UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 Commission File Number: 1-37782

ZEDGE, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	26-3199071
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1178 Broadway, 3rd Floor #1450, New York, NY	10001
(Address of principal executive offices)	(Zip Code)

(330) 577-3424

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Class B common stock, par value $.01 per share	NYSE American

Trading symbol: ZDGE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):  Yes  ☐   No  ☒

As of June 10, 2021, the registrant had the following shares outstanding:

Class A common stock, $.01 par value:	524,775 shares outstanding
Class B common stock, $.01 par value:	13,661,766 shares outstanding

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-Q/A to make certain amendments to the following items of our Quarterly Report on Form 10-Q for the quarter ended April 30, 2021 as originally filed with the Securities and Exchange Commission on June 14, 2021 (the “Original Form 10-Q”): (i) Item 1 of Part I “Financial Information,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (iii) Item 4 of Part I, “Controls and Procedures,” and (iv) Item 6 of Part II, “Exhibits”, and we have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected, but for the convenience of the reader, this report on Form 10-Q/A restates in its entirety, as amended, our Original Form 10-Q. This report on Form 10-Q/A is presented as of the filing date of the Original Form 10-Q and does not reflect events occurring after that date, or modify or update disclosures in any way other than as required to reflect the restatement described below.

We have determined that our previously reported results for the third quarter ended April 30, 2021 did not reflect a partial release of the valuation allowance on our deferred tax assets in the amount of approximately $542,000 as of April 30, 2021. The partial release is being effected in light of the Company’s generation of three-year cumulative positive income through April 30, 2021, as compared to the Company’s historical recurring losses from fiscal 2017 to fiscal 2020 and the Company’s belief that it is more-likely-than-not that certain of the deferred tax assets will be realized.

The financial statements included in this Form 10-Q/A have been restated to reflect a net tax benefit of $517,000 which resulted in an increase in our fully diluted earnings per share of $0.04 per share for the three month and nine month periods ended April 30, 2021. We have made necessary conforming changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” resulting from the correction of this error.

ZEDGE, INC.

TABLE OF CONTENTS

PART I. Financial Information			1
	Item 1.	Financial Statements (Unaudited)	1
		Consolidated Balance Sheets	1
		Consolidated Statements of Comprehensive Income (Loss)	2
		Consolidated Statements of Changes In Stockholders’ Equity	3
		Consolidated Statements of Cash Flows	5
		Notes To Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risks	25
	Item 4.	Controls and Procedures	25
PART II. OTHER INFORMATION			26
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 3.	Defaults Upon Senior Securities	26
	Item 4.	Mine Safety Disclosures	26
	Item 5.	Other Information	26
	Item 6.	Exhibits	26
SIGNATURES			27

i

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZEDGE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value data)

	As Restated
	April 30,			July 31,
	2021			2020
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	24,915		$	5,111
Trade accounts receivable, net of allowance for doubtful accounts of $0 at April 30, 2021 and July 31, 2020		2,743			1,407
Prepaid expenses		175			123
Other current assets		72			113
Total current assets		27,905			6,754
Property and equipment, net		2,166			2,584
Goodwill		2,412			2,196
Deferred tax assets		542			-
Other assets		561			471
Total assets	$	33,586		$	12,005
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	337		$	290
Insurance premium loan payable		20			-
Accrued expenses and other current liabilities		2,849			1,210
Deferred revenues		1,824			1,338
Total current liabilities		5,030			2,838
Loans Payable		218			218
Other liabilities		179			64
Total liabilities		5,427			3,120
Commitments and contingencies (Notes 8 and 11)
Stockholders’ equity:
Preferred stock, $.01 par value; authorized shares—2,400; no shares issued		-			-
Class A common stock, $.01 par value; authorized shares—2,600; 525 shares issued and outstanding at April 30, 2021 and July 31, 2020		5			5
Class B common stock, $.01 par value; authorized shares—40,000; 13,683 shares issued and 13,625 shares outstanding at April 30, 2021, and 11,788 shares issued and 11,749 shares outstanding at July 31, 2020		137			118
Additional paid-in capital		38,899			25,725
Accumulated other comprehensive loss		(750	)		(1,085	)
Accumulated deficit		(10,030	)		(15,802	)
Treasury stock, 58 shares at April 30, 2021 and 40 shares at July 31, 2020, at cost		(102	)		(76	)
Total stockholders’ equity		28,159			8,885
Total liabilities and stockholders’ equity	$	33,586		$	12,005

See accompanying notes to consolidated financial statements.

1

ZEDGE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	As Restated						As Restated
	2021			2020			2021			2020
Revenues	$	5,252		$	2,079		$	14,328		$	6,756
Costs and expenses:
Direct cost of revenues (exclusive of amortization of capitalized software and technology development costs included below)		290			289			907			925
Selling, general and administrative		2,694			1,569			6,859			5,408
Depreciation and amortization		289			348			972			1,216
Income (loss) from operations		1,979			(127	)		5,590			(793	)
Interest and other income, net		9			2			14			7
Net gain (loss) resulting from foreign exchange transactions		(12	)		(200	)		21			(239	)
Income (loss) before income taxes		1,976			(325	)		5,625			(1,025	)
Provision for (benefit from) income taxes		(473	)		-			(147	)		1
Net Income (loss)		2,449			(325	)		5,772			(1,026	)
Other comprehensive income (loss):
Changes in foreign currency translation adjustment		129			(333	)		335			(484	)
Total other comprehensive income (loss)		129			(333	)		335			(484	)
Total comprehensive income (loss)	$	2,578		$	(658	)	$	6,107		$	(1,510	)
Income (loss) per share attributable to Zedge, Inc. common stockholders:
Basic	$	0.18		$	(0.03	)	$	0.46		$	(0.10	)
Diluted	$	0.17		$	(0.03	)	$	0.43		$	(0.10	)
Weighted-average number of shares used in calculation of income (loss) per share:
Basic		13,676			11,979			12,531			10,793
Diluted		14,570			11,979			13,323			10,793

See accompanying notes to consolidated financial statements.

2

ZEDGE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

	Class A Common Stock				Class B Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated			Treasury			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Loss			Deficit			Stock			Equity
Balance – July 31, 2020		525	$	5		11,788	$	118	$	25,725	$	(1,085	)	$	(15,802	)	$	(76	)	$	8,885
Stock-based compensation		-		-		39		-		237		-			-			-			237
Purchase of treasury stock		-		-		-		-		-		-			-			(26	)		(26	)
Foreign currency translation adjustment		-		-		-		-		-		(159	)		-			-			(159	)
Net Income		-		-		-		-		-		-			1,045			-			1,045
Balance -Oct. 31, 2020		525		5		11,827		118		25,962		(1,244	)		(14,757	)		(102	)		9,982
Exercise of stock options		-		-		312		3		393		-			-			-			396
Stock-based compensation		-		-		8		-		113		-			-			-			113
Stock issued for matching contributions to the 401(k) Plan		-		-		7		-		39		-			-			-			39
Proceeds from sales of Class B Common Stock		-		-		762		8		4,777		-			-			-			4,785
Foreign currency translation adjustment		-		-		-		-		-		365			-			-			365
Net income		-		-		-		-		-		-			2,278			-			2,278
Balance – Jan. 31, 2021		525		5		12,916		129		31,284		(879	)		(12,479	)		(102	)		17,958
Exercise of stock options		-		-		185		2		421		-			-			-			423
Stock-based compensation		-		-		93		1		98		-			-			-			99
Proceeds from sales of Class B Common Stock		-		-		489		5		7,096		-			-			-			7,101
Foreign currency translation adjustment		-		-		-		-		-		129			-			-			129
Net income		-		-		-		-		-		-			2,449			-			2,449
Balance – Apr. 30, 2021 (As Restated)		525	$	5		13,683	$	137	$	38,899	$	(750	)	$	(10,030	)	$	(102	)	$	28,159

See accompanying notes to consolidated financial statements.

3

ZEDGE, INC.

	Class A Common Stock				Class B Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated			Treasury			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Loss			Deficit			Stock			Equity
Balance – July 31, 2019		525	$	5		9,876	$	99	$	23,131	$	(985	)	$	(15,243	)	$	(47	)	$	6,960
Stock-based compensation		-		-		-		-		98		-			-			-			98
Purchase of treasury stock		-		-		-		-		-		-			-			(22	)		(22	)
Foreign currency translation adjustment		-		-		-		-		-		(143	)		-			-			(143	)
Net loss		-		-		-		-		-		-			(801	)		-			(801	)
Balance – Oct. 31, 2019		525		5		9,876		99		23,229		(1,128	)		(16,044	)		(69	)		6,092
Exercise of stock options		-		-		30		-		4		-			-			-			4
Stock-based compensation		-		-		48		1		156		-			-			-			157
Purchase of treasury stock		-		-		-		-		-		-			-			(7	)		(7	)
Stock issued for matching contributions to the 401(k) Plan		-		-		26		-		41		-			-			-			41
Proceeds from sales of Class B Common Stock		-		-		-		-		275		-			-			-			275
Foreign currency translation adjustment		-		-		-		-		-		(8	)		-			-			(8	)
Net income		-		-		-		-		-		-			100			-			100
Balance – Jan. 31, 2020		525		5		9,980		100		23,705		(1,136	)		(15,944	)		(76	)		6,654
Net proceeds from sales of Class B Common Stock		-		-		1,735		17		1,817		-			-			-			1,834
Stock-based compensation		-		-		-		-		102		-			-			-			102
Foreign currency translation adjustment		-		-		-		-		-		(333	)		-			-			(333	)
Net loss		-		-		-		-		-		-			(325	)		-			(325	)
Balance sheet-Apr. 30, 2020		525	$	5		11,715	$	117	$	25,624	$	(1,469	)	$	(16,269	)	$	(76	)	$	7,932

See accompanying notes to consolidated financial statements.

4

ZEDGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended
	April 30,
	As Restated
	2021			2020
Operating activities
Net income (loss)	$	5,772		$	(1,026	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		972			1,216
Stock-based compensation		488			397
Deferred income taxes		(542	)		-
Change in assets and liabilities:
Trade accounts receivable		(1,336	)		198
Prepaid expenses and other current assets		171			259
Other assets		75			24
Trade accounts payable and accrued expenses		1,651			(37	)
Deferred revenue		486			552
Net cash provided by operating activities		7,737			1,583
Investing activities
Capitalized software and technology development costs and purchase of equipment		(543	)		(613	)
Investment in private company		(50	)		-
Net cash used in investing activities		(593	)		(613	)
Financing activities
Proceeds from sales of Class B Common Stock		12,355			2,250
Payment of issuance costs		(469	)		(141	)
Proceeds from PPP loan payable		-			218
Repayment of insurance premium loan payable		(161	)		(125	)
Proceeds from exercise of stock options		819			4
Purchase of treasury stock in connection with restricted stock and deferred stock units vesting		(26	)		(29	)
Net cash provided by financing activities		12,518			2,177
Effect of exchange rate changes on cash and cash equivalents		142			(126	)
Net increase in cash and cash equivalents		19,804			3,021
Cash and cash equivalents at beginning of period		5,111			1,609
Cash and cash equivalents at end of period	$	24,915		$	4,630
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments made for income taxes	$	1		$	3
Cash payments made for interest expenses	$	2		$	1
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Note payable issued for insurance premium financing	$	181		$	-

See accompanying notes to consolidated financial statements.

5

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 subsidiary, Zedge Europe AS (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 and nine months ended April 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2021 or any other period. The balance sheet at July 31, 2020 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, 2020, as filed with the U.S. Securities and Exchange Commission (the “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 2021 refers to the fiscal year ending July 31, 2021).

Restatement of Financial Statements

The Company’s consolidated balance sheet as of April 30, 2021, consolidated statements of comprehensive income (loss) for the three and nine month periods ended April 30, 2021 and consolidated statement of cash flows for the nine month period ended April 30, 2021 have been restated to reflect a net tax benefit of $517,000 resulting from the partial release of valuation allowance of $542,000 and additional tax expense of $25,000. The Company’s previously reported results maintained a 100% of valuation allowance on all of its deferred tax assets in light of primarily its recurring losses from fiscal 2017 to fiscal 2020 and other negative evidence, without giving consideration of strong positive evidence of three year cumulative positive income that was achieved due to pretax income of $5.6 million generated in the nine month period ended April 30, 2021. The following table summarizes the effects of our restatement resulting from the correction of this error.

	Three Months Ended		Nine Months Ended					Three Months Ended			Nine Months Ended
	April 30, 2021				Adjustment			April 30, 2021
	Previously Reported							Restated
	(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Income before income taxes	$	1,976	$	5,625	$	-		$	1,976		$	5,625
Provision for (benefit from) income taxes	$	44	$	370	$	(517	)	$	(473	)	$	(147	)
Net Income	$	1,932	$	5,255	$	(517	)	$	2,449		$	5,772
Income per share attributable to Zedge, Inc. common stockholders:
Basic	$	0.14	$	0.42	$	0.04		$	0.18		$	0.46
Diluted	$	0.13	$	0.39	$	0.04		$	0.17		$	0.43
CONSOLIDATED STATEMENT OF CASH FLOW
Net income			$	5,255	$	(517	)				$	5,772
CONSOLIDATED BALANCE SHEET
Total Assets			$	33,044	$	542					$	33,586
Total current liabilites			$	5,005	$	25					$	5,030
Total shareholders’ equity			$	27,642	$	517					$	28,159

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 four 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.

6

As of April 30, 2021, the Company had $24.9 million of cash and cash equivalents, including a net of $11.9 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 nine months ended April 30, 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:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2021		2020		2021		2020
	(in thousands)				(in thousands)
Advertising revenue	$	4,227	$	1,501	$	11,612	$	5,428
Paid subscription revenue		899		455		2,358		985
Other revenues		126		123		358		343
Total Revenues	$	5,252	$	2,079	$	14,328	$	6,756

7

Contract Balances

Deferred revenues

The Company records deferred revenues related to the unsatisfied performance obligations with respect to subscription revenue. As of April 30, 2021, the Company’s deferred revenue balance related to paid subscriptions was approximately $1,607,000, representing approximately 753,000 active subscribers including those under the account hold designation 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 nine months ended April 30, 2021 that was included in the deferred balance at July 31, 2020 was $1,078,000.

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 April 30, 2021, and July 31, 2020, the Company’s deferred revenue balance related to Zedge Premium was approximately $217,000 and $169,000, respectively.

Total deferred revenues increased $486,000 from $1,338,000 at July 31, 2020 to $1,824,000 at April 30, 2021, primarily attributed to new paid subscriptions and renewals sold in the nine months ended April 30, 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 3—Fair Value Measurements

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

	Level 1 (1)		Level 2 (2)		Level 3 (3)		Total
	(in thousands)
April 30, 2021
Assets:
Foreign exchange forward contracts	$	-	$	10	$	-	$	10
Liabilities:
Foreign exchange forward contracts	$	-	$	-	$	-	$	-
July 31, 2020
Assets:
Foreign exchange forward contracts	$	-	$	10	$	-	$	10
Liabilities:
Foreign exchange forward contracts	$	-	$		$	-	$	-

(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

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Fair Value of Other Financial Instruments

The Company’s other financial instruments at April 30, 2021 and July 31, 2020 included trade accounts receivable, trade accounts payable, and loans payable. The carrying amounts of the trade accounts receivable, trade accounts payable, and loan payables approximated fair value due to their short-term nature.

Note 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 Kroner (NOK) and USD to Euro (EUR) exchange rates. The Company is party to 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 9). The Company does not apply hedge accounting to these contracts, and therefore the changes in fair value are recorded in 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 April 30, 2021, are as follows:

Settlement Date	U.S. Dollar Amount		NOK Amount
May-21		200,000		1,694,083
Jun-21		200,000		1,683,155
Jul-21		200,000		1,683,215
Aug-21		200,000		1,683,215
Sep-21		200,000		1,683,275
Oct-21		200,000		1,683,515
Nov-21		200,000		1,683,755
Total	$	1,400,000		11,794,213

Settlement Date	U.S. Dollar Amount		EUR Amount
May-21		200,000		163,253
Jun-21		250,000		207,164
Jul-21		250,000		207,010
Aug-21		250,000		206,873
Sep-21		250,000		206,753
Oct-21		250,000		206,616
Nov-21		250,000		206,463
	$	1,700,000		1,404,132

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

		April 30,		July 31,
		2021		2020
		(in thousands)
Assets and Liabilities Derivatives:	Balance Sheet Location
Derivatives not designated or not qualifying as hedging instruments
Foreign exchange forward contracts	Other current assets	$	10	$	10

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

		Amount of Gain (Loss) Recognized on Derivatives
		Three Months Ended					Nine Months Ended
		April 30,					April 30,
Amount of Gain (Loss) Recognized on Derivatives		(in thousands)					(in thousands)
Derivatives not designated or not qualifying as hedging instruments	Location of Gain (Loss) Recognized on Derivatives	2021		2020			2021		2020
Foreign exchange forward contracts	Net gain (loss) resulting from foreign exchange transactions	$	16	$	(273	)		67	$	(327	)

Note 5—Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	April 30,		July 31,
	2021		2020
	(in thousands)
Accrued vacation	$	565	$	392
Accrued income taxes		389		-
Accrued payroll taxes		459		274
Accrued payroll and bonuses		457		132
Withholding taxes payable (option exercise gains)		560		-
Operating lease liability		89		232
Due to artists		224		136
Other		106		44
Total accrued expenses and other current liabilities	$	2,849	$	1,210

Note 6—Stock-Based Compensation

2016 Stock Option and Incentive Plan

On November 18, 2020, the Company’s Board of Directors amended the Company’s 2016 Stock Option and Incentive Plan (as amended to date, the “2016 Incentive Plan”) to increase the number of 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 April 30, 2021, there were 233,000 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 to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 230,000 shares, 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.

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Stock Options  

In August and October 2020, the Compensation Committee of the Company’s Board of Directors approved grants of options to purchase an aggregate of 90,849 shares of Class B Stock to various individuals including company executives, employees and consultants. Options with respect to 30,000 shares vested upon grant with the remaining options with respect to 60,849 shares vesting over a three-year period. Grant date fair value related to the 30,000 vested options was $32,000 which was expensed immediately. Unrecognized compensation expense related to the 60,649 options grants was an aggregate of $64,000 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.

Also 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.

In March 2021, the Compensation Committee of the Company’s Board of Directors approved grants of options to purchase an aggregate of 42,000 shares of Class B Stock to eight of its non-executive employees based in Lithuania and one consultant, vesting over a four-year period. Unrecognized compensation expense related to the 42,000 options grants was an aggregate of $316,000 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.

In November 2019 and January 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 nine months ended April 30, 2021 and 2020, the Company issued 497,252 shares and 29,917 shares respectively of Class B Stock and received $819,000 and $4,000 respectively, in connection with options exercised during the period.

At April 30, 2021, unrecognized compensation expense related to unvested stock options was an aggregate of $622,000.

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 April 30, 2021, unrecognized compensation expense related to unvested DSUs was an aggregate of $44,000.

In the nine months ended April 30, 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 Awards

In November 2020, the Compensation Committee and the Corporate Governance Committee of our Board of Directors approved a grant of 92,593 restricted shares of the Company’s Class B Common Stock to our Executive Chairman Michael Jonas. Mr. Jonas agreed to accept all of his compensation for his service as Executive Chairman during fiscal 2021 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 2021 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, 2022, 2023 and 2024.These shares had an aggregate grant date fair value of $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.

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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 April 30, 2021, unrecognized compensation expense related to unvested restricted stock awards was an aggregate of $332,000.

In the nine months ended April 30, 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 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 the 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:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2021		2020		2021		2020
	(in thousands)
Basic weighted-average number of shares		13,676		11,979		12,531		10,793
Effect of dilutive securities:
Stock options		762		-		715		-
Non-vested restricted Class B common stock		98		-		48		-
Deferred stock units		34		-		29		-
Diluted weighted-average number of shares		14,570		11,979		13,323		10,793

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

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2021		2020		2021		2020
	(in thousands)
Stock options		24		1,326		25		1,326
Non-vested restricted Class B common stock		-		120		-		120
Deferred stock units		-		69		-		69
Shares excluded from the calculation of diluted earnings per share		24		1,515		25		1,515

For the nine months ended April 30, 2020, the diluted earnings per share equals basic earnings per share because the Company incurred 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.

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Note 8—Contingencies  

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. 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 public 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 was dismissed. 

The Company may from time to time be subject to other legal proceedings that arise 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.

Note 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 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 have been reduced to the lesser of $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. Effective 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 26, 2022. The Company is required to pay an annual facility fee of $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 April 30, 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. At April 30, 2021, there were $3.1 million of outstanding foreign exchange contracts with the majority being less than six months tenor under the credit facility, which reduced the available borrowing under the revolving credit facility by $321,250.

Note 10—Business Segment and Geographic Information

The Company is a leading app developer focusing on mobile phone personalization and entertainment. “Zedge Wallpapers and Ringtones,” the Company’s flagship app, is a hub for self-expression used by millions for mobile phone personalization, social content and fandom art. The app enables consumers to showcase who they are, what they like, and amplify their persona. 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 users. “Shortz – Chat Stories by Zedge” offers serialized, short-form fiction stories delivered as text-messaging conversations and soon to be available as mini-podcasts. The Company conducts business as a 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:

	United States		Foreign		Total
	(in thousands)
Long-lived assets, net:
April 30, 2021	$	2,082	$	594	$	2,676
July 31, 2020	$	2,513	$	542	$	3,055
Total assets:
April 30, 2021	$	27,534	$	6,052	$	33,586
July 31, 2020	$	7,730	$	4,275	$	12,005

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Note 11— Operating Leases

The Company has operating leases primarily for office space. Effective April 1, 2021, the Company moved its main office in Trondheim, Norway with 11,600 square feet of office space to a 4,900 square feet facility. There were nine months left on the lease agreement for the old office space and the Company recognized $14,000 gain as a result of the lease termination. As of March 31, 2021 the Company recorded $281,000 in the right-of-use assets and the same amount for the lease liabilities for the new lease which has a three years term.

The following table presents the lease-related assets and liabilities for the new lease recorded on the Consolidated Balance Sheet (in thousands) as of April 30, 2021:

Operating leases:	As of April 30, 2021
Other assets	$	283
Other current liabilities	$	89
Other liabilities		179
Total operating lease liabilities	$	268

The following table summarizes the weighted average remaining lease term and weighted average discount rate as of April 30, 2021:

	As of April 30, 2021
Weighted average remaining lease term:
Operating leases		2.92 years
Weighted average discount rate:
Operating leases		1.00	%

Future minimum lease payments under non-cancellable leases at April 30, 2021 are as follows (in thousands):

Years ending July 31,	Operating Leases
Remainder of 2021	$	23
2022		94
2023		102
2024		53
Total future minimum lease payments		272
Less imputed interest		4
Total	$	268

There were no other material changes in the Company’s operating and finance leases in the nine months ended April 30, 2021, as compared to the disclosure in the Company’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 nine months ended April 30, 2021 and for the fiscal year ending July 31, 2021, and reduce its effective tax rate to 0.0% for those periods. The current tax expense consists 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.

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In light of the Company’s generation of three year cumulative positive income through April 30, 2021 as compared to the Company’s historical recurring losses from fiscal 2017 to fiscal 2020, the Company believes that it is more-likely-than-not that substantially all of the deferred tax assets except certain state net operating losses and capital loss carryforward will be realized. Therefore, the Company has released the valuation allowance on its deferred tax assets (other than as stated above) in the amount of $542,000 for the three and nine month periods ended April 30, 2021. As discussed in Note 1, provision for (benefit from) have been restated to ($473,000) and ($147,000) from $44,000 and $370,000 for the three and nine month periods ended April 30, 2020, respectively.

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 following: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years.  Most of these provisions are either not applicable or have no material effect on the Company.  

Note 13—Recently Issued Accounting Standards Not Yet Adopted

Recently Issued Accounting Standards Not Yet Adopted

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will 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, 2021 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

With the exception of the accounting standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended April 30, 2021 that are of significance or potential significance to the Company.

Note 14—Loans Payable

On August 1, 2020, the Company 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 Company obtained a loan of $140,000 to pay for certain insurance coverage, repayable in nine equal installments of $15,976 starting from September 1, 2019 which represented a 4.79% annual percentage interest rate.

The Company obtained a loan under the Paycheck Protection Program (PPP) of the CARES Act in the amount of $218,000 from Western Alliance Bank, a loan servicer and the Company’s lender (see Note 9), on 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 not forgiven will be due two years after inception of the loan. The loan has a 1% fixed interest rate and does not require collateral or personal guarantees.

The Company submitted the PPP Loan Forgiveness Application Form 3508EZ on November 25, 2020. On May 21, 2021, the Company was notified that such application for the loan forgiveness has been approved and the loan, including accrued interest, has been deemed satisfied in full by the Small Business Administration to Western Alliance Bank. The Company will record a gain of forgiveness of debt in the 4^th quarter of fiscal 2021.

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.

15

On March 16, 2021, the Company filed a prospectus supplement with the SEC which contemplates the sale, for a gross aggregate sale price of up to $10,000,000, of shares of the Company’s Class B common stock, from time to time in “at the market offerings” pursuant to an At Market Issuance Sales Agreement with National Securities Corporation and Maxim Group LLC (the “New Sales Agents”), dated as of March 16, 2021 (the “New ATM Sales Agreement”), pursuant to which the Company sold 489,303 shares at an average price of $15.0334 per share for total proceeds of $7.4 million as of April 30, 2021. In connection with this offering, the Company incurred a total issuance costs of $254,000. 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 registered direct offering of 1,734,459 shares of its Class B common stock for gross proceeds of $2.25 million. The Company sold 1,657,813 shares at a purchase price of $1.28 per share which represented a 20% discount from the 10 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 February 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 working capital and other general corporate purposes.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2020 (the “Form 10-K”), as filed with the U.S. Securities and Exchange Commission (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 subsidiary Zedge Europe AS, 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 the Form 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 the Form 10-K.

Overview

Zedge 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 hub for self-expression used by millions for mobile phone personalization, social content and fandom art. Our app enables consumers to showcase who they are, what they like, and amplify their persona. 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 has been installed approximately 497 million times, and at April 30, 2021, boasted approximately 34.5 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 previous 30-day 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 utilizes 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. 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 April 30, 2021, we had approximately 753,000 active subscribers. Beginning 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.

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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.

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 April 30, 2021, users in emerging markets represented 74% of our MAU compared to 69% a year prior. This shift impacts our business because emerging markets do not monetize as well as well-developed markets due to lower eCPMs and lower monthly and annual subscription rates in these regions coupled with lower priced subscriptions SKUs (Stock Keeping Unit). In the third quarter of fiscal 2021, users in emerging markets grew by 29.3% while users in well-developed economies declined 1.2% when compared to the same period in fiscal 2020. As of April 30, 2021, approximately 43% of our Zedge app’s user base was located in North America and Europe (including Eastern Europe) with a split of 21% and 22%, respectively, compared with 51% as of April 30, 2020 with a split of 25% and 26%, 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 new user acquisition. 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 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. Gartner forecasts smartphone sales are expected to rebound in 2021 and there have been reports of a partial recovery, with sales still below 2019 levels.

During the quarters ended April 30, 2021 and 2020, we generated approximately 80% and 72%, 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. 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 paid subscriptions 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 April 30, 2021, we had approximately 753,000 active subscribers, 90% of which had subscribed on an annual basis. Since inception in January 2019, subscriptions have generated approximately $5.7 million in gross 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 the Form 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.

18

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 2020, our daily advertising revenue has experienced a strong recovery since July 2020 through April 2021.

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 year ended July 31, 2020, as filed with the SEC.

Key Performance Indicators

The presentation of our results of 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 number of unique users that used our Zedge app during the previous 30-day period, which is important to understanding the size of the user base for the Company’s Zedge app which is a driver of revenue. Changes and trends in MAU are useful for measuring the general health of our business, gauging both present and potential customers’ experience, assessing the efficacy of product improvements and marketing campaigns and overall user engagement. ARPMAU is 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.

MAU increased 19.8% in the third quarter of fiscal 2021 when compared to the same period a year ago and decreased 2.6% 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 April 30, 2021, users in emerging markets represented 74% of our MAU compared to 69% a year prior. This shift impacts our business because emerging markets do not monetize as well as well-developed markets due to lower eCPMs and lower monthly and annual subscription rates in these regions coupled with lower priced subscriptions SKUs. However, ARPMAU for the three months ended April 30, 2021 was up 121% when compared to the same period a year ago, pointing to progress we have made in extracting more value from our users, particularly from paid subscriptions sales and improvement in ad optimization. ARPMAU decreased slightly on a sequential basis.

	Three Months Ended
	April 30,
(in millions, except ARPMAU)	2021			2020			% Change
MAU		34.5			28.8			19.8	%
Developed Markets MAU		8.9			9.0			-1.2	%
Emerging Markets MAU		25.6			19.8			29.3	%
Emerging Markets MAU/Total MAU		74	%		69	%		7.9	%
ARPMAU	$	0.0485		$	0.0220			120.5	%

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	Three Months Ended
	April 30,			January 31,
(in millions, except ARPMAU)	2021			2021			% Change
MAU		34.5			35.4			-2.6	%
Developed Markets MAU		8.9			9.5			-6.4	%
Emerging Markets MAU		25.6			25.9			-1.2	%
Emerging Markets MAU/Total MAU		74	%		73	%		1.4	%
ARPMAU	$	0.0485		$	0.0492			-1.4	%

Results of Operations

Three and Nine months Ended April 30, 2021 Compared to Three and Nine months Ended April 30, 2020

	Three months ended April 30,						Change						Nine Months Ended April 30,						Change
	2021			2020			$			%			2021			2020			$			%
	(in thousands)												(in thousands)
Revenues	$	5,252		$	2,079		$	3,173			153	%	$	14,328		$	6,756		$	7,572			112	%
Direct cost of revenues		290			289			1			0	%		907			925			(18	)		-2	%
Selling, general and administrative		2,694			1,569			1,125			72	%		6,859			5,408			1,451			27	%
Depreciation and amortization		289			348			(59	)		-17	%		972			1,216			(244	)		-20	%
Income (loss) from operations		1,979			(127	)		2,106			nm			5,590			(793	)		6,383			nm
Interest and other income, net		9			2			7			350	%		14			7			7			100	%
Net gain (loss) resulting from foreign exchange transactions		(12	)		(200	)		188			-94	%		21			(239	)		260			nm
Provision for (benefit from) income taxes		(473	)		-			(473	)		nm			(147	)		1			(148	)		nm
Net Income (loss)	$	2,449		$	(325	)	$	2,774			nm		$	5,772		$	(1,026	)	$	6,798			nm

nm—not measurable

Revenues

The following table sets forth the composition of our revenues for the three and nine months ended April 30, 2021 and 2020:

	Three Months Ended April 30,				Nine Months Ended April 30,				Changes
	2021		2020		2021		2020		Three Months			Nine Months
	(in thousands)				(in thousands)
Advertising revenue	$	4,227	$	1,501	$	11,612	$	5,428		182	%		114	%
Paid subscription revenue		899		455		2,358		985		98	%		139	%
Other revenues		126		123		358		343		2	%		4	%
Total Revenues	$	5,252	$	2,079	$	14,328	$	6,756		153	%		112	%

Advertising revenue. Advertising revenue increased 182% and 114% in the three and nine months ended April 30, 2021, respectively, compared to the three and nine months ended April 30, 2020, primarily due to improvement in our ad optimizations and higher advertising rates.

Paid subscription revenue. We rolled out a subscription-based product on Android in January 2019, whereby users of our Zedge app could pay a monthly or annual fee to remove unsolicited ads when using our Zedge app. We employ a regional pricing strategy in order to improve conversions. The U.S. constitutes our largest subscriber base and we generally charge $0.99 per month or $4.99 per year. We generated $990,000 and $2,806,000 in gross prepaid subscription in the three and nine months ended April 30, 2021, respectively, compared to $684,000 and $1,522,000 in the three and nine months ended April 30, 2020. We expect that, based on research and testing we undertake, from time to time, the prices of our subscription in each country/region may change and we may test other plan and price variations.

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The following table summarizes subscription revenue for the three and nine months ended April 30, 2021 and 2020.

	Three Months Ended							Nine Months Ended
	April 30,							April 30,
	2021		2020		% Change			2021		2020		% Change
	(in thousands, except revenue per subscriber and percentages)
Revenues	$	899	$	455		98	%	$	2,358	$	985	$	139	%
Active subscriptions net additions		42		101		-58	%		249		266		-6	%
Active subscriptions at end of period		753		399		89	%		753		399		89	%
Average active subscriptions		734		348		111	%		652		254		157	%
Average monthly revenue per active subscription	$	0.41	$	0.44		-6	%	$	0.40	$	0.43	$	-7	%

Zedge Premium. We completed the initial rollout of Zedge Premium in March 2018 to a segment of our Android user base and we expanded it to 100% of our Android user base in January 2019. In the three and nine months ended April 30, 2021, gross transaction value (the total sales volume transacting through the platform), or “GTV,” generated from Zedge Premium were $252,000 and $671,000, respectively, compared to $150,000 and $539,000 in the three and nine months ended April 30, 2020. In the three and nine months ended April 30, 2021 net revenue generated from Zedge Premium were $124,000 and $352,000, respectively, compared to $123,000 and $343,000 in the three and nine months ended April 30, 2020.

Revenue from Zedge Premium, as well as revenues generated by Shortz, are reported under Other Revenues, and those offerings constitute potential growth drivers in the quarters to come.

Direct cost of revenues. Direct cost of revenues consists primarily of content hosting and content delivery costs.

	Three Months Ended									Nine Months Ended
	April 30,									April 30,
(in thousands)	2021			2020			% Change			2021			2020			% Change
Direct cost of revenues	$	290		$	289			0.3	%	$	907		$	925			-1.9	%
As a percentage of revenues		5.5	%		13.9	%					6.3	%		13.7	%

Direct cost of revenues increased 0.3% and decreased 1.9% in the three and nine months ended April 30, 2021, respectively, compared to three and nine months ended April 30, 2020.

As a percentage of revenue, direct cost of revenues in three and nine months ended April 30, 2021 were 5.5% and 6.3%, respectively, compared to 13.9% and 13.7% in the three and nine months ended April 30, 2020, primarily due to significantly higher revenue in the current periods and the fixed nature of many of our direct cost of revenues.

Selling, general and administrative expense. Selling, general and administrative expense (“SG&A”) consists mainly of payroll, benefits, recruiting fees, facilities, marketing, content acquisition costs, consulting, professional fees, software licensing (“SaaS”) and public company related expenses. 

	Three Months Ended									Nine Months Ended
	April 30,									April 30,
(in thousands)	2021			2020			% Change			2021			2020			% Change
Selling, general and administrative	$	2,694		$	1,569			71.7	%	$	6,859		$	5,408			26.8	%
As a percentage of revenues		51.3	%		75.5	%					47.9	%		80.0	%

SG&A expense increased 71.7% and 26.8% in the three and nine months ended April 30, 2021, respectively, compared to three and nine months ended April 30, 2020. This increase was primarily attributable to higher compensation costs resulting from additional headcount and bonus accrual, higher payroll taxes resulting from option exercise activities as discussed below, higher professional fees and higher marketing costs associated with the approximately 23.4% average fee we pay to Google for subscription sales, offset by reductions in discretionary expenses. Norwegian NOK declined significantly to a historical low following the outbreak of Covid-19 in the three months ended April 30, 2020, as a result, SG&A expenses related to our Norwegian operations for that period were lower when expressed in US dollar term and contributed in part to the overall year over year increases in our SG&A expenses.

As a percentage of revenue, SG&A expense in the three and nine months ended April 30, 2021 were 51.3% and 47.9%, respectively, compared to 75.5% and 80.0% in the three and nine months ended April 30, 2020, primarily due to significantly higher revenue in the current periods.

21

Our headcount totaled 52 as of April 30, 2021 compared to 39 as of April 30, 2020 with the majority of our employees currently based in Lithuania.

SG&A expense also included stock-based compensation expense which was $98,000 and $487,000 for the three and nine months ended April 30, 2021, respectively, compared to $102,000 and $397,000 for the three and nine months ended April 30, 2020. Stock-based compensation includes equity grants to employees and consultants, as well as stock issuances to pay for board compensations and 401(k) matching contributions. Certain stock options, deferred stock unit and restricted stock grants are more fully described in Note 6 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

Holders exercised option to purchase 312,287 and 497,252 shares of Class B common stock, respectively, in the three and nine months ended April 30, 2021 as compared to 0 and 29,917 shares in the three and nine months ended April 30, 2020. In connection with these option exercises and the resulting net gains, we incurred approximately $258,000 and $382,000 in payroll taxes in the three and nine months ended April 30, 2021 as compared to $0 and $6,000 in the three and nine months ended April 30, 2020.

Depreciation and amortization. Depreciation and amortization consist mainly of amortization of capitalized software and technology development costs of our internal developers on various projects that we invested in specific to the various platforms on which we operate our service. We start amortizing these capitalized software and technology development costs once these projects were completed.

	Three Months Ended									Nine Months Ended
	April 30,									April 30,
(in thousands)	2021			2020			% Change			2021			2020			% Change
Depreciation and amortization	$	289		$	348			-17.0	%	$	972		$	1,216			-20.1	%
As a percentage of revenues		5.5	%		16.7	%					6.8	%		18.0	%

The comparison of depreciation and amortization expenses in any given periods can be attributed to the number of projects being amortized during those periods, as we removed fully amortized projects and added newly completed projects in the amortization pool.

Interest and other income, net. Interest and other income, net in the three and nine months ended April 30, 2021 increased $7,000 and $7,000, respectively, when compared to the same periods in fiscal 2020 due to higher cash balance resulting from cash flows provided by operating activities and financing activities in the current periods.

	Three Months Ended									Nine Months Ended
	April 30,									April 30,
(in thousands)	2021			2020			% Change			2021			2020			% Change
Interest and other income, net	$	9		$	2			350.0	%	$	14		$	7			100.0	%
As a percentage of revenues		0.2	%		0.1	%					0.1	%		0.1	%

Net gain (loss) resulting from foreign exchange transactions. Net gain (loss) resulting from foreign exchange transactions is comprised of gains and losses generated from movements in NOK and EUR relative to the U.S. Dollar, including gains or losses from our hedging activities.

	Three Months Ended									Nine Months Ended
	April 30,									April 30,
(in thousands)	2021			2020			% Change			2021			2020			% Change
Net gain (loss) resulting from foreign exchange transactions	$	(12	)	$	(200	)		-94.0	%	$	21		$	(239	)		nm
As a percentage of revenues		-0.2	%		-9.6	%					0.1	%		-3.5	%

In the three and nine months ended April 30, 2021, we realized gains of $16,000 and $67,000, respectively, from NOK and EUR hedging activities, compared to losses of $273,000 and $327,000 in the three and nine months ended April 30, 2020 for the reason stated above.

Provision for (benefit from) income taxes The tax benefit in the three and nine months ended April 30, 2021 consists of primarily the partial release of the valuation allowance on the Company’s deferred tax assets.

	Three Months Ended								Nine Months Ended
	April 30,								April 30,
(in thousands)	2021			2020			% Change		2021			2020			% Change
Provision for (benefit from) income taxes	$	(473	)	$	-			nm	$	(147	)	$	1			nm
As a percentage of revenues		-9.0	%		0.0	%				-1.0	%		0.0	%

22

At July 31, 2020, we 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, we also had available NOL carryforwards of approximately $433,000 to offset future foreign taxable income. We expect to utilize these NOL carryforwards to offset the taxable income for the nine months ended April 30, 2021 and for the fiscal year ending July 31, 2021, and reduce our effective tax rate to 0.0% for those periods.

In light of our generation of three year cumulative positive income through April 30, 2021 as compared to our historical recurring losses from fiscal 2017 to fiscal 2020, we believe that it is more-likely-than-not that substantially all of the deferred tax assets except certain state net operating losses and capital loss carryforward will be realized. Therefore, we have released the valuation allowance on our deferred tax assets (other than as stated above) in the amount of $542,000 for the three month and nine month period ended April 30, 2021, As discussed in Note 1 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q, provision for (benefit from) have been restated to ($473,000) and ($147,000) from $44,000 and $370,000 for the three and nine month periods ended April 30, 2020, respectively.

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 following: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years.  Most of these provisions are either not applicable or have no material effect on the Company.

Liquidity and Capital Resources

General

At April 30, 2021, we had cash and cash equivalents of $24.9 million and working capital (current assets less current liabilities) of $22.9 million, compared to $5.1 million and $3.9 million, respectively, at July 31, 2020. We expect that our cash and cash equivalents on hand and our cash flow from operations will be sufficient to meet our anticipated cash requirements for the twelve month period ending April 30, 2022. We also maintain a revolving line of credit of up to $2.0 million and a foreign exchange contract facility of up to $6.5 million with Western Alliance Bank, as discussed below in Financing Activities.

The following tables present selected financial information for the nine months ended April 30, 2021 and 2020:

	Nine Months Ended
	April 30,
(in thousands)	2021			2020
Cash flows provided by (used in):
Operating activities	$	7,736		$	1,583
Investing activities		(593	)		(613	)
Financing activities		12,519			2,177
Effect of exchange rate changes on cash and cash equivalents		142			(126	)
Increase in cash and cash equivalents	$	19,804		$	3,021

Operating Activities

Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable. Cash provided by operating activities in the nine months ended April 30, 2021 was $6.1 million higher when compared to the same period a year ago, primarily attributable to the higher revenues generated from our service offerings, including primarily advertising and paid subscription revenue.

Investing Activities

Cash used in investing activities in the nine months ended April 30, 2021 and 2020 consisted mostly of capitalized software and technology development costs related to various projects that we invested in specific to the various platforms on which we operate our service.

23

Financing Activities

We filed with the SEC a Registration Statement on 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, we engaged National Securities Corp. and H.C. Wainwright & Co, LLC (the “Sales Agents”) to act as our 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. We filed a Prospectus Supplement on December 9, 2020 and contemporaneously entered into an At The Market Offering Agreement with the Sales Agents, pursuant to which we 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, we incurred a total issuance costs of $215,000. We intend to use the net proceeds from this offering for working capital and other general corporate purposes.

On March 16, 2021, we filed a prospectus supplement with the SEC which contemplates the sale, for a gross aggregate sale price of up to $10,000,000, of shares of our Class B common stock, from time to time in “at the market offerings” pursuant to an At Market Issuance Sales Agreement with National Securities Corporation and Maxim Group LLC dated as of March 16, 2021, pursuant to which we sold 489,303 shares at an average price of $15.0334 per share for total proceeds of $7.4 million as of April 30, 2021. In connection with this offering, we incurred a total issuance costs of $254,000. We intend to use the net proceeds from this offering for working capital and other general corporate purposes.

In August 2020, we obtained a loan of $181,000 to finance about 82% of our directors’ and officers’ liability and cyber liability insurance policies, at an annual percentage interest rate of 3.89% to be repaid over nine equal monthly installments of $20,490 starting from September 1, 2020. We repaid approximately $161,000 in principal in the nine months ended April 30, 2021.

In August 2019, we obtained a loan of $140,000 to finance about 85% of our directors’ and officers’ liability and cyber liability insurance policies, at an annual percentage interest rate of 4.79% to be repaid over nine equal monthly installments of $15,976 starting from September 1, 2019. We repaid approximately $125,000 in principal in the nine months ended April 30, 2020.

In the nine months ended April 30, 2021 and 2020, we issued 497,252 shares and 29,917 shares respectively of Class B Stock and received $819,000 and $4,000 respectively, in connection with options exercised during the period.

In the nine months ended April 30, 2021 and 2020, we purchased 17,630 shares and 18,441shares, respectively, of Class B Stock from employees for $26,000 and $29,000 respectively, to satisfy tax withholding obligations in connection with the vesting of restricted stock and DSUs.

We maintain a credit facility of up to $2.0 million provided by Western Alliance Bank which is more fully described in Note 9 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

We do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.

Changes in Trade Accounts Receivable

Gross trade accounts receivable increased $1.33 million to $2.74 million at April 30, 2021 from $1.41 million at July 31, 2020, primarily due to higher revenue in the nine months ended April 30, 2021.

Concentration of Credit Risk and Significant Customers

Historically, we have had very little or no bad debt, which is common with other platforms of our size that derive their revenue from digital advertising, as we aggressively manage our collections and perform due diligence on our customers. In addition, the majority of our revenue is derived from large, credit-worthy customers, e.g. MoPub (owned by Twitter), Google, Facebook and Ogury, and we terminate our services with smaller customers immediately upon balances becoming past due. Since these smaller customers rely on us to derive their own revenue, they generally pay their outstanding balances on a timely basis.

In the nine months ended April 30, 2021, three customers represented 31%, 22% and 12% of our revenue. In the nine months ended April 30, 2020, two customers represented 31% and 28% of our revenue. At April 30, 2021, two customers represented 44% and 25% of our accounts receivable balance, and at July 31, 2020, two customers represented 35% and 32% of our accounts receivable balance. All of these significant customers were advertising exchanges operated by leading companies, and the receivables represent many smaller amounts due from their advertisers.

24

Contractual Obligations and Other Commercial Commitments

Smaller reporting companies are not required to provide the information required by this item.

Off-Balance Sheet Arrangements

At April 30, 2021, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

Smaller reporting companies are not required to provide the information required by this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of April 30, 2021 other than the restatement as disclosed below.

Consideration of Restatement

In light of the restatement discussed in Note 1 to the consolidated financial statements, our principal executive and principal financial officers reevaluated the effectiveness of our disclosure controls and procedures as of April 30, 2021, including whether the error identified was the result of a material weakness in our internal control over financial reporting. As part of this assessment, we reconsidered whether our existing disclosure controls and procedures over the evaluation of the valuation allowance against deferred tax assets, which has been outsourced to an outside accounting firm since fiscal 2018, were operating effectively. Based on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures related to the valuation allowance were not effective as of April 30, 2021. We are considering remedial actions and expect to implement them in the near future.

Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting during the quarter ended April 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Legal proceedings in which we are involved are more fully described in Note 8 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There are no other material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Number	Description
31.1*	Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed or furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZEDGE, INC.
November 5, 2021	By:	/s/ JONATHAN REICH
		Jonathan Reich Chief Executive Officer
November 5, 2021	By:	/s/ YI TSAI
		Yi Tsai Chief Financial Officer

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