UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2019

or

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

Commission File Number: 1-16371

 

 

 

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2018

or

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

Commission File Number: 1-16371

IDT CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware 22-3415036

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

   
520 Broad Street, Newark, New Jersey 07102
(Address of principal executive offices) (Zip Code)

 

(973) 438-1000

(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 shareNew York Stock Exchange

Trading symbol: IDT

 

 

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 filerAccelerated filer
Non-accelerated filer  (Do not check if a smaller reporting company)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 March 8, 2018,December 6, 2019, the registrant had the following shares outstanding:

 

Class A common stock, $.01 par value:1,574,326 shares outstanding (excluding 1,698,000 treasury shares)
Class B common stock, $.01 par value:23,279,95324,927,890 shares outstanding (excluding 2,302,095907,659 treasury shares)

 

 

 

 

   

IDT CORPORATION

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION1
   
Item 1.Financial Statements (Unaudited)1
   
 Consolidated Balance Sheets1
   
 Consolidated Statements of Operations2
   
 Consolidated Statements of Comprehensive Income (Loss)Loss3
   
 Consolidated Statements of Cash FlowsEquity4
   
 Consolidated Statements of Cash Flows5
Notes to Consolidated Financial Statements56
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations19
   
Item 3.Quantitative and Qualitative Disclosures About Market Risks3126
   
Item 4.Controls and Procedures3127
  
PART II.  OTHER INFORMATION3228
   
Item 1.Legal Proceedings3228
   
Item 1A.Risk Factors3228
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3228
   
Item 3.Defaults Upon Senior Securities3228
   
Item 4.Mine Safety Disclosures3228
   
Item 5.Other Information3228
   
Item 6.Exhibits3329
  
SIGNATURES3430

 

i

 

PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements (Unaudited)

 

IDT CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 January 31,
2018
 July 31,
2017
  

October 31,
2019

 

July 31,
2019

 
 (Unaudited) (Note 1)  (Unaudited) (Note 1) 
 (in thousands)  (in thousands) 
Assets          
Current assets:          
Cash and cash equivalents $54,055  $90,344  $62,183  $80,168 
Marketable securities  46,202   58,272 
Trade accounts receivable, net of allowance for doubtful accounts of $2,642 at January 31, 2018 and $2,657 at July 31, 2017  71,652   64,979 
Restricted cash and cash equivalents  190,218   177,031 
Debt securities  9,894   2,534 
Equity investments  5,710   5,688 
Trade accounts receivable, net of allowance for doubtful accounts of $5,675 at October 31, 2019 and $5,444 at July 31, 2019  50,963   58,060 
Prepaid expenses  15,915   14,506   27,809   20,276 
Other current assets  30,733   18,749   26,964   24,704 
Assets held for sale  138,700   124,267 
Total current assets  357,257   371,117   373,741   368,461 
Property, plant and equipment, net  88,621   88,994   32,874   34,355 
Goodwill  11,447   11,326   11,214   11,209 
Investments  24,350   26,894 
Other intangibles, net  4,110   4,196 
Equity investments  9,337   9,319 
Operating lease right-of-use assets  11,597    
Deferred income tax assets, net  8,653   11,841   4,110   4,589 
Other assets  8,616   3,657   12,054   11,574 
Assets held for sale  5,285   5,134 
Total assets $504,229  $518,963  $459,037  $443,703 
        
Liabilities and equity                
Current liabilities:                
Trade accounts payable $37,071  $40,989  $37,159  $37,077 
Accrued expenses  113,154   125,359   121,058   127,834 
Deferred revenue  71,789   76,451   40,739   42,479 
Customer deposits  188,258   175,028 
Other current liabilities  4,683   4,659   9,180   6,652 
Liabilities held for sale  129,423   115,318 
Total current liabilities  356,120   362,776   396,394   389,070 
Operating lease liabilities  9,335    
Other liabilities  1,107   1,080   977   1,076 
Liabilities held for sale  642   550 
Total liabilities  357,869   364,406   406,706   390,146 
Commitments and contingencies                
Equity:                
IDT Corporation stockholders’ equity:                
Preferred stock, $.01 par value; authorized shares—10,000; no shares issued            
Class A common stock, $.01 par value; authorized shares—35,000; 3,272 shares issued and 1,574 shares outstanding at January 31, 2018 and July 31, 2017  33   33 
Class B common stock, $.01 par value; authorized shares—200,000; 25,582 and 25,561 shares issued and 23,280 and 23,264 shares outstanding at January 31, 2018 and July 31, 2017, respectively  256   256 
Class A common stock, $.01 par value; authorized shares—35,000; 3,272 shares issued and 1,574 shares outstanding at October 31, 2019 and July 31, 2019  33   33 
Class B common stock, $.01 par value; authorized shares—200,000; 25,836 and 25,803 shares issued and 24,928 and 24,895 shares outstanding at October 31, 2019 and July 31, 2019, respectively  258   258 
Additional paid-in capital  396,259   394,462   274,953   273,313 
Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 2,302 and 2,297 shares of Class B common stock at January 31, 2018 and July 31, 2017, respectively  (83,365)  (83,304)
Treasury stock, at cost, consisting of 1,698 shares of Class A common stock and 908 shares of Class B common stock at October 31, 2019 and July 31, 2019  (51,739)  (51,739)
Accumulated other comprehensive loss  (2,531)  (2,343)  (6,062)  (4,858)
Accumulated deficit  (173,386)  (163,370)  (162,276)  (160,763)
Total IDT Corporation stockholders’ equity  137,266   145,734   55,167   56,244 
Noncontrolling interests  9,094   8,823   (2,836)  (2,687)
Total equity  146,360   154,557   52,331   53,557 
Total liabilities and equity $504,229  $518,963  $459,037  $443,703 

See accompanying notes to consolidated financial statements.


IDT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands, except per
share data)
 
Revenues $340,245  $362,316 
Costs and expenses:       ��
Direct cost of revenues (exclusive of depreciation and amortization)  279,461   304,693 
Selling, general and administrative (i)  53,480   50,552 
Depreciation and amortization  5,295   5,594 
Severance  626    
Total costs and expenses  338,862   360,839 
Other operating expense, net (see Note 9)  (2,775)  (1,295)
(Loss) income from operations  (1,392)  182 
Interest income, net  272   108 
Other income (expense), net  234   (1,349)
Loss before income taxes  (886)  (1,059)
Provision for income taxes  (536)  (939)
Net loss  (1,422)  (1,998)
Net income attributable to noncontrolling interests  (91)  (301)
Net loss attributable to IDT Corporation $(1,513) $(2,299)
         
Basic and diluted loss per share attributable to IDT Corporation common stockholders $(0.06) $(0.10)
         
Weighted-average number of shares used in calculation of basic and diluted loss per share  26,279   23,831 
         
(i) Stock-based compensation included in selling, general and administrative expenses $1,364  $413 

See accompanying notes to consolidated financial statements.


IDT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Net loss $(1,422) $(1,998)
Other comprehensive (loss) income:        
Change in unrealized gain on available-for-sale securities     (2)
Foreign currency translation adjustments  (1,204)  524 
Other comprehensive (loss) income  (1,204)  522 
Comprehensive loss  (2,626)  (1,476)
Comprehensive income attributable to noncontrolling interests  (91)  (301)
Comprehensive loss attributable to IDT Corporation $(2,717) $(1,777)

 

See accompanying notes to consolidated financial statements.

1


IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS
EQUITY

(Unaudited)

 

  

Three Months Ended
January 31,

  

Six Months Ended
January 31,

 
   2018  2017   2018  2017 
  (in thousands, except per share data) 
    
Revenues $395,883  $367,556  $789,438  $736,707 
Costs and expenses:                
Direct cost of revenues (exclusive of depreciation and amortization)  337,229   310,913   673,738   623,941 
Selling, general and administrative (i)  52,358   47,325   102,429   92,763 
Depreciation and amortization  5,735   5,301   11,408   10,601 
Severance  195      635    
Total costs and expenses  395,517   363,539   788,210   727,305 
Other operating expense  (846)  (889)  (1,625)  (1,088)
(Loss) income from operations  (480)  3,128   (397)  8,314 
Interest income, net  286   309   648   609 
Other income (expense), net  370   (419)  (456)  1,974 
Income (loss) before income taxes  176   3,018   (205)  10,897 
Benefit from (provision for) income taxes  1,514   (1,761)  99   12,655 
Net income (loss)  1,690   1,257   (106)  23,552 
Net income attributable to noncontrolling interests  (174)  (382)  (470)  (758)
Net income (loss) attributable to IDT Corporation $1,516  $875  $(576) $22,794 
                 
Earnings (loss) per share attributable to IDT Corporation common stockholders:                
Basic $0.06  $0.04  $(0.02) $1.00 
Diluted $0.06  $0.04  $(0.02) $0.99 
Weighted-average number of shares used in calculation of earnings (loss) per share:                
Basic  24,643   22,768   24,635   22,740 
Diluted  24,724   22,963   24,635   22,931 
                 
Dividends declared per common share $0.19  $0.19  $0.38  $0.38 
                 
(i) Stock-based compensation included in selling, general and administrative expenses $987  $1,426  $1,797  $2,128 
  Three Months Ended October 31, 2019
(in thousands)
 
  IDT Corporation Stockholders       
  Class A
Common
Stock
  Class B
Common
Stock
  Additional Paid-In Capital  Treasury Stock  Accumulated Other Comprehensive Loss  Accumulated Deficit  Noncontrolling Interests  Total Equity 
BALANCE AT JULY 31, 2019 $33  $258  $273,313  $(51,739) $(4,858) $(160,763) $(2,687) $53,557 
Exercise of stock options        276               276 
Stock-based compensation        1,364               1,364 
Distributions to noncontrolling interests                    (240)  (240)
Other comprehensive loss              (1,204)        (1,204)
Net loss                 (1,513)  91   (1,422)
BALANCE AT
OCTOBER 31, 2019
 $33  $258  $274,953  $(51,739) $(6,062) $(162,276) $(2,836) $52,331 

  Three Months Ended October 31, 2018
(in thousands)
 
  IDT Corporation Stockholders       
  Class A
Common Stock
  Class B
Common Stock
  Additional
Paid-In
Capital
  Treasury
Stock
  Accumulated
Other
Comprehensive
Loss
  Accumulated
Deficit
  Noncontrolling
Interests
  Total
Equity
 
BALANCE AT JULY 31, 2018 $33  $256  $294,047  $(85,597) $(4,972) $(173,103) $639  $31,303 
Adjustment from the adoption of change in revenue recognition                 9,064      9,064 
Adjustment from the adoption of change in accounting for equity investments              33   1,140      1,173 
ADJUSTED BALANCE AT AUGUST 1, 2018  33   256   294,047   (85,597)  (4,939)  (162,899)  639   41,540 
Repurchases of Class B common stock through repurchase program           (3,854)           (3,854)
Stock-based compensation        413               413 
Distributions to noncontrolling interests                    (339)  (339)
Other comprehensive income              522         522 
Net loss                 (2,299)  301   (1,998)
BALANCE AT
OCTOBER 31, 2018
 $33  $256  $294,460  $(89,451) $(4,417) $(165,198) $601  $36,284 

 

See accompanying notes to consolidated financial statements.

2


IDT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  

Three Months Ended
January 31,

  

Six Months Ended
January 31,

 
  

2018

  

2017

  

2018

  

2017

 
  (in thousands) 
Net income (loss) $1,690  $1,257  $(106) $23,552 
Other comprehensive income (loss):                
Change in unrealized loss on available-for-sale securities  (120)  (40)  (150)  (63)
Foreign currency translation adjustments  330   459   (38)  (2,403)
Other comprehensive income (loss)  210   419   (188)  (2,466)
Comprehensive income (loss)  1,900   1,676   (294)  21,086 
Comprehensive income attributable to noncontrolling interests  (174)  (382)  (470)  (758)
Comprehensive income (loss) attributable to IDT Corporation $1,726  $1,294  $(764) $20,328 

See accompanying notes to consolidated financial statements.


3

IDT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

  

Six Months Ended
January 31,

 
  

2018

  

2017

 
  (in thousands) 
Operating activities      
Net (loss) income $(106) $23,552 
Adjustments to reconcile net (loss) income to net cash used in operating activities:        
Depreciation and amortization  11,408   10,601 
Deferred income taxes  3,212   (12,868)
Provision for doubtful accounts receivable  696   126 
Realized loss (gain) on marketable securities  9   (305)
Interest in the equity of investments  (77)  (295)
Stock-based compensation  1,797   2,128 
Change in assets and liabilities:        
Restricted cash and cash equivalents  (3,663)  4,098 
Trade accounts receivable  (4,568)  (8,189)
Prepaid expenses, other current assets and other assets  (15,109)  (1,432)
Trade accounts payable, accrued expenses, other current liabilities and other liabilities  (20,344)  (15,010)
Customer deposits  4,481   (1,177)
Deferred revenue  (4,710)  (2,043)
Net cash used in operating activities  (26,974)  (814)
Investing activities        
Capital expenditures  (10,931)  (10,543)
Proceeds from sale of interest in Straight Path IP Group Holding, Inc.  6,000    
Purchase of IP Interest from Straight Path Communications Inc.  (6,000)   
Payment for acquisition, net of cash acquired     (1,827)
Cash used for investments     (8,304)
Purchases of marketable securities  (19,797)  (17,209)
Proceeds from maturities and sales of marketable securities  31,610   16,848 
Net cash provided by (used in) investing activities  882   (21,035)
Financing activities        
Dividends paid  (9,440)  (8,765)
Distributions to noncontrolling interests  (717)  (817)
Proceeds from borrowings under revolving credit facility  19,080    
Repayments of borrowings under revolving credit facility  (19,080)   
Proceeds from exercise of stock options     835 
Proceeds from sale of member interests in CS Pharma Holdings, LLC.     1,250 
Repurchases of Class B common stock  (61)  (1,838)
Net cash used in financing activities  (10,218)  (9,335)
Effect of exchange rate changes on cash and cash equivalents  592   (829)
Net decrease in cash and cash equivalents  (35,718)  (32,013)
Cash and cash equivalents at beginning of period, including $5,716 held for sale at July 31, 2017  96,060   109,537 
Cash and cash equivalents at end of period, including $6,287 held for sale at January 31, 2018 $60,342  $77,524 
Supplemental schedule of non-cash investing and financing activities        
Reclassification of liability for member interests in CS Pharma Holdings, LLC $  $8,750 
  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Operating activities      
Net loss $(1,422) $(1,998)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and amortization  5,295   5,594 
Deferred income taxes  479   1,117 
Provision for doubtful accounts receivable  549   447 
Stock-based compensation  1,364   413 
Other  (34)  46 
Change in assets and liabilities:        
Trade accounts receivable  7,975   97 
Prepaid expenses, other current assets and other assets  (9,166)  (8,766)
Trade accounts payable, accrued expenses, other current liabilities and other liabilities  (10,012)  6,919 
Customer deposits at IDT Financial Services Limited, our Gibraltar-based bank  1,793   5,567 
Deferred revenue  (1,798)  (1,206)
Net cash (used in) provided by operating activities  (4,977)  8,230 
Investing activities        
Capital expenditures  (3,851)  (4,463)
Payment for acquisition, net of cash acquired     (5,453)
Purchases of debt securities and equity investments  (8,195)   
Proceeds from maturities and sales of debt securities and sales of equity investments  782   3,372 
Net cash used in investing activities  (11,264)  (6,544)
Financing activities        
Distributions to noncontrolling interests  (240)  (339)
Repayment of other liabilities  (19)  (599)
Proceeds from exercise of stock options  276    
Repurchases of Class B common stock     (3,854)
Net cash provided by (used in) financing activities  17   (4,792)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents  11,426   (4,590)
Net decrease in cash, cash equivalents, and restricted cash and cash equivalents  (4,798)  (7,696)
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period  257,199   203,197 
Cash, cash equivalents, and restricted cash and cash equivalents at end of period $252,401  $195,501 

 

See accompanying notes to consolidated financial statements.


IDT CORPORATION

 

4

IDT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) 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 footnotesnotes 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 six months ended JanuaryOctober 31, 20182019 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2018.2020. The balance sheet at July 31, 20172019 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotesnotes 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 fiscal year ended July 31, 2017,2019, as filed with the U.S. Securities and Exchange Commission (“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 20182020 refers to the fiscal year ending July 31, 2018)2020).

 

Note 2— IDT Financial Services Holding Limited Assets and Liabilities Held for SaleRevenue Recognition

 

On June 22, 2017,The Company earns revenue from contracts with customers, primarily through the provision of retail telecommunications and payment offerings as well as wholesale international long-distance traffic termination. The Company has two reportable business segments, Telecom & Payment Services and net2phone. The Telecom & Payment Services segment is comprised of Core and Growth verticals. Core includes BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States, Carrier Services, which provides international long-distance termination and outsourced traffic management solutions to telecoms worldwide, and Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging and data credits to mobile accounts internationally and domestically. Core also includes smaller communications and payment offerings, many in harvest mode. Growth includes National Retail Solutions, which operates a point-of-sale terminal-based network for retailers, BOSS Revolution Money Transfer, an international money remittance service for customers in the United States, and BOSS Revolution Mobile, a mobile virtual network operator in the United States. The net2phone segment is comprised of net2phone-Unified Communications as a Service (“UCaaS”), a unified cloud-based communications service for businesses in North and South America and certain other international markets, and net2phone-Platform Services, which provides telephony services to cable operators and other businesses by leveraging a common technology platform.

The Company’s core operations are mostly minute-based, paid-voice communications services, and revenue is primarily recognized at a point in time. The Company’s Telecom & Payment Services’ growth initiatives and net2phone-UCaaS are technology-driven, synergistic businesses that leverage the Company’s wholly-owned subsidiary IDTcore assets, and revenue, in some cases, is recognized over time. The Company’s most significant revenue streams are from BOSS Revolution Calling, Mobile Top-Up, and Carrier Services. BOSS Revolution Calling and Mobile Top-Up are sold direct-to-consumers and through distributors and retailers.

Disaggregated Revenues

The following table shows the Company’s revenues disaggregated by business segment and service offered to customers:

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Core Operations:      
BOSS Revolution Calling $116,242  $123,513 
Carrier Services  113,517   142,222 
Mobile Top-Up  76,815   65,346 
Other  11,244   14,757 
Growth  9,800   6,011 
Total Telecom & Payment Services  327,618   351,849 
net2phone-UCaaS  7,221   4,805 
net2phone-Platform Services  5,406   5,662 
Total net2phone  12,627   10,467 
Total $340,245  $362,316 


The following table shows the Company’s revenues disaggregated by geographic region, which is determined based on selling location:

(in thousands) Telecom & Payment Services  net2phone  Total 
Three Months Ended October 31, 2019         
United States $218,655  $8,532  $227,187 
Outside the United States:            
United Kingdom  35,793   4   35,797 
Netherlands  54,942      54,942 
Other  18,228   4,091   22,319 
Total outside the United States  108,963   4,095   113,058 
Total $327,618  $12,627  $340,245 

(in thousands) Telecom & Payment Services  net2phone  Total 
Three Months Ended October 31, 2018         
United States $231,624  $7,930  $239,554 
Outside the United States:            
United Kingdom  50,472   8   50,480 
Netherlands  50,922      50,922 
Other  18,831   2,529   21,360 
Total outside the United States  120,225   2,537   122,762 
Total $351,849  $10,467  $362,316 

Remaining Performance Obligations

The Company’s revenue is generally recognized in the same period that its performance obligations are satisfied. The Company does not have any significant revenue from performance obligations satisfied or partially satisfied in previous reporting periods, or any significant portion of transaction price to be allocated to performance obligations that are unsatisfied (or partially unsatisfied) at the end of a reporting period.

Accounts Receivable and Contract Balances

The timing of revenue recognition may differ from the time of billing to the Company’s customers. Trade accounts receivable in the Company’s consolidated balance sheets represent unconditional rights to consideration. An entity records a contract asset when revenue is recognized in advance of the entity’s right to bill and receive consideration. The Company has not identified any contract assets.

Contract liabilities arise when the Company receives consideration or bills its customers prior to providing the goods or services promised in the contract. The primary component of the Company’s contract liability balance is the payments received for its prepaid BOSS Revolution Calling, traditional calling cards, and Mobile Top-Up services. Contract liabilities are recognized as revenue when services are provided to the customer.The contract liability balances are presented in the Company’s consolidated balance sheet as “Deferred revenue”.

The following table presents information about the Company’s contract liability balance:

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Revenue recognized in the period from amounts included in the contract liability balance at the beginning of the period $29,112  $28,506 


Deferred Customer Contract Acquisition and Fulfillment Costs

The Company incurs incremental costs of obtaining a customer contract, it does not incur direct costs to fulfill contracts. The Company’s incremental costs of obtaining a customer contract are sales commissions paid to acquire customers. For Telecom Inc.& Payment Services, the Company applies the practical expedient whereby the Company primarily charges these costs to expense when incurred because the amortization period would be one year or less for the asset that would have been recognized from deferring these costs. For net2phone-UCaaS sales, employees and third parties receive commissions on sales to end users. The Company amortizes the deferred costs over the expected customer relationship period when it is expected to exceed one year.

The Company’s deferred customer contract acquisition costs were as follows:

  

October 31,
2019

  

July 31,
2019

 
  (in thousands) 
Deferred customer contract acquisition costs included in “Other current assets” $1,754  $1,474 
Deferred customer contract acquisition costs included in “Other assets”  1,916   1,716 
Total $3,670  $3,190 

The Company’s amortization of deferred customer contract acquisition costs during the periods were as follows:

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Amortization of deferred customer contract acquisition costs $551  $ 

Note 3—Leases

On August 1, 2019, the Company adopted Accounting Standards Update No. 2016-02,Leases (Topic 842), and the amendments thereto, related to the accounting for leases (collectively referred to as “ASC 842”). ASC 842 establishes a right-of-use (“IDT Telecom”ROU”) model that requires a lessee to record a ROU asset and a lease liability on its balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Entities have the option to continue to apply historical accounting under Topic 840, the previously applicable standard, including its disclosure requirements, in comparative periods presented in the year of adoption. An entity that elects this option will recognize a Share Purchase Agreementcumulative effect adjustment to the opening balance of retained earnings in the period of adoption instead of the earliest period presented.

The Company elected to apply the optional ASC 842 transition provisions beginning on August 1, 2019. Accordingly, the Company will continue to apply Topic 840 prior to August 1, 2019, including Topic 840 disclosure requirements, in the comparative periods presented. The Company elected the package of practical expedients for all its leases that commenced before August 1, 2019. In addition, the Company elected not to apply the recognition requirements of ASC 842 for its short-term leases.

The Company’s leases primarily consist of operating leases for office space. These leases have remaining terms from one to six years. net2phone-UCaaS also has operating leases for office equipment. Certain of these leases include renewal options that may be exercised and/or options to terminate the lease. The Company has concluded that it is not reasonably certain that it would exercise the options to extend the lease or terminate the lease.

The adoption of ASC 842 resulted in the recognition of operating lease liabilities of $12.4 million and operating ROU assets of the same amount as of August 1, 2019 based on the present value of the remaining minimum rental payments associated with JAR Fintech Limited (“JAR Fintech”)the Company’s leases. As the Company’s leases do not provide an implicit rate, nor is one readily available, the Company used its incremental borrowing rate based on information available at August 1, 2019 to determine the present value of its future minimum rental payments.

net2phone has equipment leases that were classified as capital leases under Topic 840 and JAR Capital Limitedare finance leases under ASC 842. net2phone is also the lessor in various equipment leases that were classified as sales-type capital leases under Topic 840, that are classified as sales-type finance leases under ASC 842. The assets and liabilities related to sellthese finance leases are not material to the capital stockCompany’s consolidated balance sheets.


Supplemental disclosures related to the Company’s operating leases were as follows:

  

Three Months Ended October 31,
2019

 
  (in thousands) 
Operating lease cost $711 
Short-term lease cost  58 
Total lease cost $769 
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases $684 

October 31,
2019

Weighted-average remaining lease term-operating leases4.9 years
Weighted-average discount rate-operating leases3.12%

The Company’s aggregate operating lease liability was as follows:

  

October 31,
2019

 
  (in thousands) 
Operating lease liabilities included in “Other current liabilities” $2,417 
Operating lease liabilities included in noncurrent liabilities  9,335 
Total $11,752 

Future minimum maturities of IDT Financial Services Holding Limited,operating lease liabilities were as follows:

  

Twelve-month period ending October 31,

 
  (in thousands) 
2020 $2,776 
2021  2,637 
2022  2,438 
2023  1,996 
2024  1,880 
Thereafter  986 
Total lease payments  12,713 
Less imputed interest  (961)
Total operating lease liabilities $11,752 

Note 4—Cash, Cash Equivalents, and Restricted Cash and Cash Equivalents

The following table provides a company incorporated underreconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported in the lawsconsolidated balance sheet that equals the total of Gibraltarthe same amounts reported in the consolidated statement of cash flows:

  

October 31,
2019

  

July 31,
2019

 
  (in thousands) 
Cash and cash equivalents $62,183  $80,168 
Restricted cash and cash equivalents  190,218   177,031 
Total cash, cash equivalents, and restricted cash and cash equivalents $252,401  $257,199 

At October 31, 2019 and a wholly-owned subsidiary of IDT Telecom (“IDTFS Holding”), to JAR Fintech. IDTFS Holding is the sole shareholder ofJuly 31, 2019, restricted cash and cash equivalents included $190.1 million and $176.8 million, respectively, in restricted cash and cash equivalents held by IDT Financial Services Limited, (“IDTFS”), a Gibraltar-based bank and e-money issuer, providing prepaid card solutions across the European Economic Area. The Share Purchase Agreement provides for an aggregate purchase price for the outstanding equity interests of IDTFS Holding of approximately $4.1 million plus an amount equal to the value of IDTFS’ net assets, to be paid at closing, subject to adjustments relating to customer assets of IDTFS. The net asset value of IDTFS was $14.5 million at January 31, 2018. A portion of the purchase price will be placed in escrow at closing and released to IDT Telecom once all of the conditions have been met under the Share Purchase Agreement. The sale is expected to close in the second quarter of calendar 2018, subject to regulatory approval and other customary conditions set forth in the Share Purchase Agreement. The remaining closing conditions are outside of the Company’s control and there can be no assurance that the sale will be completed.

The pending disposition of IDTFS Holding did not meet the criteria to be reported as a discontinued operation and accordingly, its results of operations and cash flows have not been reclassified. The IDTFS Holding assets and liabilities held for sale included the following:

  

January 31,
2018

  

July 31,
2017

 
  (in thousands) 
Current assets held for sale:      
Cash and cash equivalents $6,287  $5,716 
Restricted cash and cash equivalents  128,153   115,609 
Trade accounts receivable, net of allowance for doubtful accounts of $3,239 and $2,550 at January 31, 2018 and July 31, 2017, respectively  2,919   1,844 
Prepaid expenses  854   758 
Other current assets  487   340 
Total current assets held for sale $138,700  $124,267 
         
Noncurrent assets held for sale:        
Property, plant and equipment, net $19  $24 
Other intangibles, net  164   165 
Other assets  5,102   4,945 
Total noncurrent assets held for sale $5,285  $5,134 
         
Current liabilities held for sale:        
Trade accounts payable $2,007  $372 
Accrued expenses  252   226 
Customer deposits  127,107   114,689 
Other current liabilities  57   31 
Total current liabilities held for sale $129,423  $115,318 
         
Noncurrent liabilities held for sale:        
Other liabilities $642  $550 
Total noncurrent liabilities held for sale $642  $550 

5

IDTFS Holding is included in the Telecom Platform Services segment. IDTFS Holding’s (loss) income before income taxes and (loss) income before income taxes attributable to the Company, which is included in the accompanying consolidated statements of operations, were as follows:

  

Three Months Ended
January 31,

  

Six Months Ended
January 31,

 
  

2018

  

2017

  

2018

  

2017

 
  (in thousands) 
(Loss) income before income taxes $(559) $(421) $(1,009) $174 
                 
(Loss) income before income taxes attributable to IDT Corporation $(559) $(421) $(1,009) $174 

Note 3—Spin-Off of Rafael Holdings, Inc. and Investment in Rafael Pharmaceuticals, Inc.

On or about March 26, 2018, the Company expects to spin-off its subsidiary, Rafael Holdings, Inc. (“RHI”), to the Company’s stockholders, so that RHI will be a separate publicly traded company. Approval of the spin-off by the Company’s stockholders is not required. The Company’s Board of Directors believes that the spin-off will allow RHI to better focus on its strategic mission and that its potential can be better realized as an independent entity. The spin-off of RHI will occur by way of a pro rata distribution of RHI’s capital stock to the Company’s stockholders. On the distribution date, each of the Company’s stockholders as of the record date for the distribution of March 13, 2018 will receive one share of RHI Class A common stock for every two shares of the Company’s Class A common stock and one share of RHI Class B common stock for every two shares of the Company’s Class B common stock. Completion of the RHI spin-off is subject to receipt of a favorable opinion as to the spin-off’s tax-free status.

RHI owns the commercial real estate assets held by the Company and interests in two clinical stage pharmaceutical companies. The commercial real estate holdings consist of the Company’s headquarters building and its associated public garage in Newark, New Jersey, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices for the Company and certain affiliates. The pharmaceutical holdings include debt interests and warrants in Rafael Pharmaceuticals, Inc. (“Rafael Pharma”), which is a clinical stage, oncology-focused pharmaceutical company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells, and a majority equity interest in Lipomedix Pharmaceuticals Ltd., a pharmaceutical development company based in Israel. In addition, prior to the spin-off, the Company intends to transfer assets to RHI such that, at the time of the spin-off, RHI will have approximately $44 million in cash, cash equivalents, and marketable securities, plus $6 million in hedge fund and other investments.

RHI’s interests in Rafael Pharma, which are held through a 90%-owned non-operating subsidiary, IDT-Rafael Holdings, LLC (“IDT-Rafael Holdings”), include convertible notes issued by Rafael Pharma, and a warrant held by the Company and certain minority holders to purchase up to a majority equity stake in Rafael Pharma at the Company’s discretion in accordance with the terms of the convertible note and the warrant. The remaining 10% of IDT-Rafael Holdings is held by Howard S. Jonas, the Company’s Chairman of the Board, and Chairman of the Board of Rafael Pharma.

IDT-Rafael Holdings had the contractual right to receive additional shares of Rafael Pharma representing 10% of the outstanding capital stock of Rafael Pharma that will be issued upon the occurrence of any of the following: (i) Food and Drug Administration approval of a Rafael Pharma drug application, (ii) an initial public offering of Rafael Pharma at a valuation of over $500 million, or (iii) a sale of Rafael Pharma above certain valuations. Currently, none of the conditions have been satisfied and the right remains contingent. On September 14, 2017, IDT-Rafael Holdings distributed this right to its members on a pro rata basis such that the Company received the right to 9% of the outstanding capital stock of Rafael Pharma and Howard Jonas received the right to 1% of the outstanding capital stock of Rafael Pharma. In addition, as compensation for assuming the role of Chairman of the Board of Rafael Pharma, and to create additional incentive to contribute to the success of Rafael Pharma, on September 19, 2017, the Company transferred its right to receive 9% of the outstanding capital stock of Rafael Pharma to Mr. Jonas. The right is further transferable at the discretion of Mr. Jonas.

Howard Jonas and his wife Deborah Jonas jointly own $525,000 of Series C Convertible Notes of Rafael Pharma, and The Howard S. and Deborah Jonas Foundation own an additional $525,000 of Series C Convertible Notes of Rafael Pharma. 

IDT-Rafael Holdings’ controlled 50%-owned subsidiary, CS Pharma Holdings, LLC (“CS Pharma”), holds Rafael Pharma’s Series D convertible promissory note with a principal amount of $10 million (the “Series D Note”). The Series D Note earns interest at 3.5% per annum, with principal and accrued interest due and payable on September 16, 2018. The Series D Note is convertible at the holder’s option into shares of Rafael Pharma’s Series D Preferred Stock. The Series D Note also includes a mandatory conversion into Rafael Pharma common stock upon a qualified initial public offering, and conversion at the holder’s option upon an unqualified financing event. In all cases, the Series D Note conversion price is based on the applicable financing purchase price.

IDT-Rafael Holdings and CS Pharma hold warrants to purchase shares of capital stock of Rafael Pharma representing in the aggregate up to 56% of the then issued and outstanding capital stock of Rafael Pharma, on an as-converted and fully diluted basis. The right to exercise warrants as to the first $10 million thereof is held by CS Pharma. The exercise price of the warrant is the lower of 70% of the price sold in an equity financing, or $1.25 per share, subject to certain adjustments. The minimum initial and subsequent exercises of the warrant shall be for such number of shares that will result in at least $5 million of gross proceeds to Rafael Pharma, or such lesser amount as represents 5% of the outstanding capital stock of Rafael Pharma, or such lesser amount as may then remain unexercised. The warrant will expire upon the earlier of December 31, 2020 or a qualified initial public offering or liquidation event. Gibraltar-based bank.

 

6


The Company’s investment in Rafael Pharma, which was included in “Investments” in the accompanying consolidated balance sheets, consists of the following:

  

January 31,
2018

  

July 31,
2017

 
  (in thousands) 
Series D Note (at fair value) $6,300  $6,300 
Warrants (at cost)  5,400   5,400 
Right to receive additional shares (at cost)     400 
Total investment in Rafael Pharma $11,700  $12,100 

Rafael Pharma is a variable interest entity, however, the Company has determined that it is not the primary beneficiary as the Company does not have the power to direct the activities of Rafael Pharma that most significantly impact Rafael Pharma’s economic performance. At January 31, 2018, the Company’s maximum exposure to loss as a result of its involvement with Rafael Pharma was its $11.7 million investment, since there were no other arrangements, events or circumstances that could expose the Company to additional loss.

Note 4—Marketable5—Debt Securities

 

The following is a summary of marketableavailable-for-sale debt securities:

 

  

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 
  (in thousands) 
Available-for-sale securities:                
January 31, 2018:                
Certificates of deposit* $24,441  $2  $(1) $24,442 
Federal Government Sponsored Enterprise notes  3,216      (26)  3,190 
International agency notes  399      (9)  390 
Mutual funds  5,425   40      5,465 
Corporate bonds  3,332      (39)  3,293 
Equity  79      (3)  76 
U.S. Treasury notes  5,397      (76)  5,321 
Municipal bonds  4,029      (4)  4,025 
Total $46,318  $42  $(158) $46,202 
July 31, 2017:                
Certificates of deposit* $29,011  $1  $(7) $29,005 
Federal Government Sponsored Enterprise notes  3,992      (14)  3,978 
International agency notes  291         291 
Mutual funds  5,353   77      5,430 
Corporate bonds  4,643         4,643 
Equity  74      (26)  48 
U.S. Treasury notes  6,673         6,673 
Municipal bonds  8,201   4   (1)  8,204 
Total $58,238  $82  $(48) $58,272 

  

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 
  (in thousands) 
October 31, 2019:            
Certificates of deposit* $9,894  $  $  $9,894 
                 
July 31, 2019:                
Certificates of deposit* $2,234  $  $  $2,234 
Municipal bonds  300         300 
Total $2,534  $  $  $2,534 

 

*Each of the Company’s certificates of deposit has a CUSIP, was purchased in the secondary market through a broker, and may be sold in the secondary market.

 

7

At January 31, 2018 and July 31, 2017, the Company owned 24,923 and 23,227 shares, respectively, of Zedge, Inc. Class B common stock that had a fair value of $76,000 and $48,000, respectively.

Proceeds from maturities and sales of available-for-saledebt securities and sales of equity investments were $12.1$0.8 million and $10.8$3.4 million in the three months ended JanuaryOctober 31, 2019 and 2018, and 2017, respectively, and $31.6 million and $16.8 million in the six months ended January 31, 2018 and 2017, respectively. The grossThere were no realized gains or realized losses that were included in earnings as a resultfrom sales of sales were $16,000 and $9,000debt securities in the three and six months ended JanuaryOctober 31, 2018, respectively. The gross realized gains that were included in earnings as a result of sales were $0.3 million in the three2019 and six months ended January 31, 2017.2018. The Company uses the specific identification method in computing the gross realized gains and gross realized losses on the sales of marketabledebt securities.

 

The contractual maturities of the Company’s available-for-sale debt securities at JanuaryOctober 31, 20182019 were as follows:

 

 

Fair Value

  

Fair Value

 
 (in thousands)  (in thousands) 
Within one year $25,771  $8,694 
After one year through five years  14,890   1,200 
After five years through ten years      
After ten years      
Total $40,661  $9,894 


Note 6—Equity Investments

Equity investments consist of the following:

  October 31,
2019
  July 31,
2019
 
  (in thousands) 
Zedge, Inc. Class B common stock, 42,282 shares at October 31, 2019 and July 31, 2019 $74  $68 
Rafael Holdings, Inc. Class B common stock, 27,419 shares at October 31, 2019 and July 31, 2019  476   567 
Mutual funds  5,160   5,053 
Current “Equity investments” $5,710  $5,688 
         
Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”) $3,637  $3,619 
Hedge funds  5,475   5,475 
Other  225   225 
Noncurrent “Equity investments” $9,337  $9,319 

On June 1, 2016, the Company completed a pro rata distribution of the common stock that the Company held in the Company’s subsidiary Zedge, Inc. to the Company’s stockholders of record as of the close of business on May 26, 2016. On March 26, 2018, the Company completed a pro rata distribution of the common stock that the Company held in the Company’s subsidiary Rafael Holdings, Inc. (“Rafael”) to the Company’s stockholders of record as of the close of business on March 13, 2018. The Company received the Zedge and Rafael shares in connection with the lapsing of restrictions on Zedge and Rafael restricted stock held by certain of the Company’s employees and the Company’s payment of taxes related thereto.

In June 2016, upon the acquisition of Visa Europe Limited by Visa, Inc., IDT Financial Services Limited received 1,830 shares of Visa Series C Preferred among other consideration. Each share of Visa Series C Preferred is convertible into 13.886 shares of Visa Class A common stock, subject to certain conditions, starting in June 2020 and will be convertible at the holder’s option beginning in June 2028.

 

The following available-for-sale securities werechanges in an unrealized loss positionthe carrying value of the Company’s equity investments without readily determinable fair values for which other-than-temporary impairments have not been recognized:the Company elected the measurement alternative was as follows:

 

  Unrealized Losses  Fair Value 
  (in thousands) 
January 31, 2018:      
Certificates of deposit $1  $5,340 
Federal Government Sponsored Enterprise notes  26   3,190 
International agency notes  9   390 
Corporate bonds  39   3,293 
Equity  3   76 
U.S. Treasury notes  76   5,321 
Municipal bonds  4   3,067 
Total $158  $20,677 
July 31, 2017:        
Certificates of deposit $7  $12,155 
Federal Government Sponsored Enterprise notes  14   3,529 
Equity  26   48 
Municipal bonds  1   3,349 
Total $48  $19,081 
  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Balance, beginning of period $3,919  $1,883 
Adoption of change in accounting for equity investments     1,213 
Adjusted balance  3,919   3,096 
Adjustment for observable transactions involving a similar investment from the same issuer  18   22 
Impairments      
Balance, end of the period $3,937  $3,118 

 

8

At JulyIn the three months ended October 31, 2017, there were no securities in a continuous unrealized loss position for 12 months or longer. At January 31, 2018, the following available-for-sale securities included in the table above were in a continuous unrealized loss position for 12 months or longer:

  Unrealized Losses  Fair Value 
  (in thousands) 
Federal Government Sponsored Enterprise notes $13  $1,810 
Municipal bonds  1   348 
Total $14  $2,158 

At January 31,2019 and 2018, the Company did not intend to sellincreased the securities that were incarrying value of the 1,830 shares of Visa Series C Preferred it held by $18,000 and $22,000, respectively, based on the fair value of Visa Class A common stock and a continuous unrealized loss positiondiscount for 12 months or longer, and it is not more likely than not that the Company will be required to sell the securities before recoverylack of their amortized cost bases, which may be at maturity.current marketability.

 

Unrealized gains and losses for all equity investments included the following:

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Net gains (losses) recognized during the period on equity investments $26  $(46)
Less: net gains and losses recognized during the period on equity investments sold during the period      
Unrealized gains (losses) recognized during the period on equity investments still held at the reporting date $26  $(46)


Note 5—7—Fair Value Measurements

 

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

 

  

Level 1 (1)

  

Level 2 (2)

  

Level 3 (3)

  

Total

 
  (in thousands) 
January 31, 2018            
Available-for-sale securities:            
Marketable securities $10,862  $35,340  $  $46,202 
Rafael Pharma Series D Note        6,300   6,300 
Total $10,862  $35,340  $6,300  $52,502 
July 31, 2017                
Available-for-sale securities:                
Marketable securities $12,151  $46,121  $  $58,272 
Rafael Pharma Series D Note        6,300   6,300 
Total $12,151  $46,121  $6,300  $64,572 
  

Level 1 (1)

  

Level 2 (2)

  

Level 3 (3)

  

Total

 
  (in thousands) 
October 31, 2019            
Debt securities $  $9,894  $  $9,894 
Equity investments included in current assets  5,710         5,710 
Equity investments included in noncurrent assets        3,637   3,637 
Total $5,710  $9,894  $3,637  $19,241 
July 31, 2019                
Debt securities $  $2,534  $  $2,534 
Equity investments included in current assets  5,688         5,688 
Equity investments included in noncurrent assets        3,619   3,619 
Total $5,688  $2,534  $3,619  $11,841 

 

(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

 

At JanuaryOctober 31, 20182019 and July 31, 2017,2019, the Company had $5.5 million in investments in hedge funds, which were included in noncurrent “Equity investments” in the accompanying consolidated balance sheets. The Company’s investments in hedge funds were accounted for using the equity method, therefore they were not measured at fair value.

At October 31, 2019 and July 31, 2019, the Company did not have any liabilities measured at fair value on a recurring basis.

At January 31, 2018 and July 31, 2017, the fair value of the Rafael Pharma Series D Note, which was classified as Level 3, was estimated based on a valuation of Rafael Pharma and other factors that could not be corroborated by the market.

 

The following table summarizes the change in the balance of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3). There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) in the three and six months ended JanuaryOctober 31, 20182019 and 2017.2018.

 

  

Three Months Ended
January 31,

  

Six Months Ended
January 31,

 
  

2018

  

2017

  

2018

  

2017

 
  (in thousands) 
Balance, beginning of period $6,300  $4,200  $6,300  $2,000 
Purchases           2,200 
Balance, end of period $6,300  $4,200  $6,300  $4,200 
                 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period $  $  $  $ 

9

At January 31, 2018 and July 31, 2017, the Company had $8.8 million and $8.6 million, respectively, in investments in hedge funds, which were included in “Investments” in the accompanying consolidated balance sheets. The Company’s investments in hedge funds are accounted for using the equity method or the cost method, therefore investments in hedge funds are not measured at fair value.

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Balance, beginning of period $3,619  $ 
Transfer into Level 3 from adoption of change in accounting for equity investments     2,794 
Total gains recognized in “Other income (expense), net”  18   22 
Balance, end of period $3,637  $2,816 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period $18  $22 

 

Fair Value of Other Financial Instruments

 

The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

 

Cash and cash equivalents, restricted cash and cash equivalents, other current assets, customer deposits, and other current liabilities.At JanuaryOctober 31, 20182019 and July 31, 2017,2019, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash, cash equivalents and restricted cash and cash equivalents were classified as Level 1 and other current assets, customer deposits, and other current liabilities were classified as Level 2 of the fair value hierarchy.

 

Other assets and other liabilities.At JanuaryOctober 31, 20182019 and July 31, 2017,2019, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.

 


The Company’s investments at January 31, 2018 and July 31, 2017 included investments in the equityNote 8—Acquisition of certain privately held entities and other investments that are accounted for at cost. It is not practicable to estimate the fair value of these investments because of the lack of a quoted market price for the shares of these entities, and the inability to estimate their fair value without incurring excessive cost. The carrying value of these investments was $10.4 million and $10.8 million at January 31, 2018 and July 31, 2017, respectively, which the Company believes was not impaired.

Note 6— Equity

Changes in the components of equity were as follows:

  Six Months Ended
January 31, 2018
 
  Attributable to IDT Corporation  Noncontrolling Interests  Total 
  (in thousands) 
Balance, July 31, 2017 $145,734  $8,823  $154,557 
Dividends declared ($0.38 per share)  (9,440)     (9,440)
Restricted Class B common stock purchased from employees  (61)     (61)
Transfer of right to receive equity to Howard S. Jonas     (40)  (40)
Consolidation of Lipomedix Pharmaceuticals Ltd.     558   558 
Distributions to noncontrolling interests     (717)  (717)
Stock-based compensation  1,797      1,797 
Comprehensive income:            
Net loss  (576)  470   (106)
Other comprehensive loss  (188)     (188)
Comprehensive income  (764)  470   (294)
Balance, January 31, 2018 $137,266  $9,094  $146,360 

Dividend Payments

In the six months ended January 31, 2018, the Company paid cash dividends of $0.38 per share on its Class A common stock and Class B common stock, or $9.4 million in total. In the six months ended October 31, 2016, the Company paid cash dividends of $0.38 per share on its Class A common stock and Class B common stock, or $8.8 million in total.Versature Corp.

 

On March 5,September 14, 2018, the Company acquired 100% of the outstanding shares of Versature Corp., a UCaaS provider serving the Canadian market, for cash of $5.9 million. Versature’s operating results from the date of acquisition, which were not significant, are included in the Company’s Boardconsolidated financial statements.

The following table presents unaudited pro forma information of Directors declaredthe Company as if the acquisition occurred on August 1, 2018:

  

Three Months Ended

October 31,

 
  2019  2018 
  (in thousands) 
Revenues $340,245  $363,200 
Net loss $(1,422) $(2,206)

Note 9—Other Operating Expense, Net

The following table summarizes the other operating expense, net by business segment:

  

Three Months Ended
October 31,

 
  

2019

  

2018

 
  (in thousands) 
Corporate—Straight Path Communications Inc. class action legal fees $260  $195 
net2phone—indemnification claim  365    
Telecom & Payment Services—accrual for non-income related taxes related to a foreign subsidiary  2,150   1,100 
Total other operating expense, net $2,775  $1,295 

Straight Path Communications Inc. Class Action

On July 31, 2013, the Company completed a dividendpro rata distribution of $0.09 per share for the second quarter of fiscal 2018 to holderscommon stock of the Company’s Class A common stock and Class B common stock. The dividend will be paid on or about March 23, 2018subsidiary Straight Path Communications Inc. (“Straight Path”) to the Company’s stockholders of record as of the close of business on March 19, 2018.July 25, 2013. As discussed in Note 15, a putative class action on behalf of Straight Path’s stockholders and derivative complaint was filed naming the Company, among others. In the three months ended October 31, 2019 and 2018, the Company incurred legal fees of $0.7 million and $0.2 million, respectively, related to this action. Also, in the three months ended October 31, 2019, the Company recorded insurance proceeds for this matter of $0.4 million.

 

10

Indemnification Claim

 

In June 2019, as part of a commercial resolution, the Company indemnified a net2phone cable telephony customer related to patent infringement claims brought against the customer.

Accrual for Non-Income Related Taxes

In the fourth quarter of fiscal 2019, the Company recorded an $8.0 million accrual for non-income related taxes related to one of its foreign subsidiaries. A portion of the accrual related to each of the fiscal quarters in fiscal 2019. Accordingly, the Company corrected its consolidated financial statements for the three months ended October 31, 2018, January 31, 2019, and April 30, 2019 to include the accrued expense and the related income tax benefit. The Company has determined that the adjustments were not material to its previously issued quarterly financial statements. The impact of the correction on the Company’s previously issued consolidated financial statements for the three months ended October 31, 2018 was as follows:

  Three Months Ended October 31, 2018 
  

Previously Reported

  

Error Correction

  

As Adjusted

 
  (in thousands, except per share data) 
Consolidated Statement of Operations:   
Other operating expense $(195) $(1,100) $(1,295)
Provision for income taxes $(1,189) $250  $(939)
Net loss $(1,148) $(850) $(1,998)
Net loss attributable to IDT Corporation $(1,449) $(850) $(2,299)
Loss per share attributable to IDT Corporation common stockholders:            
Basic $(0.06) $(0.04) $(0.10)
Diluted $(0.06) $(0.04) $(0.10)


Note 10—Equity

 

Stock Repurchases

The Company has aan existing stock repurchase program authorized by its Board of Directors for the repurchase of up to an aggregate of 8.0 million shares of the Company’s Class B common stock. There were no repurchases under the program in the sixthree months ended JanuaryOctober 31, 2019. In the three months ended October 31, 2018, or 2017.the Company repurchased 729,110 shares of Class B common stock for an aggregate purchase price of $3.9 million. At JanuaryOctober 31, 2018, 8.02019, 6.9 million shares remained available for repurchase under the stock repurchase program.

 

In the six months ended January 31, 2018 and 2017, the Company paid $0.1 million and $1.8 million, respectively, to repurchase 5,170 shares and 94,338 shares, respectively, of Class B common stock that were tendered by employees of the Company to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares were repurchased by the Company based on their fair market value on the trading day immediately prior to the vesting date.

2015 Stock Option and Incentive Plan

In the three months ended October 31, 2019, the Company received proceeds from the exercise of stock options of $0.3 million for which the Company issued 32,551 shares of its Class B common stock. There were no stock option exercises in the three months ended October 31, 2018.

On December 14, 2017,September 12, 2019, the Company’s stockholders approved an amendment toBoard of Directors amended the Company’s 2015 Stock Option and 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 0.30.4 million shares.

In The amendment is subject to approval by the six months ended January 31, 2017, the Company received proceeds from the exerciseCompany’s stockholders at its annual meeting of its stock options of $0.8 million. There were no stock option exercises in the six months ended January 31, 2018. In the six months ended January 31, 2017, the Company issued 73,471 shares of its Class B common stock for the stock option exercises.stockholders on December 12, 2019.

 

Note 7— Earnings (Loss)11—Loss 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 and to assume 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 (loss) per share attributable to the Company’s common stockholders consists of the following:

  

Three Months Ended
January 31,

  

Six Months Ended
January 31,

 
  

2018

  

2017

  

2018

  

2017

 
  (in thousands) 
Basic weighted-average number of shares  24,643   22,768   24,635   22,740 
Effect of dilutive securities:                
Stock options  10   77      58 
Non-vested restricted Class B common stock  71   118      133 
Diluted weighted-average number of shares  24,724   22,963   24,635   22,931 

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

 

 

Three Months Ended
January 31,

 

Six Months Ended
January 31,

  

Three Months Ended
October 31,

 
 

2018

 

2017

 

2018

 

2017

  

2019

 

2018

 
 (in thousands)  (in thousands) 
Stock options  1,160   3   1,273   18   1,190 1,243 
Non-vested restricted Class B common stock        191      616   49 
Shares excluded from the calculation of diluted earnings per share  1,160   3   1,464   18   1,806   1,292 

 

InThe diluted loss per share equals basic loss per share in the three months ended JanuaryOctober 31, 2018,2019 and in the three and six months ended January 31, 2017, stock options with an exercise price that was greater than the average market price of the Company’s stock during the period were excluded from the diluted earnings per share computation.

In the six months ended January 31, 2018 the diluted loss per share computation equals basic loss per share because the Company had a net loss and the impact of the assumed exercise of stock options and the vesting of restricted stock would have been anti-dilutive.

 

11

Note 8—12—Revolving Credit FacilityLoan Payable

 

TheAs of October 31, 2019, the Company’s subsidiary, IDT Telecom, Inc., entered into a credit agreement dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. The credit agreement was amended as of January 31, 2018. IDT Telecom may use the proceeds to finance working capital requirements, acquisitions and for other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum at the option of IDT Telecom, at either (a) the U.S. Prime Rate less 125 basis points, or (b) the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 125 basis points. Interest is payable monthly, and all outstanding principal and any accrued and unpaid interest is due on the maturity date of January 31,July 15, 2020. At January 31, 2018 and July 31, 2017, there were no amounts outstanding under the facility. The Company intends to borrow under the facility from time to time. IDT Telecom pays a quarterly unused commitment fee of 0.325%0.3% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain financial targets and ratios during the term of the line of credit,facility, including restrictions on dividend payments on IDT Telecom may not pay any dividend on its capital stock and restrictions on IDT Telecom’s aggregate loans and advances to affiliates or subsidiaries.stock.

 


Note 9—13—Accumulated Other Comprehensive Loss

 

The accumulated balances for each classification of other comprehensive loss were as follows:

 

  

Unrealized Gain (Loss) on Available-for-Sale Securities

  

Foreign Currency Translation

  

Accumulated Other Comprehensive Loss

  

Location of (Gain) Loss Recognized

  (in thousands)
Balance, July 31, 2017 $2,134  $(4,477) $(2,343)  
Other comprehensive loss attributable to IDT Corporation before reclassifications  (159)  (38)  (197)  
Less: reclassification for loss included in net loss  9      9  Other income (expense), net
Net other comprehensive loss attributable to IDT Corporation  (150)  (38)  (188)  
Balance, January 31, 2018 $1,984  $(4,515) $(2,531)  

At both January 31, 2018 and July 31, 2017, unrealized gain on available-for-sale securities included unrealized gain of $2.1 million on the Rafael Pharma Series D Note.

  

Unrealized Gain (Loss) on Available-for-Sale Securities

  

Foreign Currency Translation

  

Accumulated Other Comprehensive Loss

 
  (in thousands) 
Balance, July 31, 2019 $  —  $(4,858) $(4,858)
Other comprehensive loss attributable to IDT Corporation     (1,204)  (1,204)
Balance, October 31, 2019 $  $(6,062) $(6,062)

 

Note 10—14—Business Segment Information

 

The Company has two reportable business segments, Telecom Platform& Payment Services and net2phone-Unified Communications as a Service (“net2phone-UCaaS”) (formerly known as UCaaS).net2phone. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations.

 

Telecom Platform Services and net2phone-UCaaS comprise the IDT Telecom division. The Telecom Platform& Payment Services segment provides retail telecommunications and payment offerings as well as wholesale international long distancelong-distance traffic termination. The net2phone-UCaaSnet2phone segment is comprised of (1) cableprovides unified cloud communications and telephony (2) cloud-based private branch exchange, or PBX, services offered to enterprise customers exclusively through value-added resellers, service providers, telecom agentsbusiness customers. Depreciation and managed service providers, (3) Session Initiation Protocol, or SIP, trunking, which supports inboundamortization are allocated to Telecom & Payment Services and outbound domestic and international calling from an IP PBX, and (4) PicuP, a highly-automated business phone service that answers, routes and manages voice calls.net2phone because the related assets are not tracked separately by segment. There are no other significant asymmetrical allocations to segments.

 

Beginning in the first quarter of fiscal 2018, the Telecom Platform Services segment includes Consumer Phone Services, which was previously reported as a separate segment. Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Comparative results have been reclassified and restated as if Consumer Phone Services was included in Telecom Platform Services in all periods presented.

Operating segments not reportable individually are included in All Other. All Other includes the Company’s real estate holdings and other smaller businesses. Corporate costs include certain services, such as compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, charitable contributions, travel and other corporate-related general and administrative expenses including, among others, facilities costs, charitable contributions and travel, as well as depreciation expense on corporate assets.expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.

 

12

The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations. IDT Telecom depreciation and amortization are allocated to Telecom Platform Services and net2phone-UCaaS because the related assets are not tracked separately by segment. There are no other significant asymmetrical allocations to segments.

Operating results for the business segments of the Company are as follows:

 

(in thousands) Telecom
Platform
Services
  net2phone-UCaaS  All Other  Corporate  Total 
Three Months Ended January 31, 2018               
Revenues $387,065  $8,299  $519  $  $395,883 
Income (loss) from operations  4,589   (790)  (1,019)  (3,260)  (480)
Severance  195            195 
Other operating expense           (846)  (846)
                     
Three Months Ended January 31, 2017                    
Revenues $359,924  $7,142  $490  $  $367,556 
Income (loss) from operations  7,187   (464)  82   (3,677)  3,128 
Other operating expense           (889)  (889)
                     
Six Months Ended January 31, 2018                    
Revenues $772,129  $16,087  $1,222  $  $789,438 
Income (loss) from operations  9,150   (1,464)  (1,650)  (6,433)  (397)
Severance  605         30   635 
Other operating expense           (1,625)  (1,625)
                     
Six Months Ended January 31, 2017                    
Revenues $721,435  $14,278  $994  $  $736,707 
Income (loss) from operations  13,732   (639)  172   (4,951)  8,314 
Other operating expense           (1,088)  (1,088)
(in thousands) Telecom &
Payment
Services
  net2phone  Corporate  Total 
Three Months Ended October 31, 2019            
Revenues $327,618  $12,627  $  $340,245 
Income (loss) from operations  4,372   (3,263)  (2,501)  (1,392)
Other operating expense, net  (2,150)  (365)  (260)  (2,775)
                 
Three Months Ended October 31, 2018                
Revenues $351,849  $10,467  $  $362,316 
Income (loss) from operations  4,169   (1,500)  (2,487)  182 
Other operating expense, net  (1,100)     (195)  (1,295)

 

Note 11—15—Commitments and Contingencies

 

Legal Proceedings

On July 31, 2013,April 12, 2019, Scarleth Samara filed a putative class action against IDT Telecom in the U.S. District Court for the Eastern District of Louisiana alleging certain violations of the Telephone Consumer Protection Act of 1991. Plaintiff alleges that in October of 2017, IDT Telecom sent unauthorized marketing messages to her cellphone. IDT Telecom filed a motion to compel arbitration. On or about August 19, 2019, the plaintiff agreed to dismiss the pending court action and the parties intend to proceed with arbitration. At this stage, the Company completedis unable to estimate its potential liability, if any. The Company intends to vigorously defend the claim.


On January 22, 2019, Jose Rosales filed a pro rata distributionputative class action against IDT America, IDT Domestic Telecom and IDT International in California state court alleging certain violations of employment law. Plaintiff alleges that these companies failed to compensate members of the common stockputative class in accordance with California law. The Company is evaluating the claims, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend the claims. In August 2019, the Company filed a cross complaint against Rosales alleging trade secret and other violations.

On May 21, 2018, Erik Dennis filed a putative class action against IDT Telecom and the Company in the U.S. District Court for the Northern District of Georgia alleging violations of Do Not Call Regulations promulgated by the U.S. Federal Trade Commission. On October 31, 2019, the parties settled the matter and filed a stipulation of dismissal with prejudice.

On May 2, 2018, Jean Carlos Sanchez filed a putative class action against IDT Telecom in the U.S. District Court for the Northern District of Illinois alleging that the Company sent unauthorized marketing messages to cellphones in violation of the Company’s subsidiary Straight PathTelephone Consumer Protection Act of 1991. On July 26, 2018, the parties filed a stipulation of dismissal. The Company is evaluating the claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend this matter.

On April 24, 2018, Sprint Communications Inc. (“Straight Path”)Company L.P. filed a patent infringement claim against the Company and certain of its affiliates in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,298,064; 6,330,224; 6,343,084; 6,452,932; 6,463,052; 6,473,429; 6,563,918; 6,633,561; 6,697,340; 6,999,463; 7,286,561; 7,324,534; 7,327,728; 7,505,454; and 7,693,131. Plaintiff was seeking damages and injunctive relief. On June 28, 2018, Sprint dismissed the complaint without prejudice. The Company is evaluating the underlying claim, and at this stage, is unable to the Company’s stockholdersestimate its potential liability, if any. The Company intends to vigorously defend any claim of record asinfringement of the close of business on July 25, 2013 (the “Straight Path Spin-Off”). listed patents.

On July 5, 2017, plaintiff JDS1, LLC, on behalf of itself and all other similarly situated stockholders of Straight Path, and derivatively on behalf of Straight Path as nominal defendant, filed a putative class action and derivative complaint in the Court of Chancery of the State of Delaware against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas that held record and beneficial ownership of certain shares of Straight Path he formerly held), Howard S. Jonas, and each of Straight Path’s directors. The complaint alleges that the Company aided and abetted Straight Path Chairman of the Board and Chief Executive Officer Davidi Jonas, and Howard S. Jonas in his capacity as controlling stockholder of Straight Path, in breaching their fiduciary duties to Straight Path in connection with the settlement of claims between Straight Path and the Company related to potential indemnification claims concerning Straight Path’s obligations under the Consent Decree it entered into with the Federal Communications Commission (“FCC”), as well as the proposed sale of Straight Path’s subsidiary Straight Path IP Group, Inc. (“SPIP”) to the Company in connection with that settlement. That action was consolidated with a similar action that was initiated by The Arbitrage Fund. The Plaintiffs are seeking, among other things, (i) a declaration that the action may be maintained as a class action or in the alternative, that demand on the Straight Path Board is excused; (ii) that the term sheet is invalid; (iii) awarding damages for the unfair price stockholders are receivingreceived in the merger between Straight Path and Verizon Communications Inc. for their shares of Straight Path’s Class B common stock; and (iv) ordering Howard S. Jonas, Davidi Jonas, and the Company to disgorge any profits for the benefit of the class Plaintiffs. On August 28, 2017, the Plaintiffs filed an amended complaint. On September 24, 2017, the Company filed a motion to dismiss the amended complaint. Following closing of the transaction, the Delaware Chancery Court denied the motion to dismiss. On February 22, 2019, the Delaware Supreme Court affirmed the denial of the motion to dismiss. The parties are engaged in discovery. The Company intends to vigorously defend the action. On November 20, 2017, the Delaware Chancery Court issued an order staying the case pending the closing of the transaction between Verizon and Straight Path on the grounds that the claims are not ripe. That transaction closed on February 28, 2018 and the Court was so notified. In the three and six months ended January 31, 2018,this matter (see Note 9). At this stage, the Company incurred legal fees of $0.2 million and $1.0 million, respectively, relatedis unable to this putative class action, which is included in “Other operating expense” in the accompanying consolidated statement of operations.

13

On May 5, 2004, the Company filed a complaint in the Supreme Court of the State of New York, County of New York, seeking injunctive relief and damages against Tyco Group, S.A.R.L., Tyco Telecommunications (US) Inc. (f/k/a TyCom (US) Inc.), Tyco International, Ltd., Tyco International (US) Inc., and TyCom Ltd. (collectively “Tyco”). The Company alleged that Tyco breached a settlement agreement that it had entered into with the Company to resolve certain disputes and civil actions among the parties. The Company alleged that Tyco did not provide the Company, as required under the settlement agreement, free of charge and for the Company’s exclusive use, a 15-year indefeasible right to use four Wavelengths in Ring Configuration (as defined in the settlement agreement) on a global undersea fiber optic network that Tyco was deploying at that time. After extensive proceedings, including several decisions and appeals, the New York Court of Appeals affirmed a lower court decision to dismiss the Company’s claim and denied the Company’s motion for re-argument of that decision. On June 23, 2015, the Company filed a new summons and complaint against Tyco in the Supreme Court of the State of New York, County of New York alleging that Tyco breached the settlement agreement. In September 2015, Tyco filed a motion to dismiss the complaint, which the Company opposed. Oral argument was held on March 9, 2016. On October 17, 2016, the judge granted Tyco’s motion and dismissed the complaint. In August 2017, the Company filed an appeal, which Tyco opposed. On November 22, 2017, oral argument was held on the appeal. On December 21, 2017, the Company’s appeal was denied. On January 22, 2018, the Company filed a motion for leave to appeal to the New York Court of Appeals. On February 6, 2018, Tyco opposed the Company’s motion. The Company awaits the court’s decision.estimate its potential liability, if any.

 

In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, the Company believes that none of the other legal proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

Sales Tax Contingency

On June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. The Company is evaluating its state tax filings with respect to the Wayfair decision and is in the process of reviewing its collection practices. It is possible that one or more jurisdictions may assert that the Company has liability for periods for which it has not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could materially and adversely affect the Company’s business, financial position and operating results. One or more jurisdictions may change their laws or policies to apply their sales, use or other similar taxes to the Company’s operations, and if such changes were made it could materially and adversely affect the Company’s business, financial position and operating results.


Regulatory FeesFee Audit

The Company’s 2017 FCC Form 499-A, which reports its calendar year 2016 revenue, related to payments due to the FCC, is currently under audit by the Internal Audit Division of the Universal Service Administrative Company. At JanuaryOctober 31, 20182019 and July 31, 2017,2019, the Company’s accrued expenses included $39.7$42.1 million and $43.5$44.7 million, respectively, for these regulatory fees for the years covered by the audit, as well as prior and subsequent years.

Purchase Commitments

TheAt October 31, 2019, the Company had purchase commitments of $18.7$30.7 million, at January 31, 2018, including the aggregate commitment of $26.5 million under the Reciprocal Services Agreementtelecom services commitments described below.

 

ReciprocalTelecom Services AgreementCommitments

In May 2019, the Company entered into a Memorandum of Understanding (“MOU”) with a telecom operator in Central America for among other things, termination of inbound and outbound international long-distance voice calls. The MOU is effective until December 31, 2019, unless superseded by the execution of a definitive agreement. The Company has committed to pay such telecom operator monthly committed amounts during the term of the MOU. The parties intend to draft and execute a definitive agreement as soon as practicable.

In August 2017, the Company entered into a Reciprocal Services Agreement with a telecom operator in Central America for a full range of services, including, but not limited to, termination of inbound and outbound international long-distance voice calls. The Company has committed to pay such telecom operator monthly committed amounts during the term of the agreement. In addition, under certain limited circumstances, the parties may renegotiate the amount of the monthly payments. In the event the parties do not agree on re-pricing terms after good faith negotiations, then either party has the right to terminate the agreement. Pursuant to the agreement, in September 2017, the Company deposited $11.75$9.2 million into an escrow account as security for the benefit of the telecom operator, which is included in “Other current assets” in the accompanying consolidated balance sheet.sheet based on the terms and conditions of the agreement.

Performance Bonds

IDT Payment Services and IDT Telecom haveThe Company has performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively.resellers. At JanuaryOctober 31, 2018,2019, the Company had aggregate performance bonds of $15.1$17.5 million outstanding.

 

SubstantiallyCompany Restricted Cash and Cash Equivalents

 

The Company treats unrestricted cash and cash equivalents held by IDT Payment Services, which provides the Company’s international money transfer services in the United States, as substantially restricted and unavailable for other purposes. At JanuaryOctober 31, 20182019 and July 31, 2017,2019, “Cash and cash equivalents” in the Company’s consolidated balance sheets included an aggregate of $10.0$9.8 million and $10.8$13.2 million, respectively, held by IDT Payment Services that was unavailable for other purposes.

 

14

FCC Investigation of Straight Path Spectrum LLC

Straight Path Communications Inc. Settlement Agreement and Mutual Release

The Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with Straight Path after the spin-off. On September 20, 2016, the Company received a letter of inquiry from the Enforcement Bureau of the FCC requesting certain information and materials related to an investigation of potential violations by Straight Path Spectrum LLC (formerly a subsidiary of the Company and currently a subsidiary of Straight Path) in connection with licenses to operate on the 28 GHz and 39 GHz bands of the Fixed Microwave Services. The Company has cooperated with the FCC in this matter and has responded to the letter of inquiry. If the FCC were to pursue separate action against the Company, the FCC could seek to fine or impose regulatory penalties or civil liability on the Company related to activities during the period of ownership by the Company.

 

The Separation and Distribution Agreement provides for the Company and Straight Path to indemnify each other for certain liabilities. The Company and Straight Path each communicated that it was entitled to indemnification from the other in connection with the inquiry described above and related matters. On October 24, 2017, the Company, Straight Path, SPIP and PR-SP IP Holdings LLC (“PR-SP”), an entity owned by Howard Jonas, entered into a Settlement Agreement and Release that provides for, among other things, the settlement and mutual release of potential liabilities and claims that may exist or arise under the Separation and Distribution Agreement between the Company and Straight Path. In exchange for the mutual release, the Company paid Straight Path an aggregate of $16 million in cash, Straight Path transferred to the Company its majority ownership interest in Straight Path IP Group Holding, Inc. (“New SPIP”), which holds the equity of SPIP, the entity that holds intellectual property primarily related to communications over computer networks, subject to the right to receive 22% of the net proceeds, if any, received by SPIP from licenses, settlements, awards or judgments involving any of the patent rights and certain transfers of the patents or related rights, that will be retained by Straight Path’s stockholders (such equity interest, subject to the retained interest right, the “IP Interest”), and the Company undertook certain funding and other obligations related to SPIP. The Settlement Agreement and Release allocates (i) $10 million of the payment and the retained interest right to the settlement of claims and the mutual release and (ii) $6 million to the transfer of the IP Interest. 

Consistent with the contemplated arrangement that was previously disclosed, on October 24, 2017, the Company sold its entire majority interests in New SPIP to PR-SP in exchange for $6 million and the assumption by PR-SP of the funding and other obligations undertaken by the Company.


Note 12—16—Other Income (Expense), Net

 

Other income (expense), net consists of the following:

 

 

Three Months Ended
January 31,

 

Six Months Ended
January 31,

  

Three Months Ended
October 31,

 
 

2018

 

2017

 

2018

 

2017

  

2019

 

2018

 
 (in thousands)  (in thousands) 
Foreign currency transaction gains (losses) $169  $(729) $(559) $1,330  $671  $(1,205)
(Loss) gain on sale of marketable securities  (16)  305   (9)  305 
Gain on investments  179   32   59   295 
Gain (loss) on investments  26   (46)
Other  38   (27)  53   44   (463)  (98)
Total other income (expense), net $370  $(419) $(456) $1,974  $234  $(1,349)

 

Note 13—Income Tax and New Jersey Corporation Business Tax

Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, which is commonly referred to as “The Tax Cuts and Jobs Act” (the “Tax Act”). The Tax Act reduces the U.S. federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, requires companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and makes other changes to the U.S. income tax code. Due to the Company’s July 31 fiscal year-end, the lower corporate income tax rate is phased in, resulting in a blended U.S. federal statutory tax rate of approximately 26.9% for the Company’s fiscal year ending July 31, 2018, and 21.0% for the Company’s fiscal years thereafter.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), expressing its views regarding the Financial Accounting Standards Board (“FASB”)’s Accounting Standards Codification 740,Income Taxes, in the reporting period that includes the enactment date of the Tax Act. SAB 118 recognizes that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. Specifically, SAB 118 allows a company to report provisional estimates in the reporting period that includes the enactment date if the company does not have the necessary information available, prepared, or fully analyzed for certain income tax effects of the Tax Act. The provisional estimates would be adjusted during a measurement period not to exceed 12 months from the enactment date of the Tax Act, at which time the accounting for the income tax effects of the Tax Act is required to be completed.

15

As of January 31, 2018, the Company had not completed its accounting for the income tax effects of the Tax Act; however, the Company had made a reasonable estimate of the effect on its existing AMT credit carryover. Because the AMT credit will be refundable if not utilized in the next four years, the Company reversed the valuation allowance that offset the AMT credit. As a result, in the three months ended January 31, 2018, the Company recorded a noncurrent receivable and an income tax benefit of $3.3 million for the anticipated refund. The reduction in the corporate tax rate is not expected to impact the Company’s results of operations or financial position in the foreseeable future because the income tax benefit from the reduced tax rate will be offset by the valuation allowance.

The transition tax is based on total post-1986 earnings and profits which were previously deferred from U.S. income taxes. The Company expects to utilize net operating loss carryforwards to offset any transition tax that it may incur. Therefore the Company did not record any provisional income tax expense for the transition tax for its foreign subsidiaries. At January 31, 2018, the undistributed earnings of the Company’s foreign subsidiaries continued to be permanently reinvested and the Company does not intend to repatriate any of the amounts. As a result, the Company has not provided for additional income or withholding taxes for the undistributed earnings or for any additional outside basis differences with respect to the foreign entities. The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”), which are not effective until August 1, 2018. The Company has not recorded any impact associated with either GILTI or BEAT in the three months ended January 31, 2018.

The Company anticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, the Company anticipates that the U.S. state jurisdictions will continue to determine and announce their conformity or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to the Company’s provisional estimates when the accounting for the income tax effects of the Tax Act is completed. The Company will continue to evaluate the impact of the Tax Act on its financial statements, and will record the effect of any reasonable changes in its estimates and adjustments.

Elmion Netherlands B.V. Deferred Tax Assets

In the six months ended January 31, 2017, the Company determined that its valuation allowance on the losses of Elmion Netherlands B.V., a Netherlands subsidiary, was no longer required due to an internal reorganization that generated income and a projection of income in future periods. The Company recorded a benefit from income taxes of $16.6 million in the six months ended January 31, 2017 from the full recognition of the Elmion Netherlands B.V. deferred tax assets.

New Jersey Corporation Business Tax

In September 2017, the Company, IDT Domestic Telecom, Inc. (a subsidiary of the Company) and certain other affiliates, were certified by the New Jersey Economic Development Authority as having met all of the requirements of the Grow New Jersey Assistance Act Tax Credit Program. The corporation business tax credits to be received are a maximum of $21.1 million. The Company may claim a tax credit each tax year for ten years beginning in 2017. The tax credit can be applied to 100% of the Company’s New Jersey tax liability each year, and the unused amount of the annual credit can be carried forward. In addition, the Company may apply for a tax credit transfer certificate to sell unused tax credits to another business. The tax credits must be sold for no less than 75% of the value of the tax credits. The tax credits are subject to reduction, forfeiture and recapture if, among other things, the number of full-time employees declines below the program or statewide minimum.

Note 14—17—Recently Issued Accounting Standard Not Yet Adopted

 

In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company expects to adopt this standard on August 1, 2018 using the modified retrospective approach. The Company has identified its main revenue streams, which include Boss Revolution PIN-less international calling revenue, wholesale carrier services revenue, and domestic and international airtime top-up revenue. The Company is currently reviewing contracts and other relevant documents related to its wholesale carrier services revenue to determine how to apply the new standard to this revenue stream. The Company expects to continue its review and evaluation for its other revenue streams in fiscal 2018. Currently, the Company cannot reasonably estimate the impact that the adoption of the standard will have on its consolidated financial statements.

16

In January 2016, the FASB issued an ASU to provide more information about recognition, measurement, presentation and disclosure of financial instruments. The amendments in the ASU include, among other changes, the following: (1) equity investments (except those accounted for under the equity method or that result in consolidation) will be measured at fair value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period to identify impairment of equity investments without readily determinable fair values, (3) financial assets and financial liabilities will be presented separately by measurement category and form of financial asset on the balance sheet or the notes to the financial statements, and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability exception will be available for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. These investments may be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will have to reassess at each reporting period whether an investment qualifies for this practicability exception. The Company will adopt the amendments in this ASU on August 1, 2018. The Company is evaluating the impact that the ASU will have on its consolidated financial statements. 

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

In June 2016, the FASBFinancial Accounting Standards Board issued an ASUAccounting Standards Update No. 2016-13,Financial Instruments—Credit Losses (Topic 326),Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss”current expected credit loss model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. The Company will adopt the new standard on August 1, 2020.2023. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.

 

In November 2016, the FASB issued an ASU that includes specific guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash flows. The ASU will be applied using a retrospective transition method to each period presented. The Company will adopt the amendments in this ASU on August 1, 2018. The adoption will impact the Company’s beginning of the period and end of the period cash and cash equivalents balance in its statement of cash flows, as well as its net cash provided by operating activities.

In January 2017, the FASB issued an ASU to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this ASU provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. Lastly, the ASU narrows the definition of the term output. The Company will adopt the amendments in this ASU on August 1, 2018. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.

17

In May 2017, the FASB issued an ASU to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification); (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The Company will adopt the amendments in this ASU prospectively to an award modified on or after on August 1, 2018. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.

In August 2017, the FASB issued an ASU intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge accounting guidance in U.S. GAAP. The amendments in this ASU are effective for the Company on August 1, 2019. Early application is permitted. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. The Company is evaluating the impact that this ASU will have on its consolidated financial statements.

18

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, 2017,2019, as filed with the U.S. Securities and Exchange Commission (or SEC).

 

As used below, unless the context otherwise requires, the terms “the Company,” “IDT,” “we,” “us,” and “our” refer to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation, and their subsidiaries, collectively.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017.2019. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for the fiscal year ended July 31, 2017.2019.

 

Overview

 

We are a multinational holding company with operations primarily in the telecommunications and payment industries. We have two reportable business segments, Telecom Platform& Payment Services and net2phone-Unified Communications as a Service, or net2phone-UCaaS (formerly known as UCaaS). Thenet2phone. Our Telecom Platform& Payment Services segment provides retail telecommunications and payment offerings as well as wholesale international long distancelong-distance traffic termination. The net2phone-UCaaSOur net2phone segment is comprised of (1) cableprovides unified cloud communications and telephony (2) cloud-based private branch exchange, or PBX, services offered to enterprise customers exclusively through value-added resellers, service providers, telecom agents and managed service providers, (3) Session Initiation Protocol, or SIP, trunking, which supports inbound and outbound domestic and international calling from an IP PBX, and (4) PicuP, a highly-automated business phone service that answers, routes and manages voice calls. Telecom Platform Services and net2phone-UCaaS comprise our IDT Telecom division. Operating segments not reportable individually are included in All Other. All Other includes our real estate holdings and other smaller businesses.

Since our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom’s businesses. IDT Telecom’s revenues represented 99.8% and 99.9% of our total revenues in the six months ended January 31, 2018 and 2017, respectively.customers.

 

On or about March 26, 2018, we expect to spin-offcompleted a pro rata distribution of the common stock of our former subsidiary, Rafael Holdings, Inc., or RHI,Rafael, to our stockholders so that RHI will be a separate publicly traded company. Approval of the spin-off by our stockholders is not required. Our Board of Directors believes that the spin-off will allow RHI to better focus on its strategic mission and that its potential can be better realized as an independent entity. The spin-off of RHI will occur by way of a pro rata distribution of RHI’s capital stock to our stockholders. On the distribution date, each of our stockholdersrecord as of the record date for the distributionclose of business on March 13, 2018, will receive one share of RHI Class A common stock for every two shares of our Class A common stockwhich we refer to as the Rafael Spin-Off. We lease office space and one share of RHI Class B common stock for every two shares of our Class B common stock. Completion of the RHI spin-off is subject to receipt of a favorable opinion as to the spin-off’s tax-free status.

RHI owns the commercial real estate assets held by us and interestsparking in two clinical stage pharmaceutical companies. The commercial real estate holdings consist of our headquartersRafael’s building and its associated publicparking garage inlocated at 520 Broad St, Newark, New Jersey, an office/data center building in Piscataway, New Jersey and a portion of a buildingJersey. We also lease office space in Israel that hosts offices for usfrom Rafael. The Newark lease expires in April 2025 and certain affiliates. The pharmaceutical holdings include debt intereststhe Israel lease expires in July 2025. In the three months ended October 31, 2019 and warrants2018, we incurred rent expense of $0.5 million and $0.4 million, respectively, in connection with the Rafael Pharmaceuticals, Inc., or Rafael Pharma, which is a clinical stage, oncology-focused pharmaceutical company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells, and a majority equity interest in Lipomedix Pharmaceuticals Ltd., or Lipomedix, a pharmaceutical development company based in Israel. In addition, prior to the spin-off, we intend to transfer assets to RHI such that, at the time of the spin-off, RHI will have approximately $44 million in cash, cash equivalents, and marketable securities, plus $6 million in hedge fund and other investments.leases.

19

 

Critical Accounting Policies

 

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal 2017.year ended July 31, 2019. 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 the allowance for doubtful accounts, goodwill, valuation of long-lived and intangible assets, income taxes and regulatory agency fees, and IDT Telecom direct cost of revenues—disputed amounts. 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 our Annual Report on Form 10-K for the fiscal 2017.year ended July 31, 2019.

 


Recently Issued Accounting Standard Not Yet Adopted

 

In May 2014,June 2016, the Financial Accounting Standards Board or FASB, and the Internationalissued Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede mostUpdate No. 2016-13,Financial Instruments—Credit Losses (Topic 326),Measurement of the current revenue recognition guidance under U.S. GAAP and InternationalCredit Losses on Financial Reporting Standards, or IFRS. The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. We expect to adopt this standard on August 1, 2018 using the modified retrospective approach. We have identified our main revenue streams, which include Boss Revolution PIN-less international calling revenue, wholesale carrier services revenue, and domestic and international airtime top-up revenue. We are currently reviewing contracts and other relevant documents related to our wholesale carrier services revenue to determine how to apply the new standard to this revenue stream. We expect to continue our review and evaluation for our other revenue streams in fiscal 2018. Currently, we cannot reasonably estimate the impact that the adoption of the standard will have on our consolidated financial statements.

In January 2016, the FASB issued an ASU to provide more information about recognition, measurement, presentation and disclosure of financial instruments. The amendments in the ASU include, among other changes, the following: (1) equity investments (except those accounted for under the equity method or that result in consolidation) will be measured at fair value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period to identify impairment of equity investments without readily determinable fair values, (3) financial assets and financial liabilities will be presented separately by measurement category and form of financial asset on the balance sheet or the notes to the financial statements, and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability exception will be available for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. These investments may be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will have to reassess at each reporting period whether an investment qualifies for this practicability exception. We will adopt the amendments in this ASU on August 1, 2018. We are evaluating the impact that the ASU will have on our consolidated financial statements.

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

In June 2016, the FASB issued an ASUInstruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss”current expected credit loss model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. We will adopt the new standard on August 1, 2020.2023. We are evaluating the impact that the new standard will have on our consolidated financial statements.

 

20

In November 2016, the FASB issued an ASU that includes specific guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash flows. The ASU will be applied using a retrospective transition method to each period presented. We will adopt the amendments in this ASU on August 1, 2018. The adoption will impact our beginning of the period and end of the period cash and cash equivalents balance in our statement of cash flows, as well as our net cash provided by operating activities.

In January 2017, the FASB issued an ASU to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this ASU provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. Lastly, the ASU narrows the definition of the term output. We will adopt the amendments in this ASU on August 1, 2018. We are evaluating the impact that the new standard will have on our consolidated financial statements.

In May 2017, the FASB issued an ASU to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification); (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. We will adopt the amendments in this ASU prospectively to an award modified on or after on August 1, 2018. We are evaluating the impact that the new standard will have on our consolidated financial statements.

In August 2017, the FASB issued an ASU intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge accounting guidance in U.S. GAAP. The amendments in this ASU are effective for us on August 1, 2019. Early application is permitted. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. We are evaluating the impact that this ASU will have on our consolidated financial statements.

Results of Operations

 

Three and Six Months Ended JanuaryOctober 31, 20182019 Compared to Three and Six Months Ended JanuaryOctober 31, 20172018

 

We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.

21

Telecom Platform& Payment Services Segment

Beginning in the first quarter of fiscal 2018, the Telecom Platform Services segment includes Consumer Phone Services, which was previously reported as a separate segment. Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Comparative results have been reclassified and restated as if Consumer Phone Services was included in Telecom Platform Services in all periods presented.

 

Telecom Platform& Payment Services, which represented 97.8%96.3% and 97.9%97.1% of our total revenues in the sixthree months ended JanuaryOctober 31, 20182019 and 2017,2018, respectively, markets and distributes multiplethe following communications and payment services across three broad business verticals:services:

 

Retail CommunicationsCore includes our three largest communications and payments offerings by revenue: BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States, Carrier Services, which provides international long-distance calling products primarilytermination and outsourced traffic management solutions to foreign-born communitiestelecoms worldwide, with its core marketsand Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging and data credits to mobile accounts internationally and domestically. Core also includes smaller communications and payments offerings, many in the United States;harvest mode.

Wholesale Carrier Services isGrowth comprises National Retail Solutions, which operates a global telecom carrier, terminating international long distance calls around the worldpoint-of-sale, or POS, terminal-based network for Tier 1 fixed line and mobile network operators, as well as other service providers; and
Payment Services provides payment offerings, including international and domestic airtime top-up andretailers, BOSS Revolution Money Transfer, an international money transfer.remittance service for customers in the United States, and BOSS Revolution Mobile, a mobile virtual network operator which provides mobile phone service over a third-party network for customers in the United States.

 

Our Telecom & Payment Services segment’s most significant revenue streams are from BOSS Revolution Calling, Mobile Top-Up, and Carrier Services. BOSS Revolution Calling and Mobile Top-Up are sold direct-to-consumers and through distributors and retailers. We receive payments for BOSS Revolution Calling, traditional calling cards, and Mobile Top-Up prior to providing the services. We recognize the revenue when services are provided to the customer. International prepaid calling revenues tend to be somewhat seasonal, with the second fiscal quarter (which contains Christmas and New Year’s Day) and the fourth fiscal quarter (which contains Mother’s Day and Father’s Day) typically showing higher minute volumes.

  Three months ended
January 31,
  Change  Six months ended
January 31,
  Change 
  2018  2017  $  %  2018  2017  $  % 
  (in millions) 
Revenues $387.1  $359.9  $27.2   7.5% $772.1  $721.4  $50.7   7.0%
Direct cost of revenues  334.6   308.0   26.6   8.6   668.6   617.7   50.9   8.2 
Selling, general and administrative  43.6   40.7   2.9   6.8   85.7   81.8   3.9   4.7 
Depreciation  4.1   4.0   0.1   3.5   8.1   8.2   (0.1)  (0.7)
Severance  0.2      0.2   nm   0.6      0.6   nm 
Income from operations $4.6  $7.2  $(2.6)  (36.2)% $9.1  $13.7  $(4.6)  (33.4)%

 

  Three months ended
October 31,
  Change 
  2019  2018  $  % 
  (in millions) 
Revenues $327.6  $351.8  $(24.2)  (6.9)%
Direct cost of revenues  276.5   301.6   (25.1)  (8.4)
Selling, general and administrative  40.8   40.9   (0.1)  (0.1)
Depreciation and amortization  3.2   4.0   (0.8)  (21.2)
Severance  0.6      0.6   nm 
Other operating expense, net  2.1   1.1   1.0   94.5 
Income from operations $4.4  $4.2  $0.2   4.9%

 

nm—not meaningful

20

 

Revenues. Telecom Platform& Payment Services’ revenues and minutes of use and average revenue per minute for the three months ended JanuaryOctober 31, 20182019 and 20162018 consisted of the following:

 

  

Three months ended
January 31,

  

Change

  

Six months ended
January 31,

  

Change

 
  

2018

  

2017

  

$/#

  

%

  

2018

  

2017

  

$/#

  

%

 
  (in millions, except revenue per minute) 
Telecom Platform Services Revenues                                
Retail Communications $145.2  $154.6  $(9.4)  (6.1)% $291.4  $313.1  $(21.7)  (6.9)%
Wholesale Carrier Services  172.5   145.8   26.7   18.3   343.0   289.1   53.9   18.6 
Payment Services  69.4   59.5   9.9   16.5   137.7   119.2   18.5   15.5 
Total Telecom Platform Services revenues $387.1  $359.9  $27.2   7.5% $772.1  $721.4  $50.7   7.0%
Minutes of use                                
Retail Communications  1,416   1,708   (292)  (17.1)%  2,889   3,537   (648)  (18.3)%
Wholesale Carrier Services  5,385   5,057   328   6.5   10,601   9,405   1,196   12.7 
Total minutes of use  6,801   6,765   36   0.5%  13,490   12,942   548   4.2%
Average revenue per minute                                
Retail Communications $0.1026  $0.0905  $0.0121   13.3% $0.1009  $0.0885  $0.0124   14.0%
Wholesale Carrier Services  0.0320   0.0288   0.0032   11.1   0.0324   0.0307   0.0017   5.2 

  Three months ended
October 31,
  Change 
  2019  2018  $/#  % 
  (in millions) 
Core Operations:            
BOSS Revolution Calling $116.3  $123.5  $(7.2)  (5.9)%
Carrier Services  113.5   142.2   (28.7)  (20.2)
Mobile Top-Up  76.8   65.3   11.5   17.6 
Other  11.2   14.8   (3.6)  (23.8)
Growth  9.8   6.0   3.8   63.1 
Total revenues $327.6  $351.8  $(24.2)  (6.9)%
Minutes of use                
BOSS Revolution Calling  1,002   1,108   (106)  (9.6)%
Carrier Services  4,314   4,508   (194)  (4.3)

 

22

Retail Communications’ revenueRevenues and minutes of use from BOSS Revolution Calling decreased 6.1% and 6.9% in the three and six months ended JanuaryOctober 31, 2018, respectively,2019 compared to the similar periodsperiod in fiscal 2017,2019 in line with our expectations. BOSS Revolution Calling continues to be impacted by persistent, market-wide trends, including the proliferation of unlimited calling plans offered by wireless carriers and Retail Communications’ minutes of use decreased 17.1% and 18.3% in the three and six months ended January 31, 2018, respectively, compared to the similar periods in fiscal 2017. The decrease in Retail Communications’ revenues and minutes of use was primarily due to increased competition from wireless network operators, mobile virtual network operators, and alternative communications solutions such asthe increasing penetration of free and paid over-the-top voice and messaging services. Revenue

Revenues and minutes of use from our Boss Revolution international calling service, which is Retail Communications’ most significant offering, declined 4.2% and 4.8%Carrier Services decreased in the three and six months ended JanuaryOctober 31, 2018, respectively,2019 compared to the similar periodsperiod in fiscal 2017, and Boss Revolution’s minutes of use declined 14.1% and 15.3% in2019. Over the three and six months ended January 31, 2018, respectively, comparedlong-term, we expect that Carrier Services will continue to the similar periods in fiscal 2017. In addition, the decrease in Retail Communications’ revenue and minutes of use in the three and six months ended January 31, 2018 compared to the similar periods in fiscal 2017 was due to continuing declines in Europe, South America and Asia, and continuing declinesbe adversely impacted as communications globally transition away from traditional disposable calling cards in the U.S. Retail Communications’ revenue comprised 37.8% and 43.4% of Telecom Platform Services’ revenue in the six months ended January 31, 2018 and 2017, respectively.

Wholesale Carrier Services’ revenue increased 18.3% and 18.6% in the three and six months ended January 31, 2018, respectively, compared to the similar periods in fiscal 2017, and Wholesaleinternational long-distance voice operators. However, Carrier Services’ minutes of use increased 6.5% and 12.7%revenues will likely continue to fluctuate significantly from quarter-to-quarter, as we seek to maximize economics rather than necessarily sustain minutes of use or revenues.

Revenues from Mobile Top-Up increased in the three and six months ended JanuaryOctober 31, 2018, respectively,2019 compared to the similar periodsperiod in fiscal 2017,2019 due to an increase in traditional carrierexpanded bundled offerings of minutes, text and data, and growth from the addition of use and revenues. Wholesale Carrier Services’ revenue comprised 44.4% and 40.1% of Telecom Platform Services’ revenue in the six months ended January 31, 2018 and 2017, respectively.new mobile partners.

 

Payment Services’ revenueRevenues from our Growth initiatives increased 16.5% and 15.5% in the three and six months ended JanuaryOctober 31, 2018, respectively,2019 compared to the similar periodsperiod in fiscal 2017 due2019. BOSS Revolution Money Transfer revenues increased 56% to increases in revenue from our international and domestic airtime top-up service, our international money transfer service (specifically transactions originating from our direct to consumer channels), and our National Retail Solutions point-of-sale terminal business. The increase in revenues from airtime top-up$7.4 million in the three and six months ended JanuaryOctober 31, 20182019 compared to the similar periodsperiod in fiscal 2017 reflected growth2019 as revenues from new mobile partnersboth the direct-to-consumer and diversification of airtime top-up offerings. We have money transmitter licenses in 47 of the 49 states that require such a license, as well as in Puerto Rico and Washington, D.C. Future growth in Payment Services is expectedretail channels increased. Revenues from the BossBOSS Revolution Money app that featuresTransfer direct-to-consumer increased 69% to $4.6 million in the three months ended October 31, 2019 compared to the similar period in fiscal 2019 due to expansion of our international money transfers, airtime top-updisbursement network, enhanced transaction fulfillment technology, and electronic gift cards.intensified marketing. National Retail Solutions is also expected to continue expanding. Payment Services’ revenue comprised 17.8% and 16.5% of Telecom Platform Services’ revenueSolutions’ revenues increased 93% in the sixthree months ended JanuaryOctober 31, 20182019 compared to the similar period in fiscal 2019 driven by expansion of its POS network to additional retailers and 2017, respectively.increased revenue from advertising, data analytics and credit card processing that supplement the monthly recurring fees generated by the use of its terminals.

 

 Three months ended
January 31,
     Six months ended
January 31,
  Three months ended
October 31,
    
 2018 2017 Change 2018 2017 Change  2019  2018  Change 
Telecom Platform Services                        
Telecom & Payment Services            
Direct cost of revenues as a percentage of revenues  86.5%  85.6%  0.9%  86.6%  85.6%  1.0%  84.4%  85.7%  (1.3)%

 

Direct Cost of Revenues. Direct cost of revenues in Telecom Platform& Payment Services increaseddecreased in the three and six months ended JanuaryOctober 31, 20182019 compared to the similar periodsperiod in fiscal 2017 mainly2019 primarily due to the 6.5% and 12.7% increasedecreases in Wholesale Carrier Services’ minutesand BOSS Revolution Calling’s direct cost of userevenues in the three and six months ended JanuaryOctober 31, 2018, respectively,2019 compared to the similar periodsperiod in fiscal 2017.2019, partially offset by an increase in Mobile Top-Up’s direct cost of revenues in the three months ended October 31, 2019 compared to the similar period in fiscal 2019. Direct cost of revenues as a percentage of revenues in Telecom Platform& Payment Services increased 90 and 100decreased 130 basis points in the three and six months ended JanuaryOctober 31, 2018, respectively,2019 compared to the similar periodsperiod in fiscal 20172019 primarily due to a shift to higher margin traffic in the revenue mix within our Telecom Platform Services segment towards Wholesale Carrier Services which typically exhibits higher direct costresulting from the implementation of revenues asan outsourcing agreement in a percentagekey calling corridor, and the continued migration of revenues than our Retail Communications’ offerings.BOSS Revolution Calling customers to the direct-to-consumer channel.

 

Selling, General and Administrative. Selling, general and administrative expense in our Telecom Platform& Payment Services segment increaseddecreased in the three months ended JanuaryOctober 31, 20182019 compared to the similar period in fiscal 20172019 primarily due to increasesa decrease in employee compensation, and credit card charges. Selling, general and administrative expense in our Telecom Platform Services segment increased in the six months ended January 31, 2018 compared to the similar period in fiscal 2017 primarily due to increases in employee compensation and credit card charges, partially offset by a decrease in marketing expense. The increase in credit card charges relates to increases in Boss Revolutionstock-based compensation and international money transfer direct to consumer transactions.marketing expense. As a percentage of Telecom Platform& Payment Services’ revenue, Telecom Platform& Payment Services’ selling, general and administrative expense decreasedincreased to 11.2%12.5% from 11.3%11.6% in the three months ended JanuaryOctober 31, 20182019 and 2017, respectively, and decreased to 11.1% from 11.3% in the six months ended January 31, 2018, and 2017, respectively.

 


Depreciation and Amortization. Depreciation and amortization expense increased 3.5%in our Telecom & Payment Services segment decreased in the three months ended JanuaryOctober 31, 20182019 compared to the similar period in fiscal 2017,2019 as more of our property, plant and was substantially unchanged in the six months ended January 31, 2018 comparedequipment became fully depreciated, partially offset by depreciation of equipment added to the similar period in fiscal 2017. Depreciationour telecommunications network and amortization expense increased due to increases in depreciation of capitalized costs of consultants and employees developing internal use software.

 

Severance. In the three and six months ended JanuaryOctober 31, 2018,2019, Telecom Platform& Payment Services completed an adjustment to its workforce and incurred severance expense of $0.2$0.6 million.

Other Operating Expense, net. In the three months ended October 31, 2019 and 2018, Telecom & Payment Services recorded accruals for non-income related taxes related to one of its foreign subsidiaries of $2.1 million and $0.6$1.1 million, respectively.

 

23

net2phone Segment

 

net2phone-UCaaS Segment

  Three months ended
January 31,
  Change  Six months ended
January 31,
  Change 
  2018  2017  $  %  2018  2017  $  % 
  (in millions) 
Revenues $8.3  $7.1  $1.2   16.2% $16.1  $14.3  $1.8   12.7%
Direct cost of revenues  2.6   2.9   (0.3)  (10.7)  5.1   6.2   (1.1)  (17.7)
Selling, general and administrative  5.3   3.8   1.5   40.0   10.0   7.1   2.9   41.0 
Depreciation  1.2   0.9   0.3   31.4   2.5   1.6   0.9   51.5 
Loss from operations $(0.8) $(0.5) $(0.3)  (70.3)% $(1.5) $(0.6) $(0.9)  (129.3)%

Revenues. net2phone-UCaaS’ revenue increased 16.2%Our net2phone segment, which represented 3.7% and 12.7%2.9% of our total revenues in the three and six months ended JanuaryOctober 31, 2019 and 2018, respectively, is comprised of two verticals:

net2phone-Unified Communications as a Service, or UCaaS, a unified cloud communications service for businesses in North and South America and certain other international markets; and

net2phone-Platform Services, which provides telephony services to cable operators and other businesses by leveraging a common technology platform.

  Three months ended
October 31,
  Change 
  2019  2018  $  % 
  (in millions) 
Revenues $12.6  $10.5  $2.1   20.6%
Direct cost of revenues  3.0   3.0      (1.2)
Selling, general and administrative  10.4   7.4   3.0   41.1 
Depreciation and amortization  2.1   1.6   0.5   36.1 
Other operating expense, net  0.4      0.4   nm 
Loss from operations $(3.3) $(1.5) $(1.8)  (117.5)%

nm—not meaningful

Revenues. net2phone’s revenues in the three months ended October 31, 2019 and 2018 consisted of the following:

  Three months ended
October 31,
  Change 
  2019  2018  $  % 
  (in millions) 
net2phone-UCaaS $7.2  $4.8  $2.4   50.3%
net2phone-Platform Services  5.4   5.7   (0.3)  (4.5)
Total revenues $12.6  $10.5  $2.1   20.6%

net2phone-UCaaS’s revenues increased in the three months ended October 31, 2019 compared to the similar periodsperiod in fiscal 2017 primarily due to continued2019 driven by the expansion of its U.S. channel partner network and growth from its cloud-based communications offering – bothin South American markets. On September 14, 2018, net2phone-UCaaS entered the Canadian market through the acquisition of Versature Corp. Versature’s revenues increased $1.0 million in the U.S. and in South America. In light ofthree months ended October 31, 2019 compared to the strong growth in the cloud-based communications offering in Argentina and Brazil, net2phone-UCaaS anticipates additional international expansion in South America and Asiasimilar period in fiscal 2018.2019.

 

  Three months ended
January 31,
     Six months ended
January 31,
    
  2018  2017  Change  2018  2017  Change 
net2phone-UCaaS                        
Direct cost of revenues as a percentage of revenues  31.5%  41.0%  (9.5)%  31.8%  43.5%  (11.7)%

  Three months ended
October 31,
    
  2019  2018  Change 
net2phone            
Direct cost of revenues as a percentage of revenues  23.7%  29.0%  (5.3)%

 


Direct Cost of Revenues. Direct cost of revenues in net2phone-UCaaS decreased in the three and six months ended JanuaryOctober 31, 20182019 compared to the similar periodsperiod in fiscal 20172019 primarily because of a decrease in the direct cost of revenues in cable telephony service, net2phone-Platform Services,partially offset by an increase in the direct cost of revenues of cloud-based communications.in net2phone-UCaaS. Direct cost of revenues as a percentage of revenues in net2phone-UCaaS decreased 950 and 1,170530 basis points in the three and six months ended JanuaryOctober 31, 2018, respectively,2019 compared to the similar periodsperiod in fiscal 2017 primarily2019 because of the decrease in the direct cost of revenues in cable telephony service, as well as decreases in direct cost of revenues as a percentage of revenues in cloud-based communicationsboth net2phone-UCaaS and SIP trunking.net2phone-Platform Services.

 

Selling, General and Administrative. Selling, general and administrative expense in our net2phone-UCaaS segment increased in the three and six months ended JanuaryOctober 31, 20182019 compared to the similar periodsperiod in fiscal 20172019 due to an increaseincreases in employee compensation, resulting from an increasesales commissions, and marketing expense. As a percentage of net2phone’s revenues, net2phone’s selling, general and administrative expenses were 82.5% and 70.5% in the number of salesthree months ended October 31, 2019 and information technology employees. We increased employees and compensation in our net2phone-UCaaS segment as we invested in the growth of net2phone-UCaaS’ lines of business.

2018, respectively.

 

Depreciation.Depreciation and Amortization. The increase in depreciation and amortization expense in the net2phone-UCaaS segment in the three and six months ended JanuaryOctober 31, 20182019 compared to the similar periodsperiod in fiscal 20172019 was due to increases in depreciation of net2phone-UCaaS’ customer premises equipment, additional depreciation and amortization due to the acquisition of Versature, and capitalized costs of consultants and employees developing internal use software to support our new products.

All Other

Currently, operating segments not reportable individually are included in All Other.

  Three months ended
January 31,
  Change  Six months ended
January 31,
  Change 
  2018  2017  $  %  2018  2017  $  % 
  (in millions) 
Revenues $0.5  $0.5  $   5.8% $1.2  $1.0  $0.2   23.0%
Direct cost of revenues                        
Selling, general and administrative  1.1      1.1   nm   2.0      2.0   nm 
Depreciation  0.4   0.4      3.4   0.8   0.8      3.2 
(Loss) income from operations $(1.0) $0.1  $(1.1)  nm  $(1.6) $0.2  $(1.8)  nm 

nm—not meaningful

 

Revenues.Other Operating Expense, net.In April 2016, we entered into two leases with tenants for space in our headquarters building at 520 Broad Street, Newark, New Jersey. One lease is for a portion Other operating expense, net of the sixth floor for an eleven-year term, of which the first six years are non-cancellable. The other lease is for a portion of the ground floor and basement for a term of ten years and seven months. The tenant under this lease has the right to extend the term for three consecutive periods of five years each. Rental income from the first lease commenced in December 2016, and rental income from the second lease commenced in March 2017. In addition, in April 2017, we entered into a third lease for another portion of the ground floor for a term of ten years, four months. Rental income from the third lease commenced in March 2018.

24

Selling, General and Administrative. Selling, general and administrative expense increased$0.4 million in the three and six months ended JanuaryOctober 31, 2018 compared to the similar periods in fiscal 2017 primarily2019 was due to increases in expensesour indemnification of a net2phone cable telephony customer related to RHI, including Lipomedix, and our commercial real estate. We began consolidating Lipomedix in November 2017 after we purchased additional shares and increased our ownership to 50.6% ofpatent infringement claims brought against the issued and outstanding ordinary shares of Lipomedix. Selling, general and administrative expense of Lipomedix in the three and six months ended January 31, 2018 was $0.4 million.customer.

 

Corporate

 

  

Three months ended
January 31,

  

Change

  

Six months ended
January 31,

  

Change

 
  

2018

  

2017

  

$

  

%

  

2018

  

2017

  

$

  

%

 
  (in millions) 
General and administrative $2.4  $2.8  $(0.4)  (13.4)% $4.8  $3.9  $0.9   23.7%
Other operating expense  0.9   0.9      4.8   1.6   1.1   0.5   49.3 
                                 
Loss from operations $3.3  $3.7  $(0.4)  (11.4)% $6.4  $5.0  $1.4   29.9%

  Three months ended
October 31,
  Change 
  2019  2018  $  % 
  (in millions) 
General and administrative expenses $2.2  $2.3  $(0.1)  (2.2)%
Other operating expense, net  0.3   0.2   0.1   33.6 
Loss from operations $2.5  $2.5  $   0.6%

 

Corporate costs include compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development,charitable contributions, travel and other corporate-related general and administrative expenses, including, among others, facilities costs, charitable contributions and travel.expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.

General and Administrative. The decrease in Corporate general and administrative expense decreased in the three months ended JanuaryOctober 31, 20182019 compared to the similar period in fiscal 2017 was2019 primarily due tobecause of decreases in employee compensationlegal, professional, and stock-based compensation expense,consulting fees, partially offset by an increase in legal fees. The increase in Corporate general and administrative expense in the six months ended January 31, 2018 compared to the similar period in fiscal 2017 was primarily due to increases in legal fees and employee compensation, partially offset by a decrease in stock-based compensation expense.compensation. As a percentage of our total consolidated revenues, Corporate general and administrative expense werewas 0.7% and 0.6% and 0.8% in the three months ended JanuaryOctober 31, 2019 and 2018, and 2017, respectively, and 0.6% and 0.5% in the six months ended January 31, 2018 and 2017, respectively.

 

Other Operating Expense, net. On July 31, 2013, we completed a pro rata distribution of the common stock of our former subsidiary Straight Path Communications Inc., or Straight Path, to our stockholders. In the three and six months ended January 31, 2018, we incurred legal fees of $0.2 million and $1.0 million, respectively, related to the Straight Path stockholders’ putative class action and derivative complaint. In addition,As discussed in the three and six months ended January 31, 2018, we incurred fees of $0.6 million related to other legal matters. In the three and six months ended January 31, 2017, we incurred legal fees of $0.9 million and $1.1 million, respectively, related to a letter of inquiry from the Federal Communications Commission, or FCC, in connection with its investigation of potential license violations by Straight Path Spectrum LLC (a subsidiary of Straight Path and formerly a subsidiary of ours). (See Note 1115 to the Consolidated Financial Statements included in Item 1 to Part I of thethis Quarterly Report on Form 10-Q).10-Q, a putative class action on behalf of Straight Path’s stockholders and derivative complaint was filed naming us, among others. In the three months ended October 31, 2019 and 2018, we incurred legal fees of $0.7 million and $0.2 million, respectively, related to this action. Also, in the three months ended October 31, 2019, we recorded insurance proceeds for this matter of $0.4 million.

 


Consolidated

 

The following is a discussion of our consolidated stock-based compensation expense, and our consolidated income and expense line items below income from operations.

Stock-Based Compensation Expense. Stock-based compensation expense included in consolidated selling, general and administrative expenses was $1.0$1.4 million and $1.4$0.4 million in the three months ended JanuaryOctober 31, 20182019 and 2017, respectively, and $1.8 million and $2.1 million in the six months ended January 31, 2018, and 2017, respectively. At JanuaryOctober 31, 2018,2019, unrecognized compensation cost related to non-vested stock-based compensation including stock options and restricted stock, was an aggregate of $4.1$3.9 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting period that ends in 2020.2022.

 

25

  

Three months ended
January 31,

  

Change

  

Six months ended
January 31,

  

Change

 
  2018  

2017

  

$

  

%

  

2018

  

2017

  

$

  

%

 
  (in millions) 
(Loss) income from operations $(0.5) $3.1  $(3.6)  (115.3)% $(0.4) $8.3  $(8.7)  (104.8)%
Interest income, net  0.3   0.3      (7.4)  0.6   0.6      6.4 
Other income (expense), net  0.4   (0.4)  0.8   188.3   (0.4)  2.0   (2.4)  (123.1)
Benefit from (provision for) income taxes  1.5   (1.7)  3.2   186.0   0.1   12.7   (12.6)  (99.2)
Net income (loss)  1.7   1.3   0.4   34.4   (0.1)  23.6   (23.7)  (100.5)
Net income attributable to noncontrolling interests  (0.2)  (0.4)  0.2   54.5   (0.5)  (0.8)  0.3   38.0 
Net income (loss) attributable to IDT Corporation $1.5  $0.9  $0.6   73.3% $(0.6) $22.8  $(23.4)  (102.5)%

  Three months ended
October 31,
  Change 
  2019  2018  $  % 
  (in millions) 
(Loss) income from operations $(1.4) $0.2  $(1.6)  (864.8)%
Interest income, net  0.3   0.1   0.2   151.9 
Other income (expense), net  0.2   (1.3)  1.5   117.3 
Provision for income taxes  (0.5)  (1.0)  0.5   42.9 
Net loss  (1.4)  (2.0)  0.6   28.8 
Net income attributable to noncontrolling interests  (0.1)  (0.3)  0.2   69.8 
Net loss attributable to IDT Corporation $(1.5) $(2.3) $0.8   34.2%

 

Other Income (Expense), net. Other income (expense), net consists of the following:

 

  

Three months ended
January 31,

  

Six months ended
January 31,

 
  

2018

  

2017

  

2018

  

2017

 
  (in millions) 
Foreign currency transaction gains (losses) $0.2  $(0.7) $(0.6) $1.3 
Gain on sale of marketable securities     0.3      0.3 
Gain on investments  0.2      0.1   0.3 
Other        0.1   0.1 
Total other income (expense), net $0.4  $(0.4) $(0.4) $2.0 

  Three months ended
October 31,
 
  2019  2018 
  (in millions) 
Foreign currency transaction gains (losses) $0.7  $(1.2)
Other  (0.5)  (0.1)
Total other income (expense), net $0.2  $(1.3)

 

Benefit from (Provision for)Provision for Income Taxes. On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, which is commonly referred to as “The Tax Cuts and Jobs Act”, or the Tax Act. The Tax Act provides for comprehensive tax legislation that reduces the U.S. federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, requires companies to pay a one-time repatriation tax, or transition tax, on earnings of certain foreign subsidiaries that were previously tax deferred, and makes other changes to the U.S. income tax code. Due to our July 31 fiscal year-end, the lower corporate income tax rate is phased in, resulting in a blended U.S. federal statutory tax rate of approximately 26.9% for our fiscal year ending July 31, 2018, and 21.0% for our fiscal years thereafter.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, or SAB 118, expressing its views regarding the FASB’s Accounting Standards Codification 740,Income Taxes, in the reporting period that includes the enactment date of the Tax Act. SAB 118 recognizes that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. Specifically, SAB 118 allows a company to report provisional estimates in the reporting period that includes the enactment date if the company does not have the necessary information available, prepared, or fully analyzed for certain income tax effects of the Tax Act. The provisional estimates would be adjusted during a measurement period not to exceed 12 months from the enactment date of the Tax Act, at which time the accounting for the income tax effects of the Tax Act is required to be completed.

As of January 31, 2018, we had not completed our accounting for the income tax effects of the Tax Act; however, we had made a reasonable estimate of the effect on our existing AMT credit carryover. Because the AMT credit will be refundable if not utilized in the next four years, we reversed the valuation allowance that offset the AMT credit. As a result, in the three months ended January 31, 2018, we recorded a noncurrent receivable and an income tax benefit of $3.3 million for the anticipated refund. The reduction in the corporate tax rate is not expected to impact our results of operations or financial position in the foreseeable future because the income tax benefit from the reduced tax rate will be offset by the valuation allowance.

The transition tax is based on total post-1986 earnings and profits which were previously deferred from U.S. income taxes. We expect to utilize net operating loss carryforwards to offset any transition tax that we may incur. Therefore we did not record any provisional income tax expense for the transition tax for our foreign subsidiaries. At January 31, 2018, the undistributed earnings of our foreign subsidiaries continued to be permanently reinvested and we do not intend to repatriate any of the amounts. As a result, we have not provided for additional income or withholding taxes for the undistributed earnings or for any additional outside basis differences with respect to the foreign entities. We continue to review the anticipated impacts of the global intangible low taxed income, or GILTI, and base erosion anti-abuse tax, or BEAT, which are not effective until August 1, 2018. We have not recorded any impact associated with either GILTI or BEAT in the three months ended January 31, 2018.

26

We anticipate that our assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, we anticipate that the U.S. state jurisdictions will continue to determine and announce their conformity or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to our provisional estimates when the accounting for the income tax effects of the Tax Act is completed. We will continue to evaluate the impact of the Tax Act on our financial statements, and will record the effect of any reasonable changes in our estimates or adjustments.

In the six months ended January 31, 2017, we determined that our valuation allowance on the losses of Elmion Netherlands B.V., or Elmion, a Netherlands subsidiary, was no longer required due to an internal reorganization that generated income and a projection that the income would continue. We recorded a benefit from income taxes of $16.6 million in the six months ended January 31, 2017 from the full recognition of the Elmion deferred tax assets.

The changedecrease in income tax expense in the three and six months ended JanuaryOctober 31, 20182019 compared to the similar periodsperiod in fiscal 2017, excluding the benefits from income taxes in the three and six months ended January 31, 2018 and in the six months ended January 31, 2017,2019 was generallyprimarily due to the differences in the tax ratesamount of income earned in the jurisdictions where the results were recorded.various taxing jurisdictions.

Net Income Attributable to Noncontrolling Interests. The change in the net income attributable to noncontrolling interests in the three and six months ended JanuaryOctober 31, 20182019 compared to the similar periodsperiod in fiscal 20172019 was primarily due to the net loss attributable to noncontrolling interests of one of our subsidiaries of $0.1 million in the three months ended October 31, 2019. We did not record the net loss attributable to noncontrolling interests of this subsidiary in the similar period in fiscal 2019. In addition, the reduction in the net income attributable to noncontrolling interests of other subsidiaries in the three months ended October 31, 2019 compared to the similar period in fiscal 2019 was the result of a decrease in the net income attributable to the noncontrolling interests in certain IDT Telecom subsidiaries, as well as net loss attributable to the noncontrolling interests in Lipomedix in the three and six months ended January 31, 2018. We began consolidating Lipomedix in November 2017.of these subsidiaries.

 

Liquidity and Capital Resources

 

General

 

We currently expect our cash from operations in the next twelve months and the balance of cash, cash equivalents, debt securities, and marketable securitiescurrent equity investments that we held at Januaryon October 31, 20182019 to be sufficient to meet our currently anticipated working capital and capital expenditure requirements during the twelve-month period ending JanuaryOctober 31, 2019.2020.

 

At JanuaryOctober 31, 2018,2019, we had cash, cash equivalents, debt securities, and marketable securitiescurrent equity investments of $100.3$77.8 million and a working capital deficit (current assetsliabilities in excess of current liabilities)assets) of $1.1$22.7 million. At January 31, 2018, we also had $8.8 million in investments in hedge funds, which were included in “Investments” in our consolidated balance sheet.

  

On or about March 26, 2018, we expect to spin-off our wholly-owned subsidiary, RHI, to our stockholders. RHI owns certain commercial real estate assets and interests in Rafael Pharma and Lipomedix. Prior to the spin-off, we intend to transfer assets to RHI such that, at the time of the spin-off, RHI will have approximately $44 million in cash, cash equivalents, and marketable securities, plus $6 million in hedge fund and other investments.


We treat unrestricted cash and cash equivalents held by IDT Payment Services as substantially restricted and unavailable for other purposes. At JanuaryOctober 31, 2018,2019, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of $10.0$9.8 million held by IDT Payment Services that was unavailable for other purposes.

 

We have not recorded U.S. income tax expense for foreign earnings, since such earnings are permanently reinvested outside the United States. Upon distribution of these foreign earnings to our domestic entities, we may be subject to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would be paid.

  

Six months ended
January 31,

 
  

2018

  

2017

 
  (in millions) 
Cash flows (used in) provided by:        
Operating activities $(27.0) $(0.8)
Investing activities  0.9   (21.0)
Financing activities  (10.2)  (9.3)
Effect of exchange rate changes on cash and cash equivalents  0.6   (0.9)
Decrease in cash and cash equivalents $(35.7) $(32.0)

  Three months ended
October 31,
 
  2019  2018 
  (in millions) 
Cash flows (used in) provided by:        
Operating activities $(5.0) $8.2 
Investing activities  (11.2)  (6.5)
Financing activities     (4.8)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents  11.4   (4.6)
Decrease in cash, cash equivalents, and restricted cash and cash equivalents $(4.8) $(7.7)

 

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.

 

27

Gross trade accounts receivable increaseddecreased to $74.3$56.6 million at JanuaryOctober 31, 20182019 from $67.6$63.5 million at July 31, 20172019 primarily due to a $6.8 million increase in IDT Telecom’s gross trade accounts receivable balance. The increase in IDT Telecom’s gross trade accounts receivable balance was primarily due to amounts billed incollections in the sixthree months ended JanuaryOctober 31, 20182019 in excess of collectionsamounts billed during the period, andpartially offset by the effect of changes in foreign currency exchange rates.

 

Deferred revenue as a percentagearises from sales of total revenuesprepaid products and varies from period to period depending on the mix and the timing of revenues. Deferred revenue arises from IDT Telecom’s sales of prepaid products. Deferred revenue decreased to $71.8$40.7 million at JanuaryOctober 31, 20182019 from $76.5$42.5 million at July 31, 20172019 primarily due to a decreasedecreases in the BOSS Revolution Calling and net2phone-Platform Services deferred revenue balances.

In the three months ended October 31, 2019, customer deposits at IDT Telecom U.S. Boss Revolution balance.Financial Services Limited, our Gibraltar-based bank, increased mainly due to the effect of exchange rate changes, which accounted for $11.4 million of the increase. Similarly, restricted cash and cash equivalents also increased by $11.4 million in the three months ended October 31, 2019 due to the effect of exchange rate changes.

 

On September 20, 2016, we receivedJune 21, 2018, in South Dakota v Wayfair Inc., the United States Supreme Court held that states may charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a letter of inquiry fromphysical presence in the Enforcement Bureau of the FCC requesting certain information and materials related to an investigation of potential violations by Straight Path Spectrum LLC in connectiontaxing state. We are evaluating our state tax filings with licenses to operate on the 28 GHz and 39 GHz bands of the Fixed Microwave Services. We have cooperated with the FCC in this matter and have respondedrespect to the letterWayfair decision and are in the process of inquiry. The FCCreviewing our collection practices. It is possible that one or more jurisdictions may assert that we have liability for periods for which we have not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could seekadversely affect our business, financial position and operating results. One or more jurisdictions may change their laws or policies to fineapply their sales, use or impose regulatory penalties or civil liability on us relatedother similar taxes to activities during the period of ownership by us.our operations, and if such changes were made it could materially and adversely affect our business, financial position and operating results.

 

The Separation and Distribution Agreement related to the spin-off of Straight Path provides for us and Straight Path to indemnify each other for certain liabilities. We and Straight Path each communicated that it was entitled to indemnification from the other in connection with the inquiry described above and related matters. On October 24, 2017, we, Straight Path, Straight Path IP Group, Inc., or SPIP, and PR-SP IP Holdings LLC, or PR-SP, an entity owned by Howard Jonas, entered into a Settlement Agreement and Release that provides for, among other things, the settlement and mutual release of potential liabilities and claims that may exist or arise under the Separation and Distribution Agreement between us and Straight Path. In exchange for the mutual release, we paid Straight Path an aggregate of $16 million in cash, Straight Path transferred to us its majority ownership interest in Straight Path IP Group Holding, Inc., or New SPIP, which holds the equity of SPIP, the entity that holds intellectual property primarily related to communications over computer networks, subject to the right to receive 22% of the net proceeds, if any, received by SPIP from licenses, settlements, awards or judgments involving any of the patent rights and certain transfers of the patents or related rights, that will be retained by Straight Path’s stockholders (such equity interest, subject to the retained interest right, the “IP Interest”), and we undertook certain funding and other obligations related to SPIP. The Settlement Agreement and Release allocates (i) $10 million of the payment and the retained interest right to the settlement of claims and the mutual release and (ii) $6 million to the transfer of the IP Interest. In the accompanying consolidated statement of cash flows in the six months ended January 31, 2018, $10 million of the aggregate payment to Straight Path was included in operating activities and $6 million of the aggregate payment was included in investing activities.

In August 2017, we entered into a Reciprocal Services Agreement with a telecom operator in Central America for a full range of services, including, but not limited to, termination of inbound and outbound international long-distance voice calls. We have committed to pay such telecom operator monthly committed amounts during the term of the agreement. In addition, under certain limited circumstances, the parties may renegotiate the amount of the monthly payments. In the event the parties do not agree on re-pricing terms after good faith negotiations, then either party has the right to terminate the agreement. Pursuant to the agreement, in September 2017, we deposited $11.75 million into an escrow account as security for the benefit of the telecom operator, which was included in operating activities in the accompanying consolidated statement of cash flows.

Investing Activities

 

Our capital expenditures were $10.9$3.9 million and $10.5$4.5 million in the sixthree months ended JanuaryOctober 31, 20182019 and 2017,2018, respectively. We currently anticipate that total capital expenditures for the twelve-month period ending JanuaryOctober 31, 20192020 will be between $21$20 million to $23$22 million. We expect to fund our capital expenditures with our net cash provided by operating activities and cash, cash equivalents, debt securities, and marketable securitiescurrent equity investments on hand.

 

On October 24, 2017, we sold our entire majority interests in New SPIP to PR-SP in exchange for $6 million and the assumption by PR-SP of our funding and other obligations. As described above, $6 million of the aggregate payment to Straight Path that was allocated to the transfer of the IP Interest was included in investing activities in the six months ended January 31, 2018.

On December 23, 2016,September 14, 2018, we acquired all100% of the outstanding shares of Live Ninja,Versature, a business communications company that provides chat and messaging capabilities for small and medium-sized businesses withUCaaS provider serving the ability to transfer a conversation from one channel of communications (for example,Canadian market. In the web) to another (such as a mobile phone). We paid $2.0 million at closing, and expect to pay an additional $2.5 million through Decemberthree months ended October 31, 2018, for fixed and contingent payment obligations. Thethe cash paid for the acquisition net of cash acquired was $1.8$5.5 million.

28

In the six months ended January 31, 2017, we used cash of $8.3 million for additional investments. In September 2016, Rafael Pharma issued to our 50%-owned subsidiary, CS Pharma Holdings, LLC, or CS Pharma, its convertible Series D Note with a principal amount of $10 million, representing the $8 million investment funded on such date plus the conversion of $2 million principal amount convertible promissory notes issued in connection with a prior funding.

 

Purchases of marketabledebt securities and equity investments were $19.8$8.2 million and $17.2 millionnil in the sixthree months ended JanuaryOctober 31, 20182019 and 2017,2018, respectively. Proceeds from maturities and sales of marketabledebt securities and sales of equity investments were $31.6$0.8 million and $16.8$3.4 million in the sixthree months ended JanuaryOctober 31, 20182019 and 2017,2018, respectively.

 

Financing Activities

In the six months ended January 31, 2018, we paid cash dividends of $0.38 per share on our Class A common stock and Class B common stock, or $9.4 million in total. In the six months ended January 31, 2017, we paid cash dividends of $0.38 per share on our Class A common stock and Class B common stock, or $8.8 million in total. On March 5, 2018, our Board of Directors declared a dividend of $0.09 per share for the second quarter of fiscal 2018 to holders of our Class A common stock and Class B common stock. The dividend will be paid on or about March 23, 2018 to stockholders of record as of the close of business on March 19, 2018. In light of our intention to continue to invest in our growth initiatives and the impact of the RHI spin-off on our balance sheet, our Board of Directors reduced the dividend for the second quarter of fiscal 2018 from the quarterly dividend of $0.19 per share that was paid in the first two quarters of fiscal 2018.

 

We distributed cash of $0.7$0.2 million and $0.8$0.3 million in the sixthree months ended JanuaryOctober 31, 20182019 and 2017,2018, respectively, to the holders of noncontrolling interests in certain of our subsidiaries.

 

OurIn the three months ended October 31, 2019 and 2018, we repaid financing-related other liabilities of $19,000 and $0.6 million, respectively.

In the three months ended October 31, 2019, we received proceeds from the exercise of stock options of $0.3 million for which we issued 32,551 shares of our Class B common stock. There were no stock option exercises in the three months ended October 31, 2018.


We have an existing stock repurchase program authorized by our Board of Directors for the repurchase of up to an aggregate of 8.0 million shares of our Class B common stock. There were no repurchases under the program in the three months ended October 31, 2019. In the three months ended October 31, 2018, we repurchased 729,110 shares of Class B common stock for an aggregate purchase price of $3.9 million. At October 31, 2019, 6.9 million shares remained available for repurchase under the stock repurchase program.

As of October 31, 2019, our subsidiary, IDT Telecom, Inc., entered into a credit agreement dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. The credit agreement was amended as of January 31, 2018. IDT Telecom may use the proceeds to finance working capital requirements, acquisitions and for other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum at the option of IDT Telecom, at either (a) the U.S. Prime Rate less 125 basis points, or (b) the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 125 basis points. Interest is payable monthly, and all outstanding principal and any accrued and unpaid interest is due on the maturity date of January 31,July 15, 2020. At January 31, 2018 and July 31, 2017, there were no amounts outstanding under the facility. We intend to borrow under the facility from time to time. In the six months ended January 31, 2018, we borrowed and repaid an aggregate of $19.1 million under the facility. IDT Telecom pays a quarterly unused commitment fee of 0.325%0.3% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain financial targets and ratios during the term of the line of credit,facility, including restrictions on dividend payments on IDT Telecom capital stock and restrictionsmay not pay any dividend on IDT Telecom’s aggregate loans and advances to affiliates or subsidiaries.

We received proceeds from the exercise of our stock options of $0.8 million in the six months ended January 31, 2017, for which we issued 73,471 shares of our Class B commonits capital stock.

 

In connection with our investment in Rafael Pharma, our subsidiary CS Pharma issued member interests to third parties in exchange for cash investment in CS Pharma of $10 million. We hold a 50% interest in CS Pharma and we are the managing member. At July 31, 2016, CS Pharma had received $8.8 million, which was included in “Other current liabilities” pending the issuance of the member interests. In the six months ended January 31, 2017, CS Pharma received an additional $1.2 million from the sale of its member interests.

In the six months ended January 31, 2018 and 2017, we paid $0.1 million and $1.8 million, respectively, to repurchase 5,170 and 94,338 shares, respectively, of our Class B common stock that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.

We have a stock repurchase program for the repurchase of up to an aggregate of 8.0 million shares of our Class B common stock. There were no repurchases under the program in the six months ended January 31, 2018 or 2017. At January 31, 2018, 8.0 million shares remained available for repurchase under the stock repurchase program.

Other Sources and Uses of Resources

On June 22, 2017, IDT Telecom, Inc. entered into a Share Purchase Agreement with JAR Fintech Limited and JAR Capital Limited to sell the capital stock of IDT Financial Services Holding Limited, a company incorporated under the laws of Gibraltar and a wholly-owned subsidiary of IDT Telecom, to JAR Fintech Limited. IDT Financial Services Holding Limited is the sole shareholder of IDT Financial Services Limited, our Gibraltar-based bank. The Share Purchase Agreement provides for an aggregate purchase price for the outstanding equity interests of IDT Financial Services Holding Limited of £2.9 million ($4.1 million at January 31, 2018) plus an amount equal to the value of IDT Financial Services Holding Limited’s net assets, to be paid at closing, subject to adjustments relating to customer assets of IDT Financial Services Holding Limited. The net asset value of IDT Financial Services Holding Limited was $14.5 million at January 31, 2018. A portion of the purchase price will be placed in escrow and released to IDT Telecom once all of the conditions have been met under the Share Purchase Agreement. The sale is expected to close in the second quarter of calendar 2018, subject to regulatory approval and other customary conditions set forth in the Share Purchase Agreement. The remaining closing conditions are outside of our control and there can be no assurance that the sale will be completed.

29

 

We intend to, where appropriate, make strategic investments and acquisitions to complement, expand, and/or enter into new businesses. In considering acquisitions and investments, we search for opportunities to profitably grow our existing businesses and/or to add qualitatively to the range and diversification of businesses in our portfolio. At this time, we cannot guarantee that we will be presented with acquisition opportunities that meet our return on investment criteria, or that our efforts to make acquisitions that meet our criteria will be successful.

 

Contractual Obligations and Other Commercial Commitments

 

The following table quantifies our future contractual obligations and commercial commitments at January 31, 2018:

Payments Due by Period

(in millions)

 Total  Less than
1 year
  1–3 years  4–5 years  After 5 years 
Operating leases $6.4  $2.9  $2.1  $0.7  $0.7 
Revolving credit facility (1)  0.2   0.1   0.1       
Purchase commitments (2)  18.7   18.7          
                     
Total contractual obligations (3) $25.3  $21.7  $2.2  $0.7  $0.7 

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

 

(1)Revolving credit facility includes estimated fees on the unused commitment at January 31, 2018.

(2)Purchase commitments include the aggregate commitment under the Reciprocal Services Agreement with a telecom operator in Central America for a full range of services, including, but not limited to, termination of inbound and outbound international long-distance voice calls.

(3)The above table does not include an aggregate of $15.1 million in performance bonds due to the uncertainty of the amount and/or timing of any such payments.

Off-Balance Sheet Arrangements

 

We do 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, other than the following.

In connection with the Rafael Spin-Off in March 2018, we and Rafael entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Rafael after the spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Rafael with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, we indemnify Rafael and Rafael indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, we indemnify Rafael from all liability for taxes of ours, other than Rafael and its subsidiaries, for any taxable period, and from all liability for taxes due to the spin-off.

 

In connection with our spin-off of Straight Path, in July 2013, we and Straight Path entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Straight Path after the spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Straight Path with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, we indemnify Straight Path and Straight Path indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, we indemnify Straight Path from all liability for taxes of Straight Path or any of its subsidiaries or relating to the Straight Path business with respect to taxable periods ending on or before the spin-off, from all liability for taxes of ours, other than Straight Path and its subsidiaries, for any taxable period, and from all liability for taxes due to the spin-off. (See Note 1115 to the Consolidated Financial Statements included in Item 1 to Part I of thethis Quarterly Report on Form 10-Q).

 

In connection with our spin-off of Zedge, Inc., or Zedge, in June 2016, we and Zedge entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Zedge after the spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Zedge with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to Separation and Distribution Agreement, among other things, we indemnify Zedge and Zedge indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, Zedge indemnifies us from all liability for taxes of Zedge and any of Zedge’s subsidiaries or relating to Zedge’s business accruing after the spin-off, and we indemnify Zedge from all liability for taxes of Zedge and any of Zedge’s subsidiaries or relating to Zedge’s business with respect to taxable periods ending on or before the spin-off.

IDT Payment Services and IDT TelecomWe have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively.resellers. At JanuaryOctober 31, 2018,2019, we had aggregate performance bonds of $15.1$17.5 million outstanding.

30

Item 3.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

Foreign Currency Risk

Revenues from our international operations were 32% and 31% of our consolidated revenues for the six months ended January 31, 2018 and 2017, respectively. A significant portion of these revenues is in currencies other than the U.S. Dollar. Our foreign currency exchange risk is somewhat mitigated by our ability to offset a portion of these non-U.S. Dollar-denominated revenues with operating expenses that are paid in the same currencies. While the impact from fluctuations in foreign exchange rates affects our revenue and expenses denominated in foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period is generally not material.

 

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

 

In addition to, but separate from our primary business, we hold a portion of our assets in marketable securities and hedge funds for strategic and speculative purposes. At January 31, 2018, the carrying value of our marketable securities and investments in hedge funds was $46.2 million and $8.8 million, respectively. Investments in marketable securities and hedge funds carry a degree of risk, and depend to a great extent on correct assessments of the future course of price movements of securities and other instruments. There can be no assurance that our investment managers will be able to accurately predict these price movements. The securities markets have in recent years been characterized by great volatility and unpredictability. Accordingly, the value of our investments may go down as well as up and we may not receive the amounts originally invested upon redemption.


Item 4.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and PrincipalChief 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 PrincipalChief Financial Officer have concluded that our disclosure controls and procedures were not effective as of JanuaryOctober 31, 2018.2019 because of a material weakness in our internal control over financial reporting relating to management review controls associated with non-income related taxes related to one of our foreign entities. This material weakness was initially identified as of July 31, 2019 (see Item 9A to Part II of our Annual Report on Form 10-K for fiscal year ended July 31, 2019).

Remediation.As set forth below, following our Audit Committee’s independent review, management plans to take the following steps to remediate the material weakness identified above and improve our internal control over financial reporting:

 

Explore engaging an independent third party to assist in our evaluation of all non-income related taxes, relating to material foreign subsidiaries;

Provide additional outside training to employees responsible for tax compliance; and

Enhance internal documentation support related to our tax position.

Management and our Audit Committee will monitor these remedial measures and the effectiveness of our internal controls and procedures.

Notwithstanding the material weakness described above, we have performed additional analyses and other procedures to enable management to conclude that our financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition and results of operations as of and for the three months ended October 31, 2019.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended JanuaryOctober 31, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

31


PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Item 1. Legal Proceedings

 

Legal proceedings in which we are involved are more fully described in Note 1115 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

Item 1A.Risk Factors

Item 1A. Risk Factors

 

There are no 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, 2017.2019.

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

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

 

The following table provides information with respect to purchases by us of our shares during the secondfirst quarter of fiscal 2018:2020:

  

Total
Number of
Shares
Purchased

  

Average
Price
per Share

  

Total Number
of Shares
Purchased as
part of
Publicly
Announced
Plans or
Programs

  

Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (1)

 
November 1-30, 2017    $      8,000,000 
December 1-31, 2017    $      8,000,000 
January 1–31, 2018 (2)  3,502  $10.77      8,000,000 
                 
Total  3,502  $10.77        

 

Total
Number of
Shares
Purchased
Average
Price
per Share
Total Number
of Shares
Purchased as
part of
Publicly
Announced
Plans or
Programs
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (1)
August 1-31, 2019$6,903,406
September 1–30, 2019$6,903,406
October 1–31, 2019$6,903,406
Total$

(1)On January 22, 2016, our Board of Directors approved a stock repurchase program to purchase up to 8.0 million shares of our Class B common stock and cancelled the previous stock repurchase program originally approved by the Board of Directors on June 13, 2006, which had 4,636,741 shares remaining available for repurchase.
stock.
(2)Consists of shares of Class B common stock that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date and the proceeds utilized to pay the taxes due upon such vesting event.

Item 3.Defaults Upon Senior Securities

Item 3. Defaults Upon Senior Securities

 

None

Item 4.Mine Safety Disclosures

Item 4. Mine Safety Disclosures

 

Not applicable

Item 5.Other Information

Item 5. Other Information

 

None

 

32

Item 6.Exhibits

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 PrincipalChief 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 PrincipalChief 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.

 

33


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.

 

 

IDT CORPORATION

March 12, 2018By:

/s/    Shmuel JonasCorporation

Shmuel Jonas

Chief Executive Officer

   
March 12, 2018December 10, 2019By:

/s/    Marcelo FischerShmuel Jonas

Shmuel Jonas

Chief Executive Officer

  
December 10, 2019By:/s/    Marcelofischer

Marcelo Fischer

Senior Vice President of Finance

(PrincipalChief Financial Officer)Officer

 

 

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