Zedge, Inc. 10-K

Item 1. Business Company Overview We own a portfolio of leading digital consumer brands that serve 43 million monthly active users across the globe. Our portfolio consists of Zedge Ringtones and Wallpapers, Shortz, and as of the beginning of August of 2021 Emojipedia. We operate a state-of-the-art digital publishing platform that powers Zedge Ringtones and Wallpapers, available in the Google Play store and App Store, which offers an easy, entertaining and immersive way for end-users to engage with our rich and diverse catalogue of wallpapers, video wallpapers, ringtones, notification sounds on Android and wallpapers, video wallpapers, ringtones and custom icon packs on iOS. We secure our content from amateur and professional artists, and also from emerging and major brands. Artists have the ability to easily launch a virtual storefront in our Zedge app where they can market and sell their content to our user base. That same platform powers an entertainment app called “Shortz – Chat Stories by Zedge”, which is focused on serialized, short-form, fiction stories, as a beta that runs on our publishing platform. Over the past year, we have been expanding our content catalogue, started testing audio versions of a selected number of stories, materially improved our ability to measure all types of engagement within the app, and invested a modest budget in paid user acquisition. Finally, in August of 2021, we acquired Emojipedia, the leading source of all things emoji. Our Zedge app has been installed approximately 511 million times, and at July 31, 2021, boasted approximately 34 million monthly active users, or MAU. MAU is a key performance indicator that captures the number of unique users that used our Zedge app during the final 30 days of the relevant period. Our Zedge app has consistently ranked as one of the most popular free apps in the Google Play store in the United States. Historically, we have not made a material investment in paid user acquisition for our Zedge app. Our Zedge app’s success stems from its ability to meet consumer demand for a rich and diverse catalogue of both long-tail and popular content in a fun, intuitive and user-friendly fashion that aligns with their interest in expressing their essence in a bespoke manner, to offer reliable search and discovery capabilities and to make relevant content recommendations to our users. To this end, we invest heavily in both product design and development and the underlying technology required to satisfy both our Zedge app’s users’ and content contributors’ expectations. Our Zedge app contains both user-generated and licensed, third-party content to achieve these goals. In March 2018, we launched Zedge Premium, a marketplace within our Zedge app where professional creators and brands market, distribute and sell their digital content to our consumers. At launch, Zedge Premium was a “walled garden” – a separate section of the app which users needed to proactively choose to enter. In 2021, we embedded Zedge Premium content throughout the app making it far more prominent. We also introduced a new content type on iOS: custom icon packs. Over time, we expect that Zedge Premium will contribute to a virtuous cycle whereby it drives new consumers into our Zedge app resulting in more artist payouts, which in turn makes the platform more attractive for artists and brands looking to expand their reach and increase their income. In January 2019, we started offering freemium Zedge app Android users the ability to convert into paying subscribers for, amongst other things, the ability to remove unsolicited advertisements from our Zedge app. As of July 31, 2021, we had approximately 752,000 active paid subscribers. In fiscal 2022, we expect to launch subscriptions on iOS. In December 2019, we completed the beta launch of ‘Shortz’ our new entertainment app offering serialized, short-form fiction rendered in a text-message format and more recently as audio productions available across both Android and iOS, and focusing on users in the United States, the United Kingdom and Canada and it is now available globally. New stories are added to the app each week, and as the content catalog expands, we are regularly improving content discovery in order to guide users to the stories that will most interest them and improve engagement. On August 1, 2021, we acquired Emojipedia, the world’s leading authority dedicated to providing up to date and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker, which provides real time visualization of all emoji symbols used on Twitter. Emojipedia receives approximately 50 million monthly page views and has approximately 9 million monthly active users of which approximately 50% are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a voting member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Facebook and Twitter. 1 Over the past several years, our Zedge app has experienced a continuing decline in its MAU as well as a shift in the regional customer make-up with MAU in emerging markets representing an increasing portion of our user base. As of July 31, 2021, users in emerging markets represented 75% of our MAU compared to 70% a year prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. In the fourth quarter of fiscal 2021, users in emerging markets grew by 16.1% while users in well-developed economies declined 11.5% when compared to the same period in fiscal 2020. As of July 31, 2021, approximately 42% of our Zedge app’s user base was located in North America (20%) and Europe (including Eastern Europe, 22%), compared with 50% (North America, 24% and Europe 26%) as of July 31, 2020. The remaining 58% of the user base was primarily located in emerging markets with 25% located in India. MAU growth is tightly coupled with new user growth. Historically, our relatively high ranking in the Google Play store has been one of the primary drivers for securing new users. Although still an important factor, we now also dedicate resources to growth initiatives, both organic and paid. In fiscal 2022, we expect to increase our paid user acquisition spend while monitoring results to ensure that the investment is yielding a positive return on investment. With time, we believe that we can change our growth dynamic in well-developed markets. Aside from targeted growth initiatives, we need to continually improve the core user experience, test different mechanisms and content verticals that may spur growth and capitalize on the role that Zedge Premium artists can have on driving new users into the Zedge platform. The COVID-19 pandemic has impacted our Zedge app’s new user growth. According to Gartner, a leading research and advisory company, new smartphone sales declined 10.5% in calendar year 2020 as a result of the pandemic, negatively impacting new user growth, especially in well-developed markets. As of September 1, 2021, Gartner reported that worldwide smartphone sales grew by 10.8% year over year in the second quarter of calendar year 2021 despite supply constraints relating to COVID-19 component shortages and production disruptions; however, it is still unclear what the impact on user growth will be as vaccines become more available globally and as precautions like social distancing start to wane. The pandemic and measures implement to promote social distancing had a modest positive impact on user engagement. During the quarter and fiscal year ended July 31, 2021, we generated approximately 81% and 80%, respectively, of our revenues from selling our Zedge app’s advertising inventory to advertising networks, advertising exchanges, and direct arrangements with advertisers. Advertising networks and advertising exchanges are third-party technology platforms that facilitate the buying and selling of media advertising inventory from multiple ad networks. The price of advertising inventory is fixed on an advertising network whereas the price for inventory is determined through real-time bidding on an advertising exchange. Advertisers are attracted to our Zedge app because of its sizable user base. In our Zedge Premium marketplace, the content owner sets the price and the user can purchase the content by paying for it with Zedge Credits, our closed virtual currency. A user can earn Zedge Credits when taking specific actions such as watching a rewarded video or taking a survey. Alternatively, users can buy Zedge Credits via an in-app purchase. If a user purchases Zedge Credits, Google Play or App Store keeps up to 30% of the purchase price with the remainder being paid to us. When a user purchases Zedge Premium content, the artist or brand receives 70% of the actual value of the Zedge Credits used to buy the content item as a royalty and we retain the remaining 30% as our fee, which we recognize as revenue. As Zedge Premium matures and expands, we expect to also diversify our revenue source mix. In January 2019, we started offering paid subscriptions to our Android users which amongst other things removed unsolicited advertisements from our Zedge app. During the first 12 months after a customer’s sign up for the subscription-based product, Google retains up to 30% as a fee, which decreases to 15% from month 13 and beyond. As of July 31, 2021, we had approximately 752,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception in January 2019, subscriptions have generated approximately $6.7 million in gross revenue. During fiscal 2021, we generated revenues of $19.6 million and an income from operations of $7.8 million, compared to revenues of $9.5 million and a loss from operations of $0.4 million in fiscal 2020. During fiscal 2021, advertisements from MoPub (owned by Twitter) represented 30% of our revenue, advertisements from Google represented 22% of our revenues and advertisements from Facebook represented 12% of our revenues, as compared with 29%, 26% and 7%, respectively, during fiscal 2020. 2 Recent Developments In March 2018, we launched Zedge Premium, a marketplace within our Zedge app where professional creators and brands market, distribute and sell their digital content to our consumers. Since launching Zedge Premium, we have made and continue making material investments in optimizing our Zedge app’s homepage design in order to maximize exposure to premium content with the goal of driving sales. Over time, we expect that Zedge Premium will contribute to a virtuous cycle whereby it drives new consumers into our Zedge app resulting in more artist payouts, which in turn makes the platform more attractive for artists and brands looking to expand their reach and increase their income. In January 2019, we started offering paid subscriptions which, amongst other things, removed unsolicited advertisements from our Zedge app. As of July 31, 2021, we had approximately 752,000 active subscribers. Our plans call for further optimizing the offer based on user type, geography and price point as well as value adds including content bundles and rewards. In December 2019, we completed the beta launch of ‘Shortz’ our new entertainment app offering serialized, short-form fiction delivered in a text-message format across both Android and iOS, focusing on users in the United States, the United Kingdom and Canada and it is now available globally. On August 1, 2021. we acquired Emojipedia, the world’s leading authority dedicated to providing up to date and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker, which provides real time visualization of all emoji symbols used on Twitter. Emojipedia receives approximately 50 million monthly page views and has approximately 9 million monthly active users of which approximately 50% are located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a voting member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators including Apple, Google, Facebook and Twitter. Our Competitive Advantages We believe that the following competitive strengths will drive the growth of our business: § Large, global customer base. We benefit from our Zedge app having a large customer base. As of July 31, 2021, we had approximately 34 million MAU of which approximately 20% were in North America and 22% were in Europe (including Eastern Europe), which provide preferred monetization opportunities since these regions provide attractive demographics to advertisers. To serve a global user base, the Android version of our Zedge app is available in 17 languages. Our Zedge app’s global footprint helps us to secure a highly diverse portfolio of content addressing various customer tastes and preferences. In addition, our Zedge app’s customer base attracts advertisers seeking customers that have adequate disposable income to purchase their products and services. Our Zedge app’s large customer base is also a draw to artists and brands looking to market their content to a critical mass of users. § Leading global provider of mobile personalization content . We offer our Zedge app globally, enabling users to easily personalize their mobile phones with a wide variety of free, high-quality ringtones, wallpapers, notification sounds, video wallpapers and app icons. We believe that our Zedge app is well positioned for continued leadership in the personalization space. § High-quality product . We believe that our Zedge app provides our customers with a high-quality product and superior user experience. We prioritize our customers’ needs and believe that this focus is critical for our long-term growth and expansion. We invest significant resources in product development, design and usability of our Zedge app. We beta test product enhancements extensively and closely monitor customer feedback to ensure that we meet our Zedge app’s user needs. We believe that our Zedge app’s high user ranking validates our product-oriented focus. As of July 31, 2021, our Zedge app enjoyed a lifetime average user rating of 4.6 stars out of a maximum of 5 stars in the Google Play store. § Employees . We have a team of highly experienced professionals that take pride and ownership in their work product. Our diverse employee base is passionate about our Zedge app and its mission to serve as a medium for self-expression and entertainment. Our culture is founded on respect and empowerment which are critical in light of us having offices in three different countries. We strive to create an environment where our employees can be autonomous and creative. § Management team . We have an experienced management team that has a deep knowledge of the mobile app landscape and is highly focused on execution. Our core management team possesses a solid understanding of the mobile app industry, product design and development, operations and monetization. Collectively, our management team has proven ability in building and scaling a business and pursuing opportunity with a manageable risk profile. 3 § Large and diverse content catalogue . Our Zedge app offers a large and diverse catalogue of content including wallpapers, ringtones, notification sounds and, more recently, video wallpapers and app icons. With artists and contributors spanning the globe, our Zedge app has assembled a vast array of content to meet the needs of its users. § Technology and infrastructure . The Zedge app has a scalable technology and infrastructure that reliably serves tens of millions of MAU. We use a combination of off-the-shelf and proprietary technologies and infrastructure solutions in the Zedge app that scale efficiently to meet the needs of its large customer base. Competition Our Zedge app faces competition across many different fronts including: § Mobile personalization products . Generally, our Zedge app competes with other developers’ mobile apps for an end-user’s screen time. More specifically, ringtones, wallpapers, notification sounds, and video are a commodity, and many smaller apps and websites offer this content both free and for a fee. We believe that our Zedge app has a competitive advantage due to its: § large user base; § “one-stop shop” approach which avails customers of ringtones, wallpapers, notification sounds, and video wallpapers within the same Android app; § modular approach that allows the customer to selectively choose what they would like to personalize without handing over the core elements of the native operating system to a third party and overwhelming the user with a myriad of complex options; § large content catalogue; § proprietary recommendation engine; and § market ranking and longevity. § Advertisers . We face significant competition for advertising spend on our Zedge app from both digital media providers and traditional media outlets, including television, radio and print, many of which have significantly more resources than us. § Content creators . There are many websites and mobile apps that focus on offering content creators an eco-system in which they can market and sell their digital art. Yet, we are not aware of many that as of July 31, 2021 had access to an embedded customer base with approximately 34 million MAU, which we believe makes our Zedge app more attractive to many content creators. § Rapid-Paced and Changing World of Mobile App Development. The mobile app eco-system changes quickly and regularly with new apps capturing massive audiences competing for consumer’s time, mindshare and money. This is an ongoing competitive threat requiring us to do our best to adapt as necessary to remain relevant and meaningful. Our Strategy We believe that mobile phone users enjoy personalizing their phones with mobile personalization content. Our Zedge app provide consumers, globally, with a rich array of high-quality personalization content used to express their essence, individuality, and voice in an easy, entertaining and immersive fashion. Professional artists, individual creators and brands turn to our Zedge platform for marketing and distributing their content to our consumers. Our Zedge app currently offers a rich and diverse catalogue of wallpapers, video wallpapers, ringtones, notification sounds on Android and wallpapers, video wallpapers, app icons and ringtones, on iOS. In the future, we may offer new content verticals and enhanced features in our Zedge app. To date, our Zedge app has been installed approximately 511 million times as of July 31, 2021 and has consistently ranked in the top free apps in the Google Play store in the United States. The overwhelming majority of our Zedge app’s downloads have been organic in nature without our investing in paid user-acquisition campaigns. Our Zedge app continues to serve as a low-cost user acquisition channel. Our vision calls for utilizing our Zedge app’s digital publishing platform to not only continue being one of the world’s leading mobile personalization content apps but to also use this platform to publish new stand-alone apps that extend our value proposition in entertainment and possibly other verticals. We have engineered the platform to support an array of digital content enabling us to launch new apps with relative ease and speed. We want to capitalize on our Zedge app’s existing large install base as well as organic search traffic across the web and in the app stores as a low-cost user acquisition channel for these new entertainment apps. Our goal is to ensure that these new apps are equally valuable and viable across both Android and iOS. 4 If we execute our vision, we would build a network of apps which can be used for cross-promotional purposes. We identified the entertainment market as our focal point for new apps because we believe that apps in that market: § generally overlap well with the demographic of our Zedge app’s existing customer base; § enjoy a higher frequency of use when compared to our Zedge app enabling the potential for both a subscription and ad-based monetization model; and § allow for us to attract new users who may not be interested in our Zedge app’s personalization content. In fiscal 2020 we introduced the “Shortz – Chat Stories by Zedge” app, as a beta. It is our first foray in the entertainment vertical and is dedicated to offering “Chat Stories,” which are serialized, short-form fiction rendered in a text-message format and more recently as mini-podcasts. Our Zedge app’s strong position as a leading platform for personalization content that consumers use to express their essence, individuality, and voice in an easy, entertaining and immersive fashion remains critical to our business. In order to maintain this position, we are concentrating our efforts on the following goals: § Continue growing our Zedge app’s user base, globally . We expect to continue devoting resources to grow our Zedge app’s user base by: § studying its users’ needs and enhancing our app to meet those needs; § developing and offering new features and services in the Zedge app that are relevant to new users interested in personalized digital content; § Investing in paid user acquisition campaigns that we believe can yield profitable customers, primarily in well-developed markets; and § expanding our Zedge app’s reach by collaborating with strategic partners. § Improve our Zedge app’s monetization . We will continue exploring additional monetization methods for our Zedge app, including in-app purchases, one-of-a-kind and limited-edition content, subscription models, e-commerce, new advertising products and brand sponsorships. We believe that our Zedge app’s large and expanding customer base is an attractive medium for advertisers, brands and artists and that this will result in new monetization opportunities for our Zedge app over time as well as an appealing audience to promote our new apps. § Ongoing product and technology investment in our Zedge app . We plan to make continued, selected investments in product feature sets and functionalities of our Zedge app in order to both maintain its userbase and attract new users and artists and position its content contributors for optimal success in achieving their marketing and sales goals. Some of these initiatives include ongoing investment in our Zedge app’s search and discovery, content recommendations, supporting new content verticals, improving our Zedge app’s self-serve platform, and connecting creators with relevant end users via our Zedge app. § Leverage first-party data and usage insights . We plan to utilize first-party data and usage insights to optimize the product by offering personalized recommendations and content feeds, improved search and content discovery, and optimized pricing. § Building our Zedge app into a best-of-breed platform for artists and creators . Our goal is to build our Zedge app into a platform that artists view as prioritizing their needs ahead of other platforms and addressing all aspects of their marketing and revenue generation goals including, but not limited to, ease in managing their virtual storefront, promotion, education, reporting and distribution. § Increase our marketing efforts for our Zedge app . Historically, we haven’t invested materially in marketing initiatives for our Zedge app. Going forward, we envision the need to better promote our Zedge app and to amplify our Zedge app’s value proposition to artists and individual creators. We envisage these creators and influencers and brands self-promoting their availability on our Zedge app in order to extend their reach, generating incremental income and drive more end-user traffic to our platform. Furthermore, we also plan to scale up paid user acquisition focusing on users that we believe can yield profitable customers and also continue to invest in app store optimization, search, marketing automation, social marketing and community management in order to retain and expand our Zedge app’s customer base. 5 § Diversify our revenue by developing and offering new apps . Historically, the vast majority of our revenue has been derived from our Zedge app. Without losing focus on our Zedge app, we plan to diversify our revenue by developing and offering new apps that will leverage our technology and management team. For example, in December 2019, we completed the beta launch of ‘Shortz’ our new entertainment app offering serialized, short-form fiction delivered in a text-message format across both Android and iOS and in August of 2021 we acquired Emojipedia, the world’s leading authority dedicated to providing up to date and well-researched emoji definitions, information, and news. We expect Emojipedia will contribute to diversifying our portfolio of digital brands, revenue generators, and customer base. § Selectively pursue strategic investments, partnerships and acquisitions . On a selective basis, we will look to invest in, partner with or purchase entities that can provide synergistic growth opportunities for our Zedge app and otherwise. For example, on August 1, 2021 we acquired Emojipedia, the world’s leading authority dedicated to providing up to date and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker, which provides real time visualization of all emoji symbols used on Twitter. Emojipedia does not offer a mobile app and we expect to test offering their content via an in-app experience and capitalizing on our userbase base of close to 35 million monthly active users. We plan to leverage our understanding of web based businesses and the smartphone industry to pursue additional opportunities that we believe can impact our business in a materially positive fashion. Our History In 2003, Tom Arnoy, Kenneth Sundnes and Paul Shaw launched a consumer website at www.zedge.net that people used to upload and download ringtones. In December 2006, IDT Corporation acquired 90% of Zedge. Zedge Holdings, Inc. was incorporated in Delaware in 2008, and our name was changed to Zedge, Inc. in 2016. In 2009, we introduced the Android version of our Zedge app. The Zedge app provided ease-of-use by negating the need for customers to first download a ringtone or wallpaper to their computer and then upload that content to their mobile phone. We launched the iOS version of our Zedge app in 2013, followed by launch of the Windows Mobile Zedge app in 2014. During 2014 and 2015, our Zedge app introduced app icons, social sharing features and marketing automation capabilities, and expanded the number of languages supported. In 2016, IDT Corporation spun off our stock to its stockholders, and our Class B Common Stock was listed on the NYSE American with the ticker symbol “ZDGE”. In March 2018, we completed the launch of Zedge Premium, our marketplace that is part of the Zedge app where artists and brands can market, distribute and sell to our users their digital content, including wallpapers, ringtones, video wallpapers and stickers . In January 2019, we started testing a subscription-based product on the Android version of our Zedge app, whereby users could prepay a monthly or yearly fee to remove unsolicited ads when using our Zedge app. As of July 31, 2021, we had approximately 752,000 active paid subscribers. In December 2019, we completed the beta launch of ‘Shortz’, our new entertainment app offering serialized, short-form fiction delivered in a text-message format across both Android and iOS, focusing on users in the United States, the United Kingdom and Canada and it is now available globally. In August 2020, Jonathan Reich was promoted to Chief Executive Officer and Yi Tsai was promoted to Chief Financial Officer. On August 1, 2021, we acquired Emojipedia, the world’s leading authority dedicated to providing up-to-date and well-researched emoji definitions, information, and news as well as World Emoji Day and the annual World Emoji Awards, and Emojitracker, which provides real time visualization of all emoji symbols used on Twitter. 6 Our Technology Our Zedge app is powered by a scalable distributed platform that is comprised of both open source and proprietary technologies centered on content management and discovery, web and app development, data mining and analytics, deep learning, mobile content/device compatibility, advertising and reporting. We have built a robust platform that allows us to ideate, test, and launch where warranted by the outcome and we have embraced machine learning throughout our technology stack in order to improve content recommendations and relevancy. From an end user’s perspective, our Zedge app’s platform minimizes response latency while maximizing content relevancy and discoverability. We optimize our platform by utilizing systems, algorithms and heuristics that organize our Zedge app’s content based upon real user data and that renders the content in a relevant fashion. Our infrastructure provides a fully redundant production environment in a cloud-hosted, virtual-server environment. Intellectual Property Our trademarks, copyrights, domain names, proprietary technology, knowhow and other intellectual property are vital to our success. We seek to protect our intellectual property rights by relying on federal, state and common law rights in the United States and other countries, as well as contractual restrictions. We enter into confidentiality and nondisclosure agreements with our employees and business partners. The agreements we enter into with our employees also provide that all software, inventions, developments, works of authorship and trade secrets created by them during the course of their employment are our property. We have been granted trademark protection for “Zedge” in the United States, European Union, United Kingdom, India and Canada and for “Tonesync” in the European Union and the United Kingdom, and “We Make Phones Personal” and “Shortz – Chat Stories by Zedge” in the United States. We also have applied for trademark protection for “Tattoo your phone” and “Zedge, Everything You” in the United States, and have obtained a copyright registration for our flagship app, Zedge. In addition, we have registered, amongst others, the following domain names: www.zedge.net and www.zedge.com. On August 1, 2021, we acquired Emojipedia. As part of this acquisition, we acquired trademark registrations for “Emojipedia” in the United States, the European Union, the United Kingdom, China and Australia, and trademark registrations for “World Emoji Day” in the United States and United Kingdom. We also acquired the following domain name registrations: www.emojipedia.com and www.emojipedia.org. Employees As of July 31, 2021, we had 51 full-time and 2 part-time employees. 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, we moved into a smaller Trondheim, Norway facility, with approximately 3,800 square feet of space, accommodates our product, design and technology teams and is under lease through March 2024. We also lease a satellite development center in Vilnius, Lithuania. Our servers are hosted in leased data centers in different geographic locations in the United States.