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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZEDGE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value data)

See accompanying notes to consolidated financial statements.

ZEDGE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

ZEDGE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

See accompanying notes to consolidated financial statements.

ZEDGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

ZEDGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation and Recently Adopted Accounting Pronouncements

Basis of Presentation

The accompanying unaudited consolidated financial statements of Zedge, Inc. and its subsidiaries,subsidiary, Zedge Europe AS and Zedge Canada, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended January 31, 20182021 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2018.2021 or any other period. The balance sheet at July 31, 20172020 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2017,2020, as filed with the U.S. Securities and Exchange Commission (“SEC”).

The Company was formerly a majority-owned subsidiary of IDT Corporation (“IDT”). On June 1, 2016, IDT’s interest in the Company was spun-off by IDT to IDT’s stockholders and the Company became an independent public company through a pro rata distribution of the Company’s common stock held by IDT to IDT’s stockholders (the “Spin-Off”“SEC”).

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 20182021 refers to the fiscal year ending July 31, 2018)2021).

COVID-19 Impacts on Financial and Operational Results

The COVID-19 pandemic has caused widespread economic disruption impacting the Company in a number of ways, most notably, with a significant decrease in global advertising spend in the third quarter of fiscal 2020, followed by a rebound in the following three consecutive quarters. The Company expects the extent of the impact on its financial and operational results will continue to depend on the duration and severity of the economic disruption caused by the COVID-19 pandemic, including demand for new phones sales worldwide - a driver of new installs of the Company’s flagship app.

As of January 31, 2021, the Company had $13.6 million of cash and cash equivalents, including a net of $4.8 million raised from the previously announced “at-the-market” offering of shares of the Company’s Class B common stock (see Note 15). The Company has developed certain contingency plans to preserve liquidity if such actions become necessary due to worsening economic conditions, including those related to the COVID-19 pandemic. At the current time, the Company does not believe taking such actions would be prudent nor, does it expect to need to take such actions based on its current forecasts. The Company believes that its existing cash and cash equivalents, together with cash generated by operations will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future when accounting for the ill effects of the COVID-19 pandemic.

The Company considered the impacts of the COVID-19 pandemic on its significant estimates and judgments used in applying its accounting policies in the six months ended January 31, 2021. In light of the pandemic, there is a greater degree of uncertainty in applying these judgments and depending on the duration and severity of the pandemic, changes to its estimates and judgments could result in a meaningful impact to its financial statements in future periods.

Recently Adopted Accounting Pronouncements

In June 2016, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) which changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The Company adopted this new accounting standard on August 1, 2020, and the adoption did not have a material impact on the Company’s financial statements and related disclosures.

In August 2018, the FASB issued Accounting Standard Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) (ASU 2018-13), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The Company adopted this new accounting standard on August 1, 2020, and the adoption did not have a material impact on the Company’s financial statements and related disclosures.

In August 2018, the FASB issued Accounting Standard Update No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted this new accounting standard on August 1, 2020, using the prospective method, and the adoption did not have a material impact on the Company’s financial statements and related disclosures.

Note 2—Revenue

Disaggregation of Revenue

The following table summarizes revenue by type of monetization mechanisms of the Zedge app for the periods presented:

Contract Balances

Deferred revenues

The Company records deferred revenues related to the unsatisfied performance obligations with respect to subscription revenue. As of January 31, 2021, the Company’s deferred revenue balance related to paid subscriptions was approximately $1,515,000, representing approximately 711,000 active subscribers including those under the account hold implemented by Google Play on November 1, 2020. Account hold is a subscription state that begins when a user's form of payment fails and the three-day grace period has ended without payment resolution. The account hold period lasts for up to 30 days. As of July 31, 2020, the Company’s deferred revenue balance related to paid subscriptions was approximately $1,169,000, representing approximately 504,000 active subscribers. The amount of revenue recognized in the six months ended January 31, 2021 that was included in the deferred balance at July 31, 2020 was $816,000.

The Company also records deferred revenues when users purchase or earn Zedge Credits. Unused Zedge Credits represent the value of the Company’s unsatisfied performance obligation to its users. Revenue is recognized when Zedge App users use Zedge Credits to acquire Zedge Premium content or upon expiration of the Zedge Credits upon 180 days of account inactivity. As of January 31, 2021, and July 31, 2020, the Company’s deferred revenue balance related to Zedge Premium was approximately $197,000 and $169,000, respectively.

Total deferred revenues increased $374,000 from $1,338,000 at July 31, 2020 to $1,712,000 at January 31, 2021, primarily attributed to new paid subscriptions sold in the six months ended January 31, 2021.

Significant Judgments

The advertising networks and advertising exchanges to which we sell our inventory track and report the impressions and installs to Zedge and Zedge recognizes revenues based on these reports. The networks and exchanges base their payments off of those reports and Zedge independently compares the data to each of the client sites to validate the imported data and identify any differences. The number of impressions and installs delivered by the advertising networks and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.

Practical Expedients

The Company expenses the fees retained by Google Play related to subscription revenue when incurred as marketing expense because the duration of the contracts for which the Company pays commissions are less than one year. These costs are included in the selling, general and administrative expenses of the Consolidated Statements of Comprehensive Income (Loss).

Note 2—3—Fair Value Measurements

The following tables present the balance of assets and liabilities measured at fair value on a recurring basis:

(1) – quoted prices in active markets for identical assets or liabilities

(2) – observable inputs other than quoted prices in active markets for identical assets and liabilities

(3) – no observable pricing inputs in the market

Fair Value of Other Financial Instruments

The Company’s other financial instruments at January 31, 20182021 and July 31, 20172020 included trade accounts receivable, trade accounts payable, and due to IDT Corporation.loans payable. The carrying amounts of the trade accounts receivable, trade accounts payable, and due to IDT Corporation balancesloan payables approximated fair value due to their short-term nature.

Note 3—4—Derivative Instruments

The primary risk managed by the Company using derivative instruments is foreign exchange risk. Foreign exchange forward contracts are entered into as hedges against unfavorable fluctuations in the U.S. Dollar –(USD) to Norwegian KroneKroner (NOK) and USD to Euro (EUR) exchange rate. Subsequentrates. The Company is party to the Spin-Off and until November 2016, IDT provided hedging services to the Company pursuant to the Transition Services Agreement (see Note 7). As of November 16, 2016, the Company entered into a Foreign Exchange Agreement with Western Alliance Bank allowing the Company to enter into foreign exchange contracts under its revolving credit facility with the bank (see Note 8)9). The Company does not apply hedge accounting to these contracts;contracts, and therefore the changes in fair value are recorded in earnings.consolidated statements of comprehensive income (loss). By using derivative instruments to mitigate exposures to changes in foreign exchange rates, the Company is exposed to credit risk from the failure of the counterparty to perform under the terms of the contract. The credit or repayment risk is minimized by entering into transactions with high-quality counterparties.

The outstanding contracts at January 31, 2021, are as follows:

The fair value of outstanding derivative instruments recorded as assets in the accompanying consolidated balance sheets were as follows:

The effects of derivative instruments on the consolidated statements of comprehensive income (loss) were as follows:

Note 4—5—Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

Note 5—Equity6—Stock-Based Compensation

Changes in the components of equity were as follow:

2016 Stock Option and Incentive Plan

Stock Options

InOn November 18, 2020, the six months ended January 31, 2018, the Company received proceeds of $91,000 from the exercise of stock options for which the Company issued 52,855 shares of its Class B common stock.

In September 2016, the Compensation Committee of ourCompany’s Board of Directors approved an equity grant of options to purchase an aggregate of 231,327 shares of our Class B common stock to our executive officers, a non-executive employee and a consultant. The options vest over a three-year period from grant. Unrecognized compensation expense related to this grant was an aggregate of $681,000 based onamended the estimated fair value of the options on the grant date. In November, 2017, the Company cancelled 53,026 shares of these options grant because they exceeded the annual limit of 60,000 shares per grantee as set forth in Article 5(c) of the Amended and RestatedCompany’s 2016 Stock Option and Incentive Plan dated October 18, 2017 (the(as amended to date, the “2016 Incentive Plan”). Simultaneously, to increase the Compensation Committeenumber of our Board of Directors approved an options grant of 53,026 with similar terms. Unrecognized compensation expense related to this option grant was an aggregate of $85,000 based on the estimated fair value of the options on the grant date.

On October 18, 2017, the Compensation Committee of the Company’s Board of Directors approved the grant of options to purchase an aggregate of 124,435 shares of the Company’s Class B common stock to 55 of its non-executive employees. The options vest over a three-year period from December 8, 2017. Unrecognized compensation expense related to this grant was an aggregate of $159,000 based on the estimated fair value of the options on the grant date. The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period. At January 31, 2018, there were 457,000 shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 250,000 shares to an aggregate of 1,521,000 shares. This amendment was ratified by the Company’s stockholders at the Annual Meeting of Stockholders held on January 11, 2021. At January 31, 2021, there were 358,000 shares of Class B Stock available for awards under the 2016 Incentive Plan.

On November 7, 2019, the Company’s Board of Directors amended the 2016 Incentive Plan inclusiveto increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 350,000230,000 shares, discussed below.to an aggregate of 1,271,000 shares. This amendment was ratified by the Company’s stockholders at the Annual Meeting of Stockholders held on January 13, 2020.

Pursuant to the 2016 Incentive Plan, the option exercise price for all stock option awards that are designated as “Incentive Stock Options” must not be less than the Fair Market Value of the shares of Class B Common Stock covered by the option award on the date of grant. In general, Fair Market Value means the closing sale price per share of Class B Common Stock on the exchange on which the Class B Common Stock is principally traded for the last preceding date on which there was a sale of Class B Common Stock on such exchange.

2016 Stock Option and Incentive PlanOptions  

OnDuring the three months ended October 18, 2017,31, 2020, the Compensation Committee of the Company’s Board of Directors amended the 2016 Incentive Planapproved grants of options to increase the numberpurchase an aggregate of 90,849 shares of the Company’s Class B common stock available forStock to various individuals including company executives, employees and consultants. Options with respect to 30,000 shares vested upon grant with the grant of awards thereunder by an additional 350,000 shares. This amendment was ratified by the Company’s stockholders during Annual Meeting held on January 17, 2018.

Freeform Transaction

In September 2017, the Company entered into an Agreement and Releaseremaining options with Freeform Development, Inc. (“Freeform”) and certain of its former employees, pursuantrespect to which the Company obtained releases for certain employees from their Freeform employment agreements in exchange for the repayment of certain of Freeform’s liabilities. The Company paid Freeform $125,000 in cash to pay its operating liabilities (with any excess to be refunded60,849 shares vesting over a three-year period. Grant date fair value related to the Company), and30,000 vested options was $32,000 which was expensed immediately. Unrecognized compensation expense related to the Company paid60,649 options grants was an aggregate of $64,000 based on the holders of Freeform’s convertible promissory notes cash of $97,567 and issued the noteholders a total of 126,679 shares of Zedge Class B common stock with aestimated fair value of $242,000the options on issuance, which are subject to a two-year lock-up agreement.the grant date. The Company believes this transaction did not qualify as a business combination under Accounting Standard Update 2017-01, which the Company adopted early on August 1, 2017, and as such accounted for the payment of the Freeform liabilities that aggregated $465,000, as selling, general and administrativeunrecognized compensation expense in three months ended October 31, 2017. 

Additionally, the Company also granted a total of 192,953 restricted shares of the Company’s Class B common stock to former Freeform employees, which shall vest over a four-year period subject to continued employment. These shares had an aggregate grant date fair value of $369,000 which is being amortizedrecognized on a straight-line basis over the vesting period.

In October 2020, the Compensation Committee extended the expiration date of options to purchase approximately 182,000 shares of the Company’s Class B Common Stock held by one of the Company’s executive officers, from October 31, 2021 to May 31, 2026. Such options are fully vested and were granted under the Company’s 2008 Stock Option and Incentive Plan. The options have an exercise price of $1.73 per share. Compensation expense related to this modification was $78,000 and was fully expensed on the modification date.

In December 2020 and January 2021, the Compensation Committee of the Company’s Board of Directors approved grants of options to purchase an aggregate of 37,000 shares of Class B Stock to four individuals including company executives and employees, vesting over a three-year period with respect to 15,000 options grants with the remaining 22,000 options grants vesting over a four-year period. Unrecognized compensation expense related to the 37,000 options grants was an aggregate of $141,000 based on the estimated fair value of the options on the grant date. The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period.

On November 7, 2019 and January 13, 2020, the Compensation Committee approved equity grants of options to purchase an aggregate of 180,996 shares of Class B Stock to four employees and one consultant. The options vest over a three-year period. Unrecognized compensation expense related to these grants was an aggregate of $242,000 based on the estimated fair value of the options on the grant dates. The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period.

In the six months ended January 31, 2021 and 2020, the Company issued 312,287 shares and 29,917 shares respectively of Class B Stock and received $396,000 and $4,000 respectively, in connection with options exercised during the period.

At January 31, 2021, unrecognized compensation expense related to unvested stock options was an aggregate of $364,000.

Deferred Stock Units

In August 2019, the Compensation Committee approved the grant of 90,000 Deferred Stock Units (DSUs) to 11 of its non-executive employees based in Norway and Lithuania. Each DSU represents a right to receive one share of Class B Common Stock upon vesting. The DSUs vest over a four-year period from August 1, 2019. On the grant date, unrecognized compensation expense related to this grant was an aggregate of $139,000 based on the estimated fair value of the DSUs on the grant date. The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period. At January 31, 2021, unrecognized compensation expense related to unvested DSUs was an aggregate of $49,000.

In the six months ended January 31, 2021, the Company purchased 5,625 shares of Class B Stock from various employees for $8,000 to satisfy tax withholding obligations in connection with the vesting of DSUs.

Restricted Stock AwardAwards

On February 7, 2018,In November 2020, the Compensation Committee and the Corporate Governance CommitteesCommittee of our Board of Directors approved a grant of 108,55392,593 restricted shares of the Company’s Class B Common Stock to our Executive Chairman Michael Jonas. Mr. Jonas has agreed to accept all of his compensation for his service as Executive Chairman during fiscal 20182021 in the form of equity in the Company and to make receipt of such equity compensation contingent on the Company achieving certain milestones relative to its fiscal 20182021 budget. The grant was made at that time because the milestones previously set were achieved. These shares shall vest in equal amounts on February 7, 2019, 20202022, 2023 and 2021.These2024.These shares had an aggregate grant date fair value of $330,000$350,000 which is being amortized on a straight-line basis over the vesting period.

In October 2020, the Compensation Committee approved a grant of 10,619 restricted shares of Class B Common Stock to each of Mr. Elliot Gibber and Mr. Howard Jonas which vest immediately. These shares had an aggregate grant date fair value of $30,000 and have been fully amortized accordingly.

On November 7, 2019, the Compensation Committee approved a grant of 30,534 restricted shares of Class B Common Stock to Mr. Elliot Gibber, our Interim Chief Executive Officer in respect of his service in that capacity through the end of Fiscal 2020 (or such shorter period as he shall serve in that capacity). The grant vested on February 7, 2020 and May 7, 2020. These shares had an aggregate grant date fair value of $60,000 which was amortized on a straight-line basis over the vesting period. At January 31, 2020, unrecognized compensation expense related to unvested restricted stock was an aggregate of $30,000.

At January 31, 2021, unrecognized compensation expense related to unvested restricted stock awards was an aggregate of $376,000.

In the six months ended January 31, 2021 and 2020, the Company purchased 12,005 shares and 18,441 shares respectively of Class B Stock from certain employees for $18,000 and $29,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock.

Note 6—7—Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture, issuances to be made on the vesting of unvested DSUs and to assumethe exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.

The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:

The following shares were excluded from the dilutive earnings per share computations because their inclusion would have been anti-dilutive:anti-dilutive

For the three and six months ended January 31, 2018 and 2017,2020, the diluted earnings per share equals basic earnings per share because the Company hadincurred a net loss during that period and the impact of the assumed exercise of stock options and vesting of restricted stock and DSUs would have been anti-dilutive.

Note 7—Related Party Transactions8—Contingencies

PriorLegal Proceedings

In March 2014, Saregama India, Limited filed a lawsuit against the Company before the Barasat District Court, seeking approximately $1.6 million as damages and an injunction for copyright infringement. Saregama India alleged that the Company made available Saregama India’s sound recordings through the Company’s platform with full knowledge that the sound recordings had been uploaded and were being communicated to the Spin-Off, IDT chargedpublic without obtaining any license from Saregama India. On August 20, 2019, the Court lifted the injunction and, subsequently, Saregama India executed a consent pursuant to which the case against the Company for certain transactions and allocated routine expenses based on company specific items covered under a Master Services Agreement. This agreement provided for, amongwas dismissed. 

The Company may from time to time be subject to other things: (1)legal proceedings that arise in the allocation betweenordinary course of business. Although there can be no assurance in this regard, the Company and IDTdoes not expect any of coststhose legal proceedings to have a material adverse effect on the Company’s results of employee benefits, taxes and other liabilities and obligations; (2) services provided by IDT relating to human resources and employee benefits administration; and (3) finance, accounting, tax, facilities and legal services provided by IDT to the Company. Following the Spin-Off, IDT charges the Company for services it provides pursuant to the Transition Services Agreement. The services provided pursuant to the Transition Services Agreement include human resources, payroll, investor relations, legal, accounting, tax,operations, cash flows or financial systems, management consulting and foreign exchange risk management. As of October 31, 2017, most of these services were discontinued and are being performed directly by Zedge or vendors retained by Zedge. IDT’s charges are included in “Selling, general and administrative expense” in the consolidated statements of comprehensive income (loss).condition.

Note 8—9—Revolving Credit Facility

As of September 27, 2016, the Company entered into a loan and security agreement with Western Alliance Bank for a revolving credit facility of up to $2.5 million. Advancesmillion for an initial two-year term which was extended twice for another two two-year term expiring September 26, 2022. At the Company’s request in September 2020, advances under this facility may not exceedhave been reduced to the lesser of $2.5$2.0 million or 80% of the Company’s eligible accounts receivable, subject to certain concentration limits. The revolving credit facility is secured by a lien on substantially all of the Company’s assets. TheEffective with the September 2020 extension, the outstanding principal amount bears interest per annum at the greater of 3.5% or the prime rate plus 1.25%. Previously the interest rate was capped at 5.0%. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date of September 27, 2018.26, 2022. The Company is required to pay an annual facility fee of $12,500$10,000 to Western Alliance Bank. The Company is also required to comply with various affirmative and negative covenants and to maintain certain financial ratios during the term of the revolving credit facility. The covenants include a prohibition on the Company paying any dividend on its capital stock. The Company may terminate this agreement at any time without penalty or premium provided that it pays down any outstanding principal, accrued interest and bank expenses. At January 31, 2018,2021 and July 31, 2020, there were no amounts outstanding under the revolving credit facility and the Company was in compliance with all of the covenants.

As of November 16, 2016, the Company entered into a Foreign Exchange Agreement with Western Alliance Bank to allow the Company to enter into foreign exchange contracts not to exceed $5.0 million in the aggregate at any point in time under its revolving credit facility. This limit was raised to approximately $6.5 million pursuant to the Loan and Security Modification Agreement dated May 30, 2018. The available borrowing under the revolving credit facility is reduced by an applicable foreign exchange reserve percentage as determined by Western Alliance Bank, in its reasonable discretion from time to time, which was initially set at 10% of the nominal amount of the foreign exchange contracts in effect at the relevant time. In December 2016, the applicable foreign exchange reserve percentage was changed so that the reduction of available borrowing for major currency forward contracts of less than six months tenor is set at 10% of the nominal amount of the foreign exchange contracts, and for contracts over six months tenor, 12.5% of the nominal amount of the foreign exchange contracts. As ofAt January 31, 2018,2021, there were no$1.58 million of outstanding foreign exchange contracts Foreign Exchange Agreement.with less than six months tenor under the credit facility, which reduced the available borrowing under the revolving credit facility by $157,500.

Note 9—10—Business Segment and Geographic Information

The Company providesis a content platform, worldwide, centeredleading app developer focusing on mobile phone personalization and entertainment. “Zedge Wallpapers and Ringtones,” the Company’s flagship app, is a hub for self-expression attracting both creators looking to promote theirused by millions for mobile phone personalization, social content and consumers who utilize such content to express their identity, feelings, tastes and interests.fandom art. The Company’s platformapp enables consumers to personalizeshowcase who they are, what they like, and amplify their mobile devices with high quality ringtones, wallpapers, home screenpersona. Zedge Premium, the Company’s in-app marketplace, enables content creators, ranging the gamut from world class celebrities to emerging artists, to display their talent and sell their content to the Company’s flagship app iconsusers. “Shortz – Chat Stories by Zedge” offers serialized, short-form fiction stories delivered as text-messaging conversations and notification sounds. The bulk of the content is generallysoon to be available free of charge.as mini-podcasts. The Company conducts business as onea single operating segment.

Net long-lived assets and total assets held outside of the United States, which are located primarily in Norway, were as follows:

Note 10— Commitments & Contingencies and Tax Matters  11— Operating Leases

Legal Proceedings

In March 2014, Saregama India, Limited filed a lawsuit against the Company before the Barasat District Court, seeking approximately $1.6 million as damages and an injunction for copyright infringement. The main ground for the lawsuit was an allegation that the Company avails the plaintiff’s sound recordings through the Company’s platform with full knowledge that the sound recordings have been uploaded and are being communicated to the public without obtaining any license from the plaintiff. This case is still ongoing and the Company believes that the possibility of it bearing material liability on the matter is remote.

The Company may from time to time be subject tohas operating leases primarily for office space. Operating lease right-of-use assets recorded and included in other legal proceedings that ariseassets were $220,000 and $317,000 at January 31, 2021 and July 31, 2020, respectively.

There were no material changes in the ordinary course of business. Although there can be no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect on the Company’s results of operations, cash flows or financial condition. 

Tax Audits 

In September 2016, the Company was notified that the Zedge Europe AS tax returns for 2012 through 2016 were going to be audited by the tax authorities in Norway. The initial audit meeting took place in October 2016Company's operating and the audit is progressing. No significant issues have been identified at this time. Amounts asserted by taxing authorities or the amount ultimately assessed against the Company could be greater than any accrued amount. Accordingly, provisions may be recorded in the future as estimates are revised or underlying matters are settled or resolved. Imposition of assessments as a result of tax audits could have an adverse effect on the Company’s results of operations, cash flows and financial condition.

Research and Development Credits

As of January 31, 2018, the balance of the Company’s net receivable from SkatteFUNN, a Norwegian government program designed to stimulate research and development in Norwegian trade and industry, was $220,000 which was included in “Other current assets” in the consolidated balance sheet. SkatteFUNN credits of $4,500 and $39,200 were recorded as a reduction of selling, general and administrative expense for the three months and six months ended January 31, 2018 respectively, and $33,200 and $ 255,900 were recorded as a reduction of selling, general and administrative expense for the three months and six months ended January 31, 2017, of which $204,000 was related to prior periods.

Note 11—Provision for (benefit from) Income taxes

The changes from a benefit from to a provision for income taxes in the three ended January 31, 2018 compared to the same periods in fiscal 2017, and the decrease in benefit from income taxfinance leases in the six months ended January 31, 20182021, as compared to the same periods in fiscal 2017 was primarily due to the jurisdiction in which loss was incurreddisclosure in the threeCompany's Annual Report on Form 10-K for the fiscal year ended July 31, 2020.

Note 12—Provision for Income taxes

At July 31, 2020, the Company had available U.S. federal and state net operating loss (“NOL”) carryforwards from domestic operations of approximately $5.6 million and $5.9 million, respectively, to offset future taxable income, the Company also had available NOL carryforwards of approximately $433,000 to offset future foreign taxable income. The Company expects to utilize these NOL carryforwards to offset the taxable income for the six months ended January 31, 2018 compared to the same periods in fiscal 20172021 and our ability to utilize net operating losses we hold in those jurisdictions.In addition, the decrease in the Norwegian corporate tax rate from 24.0% to 23.0% resulted in an increase in deferred tax expense of approximately $7,000.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").  The Tax Act significantly revises U.S. corporate income taxation by, among other things, lowering the U.S. corporate income tax rate from 35.0 % to 21.0% effective January 1, 2018. The decrease in the U.S. federal corporate tax rate from 35.0% to 21.0% will result in a blended statutory tax rate of 26.4% for the fiscal year ending July 31, 2018.2021, and reduced its effective tax rate to 7.9% for those periods. The Company does not anticipate any impact to tax expense dueconsists of federal and state taxes based on taxable income and allocated net worth and certain income taxes payable in foreign jurisdictions where our subsidiaries reside.

On March 27, 2020, the CARES Act was signed into law.  The Act contains several new or changed income tax provisions, including but not limited to the full valuation allowance offollowing: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and the Company and believes that the most significant impact on its consolidated financial statements will be reduction of approximately $342,000 for the deferred tax assets relatedability to carry back net operating losses and other assets.  Such reduction is offset by changesincurred from tax years 2018 through 2020 up to the Company’s valuation allowance.

In December 2017,five preceding tax years.  Most of these provisions are either not applicable or have no material effect on the Securities and Exchange Commission issued Staff Accounting Bulletin 118, which allows a measurement period, not to exceed one year, to finalize the accounting for the income tax impacts of the Tax Act. Until the accounting for the income tax impacts of the Tax Act is complete, the reported amounts are based on reasonable estimates, are disclosed as provisional and reflect any adjustments in subsequent periods as we refine our estimates or complete our accounting of such tax effects.Company.  

Note 12—13—Recently Issued Accounting Standards Not Yet Adopted

In August 2017, the FinancialRecently Issued Accounting Standards Board (“FASB”)Not Yet Adopted

In December 2019, the FASB issued an Accounting StandardsStandard Update (“ASU”) intended to improveNo. 2019-12, Income Taxes(Topic 740):Simplifying the financial reporting of hedging relationships to better portrayAccounting for Income Taxes (ASU 2019-12), which simplifies the economic results of an entity’s risk management activities in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge accounting for income taxes. This guidance in U.S. GAAP. The amendments in this ASU arewill be effective for the Company in the first quarter of fiscal 2022 on a prospective basis, and early adoption is permitted. The Company will adopt the new standard effective August 1, 2019. Early application is permitted. Entities will apply2021 and does not expect the amendmentsadoption of this guidance to cash flow and net investment hedge relationships that exist on the date of adoption usinghave a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. The Company is evaluating thematerial impact that this ASU will have on its consolidated financial statements.

In May 2017,With the FASB” issued an ASU to provide guidance about whichexception of the accounting standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended January 31, 2021 that are of significance or potential significance to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification); (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The Company will adopt the amendments in this ASU prospectively to an award modified on or after on August 1, 2018. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.Company.

In June 2016,Note 14—Loans Payable

On August 1, 2020, the FASB issued an ASU that changesCompany obtained a loan of $181,000 to pay for certain insurance coverage, repayable in nine equal installments of $20,490 starting from September 1, 2020 which represented a 3.89% annual percentage interest rate.

On July 16, 2019, the impairment modelCompany obtained a loan of $140,000 to pay for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to useinsurance coverage, repayable in nine equal installments of $15,976 starting from September 1, 2019 which represented a new forward-looking “expected loss” model that generally will result4.79% annual percentage interest rate.

The Company obtained a loan under the Paycheck Protection Program (PPP) of the CARES Act in the earlier recognitionamount of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in$218,000 from Western Alliance Bank, a manner similar to current practice, exceptloan servicer and the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. The Company will adopt the new standardCompany’s lender (see Note 9), on August 1,April 22, 2020. The Company used these proceeds in full for payroll purposes for U.S. employees during the covered period provided under the PPP and therefore expects that all or most of this loan will be forgiven. Any portion of the loan that is evaluatingnot forgiven will be due two years after inception of the impact thatloan. The loan has a 1% fixed interest rate and does not require collateral or personal guarantees.

The Company submitted the new standard will havePPP Loan Forgiveness Application Form 3508EZ on November 25, 2020.

Note 15—Sales of Class B Common Stock

The Company filed with the SEC a Registration Statement on Form S-3 (the “Form S-3”) on November 30, 2020 which became effective on December 4, 2020 to facilitate capital raising. The Registration Statement registered the issuance and sale by the Company of Class B common stock or related securities for gross proceeds to the Company of up to $20 million. On November 30, 2020, the Company engaged National Securities Corp. and H.C. Wainwright & Co, LLC (the “Sales Agents”) to act as the Company’s exclusive co-Sales Agents in connection with the Company’s “at-the-market” offering of shares of the Company’s Class B common stock up to $5 million. The Company filed a Prospectus Supplement (supplementing the Prospectus included in the Form S-3) on December 9, 2020 and contemporaneously entered into an At The Market Offering Agreement with the Sales Agents (the “ATM Sales Agreement”), pursuant to which the Company sold 761,906 shares at an average price of $6.5625 per share for total proceeds of $5 million as of January 28, 2021. In connection with this offering, the Company incurred a total issuance costs of $215,000. The Company intends to use the net proceeds from this offering for working capital and other general corporate purposes.

On February 5, 2020, the Company closed on its consolidated financial statements.  

In February 2016, the FASB issued an ASU related to the accountingregistered direct offering of 1,734,459 shares of its Class B common stock for leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the patterngross proceeds of expense recognition in the income statement.$2.25 million. The Company will adoptsold 1,657,813 shares at a purchase price of $1.28 per share which represented a 20% discount from the new standard10 Day Volume Weighted Average Price (VWAP) through January 31, 2020, and certain Company insiders purchased an additional 76,646 shares at a purchase price of $1.67 per share, the closing price on August 1, 2019. A modified retrospective transition approach is requiredFebruary 3, 2020. In connection with this offering, the Company incurred a total issuance costs of $141,000. The Company intends to use the net proceeds from this offering for lessees forworking capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company expects to adopt this standard on August 1, 2018 using the modified retrospective approach. The Company has identified its main revenue streams, which are advertising revenue, app installs and advertising ops outsourcing. In addition, the Company substantially completed reviewing contracts and other relevant documents for most of its customers that comprises its main revenue streams. Based on this preliminary analysis to date of the adoption of the standard, the Company has not identified a significant impact on its consolidated financial statements, although this is subject to change as the Company completes the process.

general corporate purposes.

The following information should be read in conjunction with the accompanying consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017,2020 (the “Form 10-K”), as filed with the U.S. Securities and Exchange Commission (or SEC)(the “SEC”).

As used below, unless the context otherwise requires, the terms “the Company,” “Zedge,” “we,” “us,” and “our” refer to Zedge, Inc., a Delaware corporation and its subsidiaries,subsidiary Zedge Europe AS, and Zedge Canada, Inc., collectively.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in our Annual Report onthe Form 10-K for the fiscal year ended July 31, 2017.10-K. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report onthe Form 10-K for the fiscal year ended July 31, 2017.10-K.

Overview

We provide one ofZedge is a leading app developer focusing on mobile phone personalization and entertainment. “Zedge Wallpapers and Ringtones” our flagship app is all about personal identity. We’re the most popular content platforms, worldwide, centered onhub for self-expression attracting both creators looking to promote theirused by millions for mobile phone personalization, social content and consumers who utilize such content to express their identity, feelings, tastes and interests. Today our platformfandom art. Our app enables consumers to personalizeshowcase who they are, what they like, and amplify their mobile devices with high-quality ringtones, wallpapers, home screenpersona. Zedge Premium, our marketplace, enables content creators, ranging the gamut from world class celebrities to emerging artists, to display their talent and sell their content to our users. “Shortz – Chat Stories by Zedge,” which has been launched in beta, offers serialized, short-form fiction stories delivered as text-messaging conversations and more recently as mini-podcasts.

Our Zedge app icons, widgets and notification sounds. The bulk of the content is generally available free of charge. Our smartphone app, called Zedge, available in both the Google Play and iTunes app stores, has been installed over 300approximately 482 million times, has more than 35and at January 31, 2021, boasted approximately 35.4 million monthly active users, (“MAU”) as of January 31, 2018. The Zedge app has averaged among the top 30 free applications in the Google Play store in the United States and in the iTunes Entertainment category for the past five years.or MAU. MAU is a key performance indicator that captures the number of unique users that openedused our Zedge app induring the previous 30-day of the relevant period. To date,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 grown our user base withoutnot made a material investment in marketing,paid user acquisition or advertising.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 utilizes both user-generated and licensed, third-party content to achieve these goals.

In September 2017March 2018, we undertook the acquihire of Freeform Development, Inc. (“Freeform”)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 accelerating development of Zedge Premium, our marketplace where artists can monetize their content by making it available to our 35 million monthly active users. We rolled out a beta of Zedge Premium on iOS in December 2017 and expect to complete the rollout to our Android users in March 2018.driving sales. Over time, we expect that Zedge premiumPremium 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 users the ability to convert into paying subscribers for amongst other things the ability to remove unsolicited advertisements from our Zedge app. As of January 31, 2021, we had approximately 711,000 active subscribers. In fiscal 2021, we hope to further optimize the offer based on user type, geography and price point as well as introduce new subscription enhancements like 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 driveAndroid and iOS, focusing on users in the United States, the United Kingdom and Canada and it is now available globally.

Over the past several years, our Zedge app has experienced a decline in its MAU, with modest increases in certain periods, 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 January 31, 2021, users in emerging markets represented 73% of our MAU compared to 67% 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 second quarter of fiscal 2021, users in emerging markets grew by 12.6% while users in well-developed economies declined 15.9% when compared to the same period in fiscal 2020. As of January 31, 2021, approximately 45% of our Zedge app’s user base was located in North America and Europe (including Eastern Europe) with a split of 22% and 23%, respectively, compared with 53% as of January 31, 2020 with a split of 26% and 27%, respectively.

MAU growth is tightly coupled with securing new users. 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. 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 and new revenue streams.into the Zedge platform.

We generate over 90%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. Gartner forecasts and smartphone sales are expected to rebound in 2021. Mature Asia Pacific, Western Europe, and Latin America are expected to exhibit the strongest growth between 2020 and 2021 which we expect will bode well for our business.

During the quarters ended January 31, 2021 and 2020, we generated approximately 83% and 85%, 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 advertising inventory is determined through real-time bidding on an advertising exchange. Advertisers are attracted to usour Zedge app because of ourits sizable user basebase.

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 focus on mobile phone personalization. The remainderclosed virtual currency. A user can earn Zedge Credits when taking specific actions such as watching a rewarded video. Alternatively, users can buy Zedge Credits via an in-app purchase. If a user purchases Zedge Credits, Google Play or App Store keeps 30% of the purchase price with the remaining 70% 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 a subscription-based product to Android users of our revenue is primarily generated from our managing and optimizingZedge app in which the advertising inventorypayment of a third-party mobile application publisher, as well as overseeingmonthly or annual fee would remove unsolicited ads when using our Zedge app. During the billing, collections and reporting relatedfirst 12 months after a customer’s sign up for the subscription-based product, Google retains up to advertising for this publisher.

A key element in maintaining our position is our ability to meet user’s expectations, which necessitates retaining employees with solid educational and professional credentials who are passionate about our mission to serve30% as a medium for self-expression.

Our abilityfee, which decreases to continue attracting advertisers depends15% from month 13 and beyond. As of January 31, 2021, we had approximately 711,000 active subscribers, 90% of which had subscribed on the growth and demographics of our user base, increased app usage and improved retention. These will require continued investmentan annual basis. Since inception in product, technology and marketing. Our growth plan also relies on improved monetization techniques and selective strategic investments and acquisitions.

We believe that our business model is scalable and allows for significant portions of revenue growth to flow to our bottom line.

We were formerly a majority-owned subsidiary of IDT Corporation, or IDT. On June 1, 2016, IDT’s interestJanuary 2019, subscriptions have generated approximately $4.7 million in Zedge was spun-off by IDT to IDT’s stockholders and we became an independent public company through a pro rata distribution of our common stock held by IDT to IDT’s stockholders (the Spin-Off).

Recent Developments

On February 7, 2018, the Audit Committee of our Board of Directors dismissed BDO USA, LLP (“BDO”) as our independent registered public accounting firm, effective February 7, 2018.  

On February 7, 2018, our Audit Committee appointedMayer Hoffman McCann CPAs, the New York Practice of Mayer Hoffman McCann P.C. (“MHM”) to serve as our independent registered public accounting firm for the remainder of the fiscal year ending July 31, 2018, and to issue a report on the audit of our financial statements for fiscal 2018.  The decision to engage MHM was approved by the Audit Committee of our Board of Directors and was made after a competitive bidding process and thoughtful evaluation.

We rolled out a beta of Zedge Premium on iOS in December 2017 and expect to complete the rollout to our Android users in March 2018gross revenue.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report onthe Form 10-K for the fiscal year ended July 31, 2017.10-K. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to capitalized software and technology development costs, revenue recognition and goodwill. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.

Recently Issued Accounting Standards Not Yet Adopted

Recently issued accounting standards not yet adopted by us are more fully described in Note 13 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

COVID-19

The COVID-19 pandemic has resulted in public health responses including travel bans, restrictions, social distancing requirements, and shelter-in place orders, which have negatively impacted our business, operations and financial performance. While we saw a significant decrease in advertising spend when the pandemic became global in March, our daily advertising revenue has experienced a strong recovery since July 2020.

We responded quickly and decisively to the challenges presented by the pandemic in order to ensure the long-term continuity of our service. Initially, we shifted resources and priorities and focused on streamlining our back-end infrastructure and specifically redesigning our content management system in order to better control costs while simultaneously establishing a scalable foundation for new growth initiatives, even at the expense of new product initiatives. At the outset of the pandemic, we instituted a hiring freeze which has subsequently been relaxed and we are starting to invest in new products, features, and enhancements. We expect to grow headcount by between 15% to 20% in calendar 2021, mostly in engineering, product and design to execute on our product development roadmap.

Given the unprecedented uncertainty and rapidly shifting market conditions of the business environment, we cannot reasonably estimate the full impact of the COVID-19 pandemic on our future financial and operational results. At this point it is unclear whether variables including the economy, unemployment, retail sales, and advertising budgets, or capital markets, including volatility of our stock price will impact our business. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and there may be developments outside our control requiring us to adjust our operating plan.

The risks related to the COVID-19 pandemic on our business are further described in Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017.2020, as filed with the SEC.

Recently Issued Accounting Standards Not Yet AdoptedKey Performance Indicators

In August 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) intended to improve the financial reportingThe presentation of hedging relationships to better portray the economicour results of an entity’s risk management activities in its financial statements. In addition,operations includes disclosure of two key performance indicators - Monthly Active Users (MAU) and Average Revenue Per Monthly Active User (ARPMAU). MAU is a key performance indicator that captures the ASU includes certain targeted improvementsnumber of unique users that used our Zedge app during the previous 30-day period, which is important to simplifyunderstanding the applicationsize of hedge accounting guidance in U.S. GAAP. The amendments in this ASU are effectivethe user base for the Company on August 1, 2019. Early applicationCompany’s Zedge app which is permitted. Entities will applya driver of revenue. Changes and trends in MAU are useful for measuring the amendments to cash flowgeneral health of our business, gauging both present and net investment hedge relationships that exist onpotential customers’ experience, assessing the dateefficacy of adoption using a modified retrospective approach. The presentationproduct improvements and disclosure requirements will be applied prospectively. The Companymarketing campaigns and overall user engagement. ARPMAU is evaluating the impact that this ASU will have on its consolidated financial statements.valuable because it provides insight into how well we monetize our users and, changes and trends in ARPMAU are indications of how effective our monetization investments are.

In May 2017,MAU increased 3.2% in the FASB issued an ASU to provide guidance about which changessecond quarter of fiscal 2021 when compared to the terms or conditionssame period a year ago and increased 9.3% on a sequential basis. Over the past several years, we have experienced a continuing shift in our regional customer make-up with MAU in emerging markets representing an increasing portion of our user base. As of January 31, 2021, users in emerging markets represented 73% of our MAU compared to 67% a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should accountyear prior. This shift has negatively impacted revenue because advertising rates in emerging markets are materially lower than in well-developed markets. However, ARPMAU for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award isthree months ended January 31, 2021 was up 87.8% when compared to the same as the fairperiod a year ago, pointing to progress we have made in extracting more value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately beforefrom our users, particularly from paid subscriptions sales and after the modification); (2) the vesting conditions of the modified award areimprovement in ad optimization. For the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument orreasons, ARPMAU also increased 35.2% on a liability instrument is the same as the classification of the original award immediately before the original award is modified. The Company will adopt the amendments in this ASU prospectively to an award modified on or after on August 1, 2018. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.sequential basis.

In June 2016, the FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. The Company will adopt the new standard on August 1, 2020. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.  

In February 2016, the FASB issued an ASU related to the accounting for leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company will adopt the new standard on August 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company expects to adopt this standard on August 1, 2018 using the modified retrospective approach. The Company has identified its main revenue streams, which are advertising revenue, app installs and advertising ops outsourcing. In addition, the Company substantially completed reviewing contracts and other relevant documents for most of its customers that comprises its main revenue streams. Based on this preliminary analysis to date of the adoption of the standard, the Company has not identified a significant impact on its consolidated financial statements, although this is subject to change as the Company completes the process.

Results of Operations

Three and Six Months Ended January 31, 20182021 Compared to Three and Six Months Ended January 31, 20172020