UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
☒ Annual
report pursuant to section 13 or 15(d) of the securities exchange act of 1934 for the fiscal year ended
July 31, 2017
.
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
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22-3415036
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(State
or other jurisdiction of
incorporation or organization)
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(I.R.S.
Employer
Identification No.)
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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
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Name
of each exchange on which registered
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Class
B common stock, par value $.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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 definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
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Accelerated filer ☒
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Non-accelerated filer ☐ (Do not check if
a smaller reporting company)
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Smaller reporting company ☐
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Emerging growth company ☐
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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 Act). Yes ☐ No ☒
The
aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based on the adjusted closing
price on January 31, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) of the
Class B common stock of $19.20 per share, as reported on the New York Stock Exchange, was approximately $390.7 million.
As
of October 9, 2017, the registrant had outstanding 23,267,081 shares of Class B common stock and 1,574,326 shares of Class A common
stock. Excluded from these numbers are 2,298,467 shares of Class B common stock and 1,698,000 shares of Class A common stock held
in treasury by IDT Corporation.
DOCUMENTS
INCORPORATED BY REFERENCE
The
definitive proxy statement relating to the registrant’s Annual Meeting of Stockholders, to be held December 14, 2017, is
incorporated by reference into Part III of this Form 10-K to the extent described therein.
Index
IDT
Corporation
Annual
Report on Form 10-K
Part
I
As
used in this Annual Report, 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 its subsidiaries, collectively. Each reference to a fiscal year in this
Annual Report refers to the fiscal year ending in the calendar year indicated (for example, fiscal 2017 refers to the fiscal year
ended July 31, 2017).
Item
1. Business.
OVERVIEW
We
are a multinational holding company with operations primarily in the telecommunications and payment industries.
Since
our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom’s businesses, with IDT
Telecom’s revenues representing 99.8% of our total revenues in fiscal 2017. IDT Telecom’s primary businesses market
and distribute multiple communications and payment services across four verticals comprising multiple, related offerings:
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Retail
Communications provides international long-distance calling products primarily to foreign-born
communities worldwide, with its core markets in the United States;
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Wholesale
Carrier Services is a global telecom carrier, terminating international long distance
calls around the world for Tier 1 fixed line and mobile network operators, as well as
other service providers;
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Payment
Services provides payment offerings, including international and domestic airtime top-up
and international money transfer; and
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Unified
Communications as a Service, including a cable telephony service that enables cable companies
to offer their residential customers voice calling over cable networks, and hosted PBX
and SIP trunking services for business customers offered by our net2phone division.
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Our
Retail Communications vertical provides prepaid international long distance calling services primarily to foreign-born and underbanked
consumers in the United States, with smaller retail operations serving customers in Europe, Asia, South America and Canada. Retail
Communications offerings include our flagship ‘Boss Revolution’ branded PIN-less international long distance prepaid
calling offerings as well as traditional, disposable hard cards sold under a variety of brands. In the United States, the majority
of our customers purchase Retail Communications offerings through one of our more than 35,000 Boss Revolution authorized resellers.
These resellers are typically small, independent retailers serving foreign-born communities. Boss Revolution customers can also
purchase calling services directly through our IVR (Interactive Voice Response) system, website (www.bossrevolution.com), or mobile
calling app available free on both the iTunes App Store and Google Play.
Our
Wholesale Carrier Services business terminates international long-distance calls for our retail customers and for other telecommunications
companies, service providers, and resellers around the world. Our wholesale telecommunications network is comprised of interconnections
that link virtually every country and significant carrier in the world.
Our
Payment Services vertical includes international mobile top-up (IMTU) offerings sold through our retail network or directly from
the Boss Revolution online/mobile platform and Boss Revolution Money app, our Boss Revolution international money transfer service
and our National Retail Solutions business. IMTU is sold under the Boss Revolution brand as well as through mobile operator top-up
cards sold by Boss Revolution resellers. Our Boss Revolution international money transfer business includes remittances from the
United States to over 30 countries. It is offered through certain Boss Revolution resellers as well as the Boss Revolution online/mobile
platform and Boss Revolution Money app.
Our
National Retail Solutions, or NRS, business is also part of our Payment Services vertical and provides point of sale (POS) terminals
and services linked to those terminals - including consumer rewards programs, credit card processing and coupon program participation
- to independent retailers in the United States.
Our
Unified Communications as a Service vertical includes voice over Internet protocol (VoIP) based cloud offerings under the net2phone
brand including Session Initiation Protocol, or SIP, trunking and hosted private branch exchange, or PBX, services offered to
enterprise customers exclusively through value-added resellers (VARs), service providers, telecom agents and managed service providers,
as well as residential telephony and hosted PBX services provisioned to cable television providers.
In
addition, IDT Telecom operates a business that provides bundled local/long distance residential phone service in 11 states under
the brand name IDT America.
Outside
of our core telecommunications business, we also hold commercial real estate including our headquarters building and associated
public garage in Newark, New Jersey, an office/data center building in Piscataway, New Jersey, and a portion of a building in
Jerusalem, Israel that hosts offices for us and our affiliates. Additionally, we own interests in clinical and early stage pharmaceutical
companies Rafael Pharmaceuticals, Inc. (formerly Cornerstone Pharmaceuticals, Inc.) and Lipomedix Pharmaceuticals Ltd.
Financial
information by segment is presented in Note 24 in the Notes to our Consolidated Financial Statements in Item 8 of this Annual
Report.
Our
headquarters are located at 520 Broad Street, Newark, New Jersey 07102. The main telephone number at our headquarters is (973)
438-1000 and our corporate web site’s home page is www.idt.net.
We
make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to these reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial
owners of more than 10% of our equity through the investor relations page of our web site (http://ir.idt.net/) as soon as reasonably
practicable after such material is electronically filed with the Securities and Exchange Commission. Our web site also contains
information not incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission.
KEY
EVENTS IN OUR HISTORY
1990
– Howard Jonas, our founder, launched International Discount Telephone to provide international call re-originations services.
1995
– We began selling wholesale carrier services to other long-distance carriers by leveraging our access to favorable international
telephone rates generated by our retail calling traffic.
1996
– We successfully complete an initial public offering of our common stock.
1997
– We began marketing prepaid calling cards to provide convenient and affordable international long distance calls primarily
to immigrant communities.
2000
– We complete the sale of a stake in our net2phone subsidiary, a pioneer in the development and commercialization of VoIP
technologies and services, to AT&T for approximately $1.1 billion in cash.
2001
– Our common stock is listed on the New York Stock Exchange, or NYSE.
2004
– We launch a retail energy business to provide electricity and natural gas to residential and small business customers
in New York.
2006
– We sell our Russian telecom business, Corbina, for $129.9 million in cash.
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We launch a regulated issuing bank based in Gibraltar.
2007
– We complete the sale of IDT Entertainment to Liberty Media for (i) 14.9 million shares of our Class B common stock, (ii)
Liberty Media’s approximate 4.8% interest in IDT Telecom, (iii) $220.0 million in cash, net of certain working capital adjustments,
(iv) the repayment of $58.7 million of IDT Entertainment’s intercompany indebtedness payable to us and (v) the assumption
of all of IDT Entertainment’s existing indebtedness.
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We purchase a majority interest in Fabrix Systems Ltd., or Fabrix.
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We purchase a majority stake in Zedge, Inc. (formerly Zedge Holdings, Inc.), or Zedge, which provides one of the most popular
content platforms for mobile device personalization including ringtones, wallpapers, home screen icons and notification sounds.
2008
– We enter the oil and gas exploration business and are granted a license to explore for oil shale in Israel.
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We launch Boss Revolution PIN-less, a pay-as-you-go international calling service. Boss Revolution has since become our flagship
brand, and the Boss Revolution platform has been expanded to include payment offerings.
2009
– We spin-off our CTM Media Holdings subsidiary to stockholders. CTM Media Holdings has been renamed IDW Media Holdings
and is traded on the over-the-counter market with the ticker symbol “IDWM”.
2011
– We spin-off our Genie Energy Ltd. subsidiary, which holds retail energy and oil and gas exploration businesses, to stockholders.
Genie Energy is listed on the NYSE with the ticker symbols “GNE” and “GNE-PRA”.
2013
– We spin-off our Straight Path Communications, Inc. subsidiary to stockholders. Straight Path Communications is listed
on the NYSE MKT with the ticker symbol “STRP”.
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We introduce the Boss Revolution mobile app for Android and iOS.
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We launch an international money transfer service on the Boss Revolution platform in select states. The service offers Boss Revolution
customers a convenient, affordable means to send cash from the United States to friends and family overseas.
2014
– We sell our 78% stake in Fabrix to Ericsson for $69 million as part of Ericsson’s purchase of Fabrix for $95 million.
2015
– We become the first U.S.-based telecommunications company to terminate international long distance voice traffic directly
to Cuba.
2016
– We spin-off our Zedge, Inc. subsidiary to stockholders. Zedge is listed on the NYSE MKT with the ticker symbol “ZDGE”.
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We launch National Retail Solutions to provide Point-of-Sale (POS)-based services to independent retailers in the United States.
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We make a strategic investment in Cornerstone Pharmaceuticals, subsequently renamed Rafael Pharmaceuticals, a privately held,
clinical-stage, metabolic oncology therapeutics company focused on treating some of the most challenging cancers including pancreatic,
acute myeloid leukemia (AML), and T-cell lymphoma.
2017
– We entered into an agreement to sell our Gibraltar-based bank and e-money issuer, IDT Financial Services, which provides
prepaid card solutions across the European Economic Area, for approximately $18 million.
RECENT
STRATEGIC DEVELOPMENTS
In
August 2015, our Board of Directors approved a plan to reorganize us into three separate entities by spinning off two non-core
business units and certain assets, one of which was Zedge, to our stockholders, which we completed on June 1, 2016. Throughout
fiscal 2017, we prepared to spin off additional non-core assets including our interests in two clinical and early stage pharmaceutical
companies - Rafael Pharmaceuticals and Lipomedix Pharmaceuticals Ltd. - and our real estate holdings to our shareholders as Rafael
Holdings, Inc. In addition, we intend to contribute $50 million to $60 million in cash to Rafael Holdings, Inc. prior to the spin-off.
DIVIDENDS
AND DISTRIBUTIONS
We
have made quarterly distributions to the holders of our Class A and Class B common stock since fiscal 2011. In fiscal 2017, we
paid aggregate cash dividends of $0.76 per share on our Class A common stock and Class B common stock, or $17.9 million in total
as detailed below. In fiscal 2016, we paid aggregate cash dividends of $0.75 per share on our Class A common stock and Class B
common stock, or $17.4 million in total.
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On
October 20, 2016, we paid an ordinary cash dividend of $0.19 per share for the fourth
quarter of fiscal 2016;
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On
December 23, 2016, we paid an ordinary cash dividend of $0.19 per share for the first
quarter of fiscal 2017;
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On
March 24, 2017, we paid an ordinary cash dividend of $0.19 per share for the second quarter
of fiscal 2017; and
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On
June 30, 2017, we paid an ordinary cash dividend of $0.19 per share for the third quarter
of fiscal 2017.
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On
September 28, 2017, we declared a dividend of $0.19 per share for the fourth quarter of fiscal 2017 to holders of our Class A
common stock and Class B common stock. The dividend will be paid on or about October 20, 2017 to stockholders of record as of
the close of business on October 16, 2017.
We
expect to continue making distributions commensurate with our cash generation and financial resources, business outlook and growth
strategy, as they may be impacted by significant current or anticipated developments.
OUR
STRATEGY
History
and Background
Since
our founding, we have focused on value creation by leveraging potentially disruptive telecommunications, payment and other technologies
to challenge entrenched business models. Outside of our core businesses, we sought to select and incubate promising early stage
businesses and, in some cases, have sold those businesses or spun them off to our stockholders.
In
2007 and 2008, in response to a long-term, industry-wide decline in the sale of prepaid, disposable calling cards, which was our
dominant offering at the time, we initiated a fundamental restructuring of our businesses. We right-sized corporate overhead,
reduced network costs at IDT Telecom, streamlined our operations, and refocused on the growth and profitability of our core telecommunications
businesses. We subsequently spun off certain non-core businesses and assets to our stockholders, including CTM Media (2009), Genie
Energy (2011), Straight Path Communications (2013), and Zedge (2016). In October 2014, we completed the sale of our interest in
Fabrix, a network storage and processing technology business, to Ericsson for $69 million in cash as part of Ericsson’s
purchase of Fabrix for $95 million.
In
2017, we entered into an agreement to sell our IDT Financial Services Holdings Limited subsidiary, a Gibraltar-based bank and
e-money issuer across the European Economic Union, to JAR Fintech Limited, for approximately $18 million, which we expect to close
in calendar 2017.
Within
IDT Telecom, we reduced the cost of our infrastructure while leveraging our VoIP expertise and large retail network to develop
new products and services. We also sharpened our retail focus to provide high-quality, cost-effective communications and payment
services primarily to foreign-born consumers. This is a historically underserved market that includes significant numbers of unbanked
and under-banked consumers.
As
part of our effort to meet the changing demands of our target demographic, in 2008 we launched Boss Revolution PIN-less, a pay-as-you-go
international long-distance voice service. The service grew rapidly and eventually overtook sales of our traditional, disposable
prepaid calling cards. We believe that Boss Revolution PIN-less has become the nation’s leading pay-as-you-go international
calling service. We subsequently developed and introduced complementary payment services over the Boss Revolution platform, including
international and domestic airtime top-up, gift cards, domestic bill payment and an international money transfer service. These
additions represent significant milestones toward our goal of offering a comprehensive suite of voice and payment products under
a single, global brand and platform targeted to under-banked, foreign-born consumers.
To
simplify the Boss Revolution PIN-less calling experience and extend its reach, we introduced our Boss Revolution Calling mobile
app in 2013. The app is free to the consumer and is distributed through both the iTunes and Google Play app stores. In 2017, we
introduced a Boss Revolution retailer portal that can be accessed via the web browser on a mobile device to enable any qualified
individual in the United States with an Android or iOS smartphone to become a Boss Revolution retailer and to manage their Boss
Revolution account virtually anywhere, anytime. In 2017, we introduced the BOSS Revolution Money app, which works seamlessly with
the Boss Revolution calling app to let customers send money transfers, mobile airtime top-up and electronic gift cards to family
and friends easily and securely.
Leveraging
the high volumes of traffic to certain overseas destinations generated by our retail business, we have long been a significant
operator in the global wholesale telecommunications market, carrying and terminating international calling traffic on behalf of
other telecommunications companies and call aggregators. More recently, we have maintained our leadership in the wholesale market
by leveraging VoIP technology and broadening our offerings with different levels of service quality.
In
2015, we refocused our net2phone division to provide cloud-based communications to small and medium-sized businesses. Unlike most
other competitors in this space, net2phone works exclusively through the agent channel, provisioning its service through third-party
technology providers and other value-added resellers.
Recent
Strategic Developments
In
August 2015, our Board of Directors approved a plan to reorganize us into three separate entities by spinning off two non-core
business units and certain assets, one of which was Zedge, to our stockholders, which we completed on June 1, 2016. Throughout
fiscal 2017, we prepared to spin off additional non-core assets including our interests in two clinical and early stage pharmaceutical
companies - Rafael Pharmaceuticals and Lipomedix Pharmaceuticals Ltd. - and our real estate holdings to our shareholders as Rafael
Holdings, Inc. In addition, we intend to contribute $50 million to $60 million in cash to Rafael Holdings, Inc. prior to the spin-off.
IDT
Telecom
IDT
Telecom’s largest offerings, including its Boss Revolution prepaid PIN-less calling services and wholesale termination business,
face intense competitive pressures on revenues and margins. In response, IDT Telecom is pursuing a multi-pronged strategy that
includes:
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Reducing
the cost of operating our network, streamlining operations, and right sizing overhead;
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Expanding
our national network of 35,000+ Boss Revolution retailers;
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Building
the Boss Revolution brand through direct to consumer marketing, promotions, and rewards
programs;
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Bringing
new communications and payment services to the Boss Revolution platform and mobile apps
to increase loyalty, create cross selling opportunities, and generate new sources of
revenue;
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Utilizing
our direct and indirect sales force to deepen market penetration in certain foreign-born
communities, focusing on geographies and ethnic communities where we have not traditionally
been a leading provider;
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Providing
outsourced international long-distance management and termination solutions to fixed
and mobile telecom operators to enhance the profitability of their international long-distance
offerings;
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Building
on the early success of our net2phone brand’s enterprise offerings including Session
Initiation Protocol, or SIP, trunking and hosted private branch exchange, or PBX, services;
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Investing
to expand our early-stage international money transfer business with a focus on increasing
the number of originating agents in the United States and our direct to consumer efforts
via mobile;
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Investing
in our National Retail Solutions business which provides merchant service offerings through
point of sale (POS) terminals enabling independent retailers to participate in national
coupon and other consumer goods promotional offerings, offer rewards programs, and access
additional POS network benefits; and
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Launching
a new mobile virtual network operator service, or MVNO, to provide wireless phones and
service in the US under the Boss Revolution brand with an innovative, low-cost pricing
model.
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BUSINESS
DESCRIPTION
IDT
TELECOM
IDT
Telecom reports financial and operational results in three reportable segments: Telecom Platform Services, Unified Communications
as a Service, and Consumer Phone Service. Since our inception, we have derived the majority of our revenues and operating expenses
from IDT Telecom’s businesses. In fiscal 2017, IDT Telecom had revenues of $1,499.0 million, representing 99.8% of our total
consolidated revenues, and income from operations of $23.6 million, as compared with revenues of $1,484.8 million and income from
operations of $32.4 million in fiscal 2016.
TELECOM
PLATFORM SERVICES
Our
Telecom Platform Services segment, which represented 97.5% and 97.0% of our total consolidated revenues in fiscal 2017 and fiscal
2016, respectively, markets and distributes multiple communications and payment services across three business verticals:
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Retail
Communications provides international long-distance calling products primarily to foreign-born
communities worldwide, with its core markets in the United States;
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Wholesale
Carrier Services is a global telecom carrier, terminating international long distance
calls around the world for Tier 1 fixed line and mobile network operators, as well as
other service providers; and
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Payment
Services provides payment offerings, including international and domestic airtime top-up,
international money transfer, and our merchant service offerings through POS terminals.
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During
fiscal 2017, our Telecom Platform Services segment generated $1,464.1 million in revenues worldwide and income from operations
of $24.4 million, as compared with revenues of $1,451.6 million and income from operations of $32.8 million in fiscal 2016.
Retail
Communications
Retail
Communications’ revenue was $610.2 million in fiscal 2017 compared to $664.9 million in fiscal 2016 (41.7% and 45.8% of
Telecom Platform Services’ revenue in fiscal 2017 and fiscal 2016, respectively).
Most
of Retail Communications’ sales are generated by the Boss Revolution PIN-less international calling service. Other smaller
lines of business contribute to Retail Communications sales, including (1) traditional, disposable prepaid calling cards sold
under a variety of brand names both domestically and overseas, (2) private label and IDT branded prepaid and point of sale activated
calling cards sold to large retailers, medium sized retail chains (e.g. supermarkets, drug stores), and smaller grocery stores
and similar outlets, and (3) our PennyTalk international calling service. Other revenues generated using our Boss Revolution platform,
including airtime top-up and international money transfer, are reflected in the Payment Services vertical discussed below.
Boss
Revolution PIN-less allows users to call their families and friends overseas without the need to enter a personal identification
number, or PIN. To place a call, a customer must first establish a Boss Revolution prepaid account. Boss Revolution customers
can access our network by dialing a local access or toll-free number. Our platform recognizes the user’s network-provided
automatic number identification (ANI) and seamlessly links each call to the corresponding Boss Revolution account. Callers then
enter their destination phone numbers. The dialing process is automated to provide one-touch dialing in the Boss Revolution Calling
app.
Boss
Revolution customers’ account balances are typically debited at a fixed rate per minute. In contrast to many competitors,
Boss Revolution does not charge connection, usage or breakage fees. Boss Revolution per minute rates can vary by the destination
country, city, and whether the call is a landline or mobile phone. Rates are published on the Boss Revolution consumer website
and within the Boss Revolution Calling app. In addition to per minute prepaid plans, Boss Revolution offers unlimited calling
plans for a flat monthly fee to some destinations.
Customers
can add to, or top-up, their account balance at any Boss Revolution retailer using cash, a debit card or a credit card. Customers
with a credit card, debit card or store-bought top-up voucher can also add to their account balance directly by phone, online
through the Boss Revolution consumer web site (www.bossrevolution.com), or through the Boss Revolution Calling or Money apps.
In
the United States, we distribute many of our retail products through our network of distributors that, either directly or through
sub-distributors, sells to retail locations. In addition, our internal sales force sells Boss Revolution platform products directly
to retailers. Also, the Boss Revolution Calling app is available for download through both the iTunes and Google Play stores.
Distributors, our internal sales people and retailers typically receive commissions based on the revenue generated by each transaction.
In
2017, we introduced a Boss Revolution retailer portal that can be accessed via the web browser on a mobile device to enable any
qualified individual in the United States with an Android or iOS smartphone to become a Boss Revolution retailer and to manage
their Boss Revolution account virtually anywhere, anytime. The Boss Revolution retailer portal enables retailers to create accounts
for new customers, add funds to existing customer balances and execute sales transactions for the various products and services
available on the portal. The Boss Revolution retailer portal also provides a direct, real-time interface with our retailers, resulting
in a cost-effective and adaptable distribution model that can rapidly respond to changes in the business environment.
The
Boss Revolution platform allows us to target and promote services directly to distributors, retailers and customers and to introduce
and cross-sell offerings. In 2017, we introduced the BOSS Revolution Money app, which works seamlessly with the Boss Revolution
Calling app to let customers send money transfers, mobile airtime top-up and electronic gift cards to family and friends easily
and securely.
In
the United States, the Boss Revolution brand is supported by national, regional and local marketing programs that include television
and radio advertising, online advertising, print media, and grass roots marketing at community and sporting events. In addition,
we work closely with distributors and retailers on in-store promotional programs and events.
Retail
Communications’ sales have traditionally been strongest in the Northeastern United States and in Florida because of our
extensive local distribution network and their large foreign-born populations. We continue to grow distributor relationships and
expand our retail network in other areas of the United States, including the Southwest and West Coast, where we historically have
not had as strong of a market presence.
We
expect to launch Boss Revolution Mobile before the end of calendar 2017. Boss Revolution Mobile will be a domestic mobile service
operating on Sprint’s nationwide network offering an innovative, low-cost model for mobile service under our Boss Revolution
brand.
Wholesale
Carrier Services
Wholesale
Carrier Services’ revenue was $608.6 million in fiscal 2017 compared to $567.4 million in fiscal 2016 (41.6% and 39.1% of
Telecom Platform Services’ revenue in fiscal 2017 and fiscal 2016, respectively).
Wholesale
Carrier Services terminates international telecommunications traffic in more than 170 countries around the world. The division’s
customers include our Retail Communications business, major and niche carriers around the globe, mobile network operators, and
other service providers such as call aggregators. For many of these customers, particularly the major carriers, we engage in buy-sell
relationships, terminating their customers’ traffic in exchange for terminating our wholesale and retail traffic with them.
We
offer competitively priced international termination rates at several quality levels. We can offer competitively priced termination
services in part because of the large volumes of originating minutes generated by our Retail Communications business, our global
platform powered by proprietary software, our team of professional and experienced account managers and market makers, and an
extensive network of interconnects around the globe.
IDT
Telecom terminated 26.6 billion minutes in fiscal 2017, as compared to 27.4 billion minutes in fiscal 2016, making us one of the
largest carriers of international long-distance minutes worldwide. Wholesale Carrier Services accounted for 19.9 billion minutes
and 19.3 billion minutes of the total IDT Telecom minutes in fiscal 2017 and fiscal 2016, respectively.
IDT
Telecom has a significant number of direct connections to Tier 1 providers outside the United States, particularly Tier 1 providers
in Latin America, Asia, Africa, Europe and the Middle East. Tier 1 providers are the largest recognized licensed carriers in a
country. Direct connections improve the quality of the telephone calls and reduce the cost, thereby enabling us to generate more
traffic with higher margins to the associated foreign locales. We also have direct relationships with mobile network operators,
reflecting their growing share of the voice traffic market.
Termination
rates charged by Tier 1 and other providers of international long-distance traffic have been declining for many years. Nevertheless,
termination rates charged to us by individual Tier 1 carriers and mobile operators can be volatile. Termination price volatility
on heavily trafficked routes can significantly impact our minutes of use and wholesale revenues.
In
addition to offering competitive rates to our carrier customers, we emphasize our ability to offer the high-quality connections
that these providers often require. To that end, we offer higher-priced services in which we provide higher-quality connections,
based upon a set of predetermined quality of service criteria. These services meet a growing need for higher-quality connections
for some of our customers who provide services to high-value, quality-conscious retail customers. As of July 31, 2017, Wholesale
Carrier Services had more than 3,000 customers. IDT Telecom has over 600 carrier relationships globally.
Wholesale
Carrier Services’ revenue is generated by sales to both postpaid and prepaid customers. Postpaid customers typically include
Tier 1 carriers, mobile network operators and our most credit worthy customers. Prepaid customers are typically smaller telecommunication
companies as well as independent call aggregators.
In
fiscal 2017, we announced an outsourcing initiative, Voicehub, to help fixed and mobile telephony operators enhance the profitability
and value of their international voice operations. Wholesale Carrier Services will provide these operators with customized solutions
including full outsourcing, handing all inbound and outbound calls with or without switch management, and hybrid arrangements
whereby the operator retains certain routes or customers directly.
Payment
Services
Payment
Services’ revenue was $245.3 million in fiscal 2017 compared to $219.3 million in fiscal 2016 (16.7% and 15.1% of Telecom
Platform Services’ revenue in fiscal 2017 and fiscal 2016, respectively).
Most
of Payment Services’ revenue is generated by the sale of international airtime top-up offerings. Other products and services
in this vertical include domestic airtime top-up, gift cards sold in the United States and Europe, domestic bill pay service,
our international money transfer service, our merchant services through POS terminals offerings and, until its expected sale in
the fourth quarter of calendar 2017, the operations of our Gibraltar-based bank. Payment Services’ offerings leverage our
platform capabilities, our distribution reach into foreign-born communities and our global reach to provide convenient and affordable
offerings primarily over the Boss Revolution platform.
Our
international airtime top-up products enable customers to purchase airtime for a prepaid mobile telephone in another country.
They are sold both over our Boss Revolution platform and in hard card format. Our international airtime top-up offerings are focused
on geographic corridors, such as the United States to various Central American countries, that tend to generate high volumes of
business, and are part of a comprehensive product offering that includes product, marketing and distribution focused on those
corridors.
International
remittances are a significant economic activity among our target market of foreign-born residents and other under-banked communities.
Our international money transfer service is offered over the Boss Revolution platform, and like other payment services, utilizes
our retail network and associated ability to serve unbanked customers. However, we expect that only a limited number of Boss Revolution
retailers in the United States will eventually qualify to process international money transfer transactions.
Revenues
from international money transfer are derived from a per-transaction fee charged to the customer and from foreign exchange differentials.
Transaction costs include commissions paid to the retail agent, payment to the international disbursing agent, banking, compliance,
and foreign currency exchange costs.
Our
merchant services business, National Retail Solutions, was founded in fiscal 2016 to help bodegas and other independent retailers
serving immigrant communities compete more effectively against big-box retailers and retail chains. NRS’s services
leverage its nationwide network of point-of-sale (POS) terminals installed with bodegas nationwide. NRS designed the POS
terminals which offer versatile functionality including barcode scanners, customer and retailer facing hi-definition screens,
and credit card readers. At September 30, 2017, NRS had deployed over 3,500 POS terminals.
NRS
derives revenue from the sale of the POS terminals to retailers, a monthly recurring fee for use of the terminals, and additional
terminal-based marketing, advertising and payment services sold a la carte. These include data analytics, vendor payouts, inventory
control, credit card processing and display advertising.
NRS
also aggregates the market power of its retailer network to provide compelling offerings for consumer-packaged goods (CPG) manufacturers
and distributors who otherwise do not have an efficient channel to access independent, urban and immigrant-focused retailers.
NRS offers CPG suppliers access to its retailer network and to their customers through its popular customer loyalty program, the
BR Club. NRS’s offerings to CPG companies include coupon distribution and redemption capabilities and new product
placement and promotion.
The
NRS merchant services business is synergistic with other BOSS Revolution communications and payment services including PIN-less
calling, international and domestic money transfer, and sales of international mobile top-up products. BR Club members receive
promotional text and in-store promotions for IDT’s calling and payment services offerings, all of which can be sold and
provisioned by retailers directly from their NRS terminals.
Payment
Services also includes reloadable prepaid debit cards marketed across the European Economic Area and Bank Identification Number
(BIN) sponsorship services offered by our Gibraltar-based bank, which we expect to sell in the fourth quarter of calendar 2017.
International
Operations
Internationally,
we are a provider of prepaid calling cards including both private label and IDT-branded calling cards, which are sold through
an extensive network of thousands of independent retailers as well as through our own internal sales force. Additionally, we sell
Boss Revolution PIN-less international calling and domestic and international airtime top-up and payment services in select global
markets both through retailers and directly to consumers. Wholesale Termination and related wholesale services are marketed and
sold globally through our internal Carrier Sales team.
In
Europe, we market our Retail Communications products in the United Kingdom, the Netherlands, Spain, Germany, Belgium, Italy, Luxembourg,
Sweden, Switzerland, Denmark, Norway and Austria, seeking to capitalize on the demographic opportunity presented by immigration
from outside of Europe to these developed nations. Because the immigrant market is fragmented, and due to the large number of
markets in which we compete, we offer over 470 different prepaid calling cards in Europe. In addition, we sell Boss Revolution
platform products through retailers, our mobile Calling app, and direct-to-consumer web sites in Germany, Spain and the United
Kingdom. In the United Kingdom, we sell the Prime Card, a leading prepaid MasterCard through select retailers and online directly
to consumers.
Our
operations in Europe also include Wholesale Carrier Services. We maintain our European corporate, Retail Communications and Wholesale
Carrier Services operations in London, England. We also operate satellite offices in Germany, Belgium, Spain, Italy, Ireland and
Greece.
Our
European operations, including Wholesale Carrier Services and Retail Communications, generated $408.9 million of revenues in fiscal
2017, an 11% increase from the $368.5 million of revenues generated during fiscal 2016. Our European operations’ revenues
constituted 27.3% of IDT Telecom’s revenues in fiscal 2017, as compared to 24.8% in fiscal 2016.
In
Asia, we sell Retail Communications products in Hong Kong, Singapore, Australia, Taiwan and Malaysia. In Hong Kong, we are one
of the top providers of prepaid calling services to the Filipino, Indian and Indonesian populations, three of the largest overseas
worker segments there. In addition, in Singapore, our Retail Communications products are a market leader to the Indian, Indonesian
and Bangladeshi populations, which are among the largest ethnic segments in Singapore. We sell Boss Revolution platform products
through retailers, our mobile Calling app, and direct-to-consumer web sites in Australia, Hong Kong, and Singapore. In Asia, we
also sell postpaid services direct to consumers and small businesses. In fiscal 2017, IDT Telecom generated $43.7 million in revenues
from our operations in the Asia Pacific region compared to $45.4 million in fiscal 2016. Our operations in Asia also include Wholesale
Carrier Services. We maintain our Asia Pacific headquarters in Hong Kong.
In
Latin America, we market Retail Communications products in Argentina and Brazil. In addition, we offer SIP Trunking VoIP services
in Brazil to large enterprise businesses. In fiscal 2017, net2phone began offering its Hosted PBX services in Brazil and Argentina.
We maintain our Latin American headquarters in Buenos Aires, Argentina and Sao Paulo, Brazil. In fiscal 2017, IDT Telecom generated
$10.4 million in revenues from the sale of Retail Communications and UCaaS products in Latin America compared to $13.3 million
in fiscal 2016.
Sales,
Marketing and Distribution
In
the United States, we distribute Retail Communications and Payment Services products, including Boss Revolution PIN-less, domestic
and international airtime top-up offerings, and prepaid calling cards primarily to retail outlets through our network of distributors
or through our internal sales force. In addition, our private label calling cards as well as our IDT-branded calling cards are
also marketed to retail chains and outlets through our internal sales force, and from time to time, we may utilize third-party
agents or brokers to acquire accounts. We also market prepaid offerings, including Boss Revolution PIN-less and domestic and international
airtime top-up, direct to the consumer via online channels including the Boss Revolution consumer website (www.bossrevolution.com)
and mobile apps for iOS and Android.
net2phone,
our VoIP division, focuses on the Agent channel marketplace by partnering with service providers, distributors, system integrators,
telecom agents and master agents domestically and internationally. These partners utilize net2phone’s full suite of VoIP
communication solutions focusing on net2phone’s SIP Trunking and Hosted PBX solutions. net2phone’s Cable Telephony
unit white labels net2phone’s residential, broadband telephony solution to complete the cable operator’s triple play.
net2phone white labels its Hosted PBX solution for the operator’s business customers as well, allowing their enterprise
and residential end users to capitalize on the growth, flexibility and cost advantages of IP-based calling.
In
Europe, Asia Pacific and Latin America, we are a leading provider of prepaid calling cards including both private label and IDT-branded
calling cards, which are sold through an extensive network of thousands of independent retailers as well as through our own internal
sales force. Additionally, we sell Boss Revolution PIN-less international calling and domestic and international airtime top-up
in select markets both through retailers and directly to consumers. In Asia, we also sell postpaid services direct to consumers
and small businesses. In the United Kingdom, we sell the Prime Card, a leading prepaid MasterCard through select retailers and
online directly to consumers. Wholesale Carrier Services are marketed and sold through our internal Carrier Sales team. In Canada,
we sell Boss Revolution platform products through retailers, our mobile Calling app, and direct-to-consumer web sites.
Telecommunications
Network Infrastructure
IDT
Telecom operates a global network to provide an array of telecommunications and payment services to our customers worldwide using
a combination of proprietary and third-party applications. Proprietary applications include call routing and rating, customer
provisioning, call management, e-commerce sites, product web pages, calling card features, and payment services features. Proprietary
applications provide the flexibility to adapt to evolving marketplace demands without waiting for third-party software releases,
and often provide advantages in capability or cost over commercially available alternatives.
The
IDT Telecom core voice network utilizes VoIP and is interconnected, where needed, through gateways to time-division multiplexing,
or TDM, networks worldwide. This hybrid IP/TDM capability allows IDT Telecom to interface with carriers using the lowest cost
technology protocol available. To support its global reach, IDT Telecom operates voice switches and/or points of presence in the
United States, Europe, South America, Asia and Australia. IDT Telecom receives and terminates voice traffic from every country
in the world, including cellular, landline and satellite calls through direct and indirect interconnects. The network includes
data centers located in the United States, the United Kingdom and Hong Kong, which house equipment used for both our voice and
payment services, with smaller points of presence in several other countries. It is monitored and operated on a continual basis
by our Network Operations Center in the United States. More recently, we started to make use of one of the leading cloud providers
to serve as host for some of our application infrastructure.
UNIFIED
COMMUNICATIONS AS A SERVICE (UCAAS)
UCaaS’
revenue was $29.4 million in fiscal 2017 compared to $26.4 million in fiscal 2016. UCaaS’ loss from operations was $1.9
million in fiscal 2017 compared to $1.6 million in fiscal 2016.
UCaaS’
revenue is generated primarily by VoIP products and services sold under the net2phone brand. net2phone’s VoiP offerings
include (1) cable telephony, (2) cloud-based private branch exchange, or PBX, services offered to enterprise customers exclusively
through value-added resellers (VARs), 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. In fiscal 2017, net2phone launched cloud-based
PBX services in Brazil and Argentina, leveraging IDT’s local licenses, telephony platform and infrastructure. net2phone
plans to expand into new markets in South America, Europe and Asia focusing on its cloud-based PBX product set.
IDT
continues to optimize and improve its cable telephony platform to reduce the underlying costs of service and increase the speed
of deployment.
Sales,
Marketing and Distribution
net2phone
focuses on the agent channel marketplace by partnering with service providers, distributors, system integrators, telecom agents
and master agents domestically and internationally. These partners utilize net2phone’s full suite of VoIP communication
solutions focusing on net2phone’s SIP Trunking and Hosted PBX solutions. net2phone’s Cable Telephony unit white labels
net2phone’s residential, broadband telephony solution to complete the cable operator’s triple play. net2phone also
white labels its Hosted PBX solution for the operator’s business customers, allowing their enterprise end users to capitalize
on the growth, flexibility and cost advantages of IP-based calling.
CONSUMER
PHONE SERVICES
Our
Consumer Phone Services segment generated revenues of $5.5 million and income from operations of $1.1 million in fiscal 2017,
as compared to revenues of $6.9 million and income from operations of $1.2 million in fiscal 2016.
During
fiscal 2017, we continued to operate the business in harvest mode-maximizing revenue from current customers while maintaining
expenses at the minimum levels essential to operate the business. This strategy has been in effect since calendar 2005 when the
Federal Communications Commission, or FCC, decided to terminate the UNE-P pricing regime, which resulted in significantly inferior
economics in the operating model for this business. We expect the Consumer Phone Services’ customer base and revenues will
continue to decline in fiscal 2018.
We
currently provide our bundled local/long distance phone service in 11 states, marketed under the brand name IDT America. Our bundled
local/long distance service, offered predominantly to residential customers, includes unlimited local, regional toll and domestic
long distance calling and popular calling features. A second plan is available, providing unlimited local service with our long
distance included for as low as 3.9 cents per minute. With either plan, competitive international rates and/or additional features
can be added for additional monthly fees. We also offer stand-alone long-distance service throughout the United States.
At
July 31, 2017, we had approximately 3,500 active customers for our bundled local/long distance plans and approximately 14,500
customers for our long distance-only plans, compared to approximately 4,200 and 18,100 customers, respectively, on July 31, 2016.
Our highest customer concentrations are in large urban areas, with the greatest number of customers located in New York, New Jersey,
Pennsylvania and Massachusetts.
ALL
OTHER
Operating
segments that are not reportable individually are included in All Other. During fiscal 2017, All Other generated $2.7 million
in revenues and income from operations of $0.3 million, compared to revenues of $11.5 million and income from operations of $4.2
million during fiscal 2016.
All
Other also includes our real estate holdings, and other smaller businesses.
We
own the approximate 496,000 square-foot building in Newark, New Jersey in which our headquarters is located, and we occupy approximately
20% of that building. We also own an 800-car public parking garage located across the street from that building. In addition,
we own a building in Piscataway, New Jersey that is used partially by IDT Telecom for certain of its operations and a 12,400 square
foot condominium interest in a building in Jerusalem, Israel.
In
fiscal 2016 and 2017, we made investments totaling $10 million in Rafael Pharmaceuticals, 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. Our 90%-owned subsidiary, IDT-Rafael Holdings, LLC, or IDT-Rafael Holdings, owns direct and indirect interests
in Rafael Pharmaceuticals. IDT-Rafael Holdings owns a 50% interest in CS Pharma Holdings, LLC, or CS Pharma. CS Pharma
owns $10 million in Convertible Series D Notes issued by Rafael Pharmaceuticals. We and CS Pharma hold warrants to purchase up
to 56%, in the aggregate, of the then issued and outstanding capital stock of Rafael Pharmaceuticals, on an as-converted and fully
diluted basis.
The
Rafael Pharmaceuticals 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 Pharmaceuticals Series
D Preferred Stock at a price of $1.25 per share, subject to downward adjustment if there are interim financings of Rafael Pharmaceuticals
at lower prices and certain other events. The Series D Note also includes a mandatory conversion into Rafael Pharmaceuticals common
stock upon a qualified initial public offering of Rafael Pharmaceuticals.
The
right to exercise Rafael Pharmaceuticals 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 of Rafael Pharmaceuticals, or $1.25 per share, subject
to certain adjustments. The warrant will expire upon the earlier of December 31, 2020 or a qualified initial public offering of
Rafael Pharmaceuticals or liquidation event of Rafael Pharmaceuticals.
The
50% of CS Pharma not held by IDT-Rafael Holdings are held by investors who purchased that interest for $10 million in the aggregate.
CS Pharma holds $10 million of cash that is expected to be invested in Rafael Pharmaceuticals. The 10% of IDT-Rafael Holdings
that we do not own is owned by Howard S. Jonas.
In
addition, IDT-Rafael Holdings had the contractual right to receive additional shares of Rafael Pharmaceuticals representing 10%
of the outstanding capital stock of Rafael Pharmaceuticals that will be issued upon the occurrence of any of the following: (i)
Food and Drug Administration approval of a Rafael Pharmaceuticals drug application, (ii) an initial public offering of Rafael
Pharmaceuticals at a valuation of over $500 million, or (iii) a sale of Rafael Pharmaceuticals 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 we received the right to 9% of the outstanding capital stock of Rafael
Pharmaceuticals and Mr. Jonas received the right to 1% of the outstanding capital stock of Rafael Pharmaceuticals. In addition,
as compensation for assuming the role of Chairman of the Board of Rafael Pharmaceuticals, and to create additional incentive to
contribute to the success of Rafael Pharmaceuticals, on September 19, 2017, we transferred our right to receive 9% of the outstanding
capital stock of Rafael Pharmaceuticals to Mr. Jonas. The right is further transferable at the discretion of Mr. Jonas.
In
fiscal 2017 and fiscal 2016, we used cash of $1.4 million and $0.1 million, respectively, for investments in Lipomedix Pharmaceuticals
Ltd., a development-stage, privately held Israeli company focused on the development of an innovative, safe and effective cancer
therapy based on liposome delivery. We own 38.9% of the issued and outstanding ordinary shares of Lipomedix. We have the option
to invest an additional $0.9 million in Lipomedix, which would increase our aggregate ownership to 50.6% of the issued share capital
on a fully diluted basis. The option expires on the earlier of (1) a merger or acquisition transaction, (2) an initial public
offering, or (3) November 30, 2017.
Throughout
fiscal 2017, we prepared to spin off non-core assets including our interests in Rafael Pharmaceuticals and Lipomedix as well as
our real estate holdings to our shareholders as Rafael Holdings, Inc. In addition, we intend to contribute $50 million to $60
million in cash to Rafael Holdings, Inc. prior to the spin-off.
On
June 1, 2016, we completed the Zedge Spin-Off, which was a pro rata distribution of the common stock that we held in our subsidiary
Zedge to our stockholders. At the time of its spin-off, Zedge’s principal business consisted of providing one of the most
popular content platforms for mobile device personalization including ringtones, wallpapers, home screen icons and notification
sounds. Prior to its sale in October 2014, Fabrix was also included in All Other. Fabrix is a software development company offering
a cloud-based scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and
delivery. The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working
capital and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price was
$69.2 million, after reflecting the impact of working capital and other adjustments. We recorded gain on the sale of our interest
in Fabrix of $76.9 million and $1.1 million in fiscal 2015 and fiscal 2016, respectively.
COMPETITION
IDT
Telecom
Telecom
Platform Services
Retail
Communications
Like
all international calling services, our Boss Revolution PIN-less service is subject to fierce competition, and we do not expect
to continue to grow revenues and margins without a successful strategy and sound execution. While virtually any company offering
communication services is a competitor of our Retail Communications offerings, we face particularly strong competition from Tier
1 mobile network operators who offer flat rate international calling plans, other PIN-less prepaid voice offerings, prepaid calling
card providers, mobile virtual network operators (or MVNOs) with aggressive international rate plans, and VoIP and other “over
the top” (OTT) service providers. Outside the United States, we also compete with large foreign state-owned or state sanctioned
telephone companies.
In
our view, our ability to compete successfully against these operators depends on several factors. Our interconnect and termination
agreements, network infrastructure and least-cost-routing system enable us to offer low-cost, high quality services. Our extensive
distribution and retail networks provide us with a strong presence in communities of foreign-born residents, a significant portion
of which purchase our services with cash. Our Boss Revolution brand is often highly visible in these communities and has a reputation
for quality service and competitive, transparent pricing. Finally, we also offer synergistic payment services over the Boss Revolution
platform that customers can conveniently access from their accounts. In our view, these factors represent competitive advantages.
However,
some of our competitors have significantly greater financial resources and name recognition, and can provide comparable service
levels and pricing through established brands. Consequently, our ability to maintain and/or to capture additional market share
will remain dependent upon our ability to continue to provide competitively priced services, expand our distribution and retail
networks, improve our ability to reach and sell to customers through mobile devices, develop successful new products and services
to fit the evolving needs of our customers, and continue to build the brand equity of Boss Revolution.
Wholesale
Carrier Services
The
wholesale carrier industry has numerous entities competing for the same customers, primarily based on price, products and quality
of service.
In
our Wholesale Carrier Services business, we participate in a global market place with:
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interexchange
carriers and other long-distance resellers and providers, including large carriers such
as T Mobile, AT&T and Verizon;
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historically
state-owned or state-sanctioned telephone companies such as Telefonica, France Telecom
and KDDI;
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on-line,
spot-market trading exchanges for voice minutes;
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OTT
internet telephony providers;
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other
providers of international long-distance services; and
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alliances
between large multinational carriers that provide wholesale carrier services.
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Our
Wholesale Carrier Services business derives a competitive advantage from several inter-related factors: our Retail Communications
business generates large volumes of originating minutes, which represents a desirable, tradable asset that helps us win return
traffic and obtain beneficial pricing which we can offer in the wholesale arena; the proprietary technologies powering our wholesale
platform and in particular, the software that drives voice over internet protocols enables us to scale up at a lower cost than
many of our competitors; our professional and experienced account management; and our extensive network of interconnects around
the globe, with the ability to connect in whichever format (IP or TDM) is most feasible. In aggregate, these factors provide us
with a competitive advantage over some participants on certain routes.
Payment
Services
The
major competitors to Payment Services’ offerings include:
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international
mobile operators, who seek to control more of their own distribution channel or create
their own products that directly compete with our international airtime top-up;
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other
distributors, who develop a more comprehensive product offering than our international
airtime top-up offerings or aggressively discount their product offerings that are like
our international airtime top-up offerings; and
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traditional
international money transfer services such as Western Union and MoneyGram that target
foreign born communities in the United States, as well as new entrants trying to disrupt
the money transfer market such as Xoom.com, Transferwise and World Remit.
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Unified
Communications as a Service (UCaaS)
Some
of the major competitors to our UCaaS offerings include other UCaaS and or hosted voice providers such as Vonage Business, Nextiva,
8x8, West Corp, and Ring Central. Due to their longevity and substantial investments in the space, these providers offer a more
advanced product set that includes features such as video, chat, collaboration, and analytics. These competitors, in addition
to possessing more widely recognized brands, also support integration of their services with other well-known, third-party customer
relationship management, or CRM, vendors such as SalesForce and SugarCRM as well as with various Google applications.
Consumer
Phone Services
The
U.S. consumer phone services industry is characterized by intense competition, with numerous providers competing for a declining
number of wireline customers, leading to a high churn rate because customers frequently change providers in response to offers
of lower rates or promotional incentives.
The
regional bell operating companies, or RBOCs, remain our primary competitors in the local exchange market. We are also competing
with providers offering communications service over broadband connections using VoIP technology, such as cable companies and independent
VoIP providers. Companies also provide voice telephony services over broadband Internet connections, allowing users of these Internet
services, such as Vonage and Skype, to obtain communications services without subscribing to a conventional telephone line. Mobile
wireless companies are deploying wireless technology as a substitute for traditional wireline local telephones.
Due
to changes in the U.S. regulatory environment that affected our cost of provisioning bundled local/long distance phone services
and increased competition, we ceased marketing activities for this service, and as a result, our Consumer Phone Services business
has declined significantly.
REGULATION
The
following summary of regulatory developments and legislation is intended to describe what we believe to be the most important,
but not all, current and proposed international, federal, state and local laws, regulations, orders and legislation that are likely
to materially affect us.
Regulation
of Telecom in the United States
Telecommunications
services are subject to extensive government regulation at both the federal and state levels in the United States. Any violations
of the regulations may subject us to enforcement actions, including interest and penalties. The FCC has jurisdiction over all
telecommunications common carriers to the extent they provide interstate or international communications services, including the
use of local networks to originate or terminate such services. Each state regulatory commission has jurisdiction over the same
carriers with respect to their provision of local and intrastate communications services. Local governments often indirectly regulate
aspects of our communications business by imposing zoning requirements, taxes, permit or right-of-way procedures or franchise
fees. Significant changes to the applicable laws or regulations imposed by any of these regulators could have a material adverse
effect on our business, operating results and financial condition.
Regulation
of Telecom by the Federal Communications Commission
Universal
Service and Other Regulatory Fees and Charges
In
1997, the FCC issued an order, referred to as the Universal Service Order, that requires all telecommunications carriers providing
interstate telecommunications services to contribute to universal service support programs administered by the FCC (known as the
Universal Service Fund). In addition, beginning in October 2006, interconnected VoIP providers, such as our subsidiary net2phone,
are required to contribute to the Universal Service Fund. These periodic contributions are currently assessed based on a percentage
of each contributor’s interstate and international end user telecommunications revenues reported to the FCC. We also contribute
to several other regulatory funds and programs, most notably Telecommunications Relay Service, FCC Regulatory Fees, and Local
Number Portability (collectively, the Other Funds). We and most of our competitors pass through Universal Service Fund and Other
Funds contributions as part of the price of our services, either as part of the base rate or, to the extent allowed, as a separate
surcharge on customer bills. Due to the manner in which these contributions are calculated, we cannot be assured that we fully
recover from our customers all of our contributions. In addition, based on the nature of our current business, we receive certain
exemptions from federal Universal Service Fund contributions. Changes in our business could eliminate our ability to qualify for
some or all of these exemptions. As a result, our ability to pursue certain new business opportunities in the future may be constrained
in order to maintain these exemptions, the elimination of which could materially affect the rates we would need to charge for
existing services. Changes in regulation may also have an impact on the availability of some or all of these exemptions. If even
some of these exemptions become unavailable, they could materially increase our federal Universal Service Fund or Other Funds’
contributions and have a material adverse effect on the cost of our operations and, therefore, on our ability to continue to operate
profitably, and to develop and grow our business. We cannot be certain of the stability of the contribution factors for the Other
Funds. Significant increases in the contribution factor for the Other Funds in general and the Telecommunications Relay Service
Fund in particular can impact our profitability. Whether these contribution factors will be stable in the future is unknown, but
it is possible that we will be subject to significant increases.
Interconnection
and Unbundled Network Elements
FCC
rule changes relating to unbundling have resulted in increased costs to purchase services and increased uncertainty regarding
the financial viability of providing service using unbundled network elements. As a result, starting in 2006, we placed our Consumer
Phone Services business in “harvest mode,” wherein we seek to retain existing customers but do not actively market
to new customers.
We
continue to negotiate interconnection arrangements with Incumbent Local Exchange Carriers, or ILECs, generally on a state-by-state
basis, for our Consumer Phone Services business as well as other businesses. These agreements typically have terms of two or three
years and need to be periodically renewed and renegotiated. While current FCC rules and regulations require the incumbent provider
to provide certain network elements necessary for us to provision end-user services on an individual and combined basis, we cannot
assure that the ILECs will provide these components in a manner and at a price that will support competitive operations.
Access
Charges
As
a provider of long distance services, we remit access fees directly to local exchange carriers or indirectly to our underlying
long-distance carriers for the origination and termination of our long-distance telecommunications traffic. Generally, intrastate
access charges are higher than interstate access charges. Therefore, to the degree access charges increase or a greater percentage
of our long-distance traffic becomes intrastate, our costs of providing long distance services will increase. Similarly, as a
local exchange provider, we bill access charges to long distance providers for the termination of those providers’ long-distance
calls. Accordingly, as opposed to our long-distance business, our local exchange business benefits from the receipt of intrastate
and interstate long distance traffic. Under FCC rules, our interstate access rates must be set at levels no higher than those
of the ILEC in each area we serve, which limits our ability to seek increased revenue from these services. Some, but not all,
states have similar restrictions on our intrastate access charges.
For
nearly a decade, the FCC has had open regulatory proceedings in which it has considered reforming “intercarrier compensation,”
which is a term that covers the payments that carriers bill and remit to each other-access charges and reciprocal compensation,
generally-for the use of telecommunications networks to originate and terminate phone calls. On November 18, 2011, the FCC released
a Report and Order and Further Notice of Proposed Rulemaking wherein it set forth a schedule which, over a period of several years,
substantially reduces terminating access rates. Since we both make payments to and receive payments from other carriers for terminating
long distance calls, the FCC’s action has the effect of reducing payments we receive from other carriers while also reducing
our costs to terminate our long-distance calls. The FCC has also raised the possibility - which it has yet to conclusively act
upon - that it will reduce originating access charges in a similar manner. Due to the nature of IDT’s business, IDT pays,
but does not bill originating access charges. At this time we cannot predict the effect future FCC actions may have upon our business.
Customer
Proprietary Network Information
In
2007, the FCC increased its regulatory oversight of Customer Proprietary Network Information, or CPNI. The FCC took this increased
role in response to several high-profile cases of “pretexting,” which occurs when an individual secures from a communications
provider, through deception, the private phone records of another person. We have a CPNI compliance policy in place and we believe
we currently meet or exceed all FCC requirements for the protection of CPNI. However, we cannot be assured that we are in full
compliance and if the FCC were to conclude that we were not in compliance, we could be subject to fines or other forms of sanction.
Straight
Path Spectrum LLC
On
September 20, 2016, we 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 ours 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. As disclosed in Straight Path’s filings with the SEC, Straight Path entered into a consent decree with the FCC
that terminated the FCC’s related investigation against Straight Path. We have cooperated with the FCC in this matter and
have responded to the letter of inquiry. If the FCC were to pursue separate action against us, the FCC could seek to fine or impose
regulatory penalties or civil liability on us related to activities during the period of ownership by us.
Regulation
of Telecom by State Public Utility Commissions
Our
telecommunications services that originate and terminate within the same state, including both local and in-state long distance
services are subject to the jurisdiction of that state’s public utility commission. The Communications Act of 1934, as amended,
generally preempts state statutes and regulations that prevent the provision of competitive services, but permits state public
utility commissions to regulate the rates, terms and conditions of intrastate services, so long as such regulation is not inconsistent
with the requirements of federal law. We are certified to provide facilities-based and/or resold long-distance service in all
50 states and facilities-based and resold local exchange service in 45 states. In addition to requiring certification, state regulatory
authorities may impose tariff and filing requirements, consumer protection measures, and obligations to contribute to universal
service and other funds. Rates for intrastate switched access services, which we both pay to local exchange companies and collect
from long-distance companies for terminating in-state toll calls, are subject to the jurisdiction of the state commissions. State
commissions also have jurisdiction to approve negotiated rates, or establish rates through arbitration, for interconnection, including
rates for unbundled network elements. Changes in those access charges or rates for unbundled network elements could have a substantial
and material impact on our business.
Regulation
of Telecom—International
In
connection with our international operations, we have obtained licenses or are otherwise authorized to provide telecommunications
services in various foreign countries. We have obtained licenses or authorizations in Argentina, Australia, Belgium, Brazil, Canada,
Chile, Denmark, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, Peru, Singapore, South Africa, Spain, Sweden, Switzerland,
the United Kingdom and Uruguay. In numerous countries where we operate or plan to operate, we are subject to many local laws and
regulations that, among other things, may restrict or limit the ability of telecommunications companies to provide telecommunications
services in competition with state-owned or state-sanctioned dominant carriers.
Regulation
of Internet Telephony
The
use of the Internet and private IP networks to provide voice communications services is generally less regulated than traditional
switch-based telephony within the United States and abroad and, in many markets, is not subject to the imposition of certain taxes
and fees that increase our costs. As a result, IDT is able, in many markets, to offer VoIP communications services at rates that
are more attractive than those applicable to traditional telephone services. However, in the U.S. and abroad, there have been
efforts by legislatures and regulators to harmonize the regulatory structures between traditional switch-based telephony and VoIP.
This could result in additional fees, charges, taxes and regulations on IP communications services that could materially increase
our costs and may limit or eliminate our competitive pricing advantages. Additionally, several foreign governments have adopted
laws and/or regulations that could restrict or prohibit the provision of voice communications services over the Internet or private
IP networks. These efforts could likewise harm our ability to offer VoIP communications services.
Money
Transmitter and Payment Instrument Laws and Regulations
Our
consumer payment services offerings include money transfer and various network branded (also called “open loop”) prepaid
card offerings. These industries are heavily regulated. Accordingly, we, and the products and services that we market in consumer
payment services, are subject to a variety of federal and state laws and regulations, including:
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Banking
laws and regulations;
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Money
transmitter and payment instrument laws and regulations;
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Anti-money
laundering laws;
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Privacy
and data security laws and regulations;
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Consumer
protection laws and regulations;
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Unclaimed
property laws; and
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Card
association and network organization rules.
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In
connection with the development of our money transmission services and the expansion of our network branded prepaid card offerings,
we have actively pursued our own money transmitter licenses. At July 31, 2017, we had received a money transmitter license in
47 of the 49 U.S. states that require such a license, as well as in Puerto Rico and Washington, D.C.
Regulation
of Other Businesses
We
operate other smaller or early-stage initiatives and operations, which may be subject to federal, state, local or foreign law
and regulation.
INTELLECTUAL
PROPERTY
We
rely on a combination of patents, copyrights, trademarks, domain name registrations and trade secret laws in the United States
and other jurisdictions and contractual restrictions to protect our intellectual property rights and our brand names. All of our
employees sign confidentiality agreements. These agreements provide that the employee may not use or disclose our confidential
information except as expressly permitted in connection with the performance of his or her duties for us, or in other limited
circumstances. These agreements also state that, to the extent rights in any invention conceived by the employee while employed
by us do not vest in us automatically by operation of law, the employee is required to assign his or her rights to us.
We
own approximately 100 trademark and service mark registrations and pending applications in the United States and at least 360
registrations and pending applications abroad. We protect our brands in the marketplace including the IDT, Boss Revolution and
net2phone brands. Where deemed appropriate, we have filed trademark applications throughout the world in an effort to protect
our trademarks. Where deemed appropriate, we have also filed patent applications in an effort to protect our patentable intellectual
property. IDT Corporation owns 11 issued patents and 3 patent applications in the United States and 14 patents issued abroad with
4 patent applications pending abroad.
We
maintain a global telecommunications switching and transmission infrastructure that enables us to provide an array of telecommunications,
Internet access and Internet telephony services to our customers worldwide. We have domestic and foreign patents and patent applications
regarding our infrastructure and/or global telecommunication network for our international telecommunications traffic and the
international traffic of other telecommunications companies.
Circumstances
outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection
may not be available in every country in which our products and services are distributed. Also, the efforts we have taken to protect
our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could
harm our business or our ability to compete. Also, protecting our intellectual property rights is costly and time consuming. Any
increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating
results.
Companies
in the telecommunications industry and other industries in which we compete own large numbers of patents, copyrights and trademarks
and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights.
As we face increasing competition, the possibility of intellectual property claims against us grows. Although we do not believe
that we infringe upon the intellectual property rights of others, our technologies may not be able to withstand any third-party
claims or rights against their use.
IDT
Telecom
In
addition to IDT Corporation’s patents, our net2phone subsidiary currently owns 29 issued patents and has 2 pending patent
applications in the United States. net2phone has 5 foreign issued patents, and no patent applications pending abroad.
net2phone
owns at least 15 trademark and service mark registrations and at least 2 pending applications in the United States. net2phone
owns at least 115 trademark and service mark registrations and at least 2 pending applications in various foreign countries. net2phone’s
most important mark is “NET2PHONE.” net2phone has made a significant investment in protecting this mark, and net2phone
believes it has achieved recognition in the United States and abroad. net2phone is currently engaged in an international filing
program to file trademark applications for trademark registrations of the mark NET2PHONE in a number of foreign countries.
Other
We
also currently own three patents and three pending patent applications and three registrations in the United States that relate
to business operations we oversee or businesses-in-development. We also own or license certain trademark and service mark registrations
and pending applications in the United States and additional registrations abroad.
RESEARCH
AND DEVELOPMENT
We
incurred no research and development costs during fiscal 2017 and fiscal 2016. In fiscal 2015, we incurred research and development
costs of $1.7 million, all of which related to Fabrix.
EMPLOYEES
As
of October 1, 2017, we had a total of 1,224 employees, of which 1,221 were full-time employees.
Item
1A. Risk Factors.
RISK
FACTORS
Our
business, operating results or financial condition could be materially adversely affected by any of the following risks as well
as the other risks highlighted elsewhere in this document, particularly the discussions about regulation, competition and intellectual
property. The trading price of our Class B common stock could decline due to any of these risks.
Risks
Related to Our Businesses
Each
of our telecommunications lines of business is highly sensitive to declining prices, which may adversely affect our revenues and
margins.
The
worldwide telecommunications industry is characterized by intense price competition, which has resulted in declines in both our
average per-minute price realizations and our average per-minute termination costs. Many of our competitors continue to aggressively
price their services. The intense competition has led to continued erosion in our pricing power, in both our retail and wholesale
markets, and we have generally had to pass along all or some of the savings we achieve on our per-minute costs to our customers
in the form of lower prices. In the case of some international calling locations, when average per minute termination cost decline
to a nominal amount, indirect competitors, such as wireless carriers, may include calls to those locations at no extra cost, which
increases our risk of losing customers. For example, following regulatory changes intended to increase domestic competition in
the Mexican telecommunications market, the cost of terminating international calls to Mexico declined significantly. As a result,
many of our competitors, including some of the large U.S. mobile operators, began offering unlimited Mexico calling as part of
their monthly pricing plans, which caused a decline in our minutes of use and revenue. In July 2016, we significantly reduced
pricing on Boss Revolution’s U.S. to Mexico corridor, which accelerated the decline in our revenue and gross profit.
Any
increase by us in pricing may result in our prices not being as attractive, which may result in a reduction of revenue. If these
trends in pricing continue or accelerate, it could have a material adverse effect on the revenues generated by our telecommunications
businesses and/or our gross margins.
Because
our Boss Revolution and other retail products generate a significant portion of our revenue, our growth and our results of operations
are substantially dependent upon growth in these products.
Our
growth and our results of operations are substantially dependent upon growth in our Boss Revolution and other retail products
that currently generate a significant portion of our revenue. We compete in the international prepaid calling market with Tier
1 mobile network operators who offer flat rate international calling plans, other PIN-less prepaid voice offerings, prepaid calling
card providers, mobile virtual network operators (or MVNOs) with aggressive international rate plans, and VoIP and other “over
the top” (OTT) service providers.
Many
of these companies, such as AT&T, Verizon, T-Mobile and Sprint, are substantially larger and have greater financial, technical,
engineering, personnel and marketing resources, longer operating histories, greater name recognition and larger customer bases
than we do. The use by these competitors of their resources in or affecting the international prepaid calling market could significantly
impact our ability to compete against them successfully.
In
addition to these larger competitors, we face significant competition from smaller prepaid calling providers, who from time-to-time
offer rates that are substantially below our rates, and in some instances below what we believe to be the cost to provide the
service, to gain market share. This type of pricing by one or more competitors can adversely affect our revenues, as they gain
market share at our expense, and our gross margins, if we lower rates to better compete.
The
continued growth of Over-The-Top calling and messaging services, such as Skype, Viber WhatsApp has adversely affected the sales
of Boss Revolution and our other prepaid calling services. We expect the popularity of IP-based services—many of which offer
voice communications for free provided both the caller and recipient have a broadband connection—to continue to increase,
which may result in increased substitution and pricing pressure on our Boss Revolution and other international prepaid calling
service offerings.
Certain
wireless operators have been rolling out unlimited international long-distance plans that include international destinations to
which customers can place direct calls from their mobile phones without time limitation. These plans now include some of our most
popular international destinations. The growth of these “international unlimited” plans adversely affects our revenues
as these operators gain subscriber market share.
If
we are unable to grow our Boss Revolution and other retail products, it could have a material adverse effect on the revenues generated
by our telecommunications businesses, our gross margins and/or our profits.
We
may be unable to achieve some, all or any of the benefits that we expect to achieve from our plan to separate our businesses into
three separate entities.
In
August 2015, our Board of Directors approved a plan to reorganize us into three separate entities by spinning off two non-core
business units and certain assets, one of which was Zedge, to our stockholders, which we completed on June 1, 2016. Throughout
fiscal 2017, we prepared to spin off additional non-core assets including our interests in two clinical and early stage pharmaceutical
companies - Rafael Pharmaceuticals and Lipomedix Pharmaceuticals Ltd. - and our real estate holdings to our shareholders as Rafael
Holdings, Inc. In addition, we intend to contribute $50 million to $60 million in cash to Rafael Holdings, Inc. prior to the spin-off.
Following
the spin-offs, we expect to have sufficient liquidity to support the development of our business for the medium term, but there
can be no assurance of such liquidity. In the future, however, we may require additional financing for capital requirements and
growth initiatives. Accordingly, we will depend on our ability to generate cash flows from operations and to borrow funds and
issue securities in the capital markets to maintain and expand our business. We may need to incur debt on terms and at interest
rates that may not be as favorable as those historically enjoyed by us. If additional financing is not available when required
or is not available on acceptable terms, we may be unable to operate our business as planned or at all, fund our expansion, successfully
promote our business, develop or enhance our products and services, take advantage of business opportunities or respond to competitive
pressures, any of which could have a material adverse effect on our products and business, financial condition and results of
operations.
By
separating entities such as Zedge and Rafael Holdings, Inc. from us, there is a risk that we may be more susceptible to stock
market fluctuations and other adverse events than we would have been due to a reduction in market diversification. We expect that
the aggregate market value of the three separate companies will exceed the market capitalization of all the businesses being operated
by us because investors will be able to invest in a company that they are attracted to without having to also invest in the other
two companies. However, this expectation may be incorrect, and the aggregate value of the three separate companies may be less
than the market capitalization of the businesses being operated by us.
We
may not be able to obtain sufficient or cost-effective termination capacity to particular destinations.
Most
of our telecommunications traffic is terminated through third-party providers. In order to support our minutes-of-use demands
and geographic footprint, we may need to obtain additional termination capacity or destinations. We may not be able to obtain
sufficient termination capacity from high-quality carriers to particular destinations or may have to pay significant amounts to
obtain such capacity. This could result in our not being able to support our minutes-of-use demands or in higher cost-per-minute
to particular destinations, which could adversely affect our revenues and margins.
The
termination of our carrier agreements with foreign partners or our inability to enter into carrier agreements in the future could
materially and adversely affect our ability to compete, which could reduce our revenues and profits.
We
rely upon our carrier agreements with foreign partners in order to provide our telecommunications services to our customers. These
carrier agreements are for finite terms and, therefore, there can be no guarantee that these agreements will be renewed at all
or on favorable terms to us. Our ability to compete would be adversely affected if our carrier agreements were terminated or we
were unable to enter into carrier agreements in the future to provide our telecommunications services to our customers, which
could result in a reduction of our revenues and profits.
As
more competitors offer international airtime top-up service, our ability to secure competitive direct or indirect, exclusive or
non-exclusive, agreements with international wireless operators could become more difficult or less attractive, thereby having
an adverse effect on our revenues and operations.
Our
customers, particularly our Wholesale Carrier Services customers, could experience financial difficulties, which could adversely
affect our revenues and profitability if we experience difficulties in collecting our receivables.
As
a provider of international long-distance services, we depend upon sales of transmission and termination of traffic to other long
distance providers and the collection of receivables from these customers. The wholesale telecommunications market continues to
feature many smaller, less financially stable companies. If weakness in the telecommunications industry or the global economy
reduces our ability to collect our accounts receivable from our major customers, particularly our wholesale customers, our profitability
may be substantially reduced. While our most significant customers, from a revenue perspective, vary from quarter to quarter,
our five largest Wholesale Carrier Services customers collectively accounted for 10.6% and 6.3% of total consolidated revenues
in fiscal 2017 and fiscal 2016, respectively. Our Wholesale Carrier Services customers with the five largest receivables balances
collectively accounted for 34.9% and 21.5% of the consolidated gross trade accounts receivable at July 31, 2017 and 2016, respectively.
This concentration of revenues and receivables increases our exposure to non-payment by our larger customers, and we may experience
significant write-offs if any of our large customers fail to pay their outstanding balances, which could adversely affect our
revenues and profitability.
Our
revenues will suffer if our distributors and sales representatives fail to effectively market and distribute our Boss Revolution
voice and payment services, as well as our traditional disposable calling cards.
We
rely on our distributors and representatives to market and distribute our Boss Revolution products, our traditional disposable
prepaid calling card products, our international airtime top-up offerings and other payment services. We utilize a network of
several hundred sub-distributors that sell our Boss Revolution products, traditional disposable prepaid calling cards, and international
airtime top-up to retail outlets throughout most of the United States. In foreign countries, we are dependent upon our distributors
and independent sales representatives, many of which sell services or products for other companies. As a result, we cannot control
whether these foreign distributors and sales representatives will devote sufficient efforts to selling our services. In addition,
we may not succeed in finding capable distributors, retailers and sales representatives in new markets that we may enter. If our
distributors or sales representatives fail to effectively market or distribute our Boss Revolution products, prepaid calling card
products, international airtime top-up offerings and other services, our ability to generate revenues and grow our customer base
could be substantially impaired.
Natural
or man-made disasters could have an adverse effect on our technological infrastructure.
Natural
disasters, terrorist acts, acts of war, cyber-attacks or other breaches of network or information technology security may cause
equipment failures or disrupt our operations. Our inability to operate our telecommunications networks because of such events,
even for a limited period of time, may result in loss of revenue, significant expenses and/or loss of market share to other communications
providers, which could have a material adverse effect on our results of operations and financial condition.
Certain
functions related to our business depend on a single supplier or small group of suppliers to carry out our business, and the inability
to do business with some or all of these suppliers could have a materially adverse effect on our business and financial results.
If
the services of any of the single suppliers or small group of suppliers that we depend on were unavailable, or available only
in decreased capacity or at less advantageous terms, this could result in interruptions to our ability to provide certain services,
could cause reduction in service and/or quality as the function is transitioned to an alternate provider, if an alternate provider
is available, or could increase our cost, which in the current competitive environment, we may not be able to pass along to customers.
For
example and without limitation, the platforms that support our Hosted PBX business and our money remittance business are each
leased from a third party. These platforms are susceptible to, and have incurred, service interruptions, which can occur frequently
and can be lengthy in duration. Any such service interruption of the platform could effectively temporarily cease or otherwise
materially impair operations of our applicable business. In addition, if these platforms became permanently unavailable for any
reason, including, without limitation, because the third-party owner of such platform no longer provided the service for any reason,
then our applicable business would be materially negatively affected.
Accordingly,
any of these events could materially and negatively impact our business, our revenues, our margins, and our relationships with
customers.
We
could be harmed by network disruptions, security breaches, or other significant disruptions or failures of our IT infrastructure
and related systems or of those we operate for certain of our customers.
To
be successful, we need to continue to have available, for our and our customers’ use, a high capacity, reliable and secure
network. We face the risk, as does any company, of a security breach, whether through cyber-attacks, malware, computer viruses,
sabotage, or other significant disruption of our IT infrastructure and related systems. As such, there is a risk of a security
breach or disruption of the systems we operate, including possible unauthorized access to our and our customers’ proprietary
or classified information. We are also subject to breaches of our network resulting in unauthorized utilization of our services
or products, which subject us to the costs of providing those products or services, which are likely not recoverable. The secure
maintenance and transmission of our and our customer’s information is a critical element of our operations. Our information
technology and other systems that maintain and transmit customer information, or those of service providers or business partners,
may be compromised by a malicious third-party penetration of our network security, or that of a third party service provider or
business partner, or impacted by advertent or inadvertent actions or inactions by our employees, or those of a third party service
provider or business partner. As a result, our or our customers’ information may be lost, disclosed, accessed or taken without
the customers’ consent, or our products and services may be used without payment.
Although
we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no
assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not
be successful or damaging, especially in light of the growing sophistication of cyber-attacks and intrusions. We may be unable
to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures.
Certain of our business units have been the subject of attempted and successful cyber-attacks in the past. We have researched
the situations and do not believe any material internal or customer information has been compromised.
Network
disruptions, security breaches and other significant failures of the above-described systems could (i) disrupt the proper functioning
of our networks and systems and therefore our operations or those of certain of our customers; (ii) result in the unauthorized
use of our services or products without payment, (iii) result in the unauthorized access to, and destruction, loss, theft, misappropriation
or release of proprietary, confidential, sensitive or otherwise valuable information of ours or our customers, including trade
secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
(iv) require significant management attention or financial resources to remedy the damages that result or to change our systems
and processes; (v) subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies;
or (vi) result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional
regulatory scrutiny or expose us to litigation. Any or all of which could have a negative impact on our results of operations,
financial condition and cash flows.
We
could fail to comply with requirements imposed on us by certain third parties, including regulators.
A
significant and increasing portion of our telecom transactions are processed using credit cards and similar payment methods. The
banks, credit card companies and other relevant parties impose strict system and other requirements to participate in such parties’
payment systems. We are required to comply with the privacy provisions of various federal and state privacy statutes and regulations,
and the Payment Card Industry Data Security Standard, each of which is subject to change at any time. Compliance with these requirements
is often difficult and costly, and our failure, or our distributors’ failure, to comply may result in significant fines
or civil penalties, regulatory enforcement action, liability under or termination of necessary agreements related to our payment
services business, each of which could have a material adverse effect on our financial position and/or operations and that of
our distributors who could be liable as well. Further, our payment services are subject to stringent requirements by regulators
and trade organizations in various jurisdictions. Our payment services unit is subject to federal and state banking regulations
and we are also subject to further regulation by those states in which we are licensed as a money transmitter. We may not be able
to comply with all such requirements in a timely manner or remain in compliance. If we are not in compliance, we could be subject
to penalties or the termination of our rights to participate in such payment systems or provide such services, which could have
a material negative impact on our ability to carry on and grow our Retail Communications and Payment Services operations.
Risks
Related to Our Financial Condition
We
hold significant cash, cash equivalents, marketable securities and investments that are subject to various market risks.
At
July 31, 2017, we had cash, cash equivalents and marketable securities of $148.6 million. At July 31, 2017, we also had $8.6 million
in investments in hedge funds, which were included in “Investments” in our consolidated balance sheet. Investments
in marketable securities and hedge funds carry a degree of risk, as there can be no assurance that we can redeem the hedge fund
investments at any time and that our investment managers will be able to accurately predict the course of price movements of securities
and other instruments and, in general, the securities markets have in recent years been characterized by great volatility and
unpredictability. As a result of these different market risks, our holdings of cash, cash equivalents, marketable securities and
investments could be materially and adversely affected.
We
plan on contributing a significant amount of our cash, cash equivalents and marketable securities to Rafael Holdings, Inc., which
we expect to spin-off to our shareholders
At
July 31, 2017, we had cash, cash equivalents and marketable securities of $148.6 million. Throughout fiscal 2017, we prepared
to spin off additional non-core assets including our interests in two clinical and early stage pharmaceutical companies - Rafael
Pharmaceuticals and Lipomedix Pharmaceuticals Ltd. - and our real estate holdings to our shareholders as Rafael Holdings, Inc.
We intend to contribute $50 million to $60 million in cash to Rafael Holdings, Inc. prior to the spin-off, which would significantly
reduce our cash, cash equivalents and marketable securities holdings. This reduction in our cash, cash equivalents and marketable
securities holdings could have a material negative impact on our ability to carry on and grow our businesses, which could result
in a reduction of our business, financial condition and results of operations.
Intellectual
Property, Tax, Regulatory and Litigation Risks
We
provide communications services to consumers and are therefore subject to various Federal and state laws and regulations.
As
a provider of communications services to consumers, such as our Boss Revolution international calling service or our prepaid calling
card services, we are subject to various Federal and state laws and regulations relating to the manner in which we advertise our
services, describe and present the terms of our services, and communicate with our customers and consumers in general. Compliance
with these laws requires us to be constantly vigilant as they often vary from state to state. Failure to comply with these laws
could result in action being taken by Federal and state agencies or offices responsible for consumer protection, like the Federal
Trade Commission.
We
may be adversely affected if we fail to protect our proprietary technology.
We
depend on proprietary technology and other intellectual property rights in conducting our various business operations. We rely
on a combination of patents, copyrights, trademarks and trade secret protection and contractual rights to establish and protect
our proprietary rights. Failure of our patents, copyrights, trademarks and trade secret protection, non-disclosure agreements
and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to
more effectively compete with us and have an adverse effect on our business, financial condition and results of operations.
In
addition, we may be required to litigate in the future to enforce our intellectual property rights, to protect our trade secrets,
to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity.
Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our
business, financial condition or results of operations, and there can be no assurances that we will be successful in any such
litigation.
We
may be subject to claims of infringement of intellectual property rights of others.
From
time to time we may be subject to claims and legal proceedings from third parties regarding alleged infringement by us of trademarks,
copyrights, patents and other intellectual property rights. Such suits can be expensive and time consuming and could distract
us and our management from focusing on our businesses. Further, loss of such suits could result in financial burdens and the requirement
to modify our modes of operation, which could materially adversely affect our business.
We
are subject to tax and regulatory audits which could result in the imposition of liabilities that may or may not have been reserved.
We
are subject to audits by taxing and regulatory authorities with respect to certain of our income and operations. These audits
can cover periods for several years prior to the date the audit is undertaken and could result in the imposition of liabilities,
interest and penalties if our positions are not accepted by the auditing entity.
Our
FCC Form 499-A filings for calendar years 2000 through 2006 related to payments to the Universal Service Fund have been audited
by the Internal Audit Division, or IAD, of the Universal Service Administrative Company, or USAC, which concluded that we incorrectly
reported certain revenues on Forms 499-A. USAC’s revisions to our filing methodology resulted in additional regulatory payments
for the years covered by the audits. While we believe in the accuracy of our filing methodology and our Request for Review remains
pending, we have implemented some of the revisions set forth in the IAD’s filings beginning with our calendar year 2010
Form 499-A. We have accrued for all regulatory fees we believe may be incurred under IAD’s methodology from 2002 through
the present, in the event our Request for Review is denied and/or our methodology is not upheld on appeal, and we have made certain
payments on amounts that have been invoiced to us by USAC and/or other agencies. Our 2017 FCC Form 499-A, which reports our calendar
year 2016 revenue, is currently under audit by the IAD. At July 31, 2017, our accrued expenses included $43.5 million for these
regulatory fees for the years covered by the audit and subsequent years. Until a final decision has been reached in our disputes,
we will continue to accrue in accordance with IAD’s methodology. If we do not properly calculate, or have not properly calculated,
the amount payable by us to the Universal Service Fund, we may be subject to interest and penalties.
On
September 20, 2016, we 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 ours 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. As disclosed in Straight Path’s filings with the SEC, Straight Path entered into a consent decree with the FCC
that terminated the FCC’s related investigation against Straight Path. We have cooperated with the FCC in this matter and
have responded to the letter of inquiry. If the FCC were to pursue separate action against us, the FCC could seek to fine or impose
regulatory penalties or civil liability on us related to activities during the period of ownership by us.
We
are subject to value added tax, or VAT, audits from time-to-time in various jurisdictions. In the conduct of such audits, we may
be required to disclose information of a sensitive nature and, in general, to modify the way we have conducted business with our
distributors until the present, which may affect our business in an adverse manner.
We
are also subject to audits in various jurisdictions for various other taxes, including utility excise tax, sales and use tax,
communications services tax, gross receipts tax and property tax.
Our
business is subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure
to comply with such laws, or abuse of our programs for purposes of money laundering or terrorist financing, could have a material
adverse impact on our business.
Provisions
of the USA PATRIOT Act, the Bank Secrecy Act and other federal laws impose substantial regulations on financial institutions that
are designed to prevent money laundering and the financing of terrorist organizations. Increasing regulatory scrutiny of our industry
with respect to money laundering and terrorist financing matters could result in more aggressive enforcement of these laws or
the enactment of more onerous regulation, which could have a material adverse impact on our business. In addition, abuse of our
money transfer services or prepaid card programs for purposes of money laundering or terrorist financing, notwithstanding our
efforts to prevent such abuse through our regulatory compliance and risk management programs, could cause reputational or other
harm that would have a material adverse impact on our business.
Our
business is subject to a wide range of laws and regulations intended to help detect and prevent illegal or illicit activity and
our failure, or the failure of one of our disbursement partners or payment processors to comply with those laws and regulations
could harm our business, financial condition and results of operations.
Our
money transfer and network branded prepaid card services are subject to a strict set of legal and regulatory requirements intended
to help detect and prevent money laundering, terrorist financing, fraud and other illicit activity. The interpretation of those
requirements by judges, regulatory bodies and enforcement agencies is changing, often quickly and with little notice. Economic
and trade sanctions programs that are administered by the U.S. Treasury Department’s Office of Foreign Assets Control, or
OFAC, prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances,
with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers and terrorists
or terrorist organizations. As federal, state and foreign legislative regulatory scrutiny and enforcement action in these areas
increase, we expect our costs to comply with these requirements will increase, perhaps substantially. Failure to comply with any
of these requirements by us, our regulated retailers or our disbursement partners could result in the suspension or revocation
of a money transmitter license, the limitation, suspension or termination of our services, the seizure and/or forfeiture of our
assets and/or the imposition of civil and criminal penalties, including fines.
The
foregoing laws and regulations are constantly evolving, unclear and inconsistent across various jurisdictions, making compliance
challenging. If we fail to update our compliance system to reflect legislative or regulatory developments, we could incur penalties.
New legislation, changes in laws or regulations, implementing rules and regulations, litigation, court rulings, changes in industry
practices or standards, changes in systems rules or requirements or other similar events could expose us to increased compliance
costs, liability, reputational damage, and could reduce the market value of our money transfer and network branded prepaid card
services or render them less profitable or obsolete.
The
Dodd-Frank Act, as well as the regulations required by the Dodd-Frank Act, and the Consumer Financial Protection Bureau could
harm us and the scope of our activities, and could harm our operations, results of operations and financial condition.
The
Dodd-Frank Act, which became law in the United States on July 21, 2010, calls for significant structural reforms and substantive
regulation across the financial services industry. In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau,
or CFPB, whose purpose is to issue and enforce consumer protection initiatives governing financial products and services, including
money transfer services.
We
may be subject to examination by the CFPB, which has broad authority to enforce consumer financial laws. The CFPB has a large
budget and staff and has broad authority with respect to our money transfer service and related business. It is authorized to
collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer
complaints, request data and promote the availability of financial services to underserved consumers and communities. In addition,
the CFPB may adopt other regulations governing consumer financial services, including regulations defining unfair, deceptive or
abusive acts or practices, and new model disclosures. The CFPB’s authority to change regulations adopted in the past by
other regulators, or to rescind or alter past regulatory guidance, could increase our compliance costs and litigation exposure.
The
Dodd-Frank Act establishes a Financial Stability Oversight Counsel that is authorized to designate as “systemically important”
non-bank financial companies and payment systems. Companies designated under either standard will become subject to new regulation
and regulatory supervision. If we were designated under either standard, the additional regulatory and supervisory requirements
could result in costly new compliance burdens or may require changes in the way we conduct business that could harm our business.
We
are subject to licensing and other requirements imposed by U.S. state regulators, and the U.S. federal government. If we were
found to be subject to or in violation of any laws or regulations governing money transmitters, we could lose our licenses, be
subject to liability or be forced to change our business practices.
A
number of states have enacted legislation regulating money transmitters, with 49 states requiring a license as of July 31, 2017.
At July 31, 2017, we had obtained licenses to operate as a money transmitter in 47 U.S. states, Washington, D.C. and Puerto Rico.
We are also registered as money services businesses with the Financial Crimes Enforcement Network of the U.S. Department of the
Treasury, or FinCEN. As a licensed money transmitter, we are subject to bonding requirements, liquidity requirements, restrictions
on our investment of customer funds, reporting requirements and inspection by state and foreign regulatory agencies. If we were
found to be subject to and in violation of any banking or money services laws or regulations, we could be subject to liability
or additional restrictions, such as increased liquidity requirements. In addition, our licenses could be revoked or we could be
forced to cease doing business or change our practices in certain states or jurisdictions, or be required to obtain additional
licenses or regulatory approvals that could impose a substantial cost on us. Regulators could also impose other regulatory orders
and sanctions on us. Any change to our business practices that makes our service less attractive to customers or prohibits use
of our services by residents of a particular jurisdiction could decrease our transaction volume and harm our business.
Our
disbursement partners generally are regulated institutions in their home jurisdiction, and money transfers are regulated by governments
in both the United States and in the jurisdiction of the recipient. If our disbursement partners fail to comply with applicable
laws, it could harm our business.
Money
transfers are regulated by state, federal and foreign governments. Many of our disbursement partners are banks that are heavily
regulated by their home jurisdictions. Our non-bank disbursement partners are also subject to money transfer regulations. We require
regulatory compliance as a condition to our continued relationship, perform due diligence on our disbursement partners and monitor
them periodically with the goal of meeting regulatory expectations. However, there are limits to the extent to which we can monitor
their regulatory compliance. Any determination that our disbursement partners or their sub-disbursement partners have violated
laws and regulations could seriously damage our reputation, resulting in diminished revenue and profit and increased operating
costs. While our services are not directly regulated by governments outside the United States, except with respect to our Gibraltar
bank as discussed below, it is possible that in some cases we could be liable for the failure of our disbursement partners or
their sub-disbursement partners to comply with laws, which also could harm our business, financial condition and results of operations.
Our
bank in Gibraltar is regulated by the Gibraltar Financial Services Commission (the FSC), and, as such, is subject to
Gibraltarian and European Union laws relating to financial institutions. As an issuer of prepaid debit cards for programs
operated by other entities, commonly known as program managers, the bank is responsible, inter alia, for anti-money
laundering laws oversight and compliance. If we were to fail to implement the requisite controls or follow the rules and
procedures mandated by the FSC and applicable law, we could be subject to regulatory fines, and even the loss of our banking
license. In fiscal 2016, a referendum took place in the United Kingdom in which a majority voted in favor of the United
Kingdom’s exit from the European Union – commonly referred to as “Brexit”. As a bank licensed in
Europe, our bank in Gibraltar currently benefits from its ability to passport its license to operate in any European Union
member state. However, as a British territory, if Brexit occurs, and no alternative arrangements are established with respect
to licensing of British banks in the European Union, our bank in Gibraltar may not be able to passport its license into
European Union member states.
In 2017, we entered into an agreement to sell our Gibraltar-based bank for approximately
$18 million, which we expect to close in calendar 2017.
We
receive, store, process and use personal information and other data, which subjects us to governmental regulation and other legal
obligations related to privacy. Our actual or perceived failure to comply with such obligations could harm our business.
We
receive, store and process personal information and other customer data, including bank account numbers, credit and debit card
information, identification numbers and images of government identification cards. As a result, we are required to comply with
the privacy provisions of the Gramm-Leach-Bliley Act of 1999, or the Gramm-Leach-Bliley Act, and the Payment Card Industry Data
Security Standard. There are also numerous other federal, state and local laws around the world regarding privacy and the storing,
sharing, use, processing, disclosure and protection of personal information and other customer data, the scope of which are changing,
subject to differing interpretations, and may be inconsistent among different jurisdictions or conflict with other applicable
rules. It is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction
to another and may conflict with other rules or our business practices.
Additionally,
with advances in computer capabilities and data protection requirements to address ongoing threats, we may be required to expend
significant capital and other resources to protect against potential security breaches or to alleviate problems caused by security
breaches.
Any
failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other
third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release
or transfer of personally identifiable information or other customer data, may result in governmental enforcement actions, fines
or litigation. If there is a breach of credit or debit card information that we store, we could also be liable to the issuing
banks for their cost of issuing new cards and related expenses. In addition, a significant breach could result in our being prohibited
from processing transactions for any of the relevant network organizations, such as Visa or MasterCard, which would harm our business.
If any third parties with whom we work, such as marketing partners, vendors or developers, violate applicable laws or our policies,
such violations may put our customers’ information at risk and could harm our business. Any negative publicity arising out
of a data breach or failure to comply with applicable privacy requirements could damage our reputation and cause our customers
to lose trust in us, which could harm our business, results of operations, financial position and potential for growth.
Federal
and state regulations may be passed that could harm our business.
Our
ability to provide VoIP communications services at attractive rates arises in large part from the fact that VoIP services are
not currently subject to the same level of regulation as traditional, switch-based telephony. The use of the Internet and private
IP networks to provide voice communications services is largely unregulated within the United States, although several foreign
governments have adopted laws and/or regulations that could restrict or prohibit the provision of voice communications services
over the Internet or private IP networks. If interconnected VoIP services become subject to state regulation and/or additional
regulation by the FCC, such regulation will likely lead to higher costs and reduce or eliminate the competitive advantage interconnected
VoIP holds, by virtue of its lesser regulatory oversight, over traditional telecommunications services. More aggressive regulation
of the Internet in general, and Internet telephony providers and services specifically, may materially and adversely affect our
business, financial condition and results of operations.
Our
ability to offer services outside of the United States is subject to the local regulatory environment, which may be unfavorable,
complicated and often uncertain.
Regulatory
treatment outside the United States varies from country to country. We distribute our products and services through resellers
that may be subject to telecommunications regulations in their home countries. The failure of these resellers to comply with these
laws and regulations could reduce our revenue and profitability, or expose us to audits and other regulatory proceedings. Regulatory
developments such as these could have a material adverse effect on our operating results.
In
many countries in which we operate or our services are sold, the status of the laws that may relate to our services is unclear.
We cannot be certain that our customers, resellers, or other affiliates are currently in compliance with regulatory or other legal
requirements in their respective countries, that they or we will be able to comply with existing or future requirements, and/or
that they or we will continue in compliance with any requirements. Our failure or the failure of those with whom we transact business
to comply with these requirements could materially adversely affect our business, financial condition and results of operations.
While
we expect additional regulation of our industry in some or all of these areas, and we expect continuing changes in the regulatory
environment as new and proposed regulations are reviewed, revised and amended, we cannot predict with certainty what impact new
laws in these areas will have on us, if any. For a complete discussion of what we believe are the most material regulations impacting
our business, see Item 1 to Part I “Business-Regulation” included elsewhere in this Annual Report.
We
are subject to legal proceedings in the ordinary course of business that may have a material adverse effect on our business, results
of operations, cash flows or financial condition.
Various
legal proceedings that have arisen or may arise in the ordinary course of business have not been finally adjudicated, which may
have a material adverse effect on our results of operations, cash flows or financial condition.
In
particular, 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 Delaware Chancery Court against us, The Patrick Henry Trust (a trust formed by Howard S. Jonas to hold record and beneficial
ownership of all of his shares of Straight Path), Howard S. Jonas, and each of Straight Path’s directors. The complaint
alleges that we aided and abetted Straight Path’s directors 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 us related to potential indemnification claims concerning Straight Path’s obligations under the Consent Decree
it entered into with the FCC, as well as the proposed sale of Straight Path’s subsidiary Straight Path IP Group, Inc. to
us 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 receiving 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, the Chairman of the Board
and Chief Executive Officer of Straight Path, and us 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. We intend to vigorously defend the action.
Risks
Related to Our Capital Structure
Holders
of our Class B common stock have significantly less voting power than holders of our Class A common stock.
Holders
of our Class B common stock are entitled to one-tenth of a vote per share on all matters on which our stockholders are entitled
to vote, while holders of our Class A common stock are entitled to three votes per share. As a result, the ability of holders
of our Class B common stock to influence our management is limited.
We
are controlled by our principal stockholder, which limits the ability of other stockholders to affect our management.
Howard
S. Jonas, our Chairman of the Board and founder, has voting power over 4,279,503 shares of our common stock (which includes 1,574,326
shares of our Class A common stock, which are convertible into shares of our Class B common stock on a 1-for-1 basis, and 2,705,177
shares of our Class B common stock), representing approximately 70.8% of the combined voting power of our outstanding capital
stock, as of October 10, 2017. In addition, Mr. Jonas holds an option to purchase 1,000,000 shares of our Class B common stock,
which is fully vested and exercisable. Mr. Jonas is able to control matters requiring approval by our stockholders, including
the election of all of the directors and the approval of significant corporate matters, including any merger, consolidation or
sale of all or substantially all of our assets. As a result, the ability of any of our other stockholders to influence our management
is limited.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Our
headquarters is located in a building that we own in Newark, New Jersey. The building is approximately 496,000 square feet. We
occupy approximately 20% of the building. We also own an 800-car public parking garage located across the street from the building.
In
addition, we own a building in Piscataway, New Jersey that is used partially by IDT Telecom for certain of its operations and
a 12,400 square foot condominium interest in a building in Jerusalem, Israel.
We
lease space in New York, New York for corporate purposes as well as a number of other locations in metropolitan areas. These leased
spaces are utilized primarily to house telecommunications equipment and retail operations.
We
maintain our European headquarters in London, England. We also maintain other various international office locations and telecommunications
facilities in regions of Europe, South America, Central America, the Middle East, Asia and Africa where we conduct operations.
Item
3. Legal Proceedings.
On
May 5, 2004, we 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”). We alleged that Tyco breached a settlement agreement
that it had entered into with us to resolve certain disputes and civil actions among the parties. We alleged that Tyco did not
provide us, as required under the settlement agreement, free of charge and for our 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 our claim and denied our motion for re-argument of that decision. On June
23, 2015, we 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 we
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, we filed an appeal, which Tyco opposed.
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 Delaware Chancery
Court against us, The Patrick Henry Trust (a trust formed by Howard S. Jonas to hold record and beneficial ownership of all of
his shares of Straight Path), Howard S. Jonas, and each of Straight Path’s directors. The complaint alleges that we aided
and abetted Straight Path’s directors 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 us related
to potential indemnification claims concerning Straight Path’s obligations under the Consent Decree it entered into with
the FCC, as well as the proposed sale of Straight Path’s subsidiary Straight Path IP Group, Inc. to us 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 receiving 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, the Chairman of the Board and Chief Executive Officer of
Straight Path, and us 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. We intend to vigorously
defend the action.
In
addition to the foregoing, we are 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, we believe that none of the other legal proceedings
to which we are a party will have a material adverse effect on our results of operations, cash flows or financial condition.
Item
4. Mine Safety Disclosures.
Not
applicable.
Part
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PRICE
RANGE OF COMMON STOCK
Our
Class B common stock trades on the New York Stock Exchange under the symbol “IDT.”
The
table below sets forth the high and low sales prices for our Class B common stock as reported by the New York Stock Exchange for
the fiscal periods indicated.
|
|
High
|
|
|
Low
|
|
Fiscal year ended July 31, 2016
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
17.85
|
|
|
$
|
12.57
|
|
Second Quarter
|
|
$
|
14.90
|
|
|
$
|
10.76
|
|
Third Quarter
|
|
$
|
16.57
|
|
|
$
|
11.66
|
|
Fourth Quarter
|
|
$
|
16.29
|
|
|
$
|
11.78
|
|
Fiscal year ended July 31, 2017
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
18.70
|
|
|
$
|
13.70
|
|
Second Quarter
|
|
$
|
23.13
|
|
|
$
|
15.76
|
|
Third Quarter
|
|
$
|
20.43
|
|
|
$
|
12.03
|
|
Fourth Quarter
|
|
$
|
17.71
|
|
|
$
|
13.38
|
|
On
October 9, 2017, there were 363 holders of record of our Class B common stock and 1 holder of record of our Class A common stock.
All shares of Class A common stock are beneficially owned by Howard Jonas. The number of holders of record of our Class B common
stock does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.
On October 10, 2017, the last sales price reported on the New York Stock Exchange for the Class B common stock was $13.42 per
share.
Additional
information regarding dividends required by this item is incorporated by reference from the Management’s Discussion and
Analysis section found in Item 7 and from Note 18 to the Consolidated Financial Statements.
The
information required by Item 201(d) of Regulation S-K will be contained in our Proxy Statement for our Annual Stockholders Meeting,
which we will file with the Securities and Exchange Commission within 120 days after July 31, 2017, and which is incorporated
by reference herein.
Performance
Graph of Stock
The
line graph below compares the cumulative total stockholder return on our Class B common stock with the cumulative total return
of the New York Stock Exchange Composite Index and the Standard & Poor’s Telecommunication Services Index for the five
years ended July 31, 2017. The graph and table assume that $100 was invested on July 31, 2012 (the last day of trading for the
fiscal year ended July 31, 2012) in shares of our Class B common stock, and that all dividends were reinvested. Cumulative total
return for our Class B common stock includes the value of spin-offs consummated by IDT (i.e., pro rata distributions of the common
stock of a subsidiary to our stockholders). Cumulative total stockholder returns for our Class B common stock, the NYSE Composite
Index and the S&P Telecommunication Services Index are based on our fiscal year.
|
|
7/2012
|
|
|
7/2013
|
|
|
7/2014
|
|
|
7/2015
|
|
|
7/2016
|
|
|
7/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDT Corporation
|
|
|
100.00
|
|
|
|
219.66
|
|
|
|
202.75
|
|
|
|
246.82
|
|
|
|
279.68
|
|
|
|
284.95
|
|
NYSE Composite
|
|
|
100.00
|
|
|
|
118.85
|
|
|
|
144.85
|
|
|
|
136.68
|
|
|
|
148.49
|
|
|
|
168.01
|
|
S&P Telecommunication Services
|
|
|
100.00
|
|
|
|
105.58
|
|
|
|
114.85
|
|
|
|
112.86
|
|
|
|
142.67
|
|
|
|
132.64
|
|
Issuer
Purchases of Equity Securities
The
following table provides information with respect to purchases by us of our shares during the fourth quarter of fiscal 2017.
|
|
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)
|
|
May 1 – 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
8,000,000
|
|
June 1 – 30, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
8,000,000
|
|
July 1 – 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
8,000,000
|
|
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.
|
Item
6. Selected Financial Data.
The
selected consolidated financial data presented below at July 31, 2017 and for the fiscal year then ended has been derived from
our Consolidated Financial Statements, which have been audited by BDO USA, LLP, independent registered public accounting firm.
The selected consolidated financial data presented below at July 31, 2016, 2015, 2014 and 2013, and for each of the fiscal years
in the four-year period ended July 31, 2016, has been derived from our Consolidated Financial Statements, which have been audited
by Grant Thornton LLP, independent registered public accounting firm. The selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information appearing elsewhere
in this Annual Report.
Year Ended July 31,
(in millions, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,501.7
|
|
|
$
|
1,496.3
|
|
|
$
|
1,596.8
|
|
|
$
|
1,651.5
|
|
|
$
|
1,620.6
|
|
Income from continuing operations (a)
|
|
|
9.6
|
|
|
|
25.4
|
|
|
|
86.1
|
|
|
|
21.0
|
|
|
|
18.1
|
|
Income from continuing operations per common share—basic
|
|
|
0.35
|
|
|
|
1.03
|
|
|
|
3.69
|
|
|
|
0.85
|
|
|
|
0.77
|
|
Income from continuing operations per common share—diluted
|
|
|
0.35
|
|
|
|
1.03
|
|
|
|
3.63
|
|
|
|
0.82
|
|
|
|
0.72
|
|
Cash dividends declared per common share (b)
|
|
|
0.76
|
|
|
|
0.75
|
|
|
|
2.03
|
|
|
|
0.51
|
|
|
|
0.83
|
|
At July 31,
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
519.0
|
|
|
$
|
469.7
|
|
|
$
|
485.7
|
|
|
$
|
480.9
|
|
|
$
|
435.4
|
|
Note payable—long term portion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6.4
|
|
|
|
6.6
|
|
|
(a)
|
Included in income from continuing operations in fiscal 2017 was expense of $10.4 million related to a
legal settlement and mutual release including legal fees, and a net benefit from income taxes of $5.5 million from the full recognition
of certain deferred tax assets. Included in income from continuing operations in fiscal 2016 was gain on sale of member interest
in Visa Europe Ltd. of $7.5 million and gain on sale of interest in Fabrix Systems Ltd. of $1.1 million. Included in income from
continuing operations in fiscal 2015 was gain on sale of interest in Fabrix Systems Ltd. of $76.9 million.
|
|
(b)
|
Cash
dividends declared per common share in fiscal 2015 included special dividends of $0.68
per share and $0.64 per share paid in November 2014 and January 2015, respectively.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This
Annual Report 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 this Annual Report. The forward-looking statements are made as of the date of this Annual
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 Securities and Exchange Commission
pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.
The
following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item
8 of this Annual Report.
OVERVIEW
We
are a multinational holding company with operations primarily in the telecommunications and payment industries. We have three
reportable business segments, Telecom Platform Services, UCaaS and Consumer Phone Services. Telecom Platform Services, UCaaS and
Consumer Phone Services 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. Until the Zedge Spin-Off, All Other included Zedge, which provides a content platform that enables consumers to personalize
their mobile devices with free ringtones, wallpapers, home screen app icons and notification sounds. Until the sale of Fabrix
in October 2014, All Other also included Fabrix, a software development company offering a cloud-based scale-out storage and computing
platform optimized for big data, virtualization and media storage, processing and delivery.
In
August 2015, our Board of Directors approved a plan to reorganize us into three separate entities by spinning off our non-core
business and assets, one of which was Zedge, to our stockholders. We intend to spin-off the other entity, Rafael Holdings, Inc.,
our wholly-owned subsidiary, to our stockholders. Rafael Holdings, Inc. will own certain commercial real estate assets and interests
in clinical and early stage pharmaceutical companies. The commercial real estate holdings consist of our 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 us and certain affiliates. The pharmaceutical holdings include interests in Rafael
Pharmaceuticals, Inc. and an equity interest in Lipomedix Pharmaceuticals Ltd., an early stage pharmaceutical development company
based in Israel. Rafael Holdings, Inc.’s interests in Rafael, which are held through a 90%-owned non-operating subsidiary,
IDT-Rafael Holdings, LLC, include convertible notes issued by Rafael, and a warrant held by us and certain minority holders to
purchase up to a majority equity stake in Rafael at our discretion in accordance with the terms of the convertible note and the
warrant. In addition, we intend to contribute $50 million to $60 million in cash to Rafael Holdings, Inc. prior to the spin-off.
IDT
Telecom
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%, 99.2% and 99.0% of our total revenues in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
Telecom
Platform Services, which represented 97.5%, 97.0% and 96.7% of our total revenues in fiscal 2017, fiscal 2016 and fiscal 2015,
respectively, markets and distributes multiple communications and payment services across three broad business verticals:
|
■
|
Retail
Communications provides international long-distance calling products primarily to foreign-born
communities worldwide, with its core markets in the United States;
|
|
■
|
Wholesale
Carrier Services is a global telecom carrier, terminating international long distance
calls around the world 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
and international money transfer.
|
Beginning
in the first quarter of fiscal 2017, UCaaS is a separate reportable segment. Our UCaaS segment represented 2.0%, 1.8% and 1.8%
of our total revenues in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Our UCaaS segment is comprised of offerings from
our net2phone division, including (1) cable telephony, (2) hosted PBX, (3) 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. The operations that comprise the UCaaS segment were included in the Telecom Platform Services segment from the inception
of each unit until July 31, 2016. Comparative results have been reclassified and restated as if UCaaS was a separate segment in
all periods presented.
Our
Consumer Phone Services segment provides consumer local and long distance services in certain U.S. states. Since calendar 2005,
this business has been in harvest mode, wherein we seek to retain existing customers but do not actively market to new customers,
and we attempt to maximize profits by optimally managing both the life-cycle of our customer base as well as the costs associated
with operating this business.
Retail
Communications’ services and international and domestic airtime top-up are sold to distributors at a discount to their face
value. Revenue from Retail Communications’ services is deferred and recognized as revenues when telecommunications services
are provided and/or administrative fees are imposed.
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.
Direct
costs related to our telecom businesses consist primarily of three major categories: termination and origination costs, toll-free
costs and network costs.
Termination
and origination costs represent costs associated with the transmission and termination of international and domestic long distance
services. We terminate our traffic via the arbitrage market or through direct interconnections with other carriers. This cost
is primarily variable, with a price paid on a per-minute basis. Origination costs relating to Retail Communications’ services
include fixed charges for local access telephone numbers and may include per-minute usage charges. Origination costs relating
to our Consumer Phone Services segment consists primarily of leased lines from the RBOCs, which are billed to us as a monthly
fee.
Toll-free
costs are variable costs paid to providers of toll-free services.
Network
costs, which are also called connectivity costs, are fixed for a range of minutes of use, and include customer/carrier interconnect
charges and leased fiber circuit charges. Local circuits are generally leased for a 12 to 24 month term, while long haul circuits
generally are leased for longer terms. Although these are not purely variable costs, where the cost increases for each additional
minute carried on our suppliers’ networks, increases in minutes will likely result in incrementally higher network costs.
Direct
costs related to our telecom business include an estimate of charges for which invoices have not yet been received, and estimated
amounts for pending disputes with other carriers. Subsequent adjustments to these estimates may occur after the invoices are received
for the actual costs incurred, but these adjustments generally are not material to our results of operations.
Direct
cost of revenues for IDT Telecom also includes the cost of airtime top-up minutes.
Selling
expenses in IDT Telecom consist primarily of sales commissions paid to internal salespersons and independent agents, and advertising
costs, which are the primary costs associated with the acquisition of customers. General and administrative expenses include employee
compensation, benefits, professional fees, rent and other administrative costs. IDT Telecom’s Retail Communications offerings
generally have higher selling, general and administrative expenses than the Wholesale Carrier Services business.
Concentration
of Customers
Our
most significant customers typically include telecom carriers to whom IDT Telecom provides wholesale telecommunications services
and distributors of IDT Telecom’s international prepaid calling products. While they may vary from quarter to quarter, our
five largest customers collectively accounted for 12.4%, 11.2% and 11.2% of total consolidated revenues in fiscal 2017, fiscal
2016 and fiscal 2015, respectively. Our customers with the five largest receivables balances collectively accounted for 35.4%
and 23.0% of the consolidated gross trade accounts receivable at July 31, 2017 and 2016, respectively. This concentration of customers
increases our risk associated with nonpayment by those customers. In an effort to reduce our risk, we perform ongoing credit evaluations
of our significant retail, wholesale and cable telephony customers, and in some cases, do not offer credit terms to customers,
choosing instead to require prepayment. Historically, when we have issued credit, we have not required collateral to support trade
accounts receivables from our customers. However, when necessary, IDT Telecom has imposed stricter credit restrictions on its
customers. In some cases, this has resulted in IDT Telecom sharply curtailing, or ceasing completely, sales to certain customers.
IDT Telecom attempts to mitigate its credit risk related to specific wholesale carrier services customers by also buying services
from the customer, in order to create an opportunity to offset its payables and receivables with the customer. In this way, IDT
Telecom can continue to sell services to these customers while reducing its receivable exposure risk. When it is practical to
do so, IDT Telecom will increase its purchases from wholesale carrier services customers with receivable balances that exceed
IDT Telecom’s applicable payables in order to maximize the offset and reduce its credit risk.
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United
States of America, or U.S. GAAP. The preparation of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue 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. See Note 1 to the Consolidated Financial
Statements in this Annual Report for a complete discussion of our significant accounting policies.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for estimated losses that result from the inability or unwillingness of our customers
to make required payments. The allowance for doubtful accounts was $2.7 million and $4.0 million at July 31, 2017 and 2016, respectively.
The allowance for doubtful accounts as a percentage of gross trade accounts receivable decreased to 3.9% at July 31, 2017 from
7.7% at July 31, 2016 mostly due to the 32.1% increase in the gross accounts receivable balance. Our allowance is determined based
on known troubled accounts, historical experience and other currently available evidence. Our estimates of recoverability of customer
accounts may change due to new developments, changes in assumptions or changes in our strategy, which may impact our allowance
for doubtful accounts balance. We continually assess the likelihood of potential amounts or ranges of recoverability and adjust
our allowance accordingly; however, actual collections and write-offs of trade accounts receivables may materially differ from
our estimates.
Goodwill
Our
goodwill balance of $11.3 million and $11.2 million at July 31, 2017 and 2016, respectively, was attributable to our Retail Communications
reporting unit in our Telecom Platform Services segment. Goodwill and other intangible assets deemed to have indefinite lives
are not amortized. These assets are reviewed annually (or more frequently under various conditions) for impairment using a fair
value approach. Intangible assets with finite useful lives are amortized over their estimated useful lives.
In
fiscal 2017, we adopted the Accounting Standards Update, or ASU, that simplifies the subsequent measurement of goodwill by eliminating
Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform
procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets
and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities
assumed in a business combination. Instead, under the amendments in this ASU, we perform our annual, or interim, goodwill impairment
test by comparing the fair value of our reporting units with their carrying amounts. We would recognize an impairment charge for
the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not
exceed the total amount of goodwill allocated to that reporting unit. Additionally, we consider income tax effects from any tax
deductible goodwill on the carrying amount of our reporting unit when measuring the goodwill impairment loss, if applicable.
We
have the option to perform a qualitative assessment to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. However, we may elect to perform the two-step quantitative goodwill impairment test even if no indications
of a potential impairment exist.
We
estimate the fair value of our reporting units using discounted cash flow methodologies, as well as considering third party market
value indicators. For Retail Communications’ annual impairment test in fiscal 2017, since its estimated fair value substantially
exceeded its carrying value, there was no goodwill impairment. In addition, we do not believe Retail Communications is currently
at risk of goodwill impairment. For Retail Communications’ annual impairment test in fiscal 2016, since its estimated fair
value substantially exceeded its carrying value in Step 1, it was not necessary to perform Step 2. For Retail Communications’
annual impairment test in fiscal 2015, we qualitatively assessed whether it was more likely than not that a goodwill impairment
existed and concluded that a goodwill impairment did not exist. In fiscal 2015, Zedge’s estimated fair value substantially
exceeded its carrying value in Step 1, therefore it was not necessary to perform Step 2.
Calculating
the fair value of the reporting units requires significant estimates and assumptions by management. Should our estimates or assumptions
regarding the fair value of our reporting units prove to be incorrect, we may be required to record impairments of goodwill in
future periods and such impairments could be material.
Valuation
of Long-Lived Assets including Intangible Assets with Finite Useful Lives
We
test the recoverability of our long-lived assets including identifiable intangible assets with finite useful lives whenever events
or changes in circumstances indicate that the carrying value of any such asset may not be recoverable. Such events or changes
in circumstances include:
|
■
|
significant
actual underperformance relative to expected performance or projected future operating
results;
|
|
■
|
significant
changes in the manner or use of the asset or the strategy of our overall business;
|
|
■
|
significant
adverse changes in the business climate in which we operate; and
|
|
■
|
loss
of a significant contract.
|
If
we determine that the carrying value of certain long-lived assets may not be recoverable, we test for impairment based on the
projected undiscounted cash flows to be derived from such asset. If the projected undiscounted future cash flows are less than
the carrying value of the asset, we will record an impairment loss based on the difference between the estimated fair value and
the carrying value of the asset. We generally measure fair value by considering sale prices for similar assets or by discounting
estimated future cash flows from the asset using an appropriate discount rate. Cash flow projections and fair value estimates
require significant estimates and assumptions by management. Should our estimates and assumptions prove to be incorrect, we may
be required to record impairments in future periods and such impairments could be material.
Income
Taxes and Regulatory Agency Fees
Our
current and deferred income taxes and associated valuation allowance, as well as telecom regulatory agency fee accruals, are impacted
by events and transactions arising in the normal course of business as well as in connection with special and non-routine items.
Assessment of the appropriate amount and classification of income taxes and certain regulatory agency fees is dependent on several
factors, including estimates of the timing and realization of deferred income tax assets, the results of regulatory fee-related
audits, changes in tax laws or regulatory agency rules and regulations, as well as unanticipated future actions impacting related
accruals of regulatory agency fees.
The
valuation allowance on our deferred income tax assets was $157.8 million and $158.4 million at July 31, 2017 and 2016, respectively.
In fiscal 2017, we determined that our 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 net income in future periods.
We recorded a benefit from income taxes of $16.6 million in fiscal 2017 from the full recognition of the Elmion Netherlands B.V.
deferred tax assets. In addition, in fiscal 2017, we determined that we would not be able to utilize our deferred tax assets in
the United States and recorded a valuation allowance of $11.1 million against them.
We
have not recorded U.S. income tax expense for foreign earnings, as such earnings are permanently reinvested outside the United
States. The cumulative undistributed foreign earnings are included in accumulated deficit in our consolidated balance sheets,
and consisted of approximately $375 million and $324 million at July 31, 2017 and 2016, respectively. 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.
Our
FCC Form 499-A filings for calendar years 2000 through 2006 related to payments to the Universal Service Fund have been audited
by the IAD of USAC, which concluded that we incorrectly reported certain revenues on Forms 499-A. USAC’s revisions to our
filing methodology resulted in additional regulatory payments for the years covered by the audits. While we believe in the accuracy
of our filing methodology and our Request for Review remains pending, we have implemented some of the revisions set forth in the
IAD’s filings beginning with our calendar year 2010 Form 499-A. We have accrued for all regulatory fees we believe may be
incurred under IAD’s methodology from 2002 through the present, in the event our Request for Review is denied and/or our
methodology is not upheld on appeal, and we have made certain payments on amounts that have been invoiced to us by USAC and/or
other agencies. Our 2017 FCC Form 499-A, which reports our calendar year 2016 revenue, is currently under audit by the IAD. At
July 31, 2017 and 2016, our accrued expenses included $43.5 million and $47.5 million, respectively, for these regulatory fees
for the years covered by the audit and subsequent years. Until a final decision is reached in our disputes, we will continue to
accrue in accordance with IAD’s methodology. If we do not properly calculate, or have not properly calculated, the amount
payable by us to the Universal Service Fund, we may be subject to interest and penalties.
IDT
Telecom Direct Cost of Revenues—Disputed Amounts
IDT
Telecom’s direct cost of revenues includes estimated amounts for pending disputes with other carriers. The billing disputes
typically arise from differences in minutes of use and/or rates charged by carriers that provide service to us. At July 31, 2017
and 2016, there was $26.1 million and $21.3 million, respectively, in outstanding carrier payable disputes, for which we recorded
direct cost of revenues of $9.3 million and $9.0 million, respectively. We consider various factors to determine the amount to
accrue for pending disputes, including (1) our historical experience in dispute resolution, (2) the basis of disputes, (3) the
financial status and our current relationship with vendors and (4) our aging of prior disputes. Subsequent adjustments to our
estimates may occur when disputes are resolved or abandoned, but these adjustments are generally not material to our results of
operations. However, there can be no assurance that revisions to our estimates will not be material to our results of operations
in the future.
RECENTLY
ISSUED ACCOUNTING STANDARD NOT YET ADOPTED
In
May 2014, the Financial Accounting Standards Board, or 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, 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 ASU that changes the impairment model for most financial assets and certain other instruments. For
receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model
that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized
losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances
instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more
information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect
adjustment to retained earnings. We will adopt the new standard on August 1, 2020. We are evaluating the impact that the new standard
will have on our 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. 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
Year
Ended July 31, 2017 compared to Years Ended July 31, 2016 and 2015
The
following table sets forth certain items in our statements of income as a percentage of our total revenues:
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
IDT Telecom
|
|
|
99.8
|
%
|
|
|
99.2
|
%
|
|
|
99.0
|
%
|
All Other
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
1.0
|
|
TOTAL REVENUES
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of revenues (exclusive of depreciation and amortization)
|
|
|
85.0
|
|
|
|
83.3
|
|
|
|
83.2
|
|
Selling, general and administrative
|
|
|
12.5
|
|
|
|
13.7
|
|
|
|
13.9
|
|
Depreciation and amortization
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
1.2
|
|
Research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
Severance
|
|
|
—
|
|
|
|
0.4
|
|
|
|
0.5
|
|
TOTAL COSTS AND EXPENSES
|
|
|
98.9
|
|
|
|
98.8
|
|
|
|
98.9
|
|
Other
|
|
|
(0.7
|
)
|
|
|
—
|
|
|
|
(0.1
|
)
|
Gain on sale of member interest in Visa Europe, Ltd
|
|
|
—
|
|
|
|
0.5
|
|
|
|
—
|
|
Gain on sale of interest in Fabrix Systems, Ltd
|
|
|
—
|
|
|
|
0.1
|
|
|
|
4.8
|
|
INCOME FROM OPERATIONS
|
|
|
0.4
|
|
|
|
1.8
|
|
|
|
5.8
|
|
Interest income (expense), net
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
—
|
|
Other income (expense), net
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
INCOME BEFORE INCOME TAXES
|
|
|
0.5
|
%
|
|
|
2.0
|
%
|
|
|
5.8
|
%
|
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.
IDT
Telecom—Telecom Platform Services, UCaaS and Consumer Phone Services Segments
As
described below, the decrease in Retail Communications’ minutes of use and revenues in fiscal 2017 compared to fiscal 2016
and fiscal 2015 reflect the collapse of rates industry wide in the U.S. to Mexico corridor plus longer term secular trends impacting
the telecom industry. In fiscal 2016, following regulatory changes intended to increase domestic competition in the Mexican telecommunications
market, the cost of terminating international calls to Mexico declined significantly. The decrease in Retail Communications’
minutes of use and revenues was also due to increased competition from wireless network operators, mobile virtual network operators
and alternative communications solutions such as over-the-top voice and messaging services. In anticipation of these developments,
in recent years, we have increased investment in long term growth initiatives to mitigate the impact from those trends. We have
also been reducing our selling, general and administrative expenses and streamlining operations.
Beginning
in the first quarter of fiscal 2017, UCaaS is a separate reportable segment. Comparative results have been reclassified and restated
as if UCaaS was a separate segment in all periods presented.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom Platform Services
|
|
$
|
1,464.1
|
|
|
$
|
1,451.5
|
|
|
$
|
1,543.3
|
|
|
$
|
12.6
|
|
|
|
0.9
|
%
|
|
$
|
(91.8
|
)
|
|
|
(5.9
|
)%
|
UCaaS
|
|
|
29.4
|
|
|
|
26.4
|
|
|
|
29.4
|
|
|
|
3.0
|
|
|
|
11.8
|
|
|
|
(3.0
|
)
|
|
|
(10.5
|
)
|
Consumer Phone Services
|
|
|
5.5
|
|
|
|
6.9
|
|
|
|
8.6
|
|
|
|
(1.4
|
)
|
|
|
(20.2
|
)
|
|
|
(1.7
|
)
|
|
|
(20.3
|
)
|
Total revenues
|
|
$
|
1,499.0
|
|
|
$
|
1,484.8
|
|
|
$
|
1,581.3
|
|
|
$
|
14.2
|
|
|
|
1.0
|
%
|
|
$
|
(96.5
|
)
|
|
|
(6.1
|
)%
|
Revenues.
IDT Telecom revenues increased in fiscal 2017 compared to fiscal 2016 primarily due to increases in Telecom Platform Services’
and UCaaS’ revenues. IDT Telecom revenues decreased in fiscal 2016 compared to fiscal 2015 due to decreases in Telecom Platform
Services’, UCaaS’ and Consumer Phone Services’ revenues. Telecom Platform Services’ revenues, minutes
of use and average revenue per minute for fiscal 2017, fiscal 2016 and fiscal 2015 consisted of the following:
(in millions, except revenue per minute)
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$/#
|
|
|
%
|
|
|
$/#
|
|
|
%
|
|
Telecom Platform Services Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Communications
|
|
$
|
610.2
|
|
|
$
|
664.8
|
|
|
$
|
725.9
|
|
|
$
|
(54.6
|
)
|
|
|
(8.2
|
)%
|
|
$
|
(61.1
|
)
|
|
|
(8.4
|
)%
|
Wholesale Carrier Services
|
|
|
608.6
|
|
|
|
567.4
|
|
|
|
609.1
|
|
|
|
41.2
|
|
|
|
7.3
|
|
|
|
(41.7
|
)
|
|
|
(6.9
|
)
|
Payment Services
|
|
|
245.3
|
|
|
|
219.3
|
|
|
|
208.3
|
|
|
|
26.0
|
|
|
|
11.8
|
|
|
|
11.0
|
|
|
|
5.3
|
|
Total Telecom Platform Services revenues
|
|
$
|
1,464.1
|
|
|
$
|
1,451.5
|
|
|
$
|
1,543.3
|
|
|
$
|
12.6
|
|
|
|
0.9
|
%
|
|
$
|
(91.8
|
)
|
|
|
(5.9
|
)%
|
Minutes of use
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Communications
|
|
|
6,685
|
|
|
|
8,069
|
|
|
|
9,212
|
|
|
|
(1,384
|
)
|
|
|
(17.1
|
)%
|
|
|
(1,143
|
)
|
|
|
(12.4
|
)%
|
Wholesale Carrier Services
|
|
|
19,901
|
|
|
|
19,338
|
|
|
|
19,637
|
|
|
|
563
|
|
|
|
2.9
|
|
|
|
(299
|
)
|
|
|
(1.5
|
)
|
Total minutes of use
|
|
|
26,586
|
|
|
|
27,407
|
|
|
|
28,849
|
|
|
|
(821
|
)
|
|
|
(3.0
|
)%
|
|
|
(1,442
|
)
|
|
|
(5.0
|
)%
|
Average revenue per minute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Communications
|
|
$
|
0.0913
|
|
|
$
|
0.0824
|
|
|
$
|
0.0788
|
|
|
$
|
0.0089
|
|
|
|
10.8
|
%
|
|
$
|
0.0036
|
|
|
|
4.6
|
%
|
Wholesale Carrier Services
|
|
|
0.0306
|
|
|
|
0.0293
|
|
|
|
0.0310
|
|
|
|
0.0013
|
|
|
|
4.2
|
|
|
|
(0.0017
|
)
|
|
|
(5.4
|
)
|
Retail
Communications’ revenue decreased 8.2% and 8.4% in fiscal 2017 and fiscal 2016, respectively, compared to the prior fiscal
year. Revenue from our Boss Revolution international calling service, which is Retail Communications’ most significant offering,
declined 5.4% and 2.9% in fiscal 2017 and fiscal 2016, respectively, compared to the prior fiscal year due primarily to the continuing
decline in minutes of use and revenue from calls made in the U.S. and terminating in Mexico. In July 2016, we significantly reduced
Boss Revolution’s U.S. to Mexico calling rate because many of our competitors, including some of the large U.S. mobile operators,
began offering unlimited Mexico calling as part of their monthly pricing plans. In addition, the decrease in Retail Communications’
revenue in fiscal 2017 and fiscal 2016 compared to the prior fiscal year was due to continuing revenue declines in Europe, South
America and Asia, and continuing revenue declines from traditional disposable calling cards in the U.S. Retail Communications’
minutes of use decreased 17.1% and 12.4% in fiscal 2017 and fiscal 2016, respectively, compared to the prior fiscal year because
of decreases in Boss Revolution and traditional disposable calling cards’ minutes of use. In addition, minutes of use decreased
in Europe, South America and Asia in fiscal 2017 and fiscal 2016 compared to the prior fiscal year. In March 2017, we launched
the updated Boss Revolution Calling app that includes free app-to-app calling and messaging. The updated calling app is available
in several languages in the iTunes and Google Play stores. The Boss Revolution Calling app also integrates seamlessly with the
recently launched Boss Revolution Money app, which features international money transfers, mobile airtime top-up and electronic
gift cards. Retail Communications revenue comprised 41.7%, 45.8% and 47.0% of Telecom Platform Services’ revenue in fiscal
2017, fiscal 2016 and fiscal 2015, respectively.
Wholesale
Carrier Services’ revenues increased 7.3% in fiscal 2017 compared to fiscal 2016 due to an increase in traditional carrier
revenues, primarily from growth in traffic carried to higher revenue per minute destinations in Africa and the Middle East. Wholesale
Carrier Services minutes of use increased 2.9% in fiscal 2017 compared to fiscal 2016 due to increases in traditional carrier
minutes of use and minutes of use from our web-based, prepaid termination services portal. Wholesale Carrier Services’ revenues
declined 6.9% in fiscal 2016 compared to fiscal 2015 because the traffic mix shifted towards lower revenue per minute destinations
and certain exchange rate driven arbitrage-pricing opportunities in Latin America declined. Wholesale Carrier Services minutes
of use decreased 1.5% in fiscal 2016 compared to fiscal 2015 primarily due to a decrease in traditional carrier minutes of use
partially offset by an increase in our web-based prepaid termination service’s minutes of use. Wholesale Carrier Services
revenue comprised 41.6%, 39.1% and 39.5 % of Telecom Platform Services’ revenue in fiscal 2017, fiscal 2016 and fiscal 2015,
respectively.
Payment
Services’ revenues grew 11.8% and 5.3% in fiscal 2017 and fiscal 2016, respectively, compared to the prior fiscal year due
to increases in revenue from our international airtime top-up service, our international money transfer service, and in fiscal
2017 compared to fiscal 2016, from our National Retail Solutions point-of-sale terminal business. 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. In fiscal 2017, our international
money transfer service expanded when online operations commenced in New York. Future growth in Payment Services is expected from
the new Boss Revolution Money app that features international money transfers, mobile airtime top-up and electronic gift cards,
and from expansion of money transfer services in New York and California via retailers. National Retail Solutions is also expected
to continue growing. Payment Services revenue comprised 16.7%, 15.1% and 13.5% of Telecom Platform Services’ revenue in
fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
UCaaS’
revenue increased 11.8% in fiscal 2017 compared to fiscal 2016 due to increases in hosted PBX, SIP Trunking, and cable telephony
revenues. We successfully leveraged our global infrastructure to launch our hosted PBX offerings in Brazil and Argentina in January
2017 and May 2017, respectively. UCaaS’ revenue decreased 10.5% in fiscal 2016 compared to fiscal 2015 primarily due to
a decrease in revenues from our cable telephony business.
Consumer
Phone Services’ revenues declined 20.2% and 20.3% in fiscal 2017 and fiscal 2016, respectively, compared to the prior fiscal
year, as we continued to operate the business in harvest mode. This strategy has been in effect since calendar 2005 when the FCC
decided to terminate the UNE-P pricing regime, which resulted in significantly inferior economics in the operating model for this
business. We anticipate that Consumer Phone Services’ customer base and revenues will continue to decline. Minutes of use
relating to our Consumer Phone Services segment is not tracked as a meaningful business metric as the domestic traffic generated
by this segment is not carried on our network, and the international traffic generated by this segment, though carried on our
own network, is insignificant.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Direct cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom Platform Services
|
|
$
|
1,261.0
|
|
|
$
|
1,229.1
|
|
|
$
|
1,307.8
|
|
|
$
|
31.9
|
|
|
|
2.6
|
%
|
|
$
|
(78.7
|
)
|
|
|
(6.0
|
)%
|
UCaaS
|
|
|
12.0
|
|
|
|
13.4
|
|
|
|
14.5
|
|
|
|
(1.4
|
)
|
|
|
(10.7
|
)
|
|
|
(1.1
|
)
|
|
|
(7.9
|
)
|
Consumer Phone Services
|
|
|
2.5
|
|
|
|
3.1
|
|
|
|
4.0
|
|
|
|
(0.6
|
)
|
|
|
(18.7
|
)
|
|
|
(0.9
|
)
|
|
|
(23.6
|
)
|
Total direct cost of revenues
|
|
$
|
1,275.5
|
|
|
$
|
1,245.6
|
|
|
$
|
1,326.3
|
|
|
$
|
29.9
|
|
|
|
2.4
|
%
|
|
$
|
(80.7
|
)
|
|
|
(6.1
|
)%
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Direct cost of revenues as a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom Platform Services
|
|
|
86.1
|
%
|
|
|
84.7
|
%
|
|
|
84.7
|
%
|
|
|
1.4
|
%
|
|
|
—%
|
|
UCaaS
|
|
|
40.6
|
|
|
|
50.8
|
|
|
|
49.4
|
|
|
|
(10.2
|
)
|
|
|
1.4
|
|
Consumer Phone Services
|
|
|
45.7
|
|
|
|
44.9
|
|
|
|
46.8
|
|
|
|
0.8
|
|
|
|
(1.9
|
)
|
Total
|
|
|
85.1
|
%
|
|
|
83.9
|
%
|
|
|
83.9
|
%
|
|
|
1.2
|
%
|
|
|
—%
|
|
Direct
Cost of Revenues.
Direct cost of revenues in Telecom Platform Services increased in fiscal 2017 compared to fiscal 2016 due
to increases in Wholesale Carrier Services’ and Payment Services’ direct cost of revenues in fiscal 2017 compared
to fiscal 2016, partially offset by a decrease in Retail Communications’ direct cost of revenues in fiscal 2017 compared
to fiscal 2016. Direct cost of revenues as a percentage of revenues in Telecom Platform Services increased 140 basis points in
fiscal 2017 compared to fiscal 2016 primarily because the increase in Wholesale Carrier Services’ direct cost of revenues
exceeded the increase in its revenues.
Direct
cost of revenues in Telecom Platform Services decreased in fiscal 2016 compared to fiscal 2015 mainly due to the decreases in
Telecom Platform Services’ revenues and minutes of use in fiscal 2016 compared to fiscal 2015. Direct cost of revenues as
a percentage of revenues in Telecom Platform Services was unchanged in fiscal 2016 compared to fiscal 2015. The loss of revenue
from the relatively high margin exchange-rate driven arbitrage pricing opportunities in Latin American, the decline in margin
contribution from the cable telephony business, and pricing pressure on airtime top-up offerings in fiscal 2016 compared to fiscal
2015 were offset by an increase in Retail Communications’ average revenue per minute.
Direct
cost of revenues in UCaaS decreased in fiscal 2017 and fiscal 2016 compared to the prior fiscal year because of decreases in the
direct cost of revenues in SIP Trunking and cable telephony service, partially offset by an increase in hosted PBX direct cost
of revenues.
Direct
cost of revenues in our Consumer Phone Services segment decreased in fiscal 2017 and fiscal 2016 compared to the prior fiscal
year primarily because of the declining customer base.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom Platform Services
|
|
$
|
162.4
|
|
|
$
|
174.8
|
|
|
$
|
187.7
|
|
|
$
|
(12.4
|
)
|
|
|
(7.1
|
)%
|
|
$
|
(12.9
|
)
|
|
|
(6.9
|
)%
|
UCaaS
|
|
|
15.5
|
|
|
|
11.8
|
|
|
|
11.9
|
|
|
|
3.7
|
|
|
|
31.2
|
|
|
|
(0.1
|
)
|
|
|
(1.2
|
)
|
Consumer Phone Services
|
|
|
1.9
|
|
|
|
2.6
|
|
|
|
3.3
|
|
|
|
(0.7
|
)
|
|
|
(25.8
|
)
|
|
|
(0.7
|
)
|
|
|
(22.9
|
)
|
Total selling, general and administrative expenses
|
|
$
|
179.8
|
|
|
$
|
189.2
|
|
|
$
|
202.9
|
|
|
$
|
(9.4
|
)
|
|
|
(4.9
|
)%
|
|
$
|
(13.7
|
)
|
|
|
(6.8
|
)%
|
Selling,
General and Administrative.
Selling, general and administrative expenses in our Telecom Platform Services segment decreased
in fiscal 2017 compared to fiscal 2016 primarily due to a decrease in employee compensation. Selling, general and administrative
expenses in our Telecom Platform Services segment decreased in fiscal 2016 compared to fiscal 2015 primarily due to decreases
in employee compensation, marketing and advertising costs, call center expenses, internal sales commissions and facilities expense.
The decreases in employee compensation in fiscal 2017 and fiscal 2016 compared to the prior fiscal year were the result of headcount
reductions in fiscal 2016 and fiscal 2015 that were partially offset by annual payroll increases. As a percentage of Telecom Platform
Services’ revenues, Telecom Platform Services’ selling, general and administrative expenses were 11.1%, 12.0% and
12.2% in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
Selling,
general and administrative expenses in our UCaaS segment increased in fiscal 2017 compared to fiscal 2016 due to an increase in
employee compensation for sales and information technology employees. We increased employees and compensation in our UCaaS segment
in fiscal 2017 as we invested in the growth of UCaaS’ revenues. Selling, general and administrative expenses in our UCaaS
segment were substantially unchanged in fiscal 2016 and fiscal 2015.
Selling,
general and administrative expenses in our Consumer Phone Services segment decreased in fiscal 2017 and fiscal 2016 compared to
the prior fiscal year as the cost structure for this segment continued to be right-sized to the needs of its declining revenue
base.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom Platform Services
|
|
$
|
16.1
|
|
|
$
|
15.7
|
|
|
$
|
13.8
|
|
|
$
|
0.4
|
|
|
|
2.2
|
%
|
|
$
|
1.9
|
|
|
|
14.7
|
%
|
UCaaS
|
|
|
3.9
|
|
|
|
2.8
|
|
|
|
2.4
|
|
|
|
1.1
|
|
|
|
40.4
|
|
|
|
0.4
|
|
|
|
14.7
|
|
Consumer Phone Services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total depreciation and amortization
|
|
$
|
20.0
|
|
|
$
|
18.5
|
|
|
$
|
16.2
|
|
|
$
|
1.5
|
|
|
|
7.9
|
%
|
|
$
|
2.3
|
|
|
|
14.7
|
%
|
Depreciation
and Amortization
. The increase in depreciation and amortization expense in fiscal 2017 and fiscal 2016 compared to the prior
fiscal year was due to increases in depreciation of capitalized costs of consultants and employees developing internal use software
to support our new products.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Severance expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom Platform Services
|
|
$
|
—
|
|
|
$
|
6.2
|
|
|
$
|
7.7
|
|
|
$
|
(6.2
|
)
|
|
|
(100.0
|
)%
|
|
$
|
(1.5
|
)
|
|
|
(19.4
|
)%
|
UCaaS
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer Phone Services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total severance expense
|
|
$
|
—
|
|
|
$
|
6.2
|
|
|
$
|
7.7
|
|
|
$
|
(6.2
|
)
|
|
|
(100.0
|
)%
|
|
$
|
(1.5
|
)
|
|
|
(19.4
|
)%
|
Severance
Expense.
In July 2016 and February and March 2015, we completed separate reductions of our workforce. Telecom Platform Services
incurred severance expense of $6.2 million and $5.8 million in fiscal 2016 and fiscal 2015, respectively. In addition, severance
expense in fiscal 2015 included $1.9 million due to a downsizing of certain Telecom Platform Services’ sales and administrative
functions in Europe and the U.S.
Gain
on Sale of Member Interest in Visa Europe Ltd.
In June 2016, Visa Inc. acquired Visa Europe Limited for cash, shares of Visa
Inc. Series C preferred stock and a deferred cash payment. IDT Financial Services Limited, our Gibraltar-based bank, was a member
of Visa Europe and received cash of €5.0 million ($5.6 million on the acquisition date), 1,830 shares of Series C preferred
stock and deferred payment receivable of €0.4 million ($0.5 million on the acquisition date). At July 31, 2017 and 2016,
the carrying value of the shares of Visa Inc. Series C preferred stock was $1.6 million. The 1,830 shares of Visa Inc. Series
C preferred stock are convertible into 25,532 shares of Visa Inc. Class A common stock. The shares of preferred stock become fully
convertible in 2028. Beginning in 2020, Visa Inc. will assess whether it is appropriate to effect a partial conversion. The preferred
stock shares may only be transferred to other former Visa Europe members, or to existing qualifying holders of Visa Inc.’s
Class B common stock. In addition, the preferred stock will not be registered under the U.S. Securities Act of 1933 and therefore
is not transferable unless such transfer is registered or an exemption from registration is available. The deferred payment receivable
plus 4% compounded annual interest is due in June 2019. In fiscal 2016, we recorded a gain of $7.5 million in our Telecom Platform
Services segment from the sale of our member interest in Visa Europe, which was included in the segment’s income from operations.
In fiscal 2017, we recorded an adjustment to the gain of $0.1 million, which reduced the segment’s income from operations.
Other
Operating Loss.
The Telecom Platform Services segment’s income from operations in fiscal 2016 included a loss on disposal
of property, plant and equipment of $0.3 million due to the write-off of capitalized costs of certain projects that were terminated
prior to completion.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom Platform Services
|
|
$
|
24.4
|
|
|
$
|
32.8
|
|
|
$
|
26.4
|
|
|
$
|
(8.4
|
)
|
|
|
(25.6
|
)%
|
|
$
|
6.4
|
|
|
|
24.2
|
%
|
UCaaS
|
|
|
(1.9
|
)
|
|
|
(1.6
|
)
|
|
|
0.5
|
|
|
|
(0.3
|
)
|
|
|
(16.6
|
)
|
|
|
(2.1
|
)
|
|
|
(400.0
|
)
|
Consumer Phone Services
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
(0.1
|
)
|
|
|
(12.3
|
)
|
|
|
(0.1
|
)
|
|
|
(3.2
|
)
|
Total income from operations
|
|
$
|
23.6
|
|
|
$
|
32.4
|
|
|
$
|
28.2
|
|
|
$
|
(8.8
|
)
|
|
|
(27.1
|
)%
|
|
$
|
4.2
|
|
|
|
15.0
|
%
|
All
Other
Currently,
we report aggregate results for all of our operating businesses other than IDT Telecom in All Other. On June 1, 2016, we completed
the Zedge Spin-Off. The disposition of Zedge did not meet the criteria to be reported as a discontinued operation and accordingly,
its assets, liabilities, results of operations and cash flows have not been reclassified. Therefore, All Other included twelve
months of Zedge’s results of operations in fiscal 2015 compared to ten months in fiscal 2016 and none in fiscal 2017. In
addition, Fabrix was included in All Other until it was sold in October 2014. Therefore, in fiscal 2015, All Other included two
months of Fabrix’ results of operations compared to none in fiscal 2017 and fiscal 2016.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
$
|
2.7
|
|
|
$
|
11.5
|
|
|
$
|
15.4
|
|
|
$
|
(8.8
|
)
|
|
|
(76.2
|
)%
|
|
$
|
(3.9
|
)
|
|
|
(25.5
|
)%
|
Direct cost of revenues
|
|
|
(0.2
|
)
|
|
|
(1.0
|
)
|
|
|
(2.0
|
)
|
|
|
0.8
|
|
|
|
75.6
|
|
|
|
1.0
|
|
|
|
49.3
|
|
Selling, general and administrative
|
|
|
(0.5
|
)
|
|
|
(5.4
|
)
|
|
|
(8.3
|
)
|
|
|
4.9
|
|
|
|
91.6
|
|
|
|
2.9
|
|
|
|
35.4
|
|
Depreciation
|
|
|
(1.7
|
)
|
|
|
(2.0
|
)
|
|
|
(2.3
|
)
|
|
|
0.3
|
|
|
|
14.7
|
|
|
|
0.3
|
|
|
|
11.4
|
|
Research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1.7
|
|
|
|
100.0
|
|
Gain on sale of interest in Fabrix Systems Ltd.
|
|
|
—
|
|
|
|
1.1
|
|
|
|
76.9
|
|
|
|
(1.1
|
)
|
|
|
(100.0
|
)
|
|
|
(75.8
|
)
|
|
|
(98.6
|
)
|
Income from operations
|
|
$
|
0.3
|
|
|
$
|
4.2
|
|
|
$
|
78.0
|
|
|
$
|
(3.9
|
)
|
|
|
(91.8
|
)%
|
|
$
|
(73.8
|
)
|
|
|
(94.7
|
)%
|
Following
is the results of operations of Zedge, which were included in All Other until the Zedge Spin-Off on June 1, 2016:
Zedge
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
9.5
|
|
|
$
|
9.0
|
|
|
$
|
(9.5
|
)
|
|
|
(100.0
|
)%
|
|
$
|
0.5
|
|
|
|
4.6
|
%
|
Direct cost of revenues
|
|
|
—
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
(1.0
|
)
|
|
|
(100.0
|
)
|
|
|
(0.1
|
)
|
|
|
(7.7
|
)
|
Selling, general and administrative
|
|
|
—
|
|
|
|
5.9
|
|
|
|
6.8
|
|
|
|
(5.9
|
)
|
|
|
(100.0
|
)
|
|
|
(0.9
|
)
|
|
|
(14.2
|
)
|
Depreciation
|
|
|
—
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
(0.3
|
)
|
|
|
(100.0
|
)
|
|
|
(0.7
|
)
|
|
|
(70.8
|
)
|
Income from operations
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
$
|
0.1
|
|
|
$
|
(2.3
|
)
|
|
|
(100.0
|
)%
|
|
$
|
2.2
|
|
|
|
nm
|
|
nm—not
meaningful
Following
is the results of operations of Fabrix, which were included in All Other until it was sold in October 2014:
Fabrix
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.2
|
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
(4.2
|
)
|
|
|
(100.0
|
)%
|
Direct cost of revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
0.9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.9
|
)
|
|
|
(100.0
|
)
|
Selling, general and administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.6
|
)
|
|
|
(100.0
|
)
|
Depreciation
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
(100.0
|
)
|
Research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
1.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.7
|
)
|
|
|
(100.0
|
)
|
Income (loss) from operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
(0.9
|
)
|
|
|
(100.0
|
)%
|
Revenues.
In April 2016, we entered into two leases with tenants for space in our headquarters building at 520 Broad Street, Newark,
New Jersey. The first lease is for a portion of the sixth floor for an eleven-year term, of which the first six years are non-cancellable.
The second lease is for a portion of the ground floor and basement for a term of ten years, 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.
Gain
on Sale of Interest in Fabrix Systems Ltd.
On October 8, 2014, we completed the sale of our interest in Fabrix to Ericsson.
The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working capital
and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price was $69.2 million,
after reflecting the impact of working capital and other adjustments. We and the other shareholders placed $13.0 million of the
proceeds in escrow for the resolution of post-closing claims, of which $6.5 million was released in October 2015 and $6.5 million
was released in April 2016. In fiscal 2016, we recorded a gain on the sale of our interest in Fabrix of $1.1 million, which represented
adjustments to our share of Fabrix’ working capital and estimated transaction costs. In fiscal 2015, we recorded a gain
on the sale of our interest in Fabrix of $76.9 million.
Corporate
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
General and administrative expenses
|
|
$
|
8.0
|
|
|
$
|
10.1
|
|
|
$
|
10.9
|
|
|
$
|
(2.1
|
)
|
|
|
(20.5
|
)%
|
|
$
|
(0.8
|
)
|
|
|
(7.8
|
)%
|
Severance expense
|
|
|
—
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
(0.3
|
)
|
|
|
(100.0
|
)
|
|
|
(0.3
|
)
|
|
|
(50.8
|
)
|
Other operating loss
|
|
|
10.4
|
|
|
|
—
|
|
|
|
1.6
|
|
|
|
10.4
|
|
|
|
nm
|
|
|
|
(1.6
|
)
|
|
|
(100.0
|
)
|
Loss from operations
|
|
$
|
18.4
|
|
|
$
|
10.4
|
|
|
$
|
13.1
|
|
|
$
|
8.0
|
|
|
|
77.2
|
%
|
|
$
|
(2.7
|
)
|
|
|
(20.8
|
)%
|
nm—not
meaningful
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, 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. 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 expenses in fiscal 2017 compared to fiscal 2016 was
primarily due to decreases in payroll and related expense and legal fees, partially offset by an increase in stock-based compensation
expense. The decrease in Corporate general and administrative expenses in fiscal 2016 compared to fiscal 2015 was primarily due
to decreases in insurance, stock-based compensation, and the charitable contributions accrual, partially offset by an increase
in payroll and related expense. As a percentage of our total consolidated revenues, Corporate general and administrative expenses
was 0.5%, 0.7% and 0.7% in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
Severance
expense.
In July 2016 and February and March 2015, we completed separate reductions of our workforce. Corporate incurred severance
expense of $0.3 million and $0.6 million in fiscal 2016 and fiscal 2015, respectively.
Other
Operating Loss.
The Separation Agreement related to the spin-off of our former subsidiary, 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 below and related matters. On April 9, 2017, we entered
into a binding term sheet with Straight Path that provides for, among other things, the settlement and mutual release of the potential
indemnification claims asserted by each of us and Straight Path in connection with, among other things, liabilities (including
but not limited to fines, fees or penalties) that may exist or arise relating to the subject matter of the investigation by the
FCC. In April 2017, in connection with this term sheet, we recorded a liability of $10.0 million. In addition, in fiscal 2017,
we incurred legal fees of $0.9 million related to the FCC investigation of potential license violations by Straight Path Spectrum
LLC (formerly a subsidiary of ours) and the term sheet with Straight Path, and we received insurance proceeds related to the FCC
investigation of $0.5 million. Corporate’s other operating loss in fiscal 2015 included losses related to legal matters.
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 $3.7 million, $2.7 million and $5.2 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. At July 31, 2017, unrecognized
compensation cost related to non-vested stock-based compensation, including stock options and restricted stock, was an aggregate
of $5.8 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting period that ends in
2020.
(in millions)
|
|
|
|
|
|
|
|
|
|
|
2017 change from 2016
|
|
|
2016 change from 2015
|
|
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Income from operations
|
|
$
|
5.5
|
|
|
$
|
26.2
|
|
|
$
|
93.1
|
|
|
$
|
(20.7
|
)
|
|
|
(78.8
|
)%
|
|
$
|
(66.9
|
)
|
|
|
(71.8
|
)%
|
Interest income (expense), net
|
|
|
1.3
|
|
|
|
1.2
|
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
3.1
|
|
|
|
1.4
|
|
|
|
864.8
|
|
Other income (expense), net
|
|
|
0.8
|
|
|
|
2.0
|
|
|
|
(0.7
|
)
|
|
|
(1.2
|
)
|
|
|
(60.1
|
)
|
|
|
2.7
|
|
|
|
397.8
|
|
Benefit from (provision for) income taxes
|
|
|
2.0
|
|
|
|
(4.1
|
)
|
|
|
(6.1
|
)
|
|
|
6.1
|
|
|
|
149.2
|
|
|
|
2.0
|
|
|
|
32.5
|
|
Net income
|
|
|
9.6
|
|
|
|
25.3
|
|
|
|
86.1
|
|
|
|
(15.7
|
)
|
|
|
(62.0
|
)
|
|
|
(60.8
|
)
|
|
|
(70.6
|
)
|
Net income attributable to noncontrolling interests
|
|
|
(1.4
|
)
|
|
|
(1.8
|
)
|
|
|
(1.6
|
)
|
|
|
0.4
|
|
|
|
20.6
|
|
|
|
(0.2
|
)
|
|
|
(13.5
|
)
|
Net income attributable to IDT Corporation
|
|
$
|
8.2
|
|
|
$
|
23.5
|
|
|
$
|
84.5
|
|
|
$
|
(15.3
|
)
|
|
|
(65.2
|
)%
|
|
$
|
(61.0
|
)
|
|
|
(72.2
|
)%
|
Other
Income (Expense), net.
Other income (expense), net consists of the following:
(in millions)
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Foreign currency transaction gains (losses)
|
|
$
|
0.3
|
|
|
$
|
1.0
|
|
|
$
|
(1.7
|
)
|
Gain (loss) on marketable securities
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
Gain (loss) on investments
|
|
|
0.4
|
|
|
|
(0.4
|
)
|
|
|
1.5
|
|
Other
|
|
|
(0.2
|
)
|
|
|
0.9
|
|
|
|
(0.4
|
)
|
TOTAL
|
|
$
|
0.8
|
|
|
$
|
2.0
|
|
|
$
|
(0.7
|
)
|
Income
Taxes.
In fiscal 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 fiscal 2017 from the full recognition of the Elmion deferred
tax assets. The gains on the sale of our member interest in Visa Europe Ltd. of $7.5 million in fiscal 2016, and on the sale of
our interest in Fabrix of $1.1 million and $76.9 million in fiscal 2016 and fiscal 2015, respectively, were recorded by certain
of our wholly-owned non-U.S. subsidiaries. The gains are not taxable in the subsidiary’s tax domicile and are not subject
to U.S. tax until repatriated. There are no current plans to repatriate the proceeds of the sales. The increase in income tax
expense in fiscal 2017 compared to fiscal 2016, excluding the benefit from income taxes in fiscal 2017 and the non-taxable gains
in fiscal 2016 described above, was generally due to the differences in rates in the jurisdictions where the results were recorded.
The decrease in income tax expense in fiscal 2016 compared to fiscal 2015 was primarily due to a decrease in foreign income tax
expense, partially offset by an increase in federal income tax expense.
Net
Income Attributable to Noncontrolling Interests.
The change in the net income attributable to noncontrolling interests in
fiscal 2017 compared to fiscal 2016 was primarily due to the noncontrolling interests in the net income of Zedge, which was included
in our results of operations until the Zedge Spin-Off on June 1, 2016. The remaining change in fiscal 2017 compared to fiscal
2016 was mostly due to a decrease in the net income attributable to noncontrolling interests in certain IDT Telecom subsidiaries
due to a decrease in the net income of these subsidiaries. The increase in the net income attributable to noncontrolling interests
in fiscal 2016 compared to fiscal 2015 was due to sale of Fabrix in fiscal 2015 and the change in Zedge’s results of operations
from net loss to net income, partially offset by the decrease in net income of certain IDT Telecom subsidiaries.
LIQUIDITY
AND CAPITAL RESOURCES
General
We
currently expect our cash from operations in fiscal 2018 and the balance of cash, cash equivalents and marketable securities that
we held on July 31, 2017 to be sufficient to meet our currently anticipated working capital and capital expenditure requirements
during fiscal 2018.
At
July 31, 2017, we had cash, cash equivalents and marketable securities of $148.6 million and working capital (current assets in
excess of current liabilities) of $8.3 million. At July 31, 2017, we also had $8.6 million in investments in hedge funds, which
were included in “Investments” in our consolidated balance sheet.
We
treat unrestricted cash and cash equivalents held by IDT Payment Services as substantially restricted and unavailable for other
purposes. At July 31, 2017, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of
$10.8 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. The cumulative undistributed foreign earnings are included in accumulated deficit in our consolidated balance sheets,
and consisted of approximately $375 million at July 31, 2017. 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.
(in millions)
Year ended July 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash flows provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
19.0
|
|
|
$
|
49.1
|
|
|
$
|
30.5
|
|
Investing activities
|
|
|
(39.6
|
)
|
|
|
(16.5
|
)
|
|
|
2.9
|
|
Financing activities
|
|
|
6.8
|
|
|
|
(27.6
|
)
|
|
|
(70.2
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
0.3
|
|
|
|
(5.8
|
)
|
|
|
(6.7
|
)
|
Decrease in cash and cash equivalents
|
|
$
|
(13.5
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(43.5
|
)
|
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.
On
July 31, 2013, we completed the pro rata distribution of the common stock of our subsidiary Straight Path to our stockholders.
On September 20, 2016, we 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 ours 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. We have cooperated with the FCC in this matter and have responded to the letter of inquiry. The FCC could seek to fine
or impose regulatory penalties or civil liability on us related to activities during the period of ownership by us.
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 April 9, 2017, we entered into a binding term sheet with
Straight Path that provides for, among other things, the settlement and mutual release of the potential indemnification claims
asserted by each of us and Straight Path in connection with, among other things, liabilities (including but not limited to fines,
fees or penalties) that may exist or arise relating to the subject matter of the investigation by the FCC. Pursuant to this term
sheet, Straight Path will transfer to us or our affiliate, subsidiary, or assignee, Straight Path’s ownership interest in
SPIP Group for $6 million, the parties will provide mutual releases, and we will pay Straight Path $10 million and stockholders
of Straight Path will receive 22% of the net proceeds, if any, received by SPIP Group from any license, transfer or assignment
of any of the patent rights held by SPIP Group as of the effective date of transfer, or any settlement, award or judgment involving
any of the patent rights (including any net proceeds received following the effective date of transfer) to be pursued under the
terms of the term sheet.
On
April 10, 2017, our Board of Directors and its Corporate Governance Committee approved the transfer by us of the ownership interest
in SPIP Group to an entity to be organized by Howard S. Jonas in exchange for $6.0 million, which is the price to be paid by us
to Straight Path for the ownership interest in SPIP Group under the settlement arrangement with Straight Path. The new entity
will assume our obligations to Straight Path and its stockholders with respect to the net proceeds, if any, related to the patents
as described above.
Pursuant
to the Separation and Distribution Agreement, we paid Straight Path $0.1 million, $0.1 million and $2.8 million in fiscal 2017,
fiscal 2016 and fiscal 2015, respectively, in connection with our obligation to reimburse Straight Path for the payment of its
liabilities arising or related to the period prior to the Straight Path Spin-Off.
In
August 2016, we and the New Jersey Economic Development Authority entered into an incentive agreement pursuant to which we may
receive corporation business tax credits in exchange for investment in a qualified business facility and employment of the required
number of full-time employees. The corporation business tax credits to be received are a maximum of $24.3 million. Our tax certificate
documents are currently being reviewed by Economic Development Authority. The tax credits are based on an estimated capital investment
of $5.3 million in addition to retaining, as well as creating, a number of full-time jobs. We may claim a tax credit each tax
year for ten years beginning when the Economic Development Authority accepts our project completion certification. The tax credit
can be applied to 100% of our New Jersey tax liability each year, and the unused amount of the annual credit can be carried forward.
In addition, we 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.
In
December 2015, MasterCard Europe released a security deposit in the amount of $4.7 million made by IDT Financial Services Ltd.
In
fiscal 2015, Fabrix received $2.0 million in cash from sales of software licenses and support services.
Investing
Activities
Our
capital expenditures were $22.9 million in fiscal 2017 compared to $18.4 million in fiscal 2016 and $28.6 million in fiscal 2015.
Capital expenditures in fiscal 2015 included expenditures for the renovations of the first four floors of our building located
at 520 Broad Street, Newark, New Jersey. We currently anticipate that total capital expenditures in fiscal 2018 will be between
$21 million to $23 million. We expect to fund our capital expenditures with our net cash provided by operating activities and
cash, cash equivalents and marketable securities on hand.
On
December 23, 2016, we acquired all of the outstanding shares of Live Ninja, a business communications company that provides chat
and messaging capabilities for small and medium-sized businesses with the ability to transfer a conversation from one channel
of communications (for example, the web) to another (such as a mobile phone). The Live Ninja team has been tasked with helping
expand the development of our PicuP service. We paid $2.0 million at closing, and expect to pay an additional $2.3 million through
December 2018 for fixed and contingent payment obligations. In fiscal 2017, the cash paid for the acquisition, net of cash acquired
was $1.8 million.
On
October 8, 2014, we completed the sale of our interest in Fabrix to Ericsson. The final sale price for 100% of the shares in Fabrix
was $95 million in cash, excluding transaction costs and working capital and other adjustments. We owned approximately 78% of
Fabrix on a fully diluted basis. Our share of the sale price was $69.2 million, after reflecting the impact of working capital
and other adjustments. We and the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing
claims, of which $6.5 million was released in October 2015 and $6.5 million was released in April 2016. In fiscal 2016, we recorded
gain on the sale of our interest in Fabrix of $1.1 million, which represented adjustments to our share of Fabrix’ working
capital and estimated transaction costs. In fiscal 2015, we recorded a gain on the sale of our interest in Fabrix of $76.9 million.
In
June 2016, Visa Inc. acquired Visa Europe Limited for cash, shares of Visa Inc. Series C preferred stock and a deferred cash payment.
IDT Financial Services Ltd. was a member of Visa Europe and received cash of €5.0 million ($5.6 million on the acquisition
date), 1,830 shares of Series C preferred stock and deferred payment receivable of €0.4 million ($0.5 million on the acquisition
date). At July 31, 2017 and 2016, the carrying value of the shares of Visa Inc. Series C preferred stock was $1.6 million. The
1,830 shares of Visa Inc. Series C preferred stock are convertible into 25,532 shares of Visa Inc. Class A common stock. The shares
of preferred stock become fully convertible in 2028. Beginning in 2020, Visa Inc. will assess whether it is appropriate to effect
a partial conversion. The preferred stock shares may only be transferred to other former Visa Europe members, or to existing qualifying
holders of Visa Inc.’s Class B common stock. In addition, the preferred stock will not be registered under the U.S. Securities
Act of 1933 and therefore is not transferable unless such transfer is registered or an exemption from registration is available.
The deferred payment receivable plus 4% compounded annual interest is due in June 2019. In fiscal 2016, we recorded a gain of
$7.5 million from the sale of our member interest in Visa Europe.
In
fiscal 2017, fiscal 2016 and fiscal 2015, we used cash of $9.4 million, $2.0 million and $0.1 million, respectively, for additional
investments. In September 2016, Rafael issued to our 50%-owned subsidiary, CS Pharma, its convertible Series D Note with a principal
amount of $10 million, representing the $8 million cash investment on such date plus the conversion of a $2 million principal
amount convertible promissory notes that was issued in connection with prior funding. In addition, in fiscal 2017, we used cash
of $1.4 million for additional investments in Lipomedix, a development-stage, privately held Israeli company focused on the development
of an innovative, safe and effective cancer therapy based on liposome delivery. We own ordinary shares of Lipomedix representing
approximately 38.9% of the issued and outstanding ordinary shares. We have the option to invest an additional $0.9 million in
Lipomedix, which would increase our aggregate ownership to 50.6% of the issued share capital on a fully diluted basis. The option
expires on the earlier of (1) a merger or acquisition transaction, (2) an initial public offering, or (3) November 30, 2017. In
fiscal 2016, we used cash of $1.9 million for investment in Rafael and $0.1 million for investment in Lipomedix.
We
received $15,000, $0.6 million and $0.1 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, from the redemption
of certain of our investments.
In
fiscal 2017, fiscal 2016 and fiscal 2015, we used cash of $53.4 million, $46.9 million and $52.4 million, respectively, to purchase
marketable securities.
Proceeds
from maturities and sales of marketable securities were $48.0 million, $35.0 million and $24.1 million in fiscal 2017, fiscal
2016 and fiscal 2015, respectively.
Financing
Activities
In
fiscal 2017, we paid aggregate cash dividends of $0.76 per share on our Class A common stock and Class B common stock, or $17.9
million in total. In fiscal 2016, we paid aggregate cash dividends of $0.75 per share on our Class A common stock and Class B
common stock, or $17.4 million in total. In fiscal 2015, we paid aggregate cash dividends of $2.03 per share on our Class A common
stock and Class B common stock, or $47.6 million in total. The aggregate cash dividends in fiscal 2015 included special dividends
of $0.68 per share and $0.64 per share paid in November 2014 and January 2015, respectively. In September 2017, our Board of Directors
declared a dividend of $0.19 per share for the fourth quarter of fiscal 2017 to holders of our Class A common stock and Class
B common stock. The dividend will be paid on or about October 20, 2017 to stockholders of record as of the close of business on
October 16, 2017.
We
distributed cash of $1.5 million, $1.8 million and $2.1 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, to
the noncontrolling interests in certain of our subsidiaries.
On
June 9, 2017, we sold 1.0 million shares of our Class B common stock to Howard S. Jonas for aggregate consideration of $14.9
million. The price per share of $14.93 was equal to the closing price of our Class B common stock on May 1, 2017, the day
prior to the approval of the sale by our Board of Directors and Corporate Governance Committee. On April 11, 2017, we sold
728,332 treasury shares of our Class B common stock to Howard S. Jonas for aggregate
consideration of $10.0 million. The price per share of $13.73 was equal to the closing price of our Class B common stock on
April 10, 2017.
On
March 2, 2017, we sold 10% of our direct and indirect interest and rights in Rafael to Howard S. Jonas for a purchase price of
$1 million.
In
connection with our investment in Rafael, our subsidiary CS Pharma issued member interests to third parties in exchange for cash
investments. In fiscal 2017 and fiscal 2016, we received cash of $1.2 million and $8.8 million, respectively, from third parties
for member interests in CS Pharma. We hold a 50% interest in CS Pharma and we are the managing member. At July 31, 2016, the $8.8
million received was included in “Other current liabilities” in our consolidated balance sheet pending the issuance
of the member interests.
In
June 2016, cash and cash equivalents held by Zedge of $6.4 million were deconsolidated as a result of the Zedge Spin-Off.
In
connection with the Zedge Spin-Off, in May 2016, Zedge sold shares of its Class B common stock representing approximately 10.0%
of its capital stock to certain of its equity holders, including us, for $3 million. The other purchasers paid $0.4 million of
the total and we paid $2.6 million.
We
received proceeds from the exercise of our stock options of $0.8 million in fiscal 2017, nil in fiscal 2016, and $3.4 million
in fiscal 2015. In fiscal 2017 and fiscal 2015, we issued 73,471 and 244,938 shares, respectively, of our Class B common stock
for the stock option exercises.
We
paid the outstanding principal of $6.4 million on the mortgage on our building in Piscataway, New Jersey on the maturity date
of September 1, 2015.
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. 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 150 basis points. Interest
is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date of April 30,
2018. There were no amounts borrowed under the facility in fiscal 2017, fiscal 2016 and fiscal 2015. In fiscal 2015, we repaid
$13.0 million. We intend to borrow under the facility from time to time. IDT Telecom pays a quarterly unused commitment fee of
0.375% 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, including IDT Telecom may not pay any dividend on its capital stock and IDT Telecom’s aggregate loans
and advances to affiliates or subsidiaries may not exceed $110.0 million. At July 31, 2017 and 2016, there were no amounts utilized
for letters of credit under the line of credit, IDT Telecom was in compliance with all of the covenants, and IDT Telecom’s
aggregate loans and advances to affiliates and subsidiaries was $94.9 and $91.1 million, respectively.
Repayments
of other borrowings were nil, nil, and $0.3 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
On
June 25, 2015, we purchased 404,967 shares of our Class B common stock from Howard S. Jonas. The purchase price was $18.52 per
share, the share price at the close of business on June 23, 2015. The aggregate purchase price was $7.5 million.
In
fiscal 2017, fiscal 2016 and fiscal 2015, we paid $1.8 million, $0.1 million and $2.8 million, respectively to repurchase 94,338;
11,250 and 152,856 shares of Class B common stock, respectively, 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 are 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 fiscal 2017. In fiscal 2016, we repurchased 398,376 shares of our Class B common stock
for an aggregate purchase price of $4.6 million. In fiscal 2015, we repurchased 29,675 shares of our Class B common stock for
an aggregate purchase price of $0.4 million. At July 31, 2017, 8.0 million shares remained available for repurchase under the
stock repurchase program.
Changes
in Trade Accounts Receivable, Allowance For Doubtful Accounts and Deferred Revenue
Gross
trade accounts receivable increased to $67.6 million at July 31, 2017 from $51.2 million at July 31, 2016 primarily due to a $16.4
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 in fiscal 2017 in excess of collections during the period. In
particular, our revenues from certain large wholesale customers increased for which portions of the receivable balances were collected
subsequent to July 31, 2017.
The
allowance for doubtful accounts was $2.7 million and $4.0 million at July 31, 2017 and 2016, respectively. The allowance for doubtful
accounts as a percentage of gross trade accounts receivable decreased to 3.9% at July 31, 2017 from 7.7% at July 31, 2016 mostly
due to the 32.1% increase in the gross accounts receivable balance. In addition, uncollectible accounts written off, net of recoveries,
during fiscal 2017 exceeded amounts reserved during the same period.
Deferred
revenue as a percentage of total revenues 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 $76.5 million at July 31, 2017
from $85.7 million at July 31, 2016 primarily due to a decrease in the IDT Telecom U.S. Boss Revolution balance, as well as a
decrease in IDT Telecom’s deferred revenue balance in Europe.
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 ($3.8 million at July 31, 2017) 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
is expected to be at closing approximately £11 million ($14.5 million at July 31, 2017). 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 calendar 2017, subject to regulatory approval and other customary conditions set forth in the
Share Purchase Agreement.
We
intend to spin-off our wholly-owned subsidiary, Rafael Holdings, Inc., to our stockholders. Rafael Holdings, Inc. will own certain
commercial real estate assets and interests in Rafael and Lipomedix. We intend to contribute $50 million to $60 million in cash
to Rafael Holdings, Inc. prior to the spin-off.
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 tables quantify our future contractual obligations and commercial commitments at July 31, 2017:
CONTRACTUAL
OBLIGATIONS
Payments
Due by Period
(in millions)
|
|
Total
|
|
|
Less than
1 year
|
|
|
1—3 years
|
|
|
4—5 years
|
|
|
After 5 years
|
|
Operating leases
|
|
$
|
6.5
|
|
|
$
|
2.5
|
|
|
$
|
2.1
|
|
|
$
|
1.3
|
|
|
$
|
0.6
|
|
Straight Path obligation
|
|
|
16.0
|
|
|
|
16.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Revolving credit unused commitment fee
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase commitments
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
TOTAL CONTRACTUAL
OBLIGATIONS
(1)(2)
|
|
$
|
25.7
|
|
|
$
|
21.7
|
|
|
$
|
2.1
|
|
|
$
|
1.3
|
|
|
$
|
0.6
|
|
|
(1)
|
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.
|
|
(2)
|
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. The above table does not
include the committed amounts 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 Genie Spin-Off in October 2011, we and Genie entered into various agreements prior to the Genie Spin-Off including
a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Genie after
the Genie Spin-Off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Genie with respect to, among
other things, liabilities for federal, state, local and foreign taxes for periods before and including the Genie 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, among other things, we indemnify Genie and Genie 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, we indemnify Genie from all liability for taxes of
ours with respect to any taxable period, and Genie indemnifies us from all liability for taxes of Genie and its subsidiaries with
respect to any taxable period, including, without limitation, the ongoing tax audits related to Genie’s business.
In
connection with the Straight Path Spin-Off in July 2013, we and Straight Path entered into various agreements prior to the Straight
Path Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship
with Straight Path after the Straight Path 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 Straight Path 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, the Company indemnifies
Straight Path and Straight Path indemnifies the Company 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, the Company
indemnifies 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 Straight Path Spin-Off, from all liability for taxes of
the Company, other than Straight Path and its subsidiaries, for any taxable period, and from all liability for taxes due to the
Straight Path Spin-Off.
In
connection with the Zedge Spin-Off in June 2016, we and Zedge entered into various agreements prior to the Zedge Spin-Off including
a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Zedge after
the Zedge 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 Zedge 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 Zedge 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 Zedge Spin-Off.
IDT
Payment Services and IDT Telecom 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.
At July 31, 2017, we had aggregate performance bonds of $15.1 million outstanding.
Item
7A. Quantitative and Qualitative Disclosures about Market Risks.
FOREIGN
CURRENCY RISK
Revenues
from our international operations represented 31%, 29% and 30% of our consolidated revenues in fiscal 2017, fiscal 2016 and fiscal
2015, 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 revenues
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
RISK
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. As of July 31, 2017, the carrying value of our marketable securities and investments in
hedge funds were $58.3 million and $8.6 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 of our funds 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
8. Financial Statements and Supplementary Data.
The
Consolidated Financial Statements of the Company and the reports of the independent registered public accounting firms thereon
starting on page F-1 are included herein.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
Chief Executive Officer and Principal 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 Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer
have concluded that our disclosure controls and procedures were effective as of July 31, 2017.
Report
of Management on Internal Control over Financial Reporting
We,
the management of IDT Corporation and subsidiaries (the “Company”), are responsible for establishing and maintaining
adequate internal control over financial reporting of the Company.
The
Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities
Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal
financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for
external purposes in accordance with generally accepted accounting principles in the United States and includes those policies
and procedures that:
|
1.
|
Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of assets of the Company;
|
|
2.
|
Provide
reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
|
|
3.
|
Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on
the financial statements.
|
Management
has assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2017. In making
this assessment, the Company’s management used the criteria established in the
Internal Control-Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of our internal control over financial reporting, as prescribed above, for the period covered
by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that the Company’s
internal control over financial reporting as of July 31, 2017 was effective based on the criteria established in the
Internal
Control-Integrated Framework (2013)
issued by COSO.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
BDO
USA, LLP has provided an attestation report on the Company’s internal control over financial reporting as of July 31,
2017.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2017 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item
9B. Other Information.
None.
Part
III
Item
10. Directors, Executive Officers and Corporate Governance.
The
following is a list of our directors and executive officers along with the specific information required by Rule 14a-3 of the
Securities Exchange Act of 1934:
Executive
Officers
Howard
S. Jonas—Chairman of the Board
Shmuel
Jonas—Chief Executive Officer
Marcelo
Fischer—Senior Vice President—Finance
Mitch
Silberman—Chief Accounting Officer and Controller
Joyce
J. Mason—Executive Vice President, General Counsel and Corporate Secretary
Menachem
Ash—Executive Vice President of Strategy and Legal Affairs
Anthony
S. Davidson—Senior Vice President—Technology
Bill
Pereira—Chief Executive Officer and President of IDT Telecom
Directors
Howard
S. Jonas—Chairman of the Board
Bill
Pereira—Chief Executive Officer and President of IDT Telecom
Michael
Chenkin—Certified Public Accountant; previously worked in the Audit Department of Coopers and Lybrand and as a consultant
to the securities industry
Eric
F. Cosentino—Former Rector of the Episcopal Church of the Divine Love, Montrose, New York
Judah
Schorr—Founder of Judah Schorr MD PC, an anesthesia provider to hospitals, ambulatory surgery centers and medical offices,
and has been its President and owner since its inception
The
remaining information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which
will be filed with the Securities and Exchange Commission within 120 days after July 31, 2017, and which is incorporated by reference
herein.
Corporate
Governance
We
have included as exhibits to this Annual Report on Form 10-K certificates of our Chief Executive Officer and Principal Financial
Officer certifying the quality of our public disclosure.
We
make available free of charge through the investor relations page of our web site (
www.idt.net/ir
) our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and all beneficial
ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity, as soon
as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. We have adopted
codes of business conduct and ethics for all of our employees, including our principal executive officer, principal financial
officer and principal accounting officer. Copies of the codes of business conduct and ethics are available on our web site.
Our
web site and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report
on Form 10-K or our other filings with the Securities and Exchange Commission.
Item
11. Executive Compensation.
The
information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be
filed with the Securities and Exchange Commission within 120 days after July 31, 2017, and which is incorporated by reference
herein.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The
information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be
filed with the Securities and Exchange Commission within 120 days after July 31, 2017, and which is incorporated by reference
herein.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
The
information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be
filed with the Securities and Exchange Commission within 120 days after July 31, 2017, and which is incorporated by reference
herein.
Item
14. Principal Accounting Fees and Services.
The
information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be
filed with the Securities and Exchange Commission within 120 days after July 31, 2017, and which is incorporated by reference
herein.
Part
IV
Item
15. Exhibits, Financial Statement Schedules.
|
(a)
|
The
following documents are filed as part of this Report:
|
|
1.
|
Report
of Management on Internal Control Over Financial Reporting
|
Report
of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report
of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Consolidated
Financial Statements covered by Reports of Independent Registered Public Accounting Firms
|
2.
|
Financial
Statement Schedule.
|
All
schedules have been omitted since they are either included in the Notes to Consolidated Financial Statements or not required or
not applicable.
|
3.
|
Exhibits. Exhibit Numbers 10.03, 10.04, 10.05, 10.06, 10.07, 10.09, 10.10 and 10.11 are management contracts
or compensatory plans or arrangements.
|
The
exhibits listed in paragraph (b) of this item are filed, furnished, or incorporated by reference as part of this Form 10-K.
Certain
of the agreements filed as exhibits to this Form 10-K contain representations and warranties by the parties to the agreements
that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
|
■
|
may
have been qualified by disclosures that were made to the other parties in connection
with the negotiation of the agreements, which disclosures are not necessarily reflected
in the agreements;
|
|
■
|
may
apply standards of materiality that differ from those of a reasonable investor; and
|
|
■
|
were
made only as of specified dates contained in the agreements and are subject to subsequent
developments and changed circumstances.
|
Accordingly,
these representations and warranties may not describe the actual state of affairs as of the date that these representations and
warranties were made or at any other time. Investors should not rely on them as statements of fact.
Exhibit
Number
|
|
Description
of Exhibits
|
3.01(1)
|
|
Third Restated Certificate of Incorporation of the Registrant.
|
|
|
|
3.02(2)
|
|
Fourth Amended and Restated By-laws of the Registrant.
|
|
|
|
10.03(3)
|
|
Fourth Amended and Restated Employment Agreement, dated December 14, 2016, between the Registrant and Howard S. Jonas.
|
|
|
|
10.04(4)
|
|
1996 Stock Option and Incentive Plan, as amended and restated, of IDT Corporation.
|
|
|
|
10.05(5)
|
|
2005 Stock Option and Incentive Plan, as amended and restated, of IDT Corporation.
|
|
|
|
10.06(6)
|
|
2015 Stock Option and Incentive Plan of IDT Corporation.
|
|
|
|
10.07(7)
|
|
Employment Agreement, dated January 12, 2015, between IDT Telecom and Bill Pereira.
|
|
|
|
10.08(8)
|
|
Credit Agreement, dated July 12, 2012, between IDT Telecom, Inc. and TD Bank, N.A.
|
|
(1)
|
Incorporated
by reference to Form 8-K, filed April 5, 2011.
|
|
(2)
|
Incorporated
by reference to Form 8-K, filed September 23, 2009.
|
|
(3)
|
Incorporated by reference to Form 8-K, filed December 20, 2016.
|
|
(4)
|
Incorporated
by reference to Schedule 14A, filed November 3, 2004.
|
|
(5)
|
Incorporated
by reference to Schedule 14A, filed November 5, 2013.
|
|
(6)
|
Incorporated
by reference to Form S-8, filed October 14, 2016.
|
|
(7)
|
Incorporated
by reference to Form 8-K, filed January 14, 2015.
|
|
(8)
|
Incorporated
by reference to Form 10-K for the fiscal year ended July 31, 2012, filed October 15,
2012
|
|
(9)
|
Incorporated
by reference to Form 8-K, filed December 31, 2012.
|
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
|
IDT
CORPORATION
|
|
|
|
|
By:
|
/s/
Shmuel Jonas
|
|
|
Shmuel
Jonas
Chief Executive Officer
|
Date:
October 16, 2017
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
|
|
Titles
|
|
Date
|
|
|
|
|
|
/s/
Shmuel Jonas
|
|
Chief Executive
Officer
|
|
October 16, 2017
|
Shmuel Jonas
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
|
/s/
Howard S. Jonas
|
|
Chairman of the
Board
|
|
October 16, 2017
|
Howard S.
Jonas
|
|
|
|
|
|
|
|
|
|
/s/
Marcelo Fischer
|
|
Senior Vice President—Finance
|
|
October 16, 2017
|
Marcelo Fischer
|
|
(Principal Financial
Officer)
|
|
|
|
|
|
|
|
/s/
Mitch Silberman
|
|
Chief Accounting
Officer and Controller
|
|
October 16, 2017
|
Mitch Silberman
|
|
(Principal Accounting
Officer)
|
|
|
|
|
|
|
|
/s/
Bill Pereira
|
|
Director
|
|
October 16, 2017
|
Bill Pereira
|
|
|
|
|
|
|
|
|
|
/s/
Michael Chenkin
|
|
Director
|
|
October 16, 2017
|
Michael Chenkin
|
|
|
|
|
|
|
|
|
|
/s/
Eric F. Cosentino
|
|
Director
|
|
October 16, 2017
|
Eric F. Cosentino
|
|
|
|
|
|
|
|
|
|
/s/
Judah Schorr
|
|
Director
|
|
October 16, 2017
|
Judah Schorr
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
IDT
Corporation
Newark,
New Jersey
We
have audited the internal control over financial reporting of IDT Corporation (a Delaware corporation) and subsidiaries (the “Company”)
as of July 31, 2017, based on criteria established in
Internal Control—Integrated Framework (2013)
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting under Item 9A. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July
31, 2017 based on criteria established in
Internal Control—Integrated Framework (2013)
issued by COSO.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of the Company as of July 31, 2017, and the related consolidated statements of income, comprehensive income, equity,
and cash flows for the year then ended, and our report dated October 16, 2017 expressed an unqualified opinion thereon.
/s/ BDO
USA, LLP
Woodbridge,
New Jersey
October 16,
2017
IDT
Corporation
Index to Consolidated Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
IDT Corporation
Newark, New Jersey
We
have audited the accompanying consolidated balance sheet of IDT Corporation (a Delaware corporation) and subsidiaries (the “Company”)
as of July 31, 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of IDT Corporation and subsidiaries as of July 31, 2017, and the results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally accepted in the United States of America.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of July 31, 2017, based on criteria established in
Internal Control — Integrated
Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
October 16, 2017 expressed an unqualified opinion thereon.
/s/
BDO USA, LLP
Woodbridge,
New Jersey
October 16, 2017
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
IDT
Corporation
We
have audited the accompanying consolidated balance sheet of IDT Corporation (a Delaware corporation) and subsidiaries (the “Company”)
as of July 31, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for
each of the two years in the period ended July 31, 2016. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of IDT Corporation and subsidiaries as of July 31, 2016, and the results of their operations and their cash flows for each
of the two years in the period ended July 31, 2016 in conformity with accounting principles generally accepted in the United
States of America.
/s/ GRANT
THORNTON LLP
New
York, New York
October 14,
2016
IDT
CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
(in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
90,344
|
|
|
$
|
104,001
|
|
Marketable securities
|
|
|
58,272
|
|
|
|
52,949
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $2,657 and $3,957 at July 31, 2017 and 2016, respectively
|
|
|
64,979
|
|
|
|
47,230
|
|
Prepaid expenses
|
|
|
14,506
|
|
|
|
14,601
|
|
Other current assets
|
|
|
18,749
|
|
|
|
13,188
|
|
Assets held for sale
|
|
|
124,267
|
|
|
|
107,084
|
|
TOTAL CURRENT ASSETS
|
|
|
371,117
|
|
|
|
339,053
|
|
Property, plant and equipment, net
|
|
|
88,994
|
|
|
|
87,334
|
|
Goodwill
|
|
|
11,326
|
|
|
|
11,218
|
|
Investments
|
|
|
26,894
|
|
|
|
14,024
|
|
Deferred income tax assets, net
|
|
|
11,841
|
|
|
|
9,554
|
|
Other assets
|
|
|
3,657
|
|
|
|
3,345
|
|
Assets held for sale
|
|
|
5,134
|
|
|
|
5,130
|
|
TOTAL ASSETS
|
|
$
|
518,963
|
|
|
$
|
469,658
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
40,989
|
|
|
$
|
29,797
|
|
Accrued expenses
|
|
|
125,359
|
|
|
|
117,268
|
|
Deferred revenue
|
|
|
76,451
|
|
|
|
85,700
|
|
Other current liabilities
|
|
|
4,659
|
|
|
|
14,092
|
|
Liabilities held for sale
|
|
|
115,318
|
|
|
|
96,963
|
|
TOTAL CURRENT LIABILITIES
|
|
|
362,776
|
|
|
|
343,820
|
|
Other liabilities
|
|
|
1,080
|
|
|
|
1,200
|
|
Liabilities held for sale
|
|
|
550
|
|
|
|
435
|
|
TOTAL LIABILITIES
|
|
|
364,406
|
|
|
|
345,455
|
|
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 July 31, 2017 and 2016
|
|
|
33
|
|
|
|
33
|
|
Class B common stock, $.01 par value; authorized shares—200,000; 25,561 and 25,383 shares issued and 23,264 and 21,452 shares outstanding at July 31, 2017 and 2016, respectively
|
|
|
256
|
|
|
|
254
|
|
Additional paid-in capital
|
|
|
394,462
|
|
|
|
396,243
|
|
Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 2,297 and 3,931 shares of Class B common stock at July 31, 2017 and 2016, respectively
|
|
|
(83,304
|
)
|
|
|
(115,316
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,343
|
)
|
|
|
(3,744
|
)
|
Accumulated deficit
|
|
|
(163,370
|
)
|
|
|
(153,673
|
)
|
Total IDT Corporation stockholders’ equity
|
|
|
145,734
|
|
|
|
123,797
|
|
Noncontrolling interests
|
|
|
8,823
|
|
|
|
406
|
|
TOTAL EQUITY
|
|
|
154,557
|
|
|
|
124,203
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
518,963
|
|
|
$
|
469,658
|
|
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended July 31
(in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
REVENUES
|
|
$
|
1,501,729
|
|
|
$
|
1,496,261
|
|
|
$
|
1,596,777
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of revenues (exclusive of depreciation and amortization)
|
|
|
1,275,708
|
|
|
|
1,246,594
|
|
|
|
1,328,363
|
|
Selling, general and administrative (i)
|
|
|
188,293
|
|
|
|
204,655
|
|
|
|
222,239
|
|
Depreciation and amortization
|
|
|
21,704
|
|
|
|
20,535
|
|
|
|
18,418
|
|
Research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
1,656
|
|
Severance
|
|
|
—
|
|
|
|
6,510
|
|
|
|
8,363
|
|
TOTAL COSTS AND EXPENSES
|
|
|
1,485,705
|
|
|
|
1,478,294
|
|
|
|
1,579,039
|
|
Other (see Note 12)
|
|
|
(10,412
|
)
|
|
|
(326
|
)
|
|
|
(1,552
|
)
|
(Adjustment to) gain on sale of member interest in Visa Europe Ltd.
|
|
|
(63
|
)
|
|
|
7,476
|
|
|
|
—
|
|
Gain on sale of interest in Fabrix Systems, Ltd.
|
|
|
—
|
|
|
|
1,086
|
|
|
|
76,864
|
|
Income from operations
|
|
|
5,549
|
|
|
|
26,203
|
|
|
|
93,050
|
|
Interest income (expense), net
|
|
|
1,254
|
|
|
|
1,216
|
|
|
|
(159
|
)
|
Other income (expense), net
|
|
|
817
|
|
|
|
2,049
|
|
|
|
(688
|
)
|
Income before income taxes
|
|
|
7,620
|
|
|
|
29,468
|
|
|
|
92,203
|
|
Benefit from (provision for) income taxes
|
|
|
2,021
|
|
|
|
(4,110
|
)
|
|
|
(6,088
|
)
|
NET INCOME
|
|
|
9,641
|
|
|
|
25,358
|
|
|
|
86,115
|
|
Net income attributable to noncontrolling interests
|
|
|
(1,464
|
)
|
|
|
(1,844
|
)
|
|
|
(1,625
|
)
|
NET INCOME ATTRIBUTABLE TO IDT CORPORATION
|
|
$
|
8,177
|
|
|
$
|
23,514
|
|
|
$
|
84,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to IDT Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
1.03
|
|
|
$
|
3.69
|
|
Diluted
|
|
$
|
0.35
|
|
|
$
|
1.03
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in calculation of earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,182
|
|
|
|
22,765
|
|
|
|
22,903
|
|
Diluted
|
|
|
23,309
|
|
|
|
22,815
|
|
|
|
23,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Stock-based compensation included in selling, general and administrative expenses
|
|
$
|
3,740
|
|
|
$
|
2,680
|
|
|
$
|
5,185
|
|
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
NET INCOME
|
|
$
|
9,641
|
|
|
$
|
25,358
|
|
|
$
|
86,115
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale securities
|
|
|
2,126
|
|
|
|
583
|
|
|
|
(567
|
)
|
Foreign currency translation adjustments
|
|
|
(725
|
)
|
|
|
(6,127
|
)
|
|
|
(2,432
|
)
|
Other comprehensive income (loss)
|
|
|
1,401
|
|
|
|
(5,544
|
)
|
|
|
(2,999
|
)
|
COMPREHENSIVE INCOME
|
|
|
11,042
|
|
|
|
19,814
|
|
|
|
83,116
|
|
Comprehensive income attributable to noncontrolling interests
|
|
|
(1,464
|
)
|
|
|
(1,844
|
)
|
|
|
(1,625
|
)
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO IDT CORPORATION
|
|
$
|
9,578
|
|
|
$
|
17,970
|
|
|
$
|
81,491
|
|
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)
|
|
IDT
Corporation Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
Common Stock
|
|
|
Class
B
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Income
|
|
|
Deficit
|
|
|
Interests
|
|
|
Equity
|
|
BALANCE
AT JULY 31, 2014
|
|
|
3,272
|
|
|
$
|
33
|
|
|
|
24,587
|
|
|
$
|
246
|
|
|
$
|
392,858
|
|
|
$
|
(99,841
|
)
|
|
$
|
3,668
|
|
|
$
|
(196,725
|
)
|
|
$
|
925
|
|
|
$
|
101,164
|
|
Dividends
declared ($2.03 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(47,594
|
)
|
|
|
—
|
|
|
|
(47,594
|
)
|
Restricted
Class B common stock purchased from employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,777
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,777
|
)
|
Repurchases
of Class B common stock through repurchase program
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(425
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(425
|
)
|
Exercise
of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
245
|
|
|
|
2
|
|
|
|
3,422
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,424
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,604
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62
|
|
|
|
5,666
|
|
Restricted
stock issued to employees and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
373
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock
issued for matching contributions to the 401(k) Plan
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
|
|
1
|
|
|
|
1,266
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,267
|
|
Purchase
of Class B common stock from Howard S. Jonas
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,500
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
9
|
|
Distributions
to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,050
|
)
|
|
|
(2,050
|
)
|
Sale
of interest in Fabrix Systems Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
102
|
|
|
|
—
|
|
|
|
538
|
|
|
|
640
|
|
Other
comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,999
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,999
|
)
|
Net
income for the year ended July 31, 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
84,490
|
|
|
|
1,625
|
|
|
|
86,115
|
|
BALANCE
AT JULY 31, 2015
|
|
|
3,272
|
|
|
$
|
33
|
|
|
|
25,276
|
|
|
$
|
253
|
|
|
$
|
403,146
|
|
|
$
|
(110,543
|
)
|
|
$
|
771
|
|
|
$
|
(159,829
|
)
|
|
$
|
1,109
|
|
|
$
|
134,940
|
|
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)—(Continued)
|
|
IDT
Corporation Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
Common Stock
|
|
|
Class
B
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Income
|
|
|
Deficit
|
|
|
Interests
|
|
|
Equity
|
|
Dividends declared ($0.75 per
share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,358
|
)
|
|
|
—
|
|
|
|
(17,358
|
)
|
Restricted Class B common
stock purchased from employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(134
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(134
|
)
|
Repurchases of Class B
common stock through repurchase program
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,639
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,639
|
)
|
Exercise of subsidiary stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
9
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,680
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,680
|
|
Restricted stock issued
to employees and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Stock issued for matching
contributions to the 401(k) Plan
|
|
|
—
|
|
|
|
—
|
|
|
|
95
|
|
|
|
1
|
|
|
|
1,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,411
|
|
Sale of Zedge equity prior
to the spin-off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
374
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
374
|
|
Distributions to noncontrolling
interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,834
|
)
|
|
|
(1,834
|
)
|
Zedge Spin-Off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,369
|
)
|
|
|
—
|
|
|
|
1,029
|
|
|
|
—
|
|
|
|
(722
|
)
|
|
|
(11,062
|
)
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,544
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,544
|
)
|
Net
income for the year ended July 31, 2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,514
|
|
|
|
1,844
|
|
|
|
25,358
|
|
BALANCE
AT JULY 31, 2016
|
|
|
3,272
|
|
|
$
|
33
|
|
|
|
25,383
|
|
|
$
|
254
|
|
|
$
|
396,243
|
|
|
$
|
(115,316
|
)
|
|
$
|
(3,744
|
)
|
|
$
|
(153,673
|
)
|
|
$
|
406
|
|
|
$
|
124,203
|
|
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)—(Continued)
|
|
IDT
Corporation Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
Common Stock
|
|
|
Class
B
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Income
|
|
|
Deficit
|
|
|
Interests
|
|
|
Equity
|
|
Dividends declared ($0.76 per
share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,874
|
)
|
|
|
—
|
|
|
|
(17,874
|
)
|
Restricted Class B common
stock purchased from employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,838
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,838
|
)
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
73
|
|
|
|
1
|
|
|
|
835
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
836
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
105
|
|
|
|
1
|
|
|
|
3,739
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,740
|
|
Sale of Class B common
stock to Howard S. Jonas
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,920
|
)
|
|
|
33,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,930
|
|
Sale of interest and rights
in Rafael Pharmaceuticals, Inc. to Howard S. Jonas (see Note 2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(185
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,185
|
|
|
|
1,000
|
|
Issuance of member interests
in CS Pharma Holdings, LLC (see Note 2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,250
|
|
|
|
10,000
|
|
Distributions to noncontrolling
interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,482
|
)
|
|
|
(1,482
|
)
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,401
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,401
|
|
Net
income for the year ended July 31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,177
|
|
|
|
1,464
|
|
|
|
9,641
|
|
BALANCE
AT JULY 31, 2017
|
|
|
3,272
|
|
|
$
|
33
|
|
|
|
25,561
|
|
|
$
|
256
|
|
|
$
|
394,462
|
|
|
$
|
(83,304
|
)
|
|
$
|
(2,343
|
)
|
|
$
|
(163,370
|
)
|
|
$
|
8,823
|
|
|
$
|
154,557
|
|
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,641
|
|
|
$
|
25,358
|
|
|
$
|
86,115
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
21,704
|
|
|
|
20,535
|
|
|
|
18,418
|
|
Deferred income taxes
|
|
|
(2,329
|
)
|
|
|
3,809
|
|
|
|
5,877
|
|
Provision for doubtful accounts receivable
|
|
|
686
|
|
|
|
1,519
|
|
|
|
97
|
|
Gain on sale of interest in Fabrix Systems Ltd.
|
|
|
—
|
|
|
|
(1,086
|
)
|
|
|
(76,864
|
)
|
Gain on sale of member interest in Visa Europe Ltd.
|
|
|
—
|
|
|
|
(7,476
|
)
|
|
|
—
|
|
Net realized (gain) loss from marketable securities
|
|
|
(323
|
)
|
|
|
(543
|
)
|
|
|
54
|
|
Interest in the equity of investments
|
|
|
(356
|
)
|
|
|
362
|
|
|
|
(1,699
|
)
|
Stock-based compensation
|
|
|
3,740
|
|
|
|
2,680
|
|
|
|
5,185
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents
|
|
|
(17,702
|
)
|
|
|
(22,548
|
)
|
|
|
(28,286
|
)
|
Trade accounts receivable
|
|
|
(17,972
|
)
|
|
|
616
|
|
|
|
640
|
|
Prepaid expenses, other current assets and other assets
|
|
|
(4,856
|
)
|
|
|
8,372
|
|
|
|
2,122
|
|
Trade accounts payable, accrued expenses, other current liabilities and other liabilities
|
|
|
17,344
|
|
|
|
(10,099
|
)
|
|
|
(4,125
|
)
|
Customer deposits
|
|
|
18,980
|
|
|
|
25,344
|
|
|
|
25,939
|
|
Deferred revenue
|
|
|
(9,543
|
)
|
|
|
2,211
|
|
|
|
(2,939
|
)
|
Net cash provided by operating activities
|
|
|
19,014
|
|
|
|
49,054
|
|
|
|
30,534
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(22,949
|
)
|
|
|
(18,370
|
)
|
|
|
(28,556
|
)
|
Payment for acquisition, net of cash acquired
|
|
|
(1,827
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds from sale of interest in Fabrix Systems Ltd., net of cash and cash equivalents sold
|
|
|
—
|
|
|
|
9,557
|
|
|
|
59,678
|
|
Proceeds from sale of member interest in Visa Europe Ltd
|
|
|
—
|
|
|
|
5,597
|
|
|
|
—
|
|
Cash used for purchase of investments
|
|
|
(9,438
|
)
|
|
|
(2,002
|
)
|
|
|
(125
|
)
|
Proceeds from sales and redemptions of investments
|
|
|
15
|
|
|
|
634
|
|
|
|
119
|
|
Purchases of marketable securities
|
|
|
(53,402
|
)
|
|
|
(46,909
|
)
|
|
|
(52,360
|
)
|
Proceeds from maturities and sales of marketable securities
|
|
|
47,996
|
|
|
|
35,011
|
|
|
|
24,126
|
|
Net cash (used in) provided by investing activities
|
|
|
(39,605
|
)
|
|
|
(16,482
|
)
|
|
|
2,882
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(17,874
|
)
|
|
|
(17,358
|
)
|
|
|
(47,594
|
)
|
Distributions to noncontrolling interests
|
|
|
(1,482
|
)
|
|
|
(1,834
|
)
|
|
|
(2,050
|
)
|
Sale of Class B common stock to Howard S. Jonas
|
|
|
24,930
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from sale of interest and rights in Rafael Pharmaceuticals, Inc. to Howard S. Jonas
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from sale of member interests in CS Pharma Holdings, LLC
|
|
|
1,250
|
|
|
|
8,750
|
|
|
|
—
|
|
Cash of Zedge deconsolidated as a result of spin-off
|
|
|
—
|
|
|
|
(6,381
|
)
|
|
|
—
|
|
Proceeds from sale of Zedge equity prior to the spin-off
|
|
|
—
|
|
|
|
374
|
|
|
|
—
|
|
Proceeds from exercise of stock options
|
|
|
836
|
|
|
|
—
|
|
|
|
3,424
|
|
Repayments of borrowings including revolving credit loan payable
|
|
|
—
|
|
|
|
(6,353
|
)
|
|
|
(13,271
|
)
|
Purchase of Class B common stock from Howard S. Jonas
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,500
|
)
|
Repurchases of Class B common stock
|
|
|
(1,838
|
)
|
|
|
(4,773
|
)
|
|
|
(3,202
|
)
|
Net cash provided by (used in) financing activities
|
|
|
6,822
|
|
|
|
(27,575
|
)
|
|
|
(70,193
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
292
|
|
|
|
(5,821
|
)
|
|
|
(6,685
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(13,477
|
)
|
|
|
(824
|
)
|
|
|
(43,462
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
109,537
|
|
|
|
110,361
|
|
|
|
153,823
|
|
Cash and cash equivalents at end of year, including $5,716, $5,536 and $571 held for sale at July 31, 2017, 2016 and 2015, respectively (see Note 3)
|
|
$
|
96,060
|
|
|
$
|
109,537
|
|
|
$
|
110,361
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments made for interest
|
|
$
|
1,209
|
|
|
$
|
1,205
|
|
|
$
|
745
|
|
Cash payments made for income taxes
|
|
$
|
576
|
|
|
$
|
779
|
|
|
$
|
320
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of liability for member interests in CS Pharma Holdings, LLC
|
|
$
|
8,750
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net assets excluding cash and cash equivalents of Zedge deconsolidated as a result of spin-off
|
|
$
|
—
|
|
|
$
|
(4,681
|
)
|
|
$
|
—
|
|
Shares of Visa Inc. Series C preferred stock received from sale of member interest in Visa Europe Ltd.
|
|
$
|
—
|
|
|
$
|
1,580
|
|
|
$
|
—
|
|
Net liabilities excluding cash and cash equivalents of Fabrix Systems Ltd. sold
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,333
|
|
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1—Description of Business and Summary of Significant Accounting Policies
Description
of Business
IDT
Corporation (“IDT” or the “Company”) is a multinational holding company with operations primarily in the
telecommunications and payment industries.
The
Company has three reportable business segments, Telecom Platform Services, Unified Communications as a Service (“UCaaS”)
and Consumer Phone Services. Telecom Platform Services provides retail telecommunications and payment offerings as well as wholesale
international long distance traffic termination. UCaaS is comprised of offerings from the Company’s net2phone division,
including (1) cable telephony, (2) hosted PBX, (3) 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.
Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Telecom Platform Services,
UCaaS and Consumer Phone Services comprise the IDT Telecom division.
Operating
segments not reportable individually are included in All Other. All Other includes the Company’s real estate holdings and
other smaller businesses. Until the spin-off of Zedge, Inc. (“Zedge”) in June 2016, All Other included Zedge, which
provides a content platform that enables consumers to personalize their mobile devices with free ringtones, wallpapers, home screen
app icons and notification sounds. Until the sale of Fabrix Systems Ltd. (“Fabrix”) in October 2014, All Other also
included Fabrix, a software development company offering a cloud-based scale-out storage and computing platform optimized for
big data, virtualization and media storage, processing and delivery.
In
August 2015, the Company’s Board of Directors approved a plan to reorganize the Company into three separate entities by
spinning off its non-core business and assets, one of which was Zedge, to its stockholders. The Company intends to spin-off the
other entity, Rafael Holdings, Inc., a wholly-owned subsidiary of the Company, to its stockholders. Rafael Holdings, Inc. will
own certain commercial real estate assets and interests in clinical and early 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 interests in Rafael Pharmaceuticals, Inc. (formerly Cornerstone Pharmaceuticals,
Inc.) (“Rafael”) and an equity interest in Lipomedix Pharmaceuticals Ltd., an early stage pharmaceutical development
company based in Israel. Rafael Holdings, Inc.’s interests in Rafael, which are held through a 90%-owned non-operating subsidiary,
IDT-Rafael Holdings, LLC (“IDT-Rafael Holdings”), include convertible notes issued by Rafael, and a warrant held by
the Company and certain minority holders to purchase up to a majority equity stake in Rafael at the Company’s discretion
in accordance with the terms of the convertible note and the warrant (see Note 2). In addition, the Company intends to contribute
$50 million to $60 million in cash to Rafael Holdings, Inc. prior to the spin-off.
Basis
of Consolidation and Accounting for Investments
The
method of accounting applied to long-term investments, whether consolidated, equity or cost, involves an evaluation of the significant
terms of each investment that explicitly grant or suggest evidence of control or influence over the operations of the investee
and also includes the identification of any variable interests in which the Company is the primary beneficiary. The consolidated
financial statements include the Company’s controlled subsidiaries. In addition, Rafael 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 that most significantly impact Rafael’s economic performance. All significant intercompany accounts and transactions
between the consolidated subsidiaries are eliminated.
Investments
in businesses that the Company does not control, but in which the Company has the ability to exercise significant influence over
operating and financial matters, are accounted for using the equity method. Investments in which the Company does not have the
ability to exercise significant influence over operating and financial matters are accounted for using the cost method. Investments
in hedge funds are accounted for using the equity method unless the Company’s interest is so minor that it has virtually
no influence over operating and financial policies, in which case these investments are accounted for using the cost method. At
July 31, 2017 and 2016, the Company had $9.8 million and $8.0 million, respectively, in investments accounted for using the equity
method, and $10.8 million and $7.0 million, respectively, in investments accounted for using the cost method. Equity and cost
method investments are included in “Other current assets” or “Investments” in the accompanying consolidated
balance sheets. The Company periodically evaluates its equity and cost method investments for impairment due to declines considered
to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings
is recorded in “Other income (expense), net” in the accompanying consolidated statements of income, and a new basis
in the investment is established.
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those estimates.
Revenue
Recognition
Telephone
service, which includes domestic and international long distance, local service, and wholesale carrier telephony service, is recognized
as revenue when services are provided, primarily based on usage and/or the assessment of fees. Revenue from Boss Revolution PIN-less
international calling service and from sales of calling cards, net of customer discounts, is deferred until the service or the
cards are used or, calling card administrative fees are imposed, thereby reducing the Company’s outstanding obligation to
the customer, at which time revenue is recognized. Domestic and international airtime top-up revenue is recognized upon redemption.
International airtime top-up enables customers to purchase airtime for a prepaid mobile telephone in another country.
IDT Telecom enters into reciprocal transactions pursuant to
which IDT Telecom is committed to purchase a specific number of minutes to specific destinations at specified rates, and the counterparty
is committed to purchase from IDT Telecom a specific number of minutes to specific destinations at specified rates. The number
of minutes purchased and sold in a reciprocal transaction is not necessarily equal. The rates in these reciprocal transactions
are generally not at prevailing market rates. In addition, IDT Telecom enters into transactions in which it swaps minutes with
another carrier. The Company recognizes revenue and the related direct cost of revenue for these reciprocal and swap transactions
based on the fair value of the minutes.
Prior
to its spin-off, Zedge generated over 90% of its revenues from selling its advertising inventory to advertising networks, advertising
exchanges, and direct arrangements with advertisers. Zedge advertising revenue was recognized as advertisements were delivered
to users through impressions, ad views or app installs, as long as evidence of the arrangement with the payer existed (generally
through an executed contract), the price was fixed and determinable, and collectability was reasonably assured.
Prior
to the sale of the Company’s interest in Fabrix, revenue from Fabrix for software licenses and maintenance support was deferred
and recognized on a straight-line basis from the date on which delivered orders were accepted by the customer over the period
that the support was expected to be provided since sufficient vendor-specific objective evidence of fair value to allocate revenues
to the various deliverables did not exist.
Direct
Cost of Revenues
Direct
cost of revenues for IDT Telecom consists primarily of termination and origination costs, toll-free costs, and network costs—including
customer/carrier interconnect charges and leased fiber circuit charges. These costs include an estimate of charges for which invoices
have not yet been received, and estimated amounts for pending disputes with other carriers. Direct cost of revenues for IDT Telecom
also includes the cost of airtime top-up minutes.
Direct
cost of revenues for Zedge consisted of fees paid to third parties for internet hosting, content serving and filtering, and marketing
automation services. Such costs were charged to expense as incurred.
Direct
cost of revenues for Fabrix consisted primarily of customer support expenses.
Direct
cost of revenues excludes depreciation and amortization expense.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted
Cash and Cash Equivalents
The
Company classifies the change in its restricted cash and cash equivalents as an operating activity in the accompanying consolidated
statements of cash flows because the restrictions are directly related to the operations of IDT Financial Services Limited, the
Company’s Gibraltar-based bank, and IDT Telecom.
Substantially
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 July 31, 2017
and 2016, “Cash and cash equivalents” in the Company’s consolidated balance sheets included an aggregate of
$10.8 million and $10.5 million, respectively, held by IDT Payment Services that was unavailable for other purposes.
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Marketable
Securities
The
Company’s investments in marketable securities are classified as “available-for-sale.” Available-for-sale securities
are required to be carried at their fair value, with unrealized gains and losses (net of income taxes) that are considered temporary
in nature recorded in “Accumulated other comprehensive loss” in the accompanying consolidated balance sheets. The
Company uses the specific identification method in computing the gross realized gains and gross realized losses on the sales of
marketable securities. The Company periodically evaluates its investments in marketable securities for impairment due to declines
in market value considered to be other than temporary. Such impairment evaluations include, in addition to persistent, declining
market prices, general economic and Company-specific evaluations. If the Company determines that a decline in market value is
other than temporary, then a charge to operations is recorded in “Other income (expense), net” in the accompanying
consolidated statements of income and a new cost basis in the investment is established.
Long-Lived
Assets
Equipment,
buildings, computer software, and furniture and fixtures are recorded at cost and are depreciated on a straight-line basis over
their estimated useful lives, which range as follows: equipment—5, 7 or 20 years; buildings—40 years; computer software—2,
3 or 5 years; and furniture and fixtures—5, 7 or 10 years. Leasehold improvements are recorded at cost and are depreciated
on a straight-line basis over the term of their lease or their estimated useful lives, whichever is shorter.
At
July 31, 2017 and 2016, the Company had intangible assets with finite useful lives of $0.5 million and $0.7 million, respectively,
which were included in “Other assets” in the consolidated balance sheets. Costs associated with obtaining the right
to use trademark and patents owned by third parties are capitalized and amortized on a straight-line basis over the term of the
relevant trademark and patent licenses. The fair value of technology and domain names, customer lists, and trademark acquired
in a business combination accounted for under the purchase method are amortized over their estimated useful lives as follows:
technology and domain names are amortized on a straight-line basis over the estimated useful lives of 3 or 4 years; customer lists
are amortized ratably over the approximately 15 year period of expected cash flows; and trademark is amortized on a straight-line
basis over the 5 year period of expected cash flows. Amortization expense of intangible assets was $0.3 million, $0.4 million
and $0.4 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The Company estimates that amortization expense of
intangible assets with finite lives will be $90,000, $71,000, $55,000, $43,000 and $35,000 in fiscal 2018, fiscal 2019, fiscal
2020, fiscal 2021 and fiscal 2022, respectively.
The
Company tests the recoverability of its long-lived assets with finite useful lives whenever events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable. The Company tests for recoverability based on the projected
undiscounted cash flows to be derived from such asset. If the projected undiscounted future cash flows are less than the carrying
value of the asset, the Company will record an impairment loss, if any, based on the difference between the estimated fair value
and the carrying value of the asset. The Company generally measures fair value by considering sale prices for similar assets or
by discounting estimated future cash flows from such asset using an appropriate discount rate. Cash flow projections and fair
value estimates require significant estimates and assumptions by management. Should the estimates and assumptions prove to be
incorrect, the Company may be required to record impairments in future periods and such impairments could be material.
Goodwill
Goodwill
is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Goodwill and
other indefinite lived intangible assets are not amortized. These assets are reviewed annually (or more frequently under various
conditions) for impairment using a fair value approach.
In
fiscal 2017, the Company adopted the Accounting Standards Update (“ASU”) that simplifies the subsequent measurement
of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step
2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities
(including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of
assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, the Company performs
its annual, or interim, goodwill impairment test by comparing the fair value of its reporting units with their carrying amounts.
The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Additionally,
the Company considers income tax effects from any tax deductible goodwill on the carrying amount of its reporting unit when measuring
the goodwill impairment loss, if applicable.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
fair value of the reporting units is estimated using discounted cash flow methodologies, as well as considering third party market
value indicators. Calculating the fair value of the reporting units requires significant estimates and assumptions by management.
Should the estimates and assumptions regarding the fair value of the reporting units prove to be incorrect, the Company may be
required to record impairments to its goodwill in future periods and such impairments could be material.
The
Company has the option to perform a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill
impairment test. However, the Company may elect to perform the quantitative goodwill impairment test even if no indications of
a potential impairment exist.
Derivative
Instruments and Hedging Activities
The
Company records its derivatives instruments at their respective fair values. The accounting for changes in the fair value (that
is, gains or losses) of a derivative instrument is dependent upon whether the derivative has been designated and qualifies as
part of a hedging relationship and further, on the type of hedging relationship. The Company does not designate its derivative
instruments to qualify for hedge accounting, accordingly the instruments are recorded at fair value as a current asset or liability
and any changes in fair value are recorded in the consolidated statements of income.
Advertising
Expense
Cost of advertising is charged to selling, general and administrative
expenses in the period in which it is incurred. In fiscal 2017, fiscal 2016 and fiscal 2015, advertising expense was $17.4 million,
$16.5 million and $19.7 million, respectively.
Research
and Development Costs
Costs
for research and development are charged to expense as incurred. Research and development costs were incurred by Fabrix.
Capitalized
Internal Use Software Costs
The
Company capitalizes the cost of internal-use software that has a useful life in excess of one year. These costs consist of payments
made to third parties and the salaries of employees working on such software development. Subsequent additions, modifications
or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously
did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. Capitalized internal
use software costs are amortized on a straight-line basis over their estimated useful lives. Amortization expense related to such
capitalized software in fiscal 2017, fiscal 2016 and fiscal 2015 was $14.2 million, $12.6 million and $11.4 million, respectively.
Unamortized capitalized internal use software costs at July 31, 2017 and 2016 were $22.8 million and $18.8 million, respectively.
Repairs
and Maintenance
The
Company charges the cost of repairs and maintenance, including the cost of replacing minor items not constituting substantial
betterment, to selling, general and administrative expenses as these costs are incurred.
Foreign
Currency Translation
Assets
and liabilities of foreign subsidiaries denominated in foreign currencies are translated to U.S. Dollars at end-of-period rates
of exchange, and their monthly results of operations are translated to U.S. Dollars at the average rates of exchange for that
month. Gains or losses resulting from such foreign currency translations are recorded in “Accumulated other comprehensive
loss” in the accompanying consolidated balance sheets. Foreign currency transaction gains and losses are reported in “Other
income (expense), net” in the accompanying consolidated statements of income.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance
is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate
realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary
differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date of such change.
The
Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The
Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position
has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant information. Tax positions that meet the more-likely-than-not recognition
threshold are measured to determine the amount of tax benefit to recognize in the financial statements. The tax position is measured
at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences
between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or
more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a
reduction in a deferred tax asset, or an increase in a deferred tax liability.
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Company classifies interest and penalties on income taxes as a component of income tax expense.
Contingencies
The
Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates
that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can
reasonably be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range,
the Company records its best estimate within the range. When no amount within the range is a better estimate than any other amount,
the Company accrues the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when
it is at least reasonably possible that a loss may have been incurred.
Earnings
Per Share
Basic
earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the
weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per
share is determined 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 per share attributable to the Company’s
common stockholders consists of the following:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Basic weighted-average number of shares
|
|
|
23,182
|
|
|
|
22,765
|
|
|
|
22,903
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
44
|
|
|
|
6
|
|
|
|
23
|
|
Non-vested restricted Class B common stock
|
|
|
83
|
|
|
|
44
|
|
|
|
321
|
|
Diluted weighted-average number of shares
|
|
|
23,309
|
|
|
|
22,815
|
|
|
|
23,247
|
|
The
following outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price
of the stock option was greater than the average market price of the Company’s stock during the period:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
22
|
|
|
|
209
|
|
|
|
136
|
|
Stock-Based
Compensation
The
Company recognizes compensation expense for all of its grants of stock-based awards based on the estimated fair value on the grant
date. Compensation cost for awards is recognized using the straight-line method over the vesting period. Stock-based compensation
is included in selling, general and administrative expense.
On
August 1, 2017, the Company adopted the ASU intended to improve the accounting for employee share-based payments. The ASU simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences and classification
on the statement of cash flows. The adoption of the ASU did not have a significant impact on the Company’s consolidated
financial statements.
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Vulnerability
Due to Certain Concentrations
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents,
restricted cash and cash equivalents, marketable securities, investments in hedge funds and trade accounts receivable. The Company
holds cash and cash equivalents at several major financial institutions, which often exceed FDIC insurance limits. Historically,
the Company has not experienced any losses due to such concentration of credit risk. The Company’s temporary cash investments
policy is to limit the dollar amount of investments with any one financial institution and monitor the credit ratings of those
institutions. While the Company may be exposed to credit losses due to the nonperformance of the holders of its deposits, the
Company does not expect the settlement of these transactions to have a material effect on its results of operations, cash flows
or financial condition.
Concentration
of credit risk with respect to trade accounts receivable is limited due to the large number of customers in various geographic
regions and industry segments comprising the Company’s customer base. No single customer accounted for more than 10% of
consolidated revenues in fiscal 2017, fiscal 2016 or fiscal 2015. However, the Company’s five largest customers collectively
accounted for 12.4%, 11.2% and 11.2% of its consolidated revenues from continuing operations in fiscal 2017, fiscal 2016 and fiscal
2015, respectively. The Company’s customers with the five largest receivables balances collectively accounted for 35.4%
and 23.0% of the consolidated gross trade accounts receivable at July 31, 2017 and 2016, respectively. This concentration of customers
increases the Company’s risk associated with nonpayment by those customers. In an effort to reduce such risk, the Company
performs ongoing credit evaluations of its significant retail, wholesale and cable telephony customers. In addition, the Company
attempts to mitigate the credit risk related to specific wholesale carrier services customers by also buying services from the
customer, in order to create an opportunity to offset its payables and receivables and reduce its net trade receivable exposure
risk. When it is practical to do so, the Company will increase its purchases from wholesale carrier services customers with receivable
balances that exceed the Company’s applicable payables in order to maximize the offset and reduce its credit risk.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable
balance. The allowance is determined based on known troubled accounts, historical experience and other currently available evidence.
Doubtful accounts are written-off upon final determination that the trade accounts will not be collected. The change in the allowance
for doubtful accounts is as follows:
Year ended July 31
(in thousands)
|
|
Balance at beginning of year
|
|
|
Additions charged to costs and expenses
|
|
|
Deductions
(1)
|
|
|
Balance at end of year
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (2)
|
|
$
|
4,818
|
|
|
$
|
686
|
|
|
$
|
(297
|
)
|
|
$
|
5,207
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
5,645
|
|
|
$
|
1,519
|
|
|
$
|
(2,346
|
)
|
|
$
|
4,818
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
11,507
|
|
|
$
|
97
|
|
|
$
|
(5,959
|
)
|
|
$
|
5,645
|
|
(1)
|
Primarily
uncollectible accounts written off, net of recoveries.
|
(2)
|
Includes
allowance for doubtful accounts of $2,550 and $861 held for sale at July 31, 2017 and 2016, respectively (see Note 3)
|
Fair
Value Measurements
Fair
value of financial and non-financial assets and liabilities is defined as an exit price, which is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The three-tier hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure
fair value, is as follows:
Level 1 –
|
quoted
prices (unadjusted) in active markets for identical assets or liabilities.
|
Level 2 –
|
quoted
prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either
directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
|
Level 3 –
|
unobservable
inputs based on the Company’s assumptions used to measure assets and liabilities at fair value.
|
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A
financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement
requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair
value hierarchy.
Recently
Issued Accounting Standards Not Yet Adopted
In
May 2014, the Financial Accounting Standards Board (“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.
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 FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For
receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model
that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized
losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances
instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more
information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect
adjustment to retained earnings. The Company will adopt the new standard on August 1, 2020. The Company is evaluating the impact
that the new standard will have on its consolidated financial statements.
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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.
Note
2—Investment in Rafael Pharmaceuticals, Inc.
The
Company has made investments totaling $10 million in Rafael Pharmaceuticals, Inc., 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. The Company’s initial $2 million investment in Rafael in fiscal 2016 was in exchange for Rafael’s
3.5% convertible promissory notes due 2018. An additional $8 million was funded in August and September 2016. In September 2016,
Rafael issued to the Company’s controlled 50%-owned subsidiary, CS Pharma Holdings, LLC (“CS Pharma”), a convertible
promissory note with a principal amount of $10 million (the “Series D Note”) representing the $8 million investment
funded on such date plus the conversion of the $2 million principal amount convertible promissory notes issued in connection with
the prior funding.
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On
March 2, 2017, the Company sold 10% of the Company’s direct and indirect interests and rights in Rafael to Howard S. Jonas,
the Company’s Chairman of the Board, and Chairman of the Board of Rafael, for a purchase price of $1 million. As a result
of this transaction, the Company recorded an increase of $1.2 million in “Noncontrolling interests” and a decrease
of $0.2 million in “Additional paid-in capital” in the accompanying consolidated balance sheet.
IDT-Rafael
Holdings had the contractual right to receive additional shares of Rafael representing 10% of the outstanding capital stock of
Rafael that will be issued upon the occurrence of any of the following: (i) Food and Drug Administration approval of a Rafael
drug application, (ii) an initial public offering of Rafael at a valuation of over $500 million, or (iii) a sale of Rafael 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 and Mr. Jonas received the right to 1% of the outstanding capital stock of Rafael. In
addition, as compensation for assuming the role of Chairman of the Board of Rafael, and to create additional incentive to contribute
to the success of Rafael, on September 19, 2017, the Company transferred its right to receive 9% of the outstanding capital stock
of Rafael to Mr. Jonas. The right is further transferable at the discretion of Mr. Jonas.
Howard
Jonas and Deborah Jonas jointly own $525,000 of Series C Convertible Notes of Rafael, and The Howard S. and Deborah Jonas Foundation
own an additional $525,000 of Series C Convertible Notes of Rafael.
The
Rafael 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’s Series D Preferred Stock. The Series
D Note also includes a mandatory conversion into Rafael 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.
The
Company and CS Pharma were issued warrants to purchase shares of capital stock of Rafael representing in the aggregate up to 56%
of the then issued and outstanding capital stock of Rafael, 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, or such
lesser amount as represents 5% of the outstanding capital stock of Rafael, 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.
The
Company’s investment in Rafael, which was included in “Investments” in the accompanying consolidated balance
sheets, consists of the following:
July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
Convertible promissory note (at fair value)
|
|
$
|
6,300
|
|
|
$
|
2,000
|
|
Warrants (at cost)
|
|
|
5,400
|
|
|
|
—
|
|
Right to receive additional shares (at cost)
|
|
|
400
|
|
|
|
—
|
|
Total investment in Rafael
|
|
$
|
12,100
|
|
|
$
|
2,000
|
|
Rafael
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 that most significantly impact Rafael’s economic performance. At July
31, 2017, the Company’s maximum exposure to loss as a result of its involvement with Rafael was its $12.1 million investment,
since there were no other arrangements, events or circumstances that could expose the Company to additional loss.
In
addition to interests issued to the Company, CS Pharma has issued member interests to third parties in exchange for cash investment
in CS Pharma of $10 million. At July 31, 2017 and 2016, CS Pharma had received $10.0 million and $8.8 million, respectively, of
such investment. At July 31, 2016, the $8.8 million received was included in “Other current liabilities” in the accompanying
consolidated balance sheet pending the issuance of the member interests. In fiscal 2017, the Company recorded additional paid-capital
of $2.8 million and noncontrolling interests of $7.2 million upon the issuance of the member interests. The Company holds a 50%
interest in CS Pharma and is the managing member. It is expected that CS Pharma will use its cash to invest in Rafael.
IDT
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
3—IDT Financial Services Holding Limited Assets and Liabilities Held for Sale
On
June 22, 2017, the Company’s wholly-owned subsidiary IDT Telecom, Inc. (“IDT Telecom”) entered into a Share
Purchase Agreement with JAR Fintech Limited (“JAR Fintech”) 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. IDT Financial Services Holding Limited is the sole shareholder of IDT Financial Services Limited, 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 IDT Financial Services Holding Limited of approximately
$3.8 million 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 $14.0 million at July 31, 2017. 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 calendar
2017, subject to regulatory approval and other customary conditions set forth in the Share Purchase Agreement.
The
pending disposition of IDT Financial Services Holding Limited 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 IDT Financial Services Holding Limited
assets and liabilities held for sale included the following:
July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
CURRENT ASSETS HELD FOR SALE:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,716
|
|
|
$
|
5,536
|
|
Restricted cash and cash equivalents
|
|
|
115,609
|
|
|
|
98,500
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $2,550 and $861 at July 31, 2017 and 2016, respectively
|
|
|
1,844
|
|
|
|
2,053
|
|
Prepaid expenses
|
|
|
758
|
|
|
|
588
|
|
Other current assets
|
|
|
340
|
|
|
|
407
|
|
TOTAL CURRENT ASSETS HELD FOR SALE
|
|
$
|
124,267
|
|
|
$
|
107,084
|
|
NONCURRENT ASSETS HELD FOR SALE:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation of $228 and $213 at July 31, 2017 and 2016, respectively
|
|
$
|
24
|
|
|
$
|
40
|
|
Other intangibles, net of accumulated amortization of $57 and $37 at July 31, 2017 and 2016, respectively
|
|
|
165
|
|
|
|
162
|
|
Other assets
|
|
|
4,945
|
|
|
|
4,928
|
|
TOTAL NONCURRENT ASSETS HELD FOR SALE
|
|
$
|
5,134
|
|
|
$
|
5,130
|
|
CURRENT LIABILITIES HELD FOR SALE:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
372
|
|
|
$
|
456
|
|
Accrued expenses
|
|
|
226
|
|
|
|
166
|
|
Deferred revenue
|
|
|
—
|
|
|
|
478
|
|
Customer deposits
|
|
|
114,689
|
|
|
|
95,843
|
|
Other current liabilities
|
|
|
31
|
|
|
|
20
|
|
TOTAL CURRENT LIABILITIES HELD FOR SALE
|
|
$
|
115,318
|
|
|
$
|
96,963
|
|
NONCURRENT LIABILITIES HELD FOR SALE:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
550
|
|
|
$
|
435
|
|
TOTAL NONCURRENT LIABILITIES HELD FOR SALE
|
|
$
|
550
|
|
|
$
|
435
|
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
IDT
Financial Services Holding Limited is included in the Telecom Platform Services segment. IDT Financial Services Holding Limited’s
income before income taxes and income before income taxes attributable to the Company, which is included in the accompanying consolidated
statements of income, were as follows:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
INCOME BEFORE INCOME TAXES
|
|
$
|
(1,577
|
)
|
|
$
|
7,532
|
|
|
$
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES ATTRIBUTABLE TO IDT CORPORATION
|
|
$
|
(1,577
|
)
|
|
$
|
7,532
|
|
|
$
|
407
|
|
Note
4—Zedge Spin-Off
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 to the Company’s stockholders of record as of the close of business on May 26, 2016 (the “Zedge Spin-Off”).
The disposition of Zedge did not meet the criteria to be reported as a discontinued operation and accordingly, its assets, liabilities,
results of operations and cash flows have not been reclassified. In connection with the Zedge Spin-Off, each of the Company’s
stockholders received one share of Zedge Class A common stock for every three shares of the Company’s Class A common stock,
and one share of Zedge Class B common stock for every three shares of the Company’s Class B common stock, held of record
as of the close of business on May 26, 2016. The Company received a legal opinion that the Zedge Spin-Off should qualify as a
tax-free transaction for U.S. federal income tax purposes.
Zedge’s
income (loss) before income taxes and income before income taxes attributable to the Company, which is included in the accompanying
consolidated statements of income, were as follows:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
$
|
—
|
|
|
$
|
2,518
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES ATTRIBUTABLE TO IDT CORPORATION
|
|
$
|
—
|
|
|
$
|
2,221
|
|
|
$
|
23
|
|
Note
5—Sale of Interest in Fabrix Systems Ltd.
On
October 8, 2014, the Company completed the sale of its interest in Fabrix to Telefonaktiebolget LM Ericsson (publ) (“Ericsson”).
The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working capital
and other adjustments. The Company owned approximately 78% of Fabrix on a fully diluted basis. The Company’s share of the
sale price was $69.2 million, after reflecting the impact of working capital and other adjustments. The Company and the other
shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims, of which $6.5 million was
released in October 2015 and $6.5 million was released in April 2016. In fiscal 2016, the Company recorded gain on the sale of
its interest in Fabrix of $1.1 million, which represented adjustments to the Company’s share of Fabrix’ working capital
and estimated transaction costs. In fiscal 2015, the Company recorded gain on the sale of its interest in Fabrix of $76.9 million.
Fabrix’
income before income taxes and income before income taxes attributable to the Company, which is included in the accompanying consolidated
statements of income, were as follows:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
INCOME BEFORE INCOME TAXES
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES ATTRIBUTABLE TO IDT CORPORATION
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,325
|
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
6—Marketable Securities
The
following is a summary of marketable securities:
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit*
|
|
$
|
17,690
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
17,696
|
|
Federal Government Sponsored Enterprise notes
|
|
|
3,457
|
|
|
|
17
|
|
|
|
—
|
|
|
|
3,474
|
|
International agency notes
|
|
|
409
|
|
|
|
5
|
|
|
|
—
|
|
|
|
414
|
|
Mutual funds
|
|
|
5,121
|
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
5,082
|
|
Corporate bonds
|
|
|
3,633
|
|
|
|
40
|
|
|
|
—
|
|
|
|
3,673
|
|
Equity
|
|
|
2,463
|
|
|
|
—
|
|
|
|
(140
|
)
|
|
|
2,323
|
|
U.S. Treasury notes
|
|
|
4,946
|
|
|
|
95
|
|
|
|
(1
|
)
|
|
|
5,040
|
|
Municipal bonds
|
|
|
15,222
|
|
|
|
26
|
|
|
|
(1
|
)
|
|
|
15,247
|
|
TOTAL
|
|
$
|
52,941
|
|
|
$
|
189
|
|
|
$
|
(181
|
)
|
|
$
|
52,949
|
|
* 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.
In
January 2017, the Company received 23,227 shares of Zedge Class B common stock in connection with the lapsing of restrictions
on Zedge restricted stock held by certain of the Company’s employees and the payment of taxes related thereto. As part of
the Zedge Spin-Off, holders of the Company’s restricted Class B common stock received, in respect of those restricted shares,
one share of Zedge’s Class B common stock for every three restricted shares of the Company that they held as of the record
date for the Zedge Spin-Off. The Company received the Zedge shares in exchange for the payment of an aggregate of $74,000 for
the employees’ tax withholding obligations upon the vesting event. The number of shares was determined based on their fair
market value on the trading day immediately prior to the vesting date. At July 31, 2017, the Zedge shares owned by the Company
had a fair value of $48,000.
Proceeds
from maturities and sales of available-for-sale securities were $48.0 million, $35.0 million and $24.1 million in fiscal 2017,
fiscal 2016 and fiscal 2015, respectively. Realized gains from sales of available-for-sale securities were $0.3 million, $0.5
million and nil in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. Realized losses from sales of available-for-sale securities
were nil, nil and $0.1 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
The
contractual maturities of the Company’s available-for-sale debt securities at July 31, 2017 were as follows:
(in thousands)
|
|
Fair Value
|
|
Within one year
|
|
$
|
34,921
|
|
After one year through five years
|
|
|
17,873
|
|
After five years through ten years
|
|
|
—
|
|
After ten years
|
|
|
—
|
|
TOTAL
|
|
$
|
52,794
|
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following available-for-sale securities were in an unrealized loss position for which other-than-temporary impairments have not
been recognized:
(in thousands)
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
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
|
|
July 31, 2016
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
39
|
|
|
$
|
5,082
|
|
Equity
|
|
|
140
|
|
|
|
2,323
|
|
U.S. Treasury notes
|
|
|
1
|
|
|
|
199
|
|
Municipal bonds
|
|
|
1
|
|
|
|
3,112
|
|
TOTAL
|
|
$
|
181
|
|
|
$
|
10,716
|
|
At
July 31, 2017 and 2016, there were no securities in a continuous unrealized loss position for 12 months or longer.
Note
7—Fair Value Measurements
The
following table presents the balance of assets measured at fair value on a recurring basis:
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
12,151
|
|
|
$
|
46,121
|
|
|
$
|
—
|
|
|
$
|
58,272
|
|
Rafael convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
6,300
|
|
|
|
6,300
|
|
Total
|
|
$
|
12,151
|
|
|
$
|
46,121
|
|
|
$
|
6,300
|
|
|
$
|
64,572
|
|
July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
12,445
|
|
|
$
|
40,504
|
|
|
$
|
—
|
|
|
$
|
52,949
|
|
Rafael convertible promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
2,000
|
|
Total
|
|
$
|
12,445
|
|
|
$
|
40,504
|
|
|
$
|
2,000
|
|
|
$
|
54,949
|
|
At
July 31, 2017 and 2016, the Company did not have any liabilities measured at fair value on a recurring basis.
At
July 31, 2017, the fair value of the Rafael convertible promissory notes, which were classified as Level 3, was estimated based
on a valuation of Rafael and other factors that could not be corroborated by the market.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following tables summarize 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 years ended July 31, 2017, 2016 or 2015.
Year ended July 31,
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of period
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total gains included in other comprehensive income
|
|
|
2,100
|
|
|
|
—
|
|
|
|
—
|
|
Purchases
|
|
|
2,200
|
|
|
|
2,000
|
|
|
|
—
|
|
Balance, end of period
|
|
$
|
6,300
|
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
At
July 31, 2017 and 2016, the Company had $8.6 million and $8.1 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.
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 July 31, 2017 and 2016, 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 July 31, 2017 and 2016, 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 July 31, 2017 and 2016 included investments in the equity 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 $10.8 million and $7.0 million at July 31, 2017 and 2016,
respectively, which the Company believes was not impaired.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
8—Derivative Instruments
Prior
to the Zedge Spin-Off, the primary risk managed by the Company using derivative instruments was foreign exchange risk. Foreign
exchange forward contracts were entered into as hedges against unfavorable fluctuations in the U.S. dollar – Norwegian krone
(“NOK”) exchange rate. Zedge is based in Norway and much of its operations are located in Norway. Subsequent to the
Zedge Spin-Off, the Company provided hedging services to Zedge pursuant to its Transition Services Agreement (see Note 22) until
Zedge established a credit facility and was able to enter into foreign exchange contracts. The Company did not apply hedge accounting
to these contracts, therefore the changes in fair value were recorded in earnings.
The
effects of derivative instruments on the consolidated statements of income were as follows:
|
|
|
|
Amount
of Gain (Loss) Recognized on Derivatives
|
|
|
|
|
|
Year
ended July 31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Derivatives not designated or not qualifying as hedging instruments
|
|
Location of Gain (Loss) Recognized on Derivatives
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards
|
|
Other income (expense), net
|
|
$
|
—
|
|
|
$
|
(145
|
)
|
|
$
|
(58
|
)
|
Note
9—Property, Plant and Equipment
Property,
plant and equipment consist of the following:
July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
Equipment
|
|
$
|
75,867
|
|
|
$
|
73,856
|
|
Land and buildings
|
|
|
62,255
|
|
|
|
60,452
|
|
Computer software
|
|
|
88,480
|
|
|
|
68,607
|
|
Leasehold improvements
|
|
|
1,977
|
|
|
|
1,710
|
|
Furniture and fixtures
|
|
|
1,474
|
|
|
|
1,428
|
|
|
|
|
230,053
|
|
|
|
206,053
|
|
Less accumulated depreciation and amortization
|
|
|
(141,059
|
)
|
|
|
(118,719
|
)
|
Property, plant and equipment, net
|
|
$
|
88,994
|
|
|
$
|
87,334
|
|
Depreciation
and amortization expense of property, plant and equipment was $21.4 million, $20.1 million and $18.0 million in fiscal 2017, fiscal
2016 and fiscal 2015, respectively.
Note
10—Goodwill
The
table below reconciles the change in the carrying amount of goodwill by operating segment for the period from July 31, 2015 to
July 31, 2017:
(in thousands)
|
|
Telecom
Platform
Services
|
|
|
All Other
(Zedge)
|
|
|
Total
|
|
Balance as of July 31, 2015
|
|
$
|
11,181
|
|
|
$
|
3,207
|
|
|
$
|
14,388
|
|
Foreign currency translation adjustments
|
|
|
37
|
|
|
|
(823
|
)
|
|
|
(786
|
)
|
Zedge Spin-Off
|
|
|
—
|
|
|
|
(2,384
|
)
|
|
|
(2,384
|
)
|
Balance as of July 31, 2016
|
|
|
11,218
|
|
|
|
—
|
|
|
|
11,218
|
|
Foreign currency translation adjustments
|
|
|
108
|
|
|
|
—
|
|
|
|
108
|
|
Balance as of July 31, 2017
|
|
$
|
11,326
|
|
|
$
|
—
|
|
|
$
|
11,326
|
|
Note
11—Sale of Member Interest in Visa Europe Ltd.
In
June 2016, Visa Inc. acquired Visa Europe Limited for cash, shares of Visa Inc. Series C preferred stock and a deferred cash payment.
IDT Financial Services Limited was a member of Visa Europe and received cash of €5.0 million ($5.6 million on the acquisition
date), 1,830 shares of Series C preferred stock and deferred payment receivable of €0.4 million ($0.5 million on the acquisition
date). The Visa Inc. Series C preferred stock is accounted for using the cost method. At July 31, 2017 and 2016, the carrying
value of these shares was $1.6 million. The 1,830 shares of Visa Inc. Series C preferred stock are convertible into 25,532 shares
of Visa Inc. Class A common stock. The shares of preferred stock become fully convertible in 2028. Beginning in 2020, Visa Inc.
will assess whether it is appropriate to effect a partial conversion. The preferred stock shares may only be transferred to other
former Visa Europe members, or to existing qualifying holders of Visa Inc.’s Class B common stock. In addition, the preferred
stock will not be registered under the U.S. Securities Act of 1933 and therefore is not transferable unless such transfer is registered
or an exemption from registration is available. The deferred payment receivable plus 4% compounded annual interest is due in June
2019. In fiscal 2016, the Company recorded a gain of $7.5 million from the sale of its member interest in Visa Europe.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
12—Other Operating Losses, Net
The
following table summarizes the other operating losses, net by business segment:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Corporate —loss related to legal settlement and mutual release
|
|
$
|
(10,436
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Telecom Platform Services— loss on disposal of property, plant and equipment
|
|
|
—
|
|
|
|
(326
|
)
|
|
|
—
|
|
Corporate—gain (losses) related to legal matters
|
|
|
24
|
|
|
|
—
|
|
|
|
(1,552
|
)
|
TOTAL
|
|
$
|
(10,412
|
)
|
|
$
|
(326
|
)
|
|
$
|
(1,552
|
)
|
Straight
Path Communications Inc. Settlement and Mutual Release
On
July 31, 2013, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary Straight Path
Communications Inc. (“Straight Path”) to the Company’s stockholders of record as of the close of business on
July 25, 2013 (the “Straight Path Spin-Off”). 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 Federal Communications Commission (“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 April 9, 2017, the Company and Straight Path entered into a binding term sheet
that provides for, among other things, the settlement and mutual release of the potential indemnification claims asserted by each
of the Company and Straight Path in connection with, among other things, liabilities (including but not limited to fines, fees
or penalties) that may exist or arise relating to the subject matter of the investigation by the FCC. Pursuant to this term sheet,
Straight Path will transfer to the Company or its affiliate, subsidiary, or assignee, Straight Path’s ownership interest
in Straight Path IP Group, Inc. (“SPIP”), a subsidiary of Straight Path that holds intellectual property primarily
related to communications over computer networks, for $6 million, the parties will provide mutual releases, and the Company will
pay Straight Path $10 million and stockholders of Straight Path will receive 22% of the net proceeds, if any, received by SPIP
from any license, transfer or assignment of any of the patent rights held by SPIP as of the effective date of transfer, or any
settlement, award or judgment involving any of the patent rights (including any net proceeds received following the effective
date of transfer) to be pursued under the terms of the term sheet.
On
April 10, 2017, the Company’s Board of Directors and its Corporate Governance Committee approved the transfer by the Company
of the ownership interest in SPIP to an entity to be organized by Howard S. Jonas in exchange for $6.0 million, which is the price
to be paid by the Company to Straight Path for the ownership interest in SPIP. The new entity will assume the Company’s
obligations to Straight Path and its stockholders with respect to the net proceeds, if any, related to the patents as described
above.
In April 2017, the Company recorded a liability of $10.0 million
related to a legal settlement and mutual release. In addition, in fiscal 2017, the Company incurred legal fees of $0.9 million
related to the FCC investigation and the settlement and mutual release, and the Company received insurance proceeds related to
the FCC investigation of $0.5 million.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
13—Revolving Credit Loan Payable
The
Company’s subsidiary, IDT Telecom, 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. 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 150
basis points. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity
date of April 30, 2018. At July 31, 2017 and 2016, 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 0.375% 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, including
IDT Telecom may not pay any dividend on its capital stock and IDT Telecom’s aggregate loans and advances to affiliates or
subsidiaries may not exceed $110.0 million. At July 31, 2017 and 2016, there were no amounts utilized for letters of credit under
the line of credit, IDT Telecom was in compliance with all of the covenants, and IDT Telecom’s aggregate loans and advances
to affiliates and subsidiaries was $94.9 million and $91.1 million, respectively.
Note
14—Accrued Expenses
Accrued
expenses consist of the following:
July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
Carrier minutes termination
|
|
$
|
40,131
|
|
|
$
|
34,719
|
|
Carrier network connectivity, toll-free and 800 services
|
|
|
2,152
|
|
|
|
3,046
|
|
Regulatory fees and taxes
|
|
|
44,766
|
|
|
|
48,369
|
|
Legal settlements
|
|
|
12,099
|
|
|
|
2,069
|
|
Compensation costs
|
|
|
9,341
|
|
|
|
14,471
|
|
Legal and professional fees
|
|
|
4,296
|
|
|
|
4,278
|
|
Other
|
|
|
12,574
|
|
|
|
10,316
|
|
TOTAL
|
|
$
|
125,359
|
|
|
$
|
117,268
|
|
Note
15—Severance Expense
In
July 2016, the Company completed a reduction of its workforce and incurred severance expense of $6.3 million in fiscal 2016. Severance
expense in fiscal 2016 also included $0.2 million unrelated to the July 2016 workforce reduction. At July 31, 2017 and 2016, there
was accrued severance of $0.3 million and $5.7 million, respectively, included in “Accrued expenses” in the accompanying
consolidated balance sheets for the July 2016 workforce reduction.
In
February and March 2015, the Company completed a reduction of its workforce and incurred severance expense of $6.2 million in
fiscal 2015. Severance expense in fiscal 2015 also included $1.9 million due to a downsizing of certain IDT Telecom sales and
administrative functions in Europe and the U.S in the first quarter of fiscal 2015, and an additional $0.2 million in the fourth
quarter of fiscal 2015. At July 31, 2017 and 2016, there was accrued severance of nil and $0.1 million, respectively, included
in “Accrued expenses” in the accompanying consolidated balance sheets for the February and March 2015 headcount reductions.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
16—Other Income (Expense), Net
Other
income (expense), net consists of the following:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Foreign currency transaction gains (losses)
|
|
$
|
287
|
|
|
$
|
980
|
|
|
$
|
(1,704
|
)
|
Gain (loss) on marketable securities
|
|
|
323
|
|
|
|
543
|
|
|
|
(54
|
)
|
Gain (loss) on investments
|
|
|
355
|
|
|
|
(405
|
)
|
|
|
1,500
|
|
Other
|
|
|
(148
|
)
|
|
|
931
|
|
|
|
(430
|
)
|
TOTAL
|
|
$
|
817
|
|
|
$
|
2,049
|
|
|
$
|
(688
|
)
|
Note
17—Income Taxes
The
components of (loss) income before income taxes are as follows:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
(3,161
|
)
|
|
$
|
11,278
|
|
|
$
|
7,538
|
|
Foreign
|
|
|
10,781
|
|
|
|
18,190
|
|
|
|
84,665
|
|
INCOME BEFORE INCOME TAXES
|
|
$
|
7,620
|
|
|
$
|
29,468
|
|
|
$
|
92,203
|
|
Significant
components of the Company’s deferred income tax assets consist of the following:
July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
Bad debt reserve
|
|
$
|
535
|
|
|
$
|
575
|
|
Accrued expenses
|
|
|
7,888
|
|
|
|
5,327
|
|
Stock options and restricted stock
|
|
|
1,608
|
|
|
|
1,802
|
|
Charitable contributions
|
|
|
1,768
|
|
|
|
1,527
|
|
Impairment
|
|
|
27,944
|
|
|
|
25,746
|
|
Depreciation
|
|
|
4,438
|
|
|
|
6,785
|
|
Unrealized gain
|
|
|
317
|
|
|
|
193
|
|
Net operating loss
|
|
|
122,260
|
|
|
|
122,849
|
|
Credits
|
|
|
2,899
|
|
|
|
3,192
|
|
Total deferred income tax assets
|
|
|
169,657
|
|
|
|
167,996
|
|
Valuation allowance
|
|
|
(157,816
|
)
|
|
|
(158,442
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
11,841
|
|
|
|
9,554
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized loss
|
|
|
—
|
|
|
|
42
|
|
NET DEFERRED INCOME TAX ASSETS
|
|
$
|
11,841
|
|
|
$
|
9,512
|
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
benefit from (provision for) income taxes consists of the following:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(83
|
)
|
|
$
|
—
|
|
State and local
|
|
|
(26
|
)
|
|
|
(30
|
)
|
|
|
—
|
|
Foreign
|
|
|
(282
|
)
|
|
|
(185
|
)
|
|
|
(311
|
)
|
|
|
|
(308
|
)
|
|
|
(298
|
)
|
|
|
(311
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(9,536
|
)
|
|
|
(3,148
|
)
|
|
|
(1,967
|
)
|
State and local
|
|
|
(66
|
)
|
|
|
(51
|
)
|
|
|
(245
|
)
|
Foreign
|
|
|
11,931
|
|
|
|
(613
|
)
|
|
|
(3,565
|
)
|
|
|
|
2,329
|
|
|
|
(3,812
|
)
|
|
|
(5,777
|
)
|
BENEFIT FROM (PROVISION FOR) INCOME TAXES
|
|
$
|
2,021
|
|
|
$
|
(4,110
|
)
|
|
$
|
(6,088
|
)
|
The
differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. federal income tax at statutory rate
|
|
$
|
(2,667
|
)
|
|
$
|
(10,314
|
)
|
|
$
|
(32,271
|
)
|
Valuation allowance
|
|
|
626
|
|
|
|
—
|
|
|
|
—
|
|
Foreign tax rate differential
|
|
|
3,107
|
|
|
|
6,035
|
|
|
|
25,757
|
|
Nondeductible expenses
|
|
|
457
|
|
|
|
487
|
|
|
|
659
|
|
Other
|
|
|
64
|
|
|
|
(67
|
)
|
|
|
(73
|
)
|
Prior year tax benefit (expense)
|
|
|
494
|
|
|
|
(231
|
)
|
|
|
—
|
|
State and local income tax, net of federal benefit
|
|
|
(60
|
)
|
|
|
(20
|
)
|
|
|
(160
|
)
|
BENEFIT FROM (PROVISION FOR) INCOME TAXES
|
|
$
|
2,021
|
|
|
$
|
(4,110
|
)
|
|
$
|
(6,088
|
)
|
At
July 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $180 million. This carry-forward
loss is available to offset future U.S. federal and state taxable income. The net operating loss carryforwards will start to expire
in fiscal 2018, with fiscal 2017’s loss expiring in fiscal 2038. The Company has foreign net operating losses of approximately
$159 million, of which approximately $111 million does not expire, approximately $47 million expires in two to nine years and
$1 million expires in twenty years. These foreign net operating losses are available to offset future taxable income in the countries
in which the losses were incurred. The Company’s subsidiary, net2phone, which provides voice over Internet protocol communications
services, has additional federal net operating losses of approximately $77 million, which will expire through fiscal 2027. With
the reacquisition of net2phone by the Company in March 2006, its losses were limited under Internal Revenue Code Section 382 to
approximately $7 million per year. The net operating losses do not include any excess benefits related to stock options or restricted
stock.
The
Company has not recorded U.S. income tax expense for foreign earnings, since such earnings are permanently reinvested outside
the United States. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated
balance sheets, and consisted of approximately $375 million at July 31, 2017. Upon distribution of these foreign earnings to the
Company’s domestic entities, the Company 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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
change in the valuation allowance is as follows:
Year ended July 31
(in thousands)
|
|
Balance at
beginning of
year
|
|
|
Additions
charged to
costs and
expenses
|
|
|
Deductions
|
|
|
Balance at
end of year
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from deferred income taxes, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
158,442
|
|
|
$
|
16,017
|
|
|
$
|
(16,643
|
)
|
|
$
|
157,816
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from deferred income taxes, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
155,393
|
|
|
$
|
3,049
|
|
|
$
|
—
|
|
|
$
|
158,442
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from deferred income taxes, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
151,975
|
|
|
$
|
3,418
|
|
|
$
|
—
|
|
|
$
|
155,393
|
|
In
fiscal 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 net income in future periods.
The Company recorded a benefit from income taxes of $16.6 million in fiscal 2017 from the full recognition of the Elmion Netherlands
B.V. deferred tax assets. In addition, in fiscal 2017, the Company determined that it would not be able to utilize its deferred
tax assets in the United States and recorded a valuation allowance of $11.1 million against them.
At
July 31, 2017 and 2016, the Company did not have any unrecognized income tax benefits. There were no changes in the balance of
unrecognized income tax benefits in fiscal 2017, fiscal 2016 and fiscal 2015. At July 31, 2017, the Company did not expect any
changes in unrecognized income tax benefits during the next twelve months. In fiscal 2017, fiscal 2016 and fiscal 2015, the Company
did not record any interest and penalties on income taxes. At July 31, 2017 and 2016, there was no accrued interest included in
current income taxes payable.
In
August 2016, the Company and the New Jersey Economic Development Authority entered into an incentive agreement pursuant to which
the Company may receive corporation business tax credits in exchange for investment in a qualified business facility and employment
of the required number of full-time employees. The corporation business tax credits to be received are a maximum of $24.3 million.
The Company’s tax certificate documents are currently being reviewed by Economic Development Authority. The tax credits
are based on an estimated capital investment of $5.3 million in addition to retaining, as well as creating, a number of full-time
jobs. The Company may claim a tax credit each tax year for ten years beginning when the Economic Development Authority accepts
the Company’s project completion certification. 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.
The
Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal 2014 to fiscal
2017, state and local tax returns generally for fiscal 2013 to fiscal 2017 and foreign tax returns generally for fiscal 2013 to
fiscal 2017.
Note
18—Equity
Class
A Common Stock and Class B Common Stock
The
rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights
and restrictions on transferability. The holders of Class A common stock and Class B common stock receive identical dividends
per share when and if declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and
Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common
stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes
per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common
stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common
stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Dividend
Payments
In
fiscal 2017, the Company paid aggregate cash dividends of $0.76 per share on its Class A common stock and Class B common stock,
or $17.9 million in total. In fiscal 2016, the Company paid aggregate cash dividends of $0.75 per share on its Class A common
stock and Class B common stock, or $17.4 million in total. In fiscal 2015, the Company paid aggregate cash dividends of $2.03
per share on its Class A common stock and Class B common stock, or $47.6 million in total. The aggregate cash dividends in fiscal
2015 included special dividends of $0.68 per share and $0.64 per share paid in November 2014 and January 2015, respectively.
In
September 2017, the Company’s Board of Directors declared a dividend of $0.19 per share for the fourth quarter of fiscal
2017 to holders of the Company’s Class A common stock and Class B common stock. The dividend will be paid on or about October
20, 2017 to stockholders of record as of the close of business on October 16, 2017.
Sales
of Shares of Class B Common Stock to Howard S. Jonas
On
April 11, 2017, the Company sold 728,332 treasury shares of its Class B common stock to Howard S.
Jonas for aggregate consideration of $10.0 million. The price per share of $13.73 was equal to the closing price of the Company’s
Class B common stock on April 10, 2017.
On
June 9, 2017, the Company sold 1.0 million shares of its Class B common stock to Howard S. Jonas for aggregate consideration of
$14.9 million. The price per share of $14.93 was equal to the closing price of the Class B common stock on May 1, 2017, the day
prior to the approval of the sale by the Company’s Board of Directors and Corporate Governance Committee.
Purchase
of Shares of Class B Common Stock from Howard S. Jonas
On
June 25, 2015, the Company purchased 404,967 shares of its Class B common stock from Howard S. Jonas. The purchase price was $18.52
per share, the share price at the close of business on June 23, 2015. The aggregate purchase price was $7.5 million.
Stock
Repurchases
The
Company has a stock repurchase program 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 fiscal 2017. In fiscal 2016, the Company repurchased 398,376 shares
of Class B common stock for an aggregate purchase price of $4.6 million. In fiscal 2015, the Company repurchased 29,675 shares
of Class B common stock for an aggregate purchase price of $0.4 million. At July 31, 2017, 8.0 million shares remained available
for repurchase under the stock repurchase program.
In
fiscal 2017, fiscal 2016 and fiscal 2015, the Company paid $1.8 million, $0.1 million and $2.8 million, respectively, to repurchase
shares 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 are repurchased by the Company
based on their fair market value on the trading day immediately prior to the vesting date. In fiscal 2017, fiscal 2016 and fiscal
2015, the Company repurchased 94,338; 11,250 and 152,856 shares of Class B common stock, respectively, from employees.
Equity
Sale Prior to the Zedge Spin-Off
In
connection with the Zedge Spin-Off, in May 2016, Zedge sold shares of its Class B common stock representing approximately 10.0%
of its capital stock to certain of its equity holders, including the Company, for $3 million. The other purchasers paid $0.4 million
of the total and the Company paid $2.6 million.
Note
19—Stock-Based Compensation
Stock-Based
Compensation Plan
The
2015 Stock Option and Incentive Plan is intended to provide incentives to officers, employees, directors and consultants of the
Company, including stock options, stock appreciation rights, limited rights, deferred stock units, and restricted stock. On December
14, 2016, the Company’s stockholders approved an amendment to 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 0.1 million shares. At July 31, 2017, the Company had 0.7 million shares of Class B common stock reserved for award
under its 2015 Stock Option and Incentive Plan and 0.1 million shares were available for future grants.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On
September 28, 2017, the Company’s Board of Directors amended the 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 0.3 million
shares. The amendment is subject to ratification by the Company’s stockholders.
In
fiscal 2017, fiscal 2016 and fiscal 2015, there was no income tax benefit resulting from tax deductions in excess of the compensation
cost recognized for the Company’s stock-based compensation.
Stock
Options
Option
awards are generally granted with an exercise price equal to the market price of the Company’s stock on the date of grant.
Option awards generally vest on a graded basis over three years of service and have ten-year contractual terms. The fair value
of stock options was estimated on the date of the grant using a Black-Scholes valuation model and the assumptions in the following
table. No option awards were granted in fiscal 2016. Expected volatility is based on historical volatility of the Company’s
Class B common stock and other factors. The Company uses historical data on exercise of stock options, post vesting forfeitures
and other factors to estimate the expected term of the stock-based payments granted. The risk free rate is based on the U.S. Treasury
yield curve in effect at the time of grant.
Year ended July 31
|
|
2017
|
|
|
2015
|
|
ASSUMPTIONS
|
|
|
|
|
|
|
Average risk-free interest rate
|
|
|
1.82
|
%
|
|
|
1.63
|
%
|
Expected dividend yield
|
|
|
5.09
|
%
|
|
|
—
|
|
Expected volatility
|
|
|
40.0
|
%
|
|
|
51.4
|
%
|
Expected term
|
|
|
4.0 years
|
|
|
|
6.0 years
|
|
Weighted-average grant date fair value
|
|
$
|
3.26
|
|
|
$
|
7.94
|
|
A
summary of stock option activity for the Company is as follows:
|
|
Number of
Options
(in thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at July 31, 2016
|
|
|
360
|
|
|
$
|
11.98
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,000
|
|
|
|
14.93
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(73
|
)
|
|
|
11.37
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited
|
|
|
(14
|
)
|
|
|
17.21
|
|
|
|
|
|
|
|
|
|
OUTSTANDING AT JULY 31, 2017
|
|
|
1,273
|
|
|
$
|
14.28
|
|
|
|
4.9
|
|
|
$
|
850
|
|
EXERCISABLE AT JULY 31, 2017
|
|
|
166
|
|
|
$
|
13.38
|
|
|
|
4.4
|
|
|
$
|
288
|
|
The
total intrinsic value of options exercised during fiscal 2017, fiscal 2016 and fiscal 2015 was $0.4 million, nil and $1.3 million,
respectively. At July 31, 2017, there was $3.4 million of total unrecognized compensation cost related to non-vested stock options,
which is expected to be recognized over a weighted-average period of 1.5 years.
On
May 2, 2017, the Company’s Board of Directors and its Compensation and Corporate Governance Committees approved the grant
to Howard S. Jonas of options to purchase up to 1.0 million shares of the Company’s Class B common stock at an exercise
price of $14.93 per share, the closing price of the Company’s Class B common stock on May 1, 2017. Mr. Jonas, the Company’s
Chairman of the Board, controls matters requiring approval by the Company’s stockholders. The options were immediately exercisable
and will expire on May 1, 2022. Subject to certain vesting provisions in Mr. Jonas’ employment agreement with the Company,
the unexercised portion of the options will terminate should Mr. Jonas cease to provide services as an officer or director of
the Company or one or more of its subsidiaries. The Company will have the right to repurchase the Class B common stock issued
upon exercise of the options at a purchase price equal to the exercise price of the option should Mr. Jonas cease to provide services
as an officer or director of the Company or one or more of its subsidiaries. The Company’s repurchase right will lapse as
to 333,333 shares underlying the options on each of May 2, 2018 and 2019 and as to 333,334 shares underlying the option on May
2, 2020. Mr. Jonas will be prohibited from transferring any shares of the Class B common stock issued on exercise of the
option that are subject to the Company’s repurchase right. The Company’s repurchase right is essentially a forfeiture
provision. The options were not granted under the Company’s 2015 Stock Option and Incentive Plan, but, except to the extent
otherwise provided in the related grant agreement, are subject to the terms of the 2015 Stock Option and Incentive Plan. The grant
of the options is subject to ratification by the stockholders of the Company. The Company estimated that the fair value of the
options on the date of grant was $3.3 million, which will be recognized on a straight-line basis over the requisite three year
service period ending in May 2020.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On
June 7, 2016, in connection with the Zedge Spin-Off, the Compensation Committee of the Company’s Board of Directors approved
a $2.25 reduction in the per share exercise price of all outstanding options to purchase the Company’s Class B common stock.
The Company accounted for the reduction in the exercise price of the Company’s outstanding stock options as a modification.
The Company determined that there was no incremental value from the modification, and therefore, the Company did not record a
stock-based compensation charge.
Restricted
Stock
The
fair value of restricted shares of the Company’s Class B common stock is determined based on the closing price of the Company’s
Class B common stock on the grant date. Share awards generally vest on a graded basis over three years of service.
A
summary of the status of the Company’s grants of restricted shares of Class B common stock is presented below:
(in thousands)
|
|
Number of
Non-vested
Shares
|
|
|
Weighted-
Average
Grant-
Date Fair
Value
|
|
Non-vested shares at July 31, 2016
|
|
|
359
|
|
|
$
|
17.10
|
|
Granted
|
|
|
99
|
|
|
|
19.17
|
|
Vested
|
|
|
(228
|
)
|
|
|
17.83
|
|
Forfeited
|
|
|
(7
|
)
|
|
|
17.61
|
|
NON-VESTED SHARES AT JULY 31, 2017
|
|
|
223
|
|
|
$
|
18.16
|
|
At
July 31, 2017, there was $2.4 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements,
which is expected to be recognized over a weighted-average period of 0.7 years. The total grant date fair value of shares vested
in fiscal 2017, fiscal 2016 and fiscal 2015 was $4.1 million, $1.3 million and $5.6 million, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
20—Accumulated Other Comprehensive Income (Loss)
The
accumulated balances for each classification of other comprehensive income (loss) were as follows:
(in thousands)
|
|
Unrealized
gain (loss) on
available-for-
sale securities
|
|
|
Foreign
currency
translation
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
Location of (Gain) Loss Recognized
|
Balance at July 31, 2014
|
|
$
|
(8
|
)
|
|
$
|
3,676
|
|
|
$
|
3,668
|
|
|
|
Sale of interest in Fabrix Systems Ltd.
|
|
|
—
|
|
|
|
102
|
|
|
|
102
|
|
|
|
Other comprehensive loss attributable to IDT Corporation
|
|
|
(567
|
)
|
|
|
(2,432
|
)
|
|
|
(2,999
|
)
|
|
|
Balance at July 31, 2015
|
|
|
(575
|
)
|
|
|
1,346
|
|
|
|
771
|
|
|
|
Zedge Spin-Off
|
|
|
—
|
|
|
|
1,029
|
|
|
|
1,029
|
|
|
|
Other comprehensive income (loss) attributable to IDT Corporation before reclassification
|
|
|
1,126
|
|
|
|
(6,127
|
)
|
|
|
(5,001
|
)
|
|
|
Less: reclassification for gain included in net income
|
|
|
(543
|
)
|
|
|
—
|
|
|
|
(543
|
)
|
|
Other income (expense), net
|
Net other comprehensive income (loss) attributable to IDT Corporation
|
|
|
583
|
|
|
|
(6,127
|
)
|
|
|
(5,544
|
)
|
|
|
Balance at July 31, 2016
|
|
|
8
|
|
|
|
(3,752
|
)
|
|
|
(3,744
|
)
|
|
|
Other comprehensive income (loss) attributable to IDT Corporation before reclassification
|
|
|
2,449
|
|
|
|
(725
|
)
|
|
|
1,724
|
|
|
|
Less: reclassification for gain included in net income
|
|
|
(323
|
)
|
|
|
—
|
|
|
|
(323
|
)
|
|
Other income (expense), net
|
Net other comprehensive income (loss) attributable to IDT Corporation (1)
|
|
|
2,126
|
|
|
|
(725
|
)
|
|
|
1,401
|
|
|
|
BALANCE AT JULY 31, 2017
|
|
$
|
2,134
|
|
|
$
|
(4,477
|
)
|
|
$
|
(2,343
|
)
|
|
|
|
(1)
|
In
fiscal 2017, net other comprehensive income attributable to IDT Corporation from unrealized gains on available-for-sale securities
included unrealized gains on the Rafael convertible promissory notes of $2.1 million and unrealized gains, net on marketable
securities of $26,000.
|
Note
21—Commitments and Contingencies
Legal
Proceedings
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 Delaware Chancery
Court against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas to hold record and beneficial ownership
of all of his shares of Straight Path), Howard S. Jonas, and each of Straight Path’s directors. The complaint alleges that
the Company aided and abetted Straight Path’s directors 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 FCC, as well as the proposed sale of Straight Path’s subsidiary 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 receiving 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, the Chairman of the Board and Chief Executive
Officer of Straight Path, 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.
The Company intends to vigorously defend the action.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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.
Universal
Service Fund Audit
The
Company’s Federal Communications Commission (“FCC”) Form 499-A filings for calendar years 2000 through 2006
related to payments to the Universal Service Fund have been audited by the Internal Audit Division (“IAD”) of the
Universal Service Administrative Company (“USAC”), which concluded that the Company incorrectly reported certain revenues
on Forms 499-A. USAC’s revisions to the Company’s filing methodology resulted in additional regulatory payments for
the years covered by the audits. While the Company believes in the accuracy of its filing methodology and the Company’s
Request for Review remains pending, the Company has implemented some of the revisions set forth in the IAD’s filings beginning
with the Company’s calendar year 2010 Form 499-A. The Company has accrued for all regulatory fees that the Company believes
may be incurred under IAD’s methodology from 2002 through the present, in the event the Company’s Request for Review
is denied and/or its methodology is not upheld on appeal, and the Company has made certain payments on amounts that have been
invoiced to it by USAC and/or other agencies. The Company’s 2017 FCC Form 499-A, which reports its calendar year 2016 revenue,
is currently under audit by the IAD. At July 31, 2017 and 2016, the Company’s accrued expenses included $43.5 million and
$47.5 million, respectively, for these regulatory fees for the years covered by the audit and subsequent years. Until a final
decision is reached in the Company’s disputes, the Company will continue to accrue in accordance with IAD’s methodology.
If the Company does not properly calculate, or has not properly calculated, the amount payable by the Company to the Universal
Service Fund, the Company may be subject to interest and penalties.
Purchase
Commitments
The
Company had purchase commitments of $3.1 million at July 31, 2017.
Lease
Commitments
The
future minimum payments for operating leases as of July 31, 2017 were as follows:
(in thousands)
|
|
|
|
Year ending July 31:
|
|
|
|
|
2018
|
|
$
|
2,510
|
|
2019
|
|
|
1,373
|
|
2020
|
|
|
760
|
|
2021
|
|
|
720
|
|
2022
|
|
|
615
|
|
Thereafter
|
|
|
564
|
|
Total payments
|
|
$
|
6,542
|
|
Rental
expense under operating leases was $2.9 million, $3.2 million and $6.1 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
In addition, connectivity charges under operating leases were $6.4 million, $7.5 million and $8.4 million in fiscal 2017, fiscal
2016 and fiscal 2015, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Rentals
under Operating Leases
In
April 2016, the Company entered into two leases for space in its headquarters building at 520 Broad Street, Newark, New Jersey.
In addition, the Company has leases for a portion of its building in Piscataway, New Jersey. The leases do not include contingent
rental income.
The
minimum future rentals on noncancelable operating leases as of July 31, 2017 were as follows:
(in thousands)
|
|
|
|
Year ending July 31:
|
|
|
|
2018
|
|
$
|
902
|
|
2019
|
|
|
1,043
|
|
2020
|
|
|
1,079
|
|
2021
|
|
|
940
|
|
2022
|
|
|
843
|
|
Thereafter
|
|
|
2,791
|
|
Total minimum future rentals
|
|
$
|
7,598
|
|
The
aggregate carrying value of the Company’s land, building and improvements in New Jersey was as follows:
July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
Land, building and improvements
|
|
$
|
61,206
|
|
|
$
|
59,553
|
|
Less accumulated depreciation
|
|
|
(12,563
|
)
|
|
|
(11,202
|
)
|
Net
|
|
$
|
48,643
|
|
|
$
|
48,351
|
|
Performance
Bonds
IDT
Payment Services and IDT Telecom 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.
At July 31, 2017, the Company had aggregate performance bonds of $15.1 million outstanding.
Subsequent
Event—Reciprocal Services Agreement
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 million into an escrow account as security for the benefit of the telecom operator.
Note
22—Related Party Transactions
The
Company entered into various agreements with Zedge prior to the Zedge Spin-Off including a Separation and Distribution Agreement
to effect the separation and provide a framework for our relationship with Zedge after the Zedge Spin-Off, and a Tax Separation
Agreement, which sets forth the responsibilities of the Company and Zedge with respect to, among other things, liabilities for
federal, state, local and foreign taxes for periods before and including the Zedge 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, among other things, the Company indemnifies Zedge and Zedge indemnifies the Company 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 the Company from all liability for taxes of Zedge
and any of Zedge’s subsidiaries or relating to Zedge’s business accruing after the Zedge Spin-Off, and the Company
indemnifies 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 Zedge Spin-Off.
In
connection with the Zedge Spin-Off, the Company and Zedge entered into a Transition Services Agreement pursuant to which the Company
provides to Zedge certain administrative and other services, including services relating to human resources, payroll, investor
relations, legal, accounting, tax, financial systems, management consulting and foreign exchange risk management. The Company
charged Zedge $1.0 million and $0.6 million in fiscal 2017 and fiscal 2016, respectively, for services provided pursuant to the
Transition Services Agreement. At July 31, 2017 and 2016, other current assets reported in the Company’s consolidated balance
sheet included receivables from Zedge of $0.1 million and $0.3 million, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At
July 31, 2017, the Company held 23,227 shares of Zedge Class B common stock (see Note 6).
The
Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including (1) 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, (2) a Tax Separation Agreement, which sets forth the responsibilities of the Company 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,
and (3) a Transition Services Agreement, which provides for certain services to be performed by the Company to facilitate Straight
Path’s transition into a separate publicly-traded company. These agreements provide for, among other things, the allocation
between the Company and Straight Path of employee benefits, taxes and other liabilities and obligations attributable to periods
prior to the spin-off, and provision of certain services by the Company to Straight Path following the spin-off, including services
relating to human resources and employee benefits administration, treasury, accounting, tax, external reporting, and legal. Straight
Path transitioned accounting and external reporting services from the Company to a third party in the first quarter of fiscal
2015. In addition, the Company and Straight Path have entered into a license agreement whereby each of the Company, Straight Path
and their subsidiaries granted and will grant a license to the other to utilize patents held by each entity.
The
Separation and Distribution Agreement also includes that the Company is obligated to reimburse Straight Path for the payment of
liabilities of Straight Path arising or related to the period prior to the Straight Path Spin-Off. The following table summarizes
the change in the balance of the Company’s estimated liability to Straight Path, which is included in “Other current
liabilities” in the accompanying consolidated balance sheet:
Year ended July 31
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
133
|
|
|
$
|
286
|
|
Additional liability
|
|
|
104
|
|
|
|
59
|
|
Adjustments
|
|
|
(51
|
)
|
|
|
(136
|
)
|
Payments
|
|
|
(105
|
)
|
|
|
(76
|
)
|
Balance at end of year
|
|
$
|
81
|
|
|
$
|
133
|
|
Pursuant
to the Separation and Distribution Agreement, the Company indemnifies Straight Path and Straight Path indemnifies the Company
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, the Company indemnifies 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 Straight Path Spin-Off, from all liability for taxes of the Company, other than Straight Path and its
subsidiaries, for any taxable period, and from all liability for taxes due to the Straight Path Spin-Off.
The
Company charged Straight Path nil, nil and $1.1 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, for services
provided pursuant to the Transition Services Agreement and other items. At July 31, 2017 and 2016, the Company’s receivable
from Straight Path was nil and nil, respectively.
In
July 2015, the Company received 64,624 shares of Straight Path Class B common stock in connection with the lapsing of restrictions
on awards of Straight Path restricted stock to certain of the Company’s employees and the payment of taxes related thereto.
As part of the Straight Path Spin-Off, holders of the Company’s restricted Class B common stock received, in respect of
those restricted shares, one share of Straight Path’s Class B common stock for every two restricted shares of the Company
that they held as of the record date for the Straight Path Spin-Off. The Company received the Straight Path shares in exchange
for the payment of an aggregate of $2.1 million for the employees’ tax withholding obligations upon the vesting event. The
number of shares was determined based on their fair market value on the trading day immediately prior to the vesting date. In
September and October 2015, the Company sold all of the shares for $2.6 million and recorded a gain on the sale of $0.5 million.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On
April 9, 2017, the Company and Straight Path entered into a binding term sheet providing for the settlement and mutual release
of potential indemnification and other claims asserted by each of the Company and Straight Path (see Note 12). In addition, 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 Delaware Chancery
Court against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas to hold record and beneficial ownership
of all of his shares of Straight Path), Howard S. Jonas, and each of Straight Path’s directors (see Note 21).
On
October 28, 2011, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary, Genie Energy
Ltd. (“Genie”), to the Company’s stockholders of record as of the close of business on October 21, 2011 (the
“Genie Spin-Off”). The Company entered into various agreements with Genie prior to the Genie Spin-Off including a
Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with
Genie after the spin-off, and a Transition Services Agreement, which provides for certain services to be performed by the Company
and Genie to facilitate Genie’s transition into a separate publicly-traded company. These agreements provide for, among
other things, (1) the allocation between the Company and Genie of employee benefits, taxes and other liabilities and obligations
attributable to periods prior to the spin-off, (2) transitional services to be provided by the Company relating to human resources
and employee benefits administration, (3) the allocation of responsibilities relating to employee compensation and benefit plans
and programs and other related matters, (4) finance, accounting, tax, internal audit, facilities, external reporting, investor
relations and legal services to be provided by the Company to Genie following the spin-off and (5) specified administrative services
to be provided by Genie to certain of the Company’s foreign subsidiaries. In addition, the Company entered into a Tax Separation
Agreement with Genie, which sets forth the responsibilities of the Company and Genie 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, the Company indemnifies Genie and Genie indemnifies the Company 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, the Company indemnifies Genie from all liability for the Company’s taxes with
respect to any taxable period, and Genie indemnifies the Company from all liability for taxes of Genie and its subsidiaries with
respect to any taxable period, including, without limitation, the ongoing tax audits related to Genie’s business.
The
Company charged Genie $1.6 million, $2.2 million and $3.6 million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, for
services provided pursuant to the Transition Services Agreement and other items, net of the amounts charged by Genie to the Company.
At July 31, 2017 and 2016, other current assets reported in the Company’s consolidated balance sheet included receivables
from Genie of $0.2 million and $0.3 million, respectively.
The
Company provides certain administrative and other services to Rafael Pharmaceuticals, Inc. The Company charged Rafael $0.6 million
in fiscal 2017 for services. At July 31, 2017, other current assets reported in the Company’s consolidated balance sheet
included receivable from Rafael of $0.6 million.
The
Company provides office space, certain connectivity and other services to Jonas Media Group, a publishing firm owned by Howard
S. Jonas. Billings for such services were $22,000, $22,000 and $21,000 in fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
The balance owed to the Company by Jonas Media Group was $22,000 and $6,000 as of July 31, 2017 and 2016, respectively.
The
Company obtains insurance policies from several insurance brokers, one of which is IGM Brokerage Corp. (“IGM”). IGM
was, until his death in October 2009, owned by Irwin Jonas, father of Howard S. Jonas, and the Company’s General Counsel,
Joyce J. Mason. IGM is currently owned by Irwin Jonas’ widow—the mother of Howard S. Jonas and Joyce Mason. Jonathan
Mason, husband of Joyce Mason and brother-in-law of Howard S. Jonas, provides insurance brokerage services via IGM. Based on information
the Company received from IGM, the Company believes that IGM received commissions and fees from payments made by the Company to
third party brokers in the aggregate amounts of $24,000 in fiscal 2017, $22,000 in fiscal 2016 and $20,000 in fiscal 2015, which
fees and commissions inured to the benefit of Mr. Mason. Neither Howard S. Jonas nor Joyce Mason has any ownership or other interest
in IGM or the commissions paid to IGM other than via the familial relationships with their mother and Jonathan Mason.
Mason
and Company Consulting, LLC (“Mason and Co.”), a company owned solely by Jonathan Mason, receives an annual fee for
the insurance brokerage referral and placement of the Company’s health benefit plan with Brown & Brown Metro, Inc. Based
on information the Company received from Jonathan Mason, the Company believes that Mason and Co. received from Brown & Brown
Metro, Inc. commissions and fees from payments made by the Company in the amount of $22,000 in fiscal 2017, $24,000 in fiscal
2016 and $18,000 in fiscal 2015. Neither Howard S. Jonas nor Joyce Mason has any ownership or other interest in Mason and Co.
or the commissions paid to Mason and Co., other than via the familial relationships with Jonathan Mason.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Since
August 2009, IDT Domestic Telecom, Inc., a subsidiary of the Company, has leased space in a building in the Bronx, New York. Howard
S. Jonas and Shmuel Jonas, the Company’s Chief Executive Officer, and the son of Howard S. Jonas, are members of the limited
liability company that owns the building. The latest lease, which became effective November 1, 2012, had a one-year term with
a one-year renewal option for IDT Domestic Telecom with the same terms. Aggregate annual rent under the lease was $69,025. The
parties have continued IDT Domestic Telecom’s occupancy of the space on the same terms.
The
Company had net loans receivable outstanding from employees aggregating $0.2 million and $0.2 million at July 31, 2017 and 2016,
respectively, which are included in “Other current assets” in the accompanying consolidated balance sheets.
At
July 31, 2017 and 2016, the Company had a payable to Howard S. Jonas of nil and $92,400, respectively.
See
Note 2 for the Company’s sale of a 10% direct and indirect interest and rights in Rafael and the transfer of rights to an
additional 10% interest in Rafael to Howard S. Jonas. See Note 12 for the Company’s proposed transfer of the ownership interest
in SPIP to an entity to be organized by Howard S. Jonas. See Note 18 for sales of shares of the Company’s Class B Common
Stock to Howard S. Jonas and purchases of the Company’s Class B Common Stock from Howard S. Jonas. See Note 19 for the grant
to Howard S. Jonas of options to purchase shares of the Company’s Class B Common Stock.
Note
23—Defined Contribution Plans
The
Company maintains a 401(k) Plan available to all employees meeting certain eligibility criteria. The Plan permits participants
to contribute up to 20% of their salary, not to exceed the limits established by the Internal Revenue Code. The Plan provides
for discretionary matching contributions of 50%, up to the first 6% of compensation. The discretionary matching contributions
vest over the first five years of employment. The Plan permits the discretionary matching contributions to be granted as of December
31 of each year. All contributions made by participants vest immediately into the participant’s account. In fiscal 2017,
fiscal 2016 and fiscal 2015, the Company’s cost for contributions to the Plan was $1.2 million, $1.4 million and $1.3 million,
respectively. In fiscal 2016 and fiscal 2015, the Company contributed 94,712 shares and 70,843 shares, respectively, of the Company’s
Class B common stock to the Plan for matching contributions. The Company’s Class A common stock and Class B common stock
are not investment options for the Plan’s participants.
Note
24—Business Segment Information
The
Company has three reportable business segments, Telecom Platform Services, UCaaS and Consumer Phone Services, which comprise the
IDT Telecom division. 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
Telecom Platform Services segment provides retail telecommunications and payment offerings as well as wholesale international
long distance traffic termination. The Consumer Phone Services segment provides consumer local and long distance services in certain
U.S. states.
Beginning
in the first quarter of fiscal 2017, UCaaS is a separate reportable segment. The UCaaS segment is comprised of offerings from
the Company’s net2phone division, including (1) cable telephony, (2) hosted PBX, (3) 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. The operations that comprise the UCaaS segment were included in the Telecom Platform
Services segment from the inception of each unit until July 31, 2016. Comparative results have been reclassified and restated
as if UCaaS was a separate segment in all periods presented.
Operating
segments that are not reportable individually are included in All Other. All Other includes the Company’s real estate holdings
and other smaller businesses. Prior to the Zedge Spin-Off, All Other included Zedge, which provides a content platform that enables
consumers to personalize their mobile devices with free ringtones, wallpapers, home screen app icons and notification sounds.
Until the sale of Fabrix in October 2014, All Other also included Fabrix, a software development company offering a cloud-based
scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and delivery.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 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. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
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, UCaaS and Consumer Phone Services 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 were as follows:
(in thousands)
|
|
Telecom
Platform
Services
|
|
|
UCaaS
|
|
|
Consumer
Phone
Services
|
|
|
All Other
|
|
|
Corporate
|
|
|
Total
|
|
Year ended July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,464,059
|
|
|
$
|
29,450
|
|
|
$
|
5,482
|
|
|
$
|
2,738
|
|
|
$
|
—
|
|
|
$
|
1,501,729
|
|
Income (loss) from operations
|
|
|
24,427
|
|
|
|
(1,865
|
)
|
|
|
1,069
|
|
|
|
342
|
|
|
|
(18,424
|
)
|
|
|
5,549
|
|
Depreciation and amortization
|
|
|
16,134
|
|
|
|
3,875
|
|
|
|
—
|
|
|
|
1,695
|
|
|
|
—
|
|
|
|
21,704
|
|
Adjustment to gain on sale of member interest in Visa Europe Ltd.
|
|
|
(63
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(63
|
)
|
Other operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,412
|
)
|
|
|
(10,412
|
)
|
Year ended July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,451,553
|
|
|
$
|
26,353
|
|
|
$
|
6,874
|
|
|
$
|
11,481
|
|
|
$
|
—
|
|
|
$
|
1,496,261
|
|
Income (loss) from operations
|
|
|
32,813
|
|
|
|
(1,599
|
)
|
|
|
1,218
|
|
|
|
4,165
|
|
|
|
(10,394
|
)
|
|
|
26,203
|
|
Depreciation and amortization
|
|
|
15,787
|
|
|
|
2,760
|
|
|
|
—
|
|
|
|
1,987
|
|
|
|
1
|
|
|
|
20,535
|
|
Severance
|
|
|
6,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
310
|
|
|
|
6,510
|
|
Gain on sale of member interest in Visa Europe Ltd.
|
|
|
7,476
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,476
|
|
Gain on sale of interest in Fabrix Systems Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,086
|
|
|
|
—
|
|
|
|
1,086
|
|
Other operating expenses
|
|
|
(326
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(326
|
)
|
Year ended July 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,543,310
|
|
|
$
|
29,434
|
|
|
$
|
8,629
|
|
|
$
|
15,404
|
|
|
$
|
—
|
|
|
$
|
1,596,777
|
|
Income (loss) from operations
|
|
|
26,418
|
|
|
|
533
|
|
|
|
1,259
|
|
|
|
77,969
|
|
|
|
(13,129
|
)
|
|
|
93,050
|
|
Depreciation and amortization
|
|
|
13,764
|
|
|
|
2,405
|
|
|
|
—
|
|
|
|
2,243
|
|
|
|
6
|
|
|
|
18,418
|
|
Severance
|
|
|
7,696
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35
|
|
|
|
632
|
|
|
|
8,363
|
|
Gain on sale of interest in Fabrix Systems Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76,864
|
|
|
|
—
|
|
|
|
76,864
|
|
Other operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,552
|
)
|
|
|
(1,552
|
)
|
Total
assets for the reportable segments are not provided because a significant portion of the Company’s assets are servicing
multiple segments and the Company does not track such assets separately by segment.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Company’s revenue from external customers for each service was as follows:
Year ended July 31
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Retail Communications
|
|
$
|
610,162
|
|
|
$
|
664,850
|
|
|
$
|
725,860
|
|
Wholesale Carrier Services
|
|
|
608,634
|
|
|
|
567,369
|
|
|
|
609,122
|
|
Payment Services
|
|
|
245,263
|
|
|
|
219,334
|
|
|
|
208,328
|
|
UCaaS
|
|
|
29,450
|
|
|
|
26,353
|
|
|
|
29,434
|
|
Consumer Phone Services
|
|
|
5,482
|
|
|
|
6,874
|
|
|
|
8,629
|
|
Fabrix
|
|
|
—
|
|
|
|
—
|
|
|
|
4,170
|
|
Zedge
|
|
|
—
|
|
|
|
9,474
|
|
|
|
9,054
|
|
Real estate
|
|
|
2,292
|
|
|
|
2,007
|
|
|
|
2,180
|
|
Other
|
|
|
446
|
|
|
|
—
|
|
|
|
—
|
|
TOTAL REVENUES
|
|
$
|
1,501,729
|
|
|
$
|
1,496,261
|
|
|
$
|
1,596,777
|
|
Geographic
Information
Revenue
from customers located outside of the United States as a percentage of total revenues from continuing operations and revenue from
customers located in the United Kingdom as a percentage of total revenues from continuing operations were as follows. Revenues
by country are determined based on selling location.
Year ended July 31
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenue from customers located outside of the United States
|
|
|
31
|
%
|
|
|
29
|
%
|
|
|
30
|
%
|
Revenue from customers located in the United Kingdom
|
|
|
14
|
%
|
|
|
23
|
%
|
|
|
20
|
%
|
Net
long-lived assets and total assets held outside of the United States, which are located primarily in Western Europe, were as follows:
(in thousands)
|
|
United
States
|
|
|
Foreign
Countries
|
|
|
Total
|
|
July 31, 2017
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
82,682
|
|
|
$
|
6,312
|
|
|
$
|
88,994
|
|
Total assets
|
|
|
203,548
|
|
|
|
315,415
|
|
|
|
518,963
|
|
July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
82,060
|
|
|
$
|
5,314
|
|
|
$
|
87,374
|
|
Total assets
|
|
|
257,385
|
|
|
|
212,273
|
|
|
|
469,658
|
|
July 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
86,750
|
|
|
$
|
4,566
|
|
|
$
|
91,316
|
|
Total assets
|
|
|
277,342
|
|
|
|
208,340
|
|
|
|
485,682
|
|
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
25—Selected Quarterly Financial Data (Unaudited)
The
table below presents selected quarterly financial data of the Company for its fiscal quarters in fiscal 2017 and fiscal 2016:
Quarter Ended
(in thousands,
except per share data)
|
|
Revenues
|
|
|
Direct cost
of revenues
|
|
|
Income (loss)
from
operations
|
|
|
Net income (loss)
|
|
|
Net income (loss)
attributable
to IDT
Corporation
|
|
|
Net income (loss)
per share –basic
|
|
|
Net income (loss)
per share – diluted
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31(a)
|
|
$
|
369,151
|
|
|
$
|
313,029
|
|
|
$
|
5,186
|
|
|
$
|
22,294
|
|
|
$
|
21,918
|
|
|
$
|
0.97
|
|
|
$
|
0.96
|
|
January 31
|
|
|
367,556
|
|
|
|
310,913
|
|
|
|
3,128
|
|
|
|
1,257
|
|
|
|
875
|
|
|
|
0.04
|
|
|
|
0.04
|
|
April 30 (b)
|
|
|
370,035
|
|
|
|
314,704
|
|
|
|
(6,502
|
)
|
|
|
(4,452
|
)
|
|
|
(4,775
|
)
|
|
|
(0.21
|
)
|
|
|
(0.21
|
)
|
July 31(c)
|
|
|
394,987
|
|
|
|
337,062
|
|
|
|
3,737
|
|
|
|
(9,458
|
)
|
|
|
(9,841
|
)
|
|
|
(0.41
|
)
|
|
|
(0.41
|
)
|
TOTAL
|
|
$
|
1,501,729
|
|
|
$
|
1,275,708
|
|
|
$
|
5,549
|
|
|
$
|
9,641
|
|
|
$
|
8,177
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31
|
|
$
|
390,578
|
|
|
$
|
324,511
|
|
|
$
|
7,925
|
|
|
$
|
4,575
|
|
|
$
|
4,193
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
January 31
|
|
|
382,454
|
|
|
|
319,724
|
|
|
|
6,377
|
|
|
|
4,663
|
|
|
|
4,065
|
|
|
|
0.18
|
|
|
|
0.18
|
|
April 30 (d)
|
|
|
355,154
|
|
|
|
293,220
|
|
|
|
5,676
|
|
|
|
4,701
|
|
|
|
4,237
|
|
|
|
0.19
|
|
|
|
0.19
|
|
July 31(e)
|
|
|
368,075
|
|
|
|
309,139
|
|
|
|
6,225
|
|
|
|
11,419
|
|
|
|
11,019
|
|
|
|
0.49
|
|
|
|
0.48
|
|
TOTAL
|
|
$
|
1,496,261
|
|
|
$
|
1,246,594
|
|
|
$
|
26,203
|
|
|
$
|
25,358
|
|
|
$
|
23,514
|
|
|
$
|
1.03
|
|
|
$
|
1.03
|
|
|
(a)
|
Included
in net income was a benefit from income taxes of $16.6 million from the full recognition of certain deferred tax assets.
|
|
(b)
|
Included in loss from operations was expense of $10.1 million related to a legal settlement and mutual
release, including legal fees incurred in the quarter.
|
|
(c)
|
Included
in net loss was income tax expense of $11.1 million from an increase in the valuation allowance on deferred tax assets.
|
|
(d)
|
Included
in income from operations was gain on sale of interest in Fabrix Systems Ltd. of $1.1 million.
|
|
(e)
|
Included
in income from operations was severance expense of $6.3 million and gain on sale of member interest in Visa Europe Ltd. of
$7.5 million.
|
F-42
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