R&D expenses are required to be capitalized and amortized for US tax purposes, which has delayed the deductibility
of these expenses and potentially increase the amount of cash taxes we paid during the years ended July 31, 2024 and 2023. In the future,
among other things, Congress may consider legislation that would defer the capitalization requirement to later years or eliminate the
capitalization requirement, possibly with retroactive effect, and/or the IRS may issue guidance on the currently enacted tax law which
differs from our interpretation. It is possible that the enactment of new legislation and/or issuance of IRS guidance could have a material
effect on our financial condition, results of operations and cash flows in future periods.
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We are exposed to fluctuations in foreign currency
exchange rates.
We have significant operations in Europe and Israel
that are denominated in foreign currencies, primarily the Norwegian Krone, Euro and Israeli Shekel, subjecting us to foreign currency
risk. The strengthening or weakening of the U.S. Dollar versus these currencies impacts the expenses generated in these foreign currencies
when converted into the U.S. Dollar. In fiscal 2024 and fiscal 2023, we recorded a loss of $190,000 and a gain of $36,000, respectively,
from foreign currency movements relative to the U.S. Dollar. Included in these amounts were losses from hedging activities of $245,000
and gains of $14,000 in fiscal 2024 and fiscal 2023, respectively. While we regularly enter into transactions to hedge portions of our
foreign currency exposure, it is impossible to predict or eliminate the effects of this exposure. Fluctuations in foreign exchange rates
could significantly impact our financial results.
If we fail to implement and maintain an effective
system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting
obligations or prevent fraud.
Under Section 404 of the Sarbanes-Oxley Act of
2002, we are required to include a report of management on our internal control over financial reporting in our annual report on Form
10-K. In addition, should we become an accelerated filer, our independent registered public accounting firm must attest to and report
on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial
reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective,
our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified
if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or
if it interprets the relevant requirements differently from us. In addition, our reporting obligations may place a significant strain
on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our
evaluation testing and any required remediation.
During the course of documenting and testing our
internal control procedures, in order to satisfy the requirements of Section 404, we may identify weaknesses and deficiencies in our internal
control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as
these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have
effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal
control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, and
we may be required to restate our financial statements from prior periods, any of which would likely cause investors to lose confidence
in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead
to a decline in the trading price of our stock.
Additionally, ineffective internal control over
financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from
the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.
RISKS RELATED TO OUR OPERATIONS
We may not be able to effectively manage our
growth or implement our future business strategies, in which case our business and results of operations may be materially and adversely
affected.
Our continued success depends on our ability to
effectively and efficiently grow each of the properties in our brand portfolio.
We may not be capable of growing our business
organically or with paid marketing campaigns, attract new players and artists and/or establish cooperation with strategic partners. Our
business has experienced periods of rapid growth and expansion that has placed, and continues to place, significant strain on our management
and resources. We cannot assure you that these periods will recur or be sustainable. We have also acquired other companies and made asset
purchases and integrating those into Zedge has placed and continues to place significant strain on management and resources. We believe
that continued growth of our business will depend on our ability to successfully develop and enhance our products and services, cost efficiently
attract new artists and individual creators, maintain our relationship with various artists and content partners like Google, Meta and
Apple, sustain our high rankings with the leading search engines including Google, capture the changes that are taking place in the industry
in a timely fashion grow our user base at a cost effective rate, retain existing users, continue developing innovative technologies in
response to user demand, increase brand awareness through marketing and promotional activities, react to changes in market trends, expand
into new market segments, attract new advertisers, retain existing advertisers, get users to engage with our digital properties and convert
into paying users or subscribers, and take advantage of the growth in the relevant markets. We cannot assure you that we will achieve
any or all of the above. In the event that we are not successful in some or all of these areas we may not be able to retain our customers
and advertisers.
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We need to invest in paid user acquisition in
order to grow our customer base. However, we may not be able to secure new users at scale with a positive return on investment. Even if
we can secure new profitable customers these customers may not mature into sustainable long-term customers.
To manage our growth and for us to attain and
maintain profitability, we will also need to further expand, train, manage and motivate our workforce across multiple geographies and
manage our relationships with users, consultants, business partners and advertisers globally. We anticipate that we will need to implement
a variety of enhanced and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting
and other internal management systems. All of these endeavors involve risks and will require substantial management efforts and skills
and additional expenditures.
Our products currently enjoy a global customer
base. This geographic diversity may raise the level of difficulty in managing future growth and profitability. We cannot assure you that
our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. In addition, we
cannot assure you that we will be able to effectively manage our growth or implement our future business strategies effectively, and failure
to do so may materially and adversely affect our business and results of operations.
During the past five years, we have experienced
a shift in our Zedge App’s regional customer make-up with the portion of our total MAU from emerging markets increasing, and the
portion from well-developed markets decreasing. In Q4 of fiscal 2024, our Zedge App’s users in emerging markets declined by 15%
while its users in well-developed regions declined 19% when compared to fiscal 2023. India comprised 30% of our MAU as of July 31, 2024.
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.
In 2021, Apple released iOS 14 which started requiring
users to opt in to share their identifier for advertisers IDFA with app developers. Apple’s IDFA is a unique string of alphanumeric
characters assigned to Apple devices which advertisers use to identify app users in order to deliver personalized and targeted advertising.
According to Statista, the worldwide opt-in rate enabling app tracking after the release of iOS 14 was less than 25%. As a consequence,
the ability of advertisers to accurately target, measure and optimize their advertising campaigns at the user level has become significantly
more difficult typically resulting in higher user acquisition costs. Further, other companies upon whom the industry depends to identify
potential users such as Google may implement similar changes with respect to its Android operating system. The longer-term impact of these
changes on the overall mobile advertising ecosystem, our competitors, our business, and the developers, partners, and advertisers within
our community remains uncertain, and depending on how we, our competitors, and the overall mobile advertising ecosystem adjusts, and how
our partners, advertisers, and users respond, our business could be seriously harmed. If we are unable to mitigate or respond to these
and future developments, and alternative solutions do not become widely adopted by our advertisers, then targeting, measurement, and optimization
capabilities will be materially and adversely affected, which would in turn negatively impact our advertising revenue.
Our products may contain errors, flaws or failures
that may only become apparent after their release. From time to time, we receive user feedback in connection with errors, flaws or failures
and such errors, flaws or failures may also come to our attention during our internal testing process. We generally have been able to
resolve such errors, flaws or failures in a timely manner, but we cannot assure you that we will be able to detect and resolve all of
them effectively or in a timely manner. Errors, flaws or failures in our services and products may adversely affect user experience and
cause our users to stop using our services and products, which could materially and adversely affect our business and results of operations.
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Our marketing efforts
to acquire new, and retain existing, customers may not be effective or cost-efficient, and may be affected by external factors beyond
our control.
Maintaining and promoting awareness of our services
is important to our ability to attract and retain customers. We spend a significant amount on marketing activities to acquire new customers
and retain and engage existing customers and have plans to maintain and increase that focus. For example, in 2024 and 2023 our marketing
expenses were approximately $6.9 million and $3.2 million, respectively, and we expect our marketing expenses to continue to account for
a significant portion of our operating expenses. Our business depends on a high degree of app installs from the app stores and website
traffic, which is dependent on many factors, including the availability of appealing website content and search engine optimization, affiliate
marketing and display advertising, as well as social media and email. The marketing efforts we implement may not succeed for a variety
of reasons, including our inability to execute and implement our plans. External factors beyond our control may also impact the success
of our marketing initiatives.
Our digital presence heavily depends on search
engine traffic, primarily from platforms like Google. A key driver of our success in this domain is our website’s visibility and
ranking in response to search queries. As search engines frequently update their algorithms, affecting our link placements and rankings
we need to regularly manage our search engine optimization in order to avoid a material decrease in web traffic to our online properties.
Substituting free traffic with paid alternatives could also lead to increased costs. These risks highlight the critical importance of
continuous adaptation to the evolving search engine landscape and the potential consequences if we do not adequately navigate these challenges.
User acquisition for our apps depends on a host
of items including and especially on paid and organic app marketing initiatives. Effective and profitable user acquisition relies on knowing
how to optimize across each acquisition platform, data analysis, creatives, amongst other things. In addition, due to the changing nature
of what data the platforms provide to publishers like Zedge may result in elongating testing time windows and increasing testing budgets.
Taken together if we are unsuccessful in accounting for all of these items, we may be unable to recover our marketing spend and we may
not acquire new customers or our cost to acquire new customers may increase, and our existing customers may reduce the frequency or size
of their purchases from us, any of which could have a material adverse effect on our business, prospects, results of operations, financial
condition or cash flows.
Our products face competition in all aspects
of their business. If our apps fail to compete effectively or if their reputation is damaged, our business, financial condition and results
of operations may be materially and adversely affected.
Although our products are leaders in their specific
verticals, including mobile phone personalization, emoji related content and information, and digital photo competitions, we cannot guarantee
that our brands will be able to maintain their leadership position. Our products face potential competition from other internet companies,
app developers and smartphone manufacturers, and new market entrants may also emerge. If we are not able to differentiate our products
from that of our competitors, drive value for our customers, and/or effectively align our resources with our goals and objectives, we
may not be able to compete effectively against our competitors. Our failure to compete effectively against any of the foregoing competitive
threats could materially and adversely harm our business. Increased competition may result in new products and offerings which may in
turn require us to take actions to retain and attract our users and advertisers in such a fashion which would lower our gross margins.
If we fail to compete effectively, our market share would decrease and our results from operations, revenues and profits would be materially
and adversely affected.
We are attempting to expand our Zedge Premium
marketplace where professional artists, individual creators and brands offer their content to our users. We aspire to be a popular destination
that users turn to when looking for high quality digital content. If we are unsuccessful in meeting our goal, our business may suffer
resulting in diluting our value proposition, losing MAU and having lower revenues and profits.
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