NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1—Basis of Presentation
The
accompanying unaudited consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”)
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the
three and six months ended January 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending
July 31, 2023. The balance sheet at July 31, 2022 has been derived from the Company’s audited financial statements at that
date but does not include all of the information and notes required by U.S. GAAP for complete financial statements. For further
information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report
on Form 10-K for the fiscal year ended July 31, 2022, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The
Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year
ending in the calendar year indicated (e.g., fiscal 2023 refers to the fiscal year ending July 31, 2023).
Note
2—Business Segment Information
As
of August 1, 2022, the Company revised its reportable business segments primarily to reflect the growth of its financial technology businesses
and their increased contributions to the Company’s consolidated results. The Company’s four reportable business segments,
Fintech, National Retail Solutions (“NRS”), net2phone, and Traditional Communications, reflect management’s current
approach to analyzing results, its resource allocation strategy, and its assessment of business performance. NRS was previously included
in the Company’s Fintech segment. In addition, certain lines of business were reclassified to the Fintech segment from the Traditional
Communications segment. Comparative segment information has been reclassified and restated in all periods to conform to the current period
presentation.
The
Company’s reportable segments are distinguished by types of service, customers, and methods used to provide their services. The
operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The accounting
policies of the segments are the same as the accounting policies of the Company as a whole. There are no significant asymmetrical allocations
to segments. The Company evaluates the performance of its business segments based primarily on income (loss) from operations.
The Fintech segment is comprised of BOSS Money, a provider of international money remittance and related value/payment transfer services,
as well as other, significantly smaller financial services businesses, including Leaf Global Fintech Corporation (“Leaf”),
a provider of digital wallet services in emerging markets, the Company’s variable interest entity (“VIE”) that operates
money transfer businesses (see Note 9), and IDT Financial Services Limited (“IDT Financial Services”), the Company’s
Gibraltar-based bank.
The NRS segment is an operator of a nationwide point of sale (“POS”) network providing independent retailers with store management software with credit, debit,
and other electronic payment processing, as well as with other ancillary merchant services. NRS’ POS platform provides marketers
with digital out-of-home advertising and transaction data.
The net2phone segment is comprised of net2phone’s cloud communications offerings.
The Traditional Communications segment includes Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging,
and data to international and domestic mobile accounts, BOSS Revolution Calling, an international long-distance calling service marketed
primarily to immigrant communities in the United States and Canada, and IDT Global, a wholesale provider of international voice and SMS
termination and outsourced traffic management solutions to telecoms worldwide. Traditional Communications also includes other small
businesses and offerings including early-stage business initiatives and mature businesses in harvest mode.
Corporate
costs mainly include compensation, consulting fees, treasury, tax and accounting services, human resources, corporate purchasing, corporate
governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate
legal, and other corporate-related general and administrative expenses. Corporate does not generate any revenues, nor does it incur any
direct cost of revenues.
Operating
results for the business segments of the Company were as follows:
Schedule
of Operating Results of Business Segments
(in thousands) | |
Fintech | | |
National Retail Solutions | | |
net2phone | | |
Traditional Communications | | |
Corporate | | |
Total | |
Three Months Ended January 31, 2023 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 20,321 | | |
$ | 19,822 | | |
$ | 17,794 | | |
$ | 255,999 | | |
$ | — | | |
$ | 313,936 | |
(Loss) income from operations | |
| (806 | ) | |
| 5,374 | | |
| (575 | ) | |
| 17,008 | | |
| (2,820 | ) | |
| 18,181 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Three Months Ended January 31, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 14,599 | | |
$ | 10,620 | | |
$ | 13,535 | | |
$ | 298,304 | | |
$ | — | | |
$ | 337,058 | |
(Loss) income from operations | |
| (2,271 | ) | |
| 2,058 | | |
| (2,866 | ) | |
| 19,897 | | |
| (3,004 | ) | |
| 13,814 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Six Months Ended January 31, 2023 | |
| | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 40,208 | | |
$ | 39,135 | | |
$ | 34,744 | | |
$ | 521,665 | | |
$ | — | | |
$ | 635,752 | |
Income (loss) from operations | |
| 706 | | |
| 10,605 | | |
| (1,631 | ) | |
| 34,271 | | |
| (5,544 | ) | |
| 38,407 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Six Months Ended January 31, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 28,829 | | |
$ | 20,692 | | |
$ | 26,448 | | |
$ | 631,172 | | |
$ | — | | |
$ | 707,141 | |
(Loss) income from operations | |
| (3,866 | ) | |
| 3,405 | | |
| (7,059 | ) | |
| 40,225 | | |
| (5,113 | ) | |
| 27,592 | |
Note
3—Revenue Recognition
The
Company earns revenue from contracts with customers, primarily through the provision of retail telecommunications and payment offerings
as well as wholesale international voice and SMS termination. BOSS Money, NRS, and net2phone are technology-driven, synergistic businesses
that leverage the Company’s core assets. BOSS Money and NRS’ revenues are primarily recognized at a point in time, and net2phone’s
revenue is mainly recognized over time. Traditional Communications are mostly minute-based, paid-voice communications services, and revenue
is primarily recognized at a point in time. The Company’s most significant revenue streams are from Mobile Top-Up, BOSS Revolution
Calling, and IDT Global. Mobile Top-Up and BOSS Revolution Calling are sold direct-to-consumers and through distributors and retailers.
Disaggregated
Revenues
The
following table shows the Company’s revenues disaggregated by business segment and service offered to customers:
Schedule of Revenues Disaggregated by Business Segment and Service Offered to Customers
| |
| | |
| | |
| | |
| |
| |
Three
Months Ended
January
31, | | |
Six Months
Ended
January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in thousands) | |
BOSS Money | |
$ | 17,649 | | |
$ | 12,029 | | |
$ | 35,203 | | |
$ | 24,123 | |
Other | |
| 2,672 | | |
| 2,570 | | |
| 5,005 | | |
| 4,706 | |
Total Fintech | |
| 20,321 | | |
| 14,599 | | |
| 40,208 | | |
| 28,829 | |
National Retail Solutions | |
| 19,822 | | |
| 10,620 | | |
| 39,135 | | |
| 20,692 | |
net2phone | |
| 17,794 | | |
| 13,535 | | |
| 34,744 | | |
| 26,448 | |
Mobile Top-Up | |
| 106,127 | | |
| 116,246 | | |
| 215,176 | | |
| 244,731 | |
BOSS Revolution Calling | |
| 82,831 | | |
| 99,951 | | |
| 169,083 | | |
| 205,920 | |
IDT Global | |
| 58,631 | | |
| 73,117 | | |
| 120,242 | | |
| 162,312 | |
Other | |
| 8,410 | | |
| 8,990 | | |
| 17,164 | | |
| 18,209 | |
Total Traditional Communications | |
| 255,999 | | |
| 298,304 | | |
| 521,665 | | |
| 631,172 | |
Total | |
$ | 313,936 | | |
$ | 337,058 | | |
$ | 635,752 | | |
$ | 707,141 | |
The
following table shows the Company’s revenues disaggregated by geographic region, which is determined based on selling location:
Schedule of Revenues Disaggregated by Geographic Region
| |
| | | |
| | | |
| | | |
| | | |
| | |
(in thousands) | |
Fintech | | |
National Retail Solutions | | |
net2phone | | |
Traditional Communications | | |
Total | |
Three Months Ended January 31, 2023 | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
$ | 19,612 | | |
$ | 19,822 | | |
$ | 9,514 | | |
$ | 176,424 | | |
$ | 225,372 | |
Outside the United States: | |
| | | |
| | | |
| | | |
| | | |
| | |
United Kingdom | |
| — | | |
| — | | |
| — | | |
| 69,000 | | |
| 69,000 | |
Other | |
| 709 | | |
| — | | |
| 8,280 | | |
| 10,575 | | |
| 19,564 | |
Total outside the United States | |
| 709 | | |
| — | | |
| 8,280 | | |
| 79,575 | | |
| 88,564 | |
Total | |
$ | 20,321 | | |
$ | 19,822 | | |
$ | 17,794 | | |
$ | 255,999 | | |
$ | 313,936 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
(in thousands) | |
Fintech | | |
National Retail Solutions | | |
net2phone | | |
Traditional Communications | | |
Total | |
Three Months Ended January 31,
2022 | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
$ | 14,166 | | |
$ | 10,620 | | |
$ | 7,157 | | |
$ | 209,065 | | |
$ | 241,008 | |
Outside the United States: | |
| | | |
| | | |
| | | |
| | | |
| | |
United Kingdom | |
| — | | |
| — | | |
| — | | |
| 77,337 | | |
| 77,337 | |
Other | |
| 433 | | |
| — | | |
| 6,378 | | |
| 11,902 | | |
| 18,713 | |
Total outside the United States | |
| 433 | | |
| — | | |
| 6,378 | | |
| 89,239 | | |
| 96,050 | |
Total | |
$ | 14,599 | | |
$ | 10,620 | | |
$ | 13,535 | | |
$ | 298,304 | | |
$ | 337,058 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
(in thousands) | |
Fintech | | |
National Retail Solutions | | |
net2phone | | |
Traditional Communications | | |
Total | |
Six Months Ended January 31, 2023 | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
$ | 38,867 | | |
$ | 39,135 | | |
$ | 18,316 | | |
$ | 361,262 | | |
$ | 457,580 | |
Outside the United States: | |
| | | |
| | | |
| | | |
| | | |
| | |
United Kingdom | |
| — | | |
| — | | |
| — | | |
| 137,940 | | |
| 137,940 | |
Other | |
| 1,341 | | |
| — | | |
| 16,428 | | |
| 22,463 | | |
| 40,232 | |
Total outside the United States | |
| 1,341 | | |
| — | | |
| 16,428 | | |
| 160,403 | | |
| 178,172 | |
Total | |
$ | 40,208 | | |
$ | 39,135 | | |
$ | 34,744 | | |
$ | 521,665 | | |
$ | 635,752 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
(in thousands) | |
Fintech | | |
National Retail Solutions | | |
net2phone | | |
Traditional Communications | | |
Total | |
Six Months Ended January 31, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | |
United States | |
$ | 27,966 | | |
$ | 20,692 | | |
$ | 13,981 | | |
$ | 445,992 | | |
$ | 508,631 | |
Outside the United States: | |
| | | |
| | | |
| | | |
| | | |
| | |
United Kingdom | |
| — | | |
| — | | |
| — | | |
| 159,080 | | |
| 159,080 | |
Other | |
| 863 | | |
| — | | |
| 12,467 | | |
| 26,100 | | |
| 39,430 | |
Total outside the United States | |
| 863 | | |
| — | | |
| 12,467 | | |
| 185,180 | | |
| 198,510 | |
Total | |
$ | 28,829 | | |
$ | 20,692 | | |
$ | 26,448 | | |
$ | 631,172 | | |
$ | 707,141 | |
Remaining Performance Obligations
The
Company does not have any significant revenue from performance obligations satisfied or partially satisfied in previous reporting periods.
The Company’s remaining performance obligations at January 31, 2023 and July 31, 2022 primarily had an original expected duration
of one year or less.
Accounts Receivable and Contract Balances
The
timing of revenue recognition may differ from the time of billing to the Company’s customers. Trade accounts receivable in the
Company’s consolidated balance sheets represent unconditional rights to consideration. The Company would record a contract asset
when revenue is recognized in advance of its right to bill and receive consideration. The Company has not identified any contract assets.
Contract
liabilities arise when the Company receives consideration or bills its customers prior to providing the goods or services promised in
the contract. The Company’s contract liability balance is primarily payments received for prepaid BOSS Revolution Calling. Contract
liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in the
Company’s consolidated balance sheets as “Deferred revenue”.
The
following table presents information about the Company’s contract liability balance:
Schedule
of Information About Contract Liabilities
| |
| | |
| | |
| | |
| |
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in thousands) | |
Revenue recognized in the period from amounts included in the contract liability balance at the beginning of the period | |
$ | 17,072 | | |
$ | 20,152 | | |
$ | 21,205 | | |
$ | 24,378 | |
Deferred Customer Contract Acquisition and Fulfillment Costs
The
Company recognizes its incremental costs of obtaining a contract with a customer that it expects to recover as an asset. The Company’s
incremental costs of obtaining a contract with a customer are sales commissions paid to employees and third parties on sales to end users.
If the amortization period would be one year or less for the asset that would be recognized from deferring these costs, the Company applies
the practical expedient whereby the Company charges these costs to expense when incurred. For net2phone sales, the Company defers these
costs and amortizes them over the expected customer relationship period when it is expected to exceed one year.
The
Company’s costs to fulfill its contracts do not meet the criteria to be recognized as an asset, therefore these costs are charged
to expense as incurred.
The
Company’s deferred customer contract acquisition costs were as follows:
Schedule of Deferred Customer Contract Acquisition Costs
| |
| | | |
| | |
| |
January 31, 2023 | | |
July 31, 2022 | |
| |
(in thousands) | |
Deferred customer contract acquisition costs included in “Other current assets” | |
$ | 4,265 | | |
$ | 4,085 | |
Deferred customer contract acquisition costs included in “Other assets” | |
| 3,465 | | |
| 3,469 | |
| |
| | | |
| | |
Total | |
$ | 7,730 | | |
$ | 7,554 | |
The
Company’s amortization of deferred customer contract acquisition costs during the periods were as follows:
Schedule of Amortization of Deferred Customer Contract Acquisition Costs
| |
| | |
| | |
| | |
| |
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in thousands) | |
Amortization of deferred customer contract acquisition costs | |
$ | 1,228 | | |
$ | 1,030 | | |
$ | 2,405 | | |
$ | 2,042 | |
Note
4—Leases
The
Company’s leases primarily consist of operating leases for office space. These leases have remaining terms from less than one year
to five years. net2phone also has operating leases for office equipment. Certain of these leases contain renewal options that may be exercised
and/or options to terminate the lease. The Company has concluded that it is not reasonably certain that it would exercise any of these options.
net2phone
is the lessee under equipment leases that are classified as finance leases. The assets and liabilities related to these finance leases are
not material to the Company’s consolidated balance sheets.
The
Company leases office and parking space in a building and parking garage located at 520 Broad Street, Newark, New Jersey that was
previously owned by the Company’s former subsidiary, Rafael Holdings, Inc. (“Rafael”). On August 22, 2022, Rafael
sold the building and parking garage to an unrelated third party. The Company’s lease in that building continues with the new
owner. The Company leases office space in Israel from Rafael. Howard S. Jonas, the Chairman of the Company (an executive officer
position) and the Chairman of the Company’s Board of Directors, is also the Chairman of the Board of Directors and Executive
Chairman of Rafael. The
Newark lease expires in April 2025 and the Israel lease expires in July 2025. In the three and six months ended January 31,
2023, the Company incurred lease costs of $32,000
and $0.2
million, respectively, in connection with the Rafael leases, which excludes Newark lease costs after August 22, 2022. In the three
and six months ended January 31, 2022, the Company incurred lease costs of $0.5
million and $0.9
million, respectively, in connection with the Rafael leases. Lease costs incurred in connection with the Rafael leases is included
in operating lease cost in the table below.
Supplemental
disclosures related to the Company’s operating leases were as follows:
Schedule of Supplemental Disclosures Related to the Company's Operating Leases
| |
| | |
| | |
| | |
| |
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in thousands) | |
Operating lease cost | |
$ | 799 | | |
$ | 687 | | |
$ | 1,566 | | |
$ | 1,387 | |
Short-term lease cost | |
| 259 | | |
| 253 | | |
| 528 | | |
| 600 | |
Total lease cost | |
$ | 1,058 | | |
$ | 940 | | |
$ | 2,094 | | |
$ | 1,987 | |
| |
| | | |
| | | |
| | | |
| | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | | |
| | | |
| | |
Operating cash flows from operating leases | |
$ | 824 | | |
$ | 670 | | |
$ | 1,588 | | |
$ | 1,365 | |
Cash
paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases | |
| 824 | | |
| 670 | | |
| 1,588 | | |
| 1,365 | |
Schedule of Supplemental Disclosures Related Weighted Average Operating Leases
| |
January 31, 2023 | | |
July 31, 2022 | |
Weighted-average remaining lease term-operating leases | |
| 2.7 years | | |
| 2.8
years | |
Weighted-average discount rate-operating leases | |
| 3.6 | % | |
| 3.0 | % |
In
the six months ended January 31, 2023 and 2022, the Company obtained right-of-use assets of $1.7 million and $0.7 million, respectively,
in exchange for new operating lease liabilities.
The Company’s aggregate operating lease liability was as follows:
Schedule of Aggregate Operating Lease Liability
| |
| | | |
| | |
| |
January 31, 2023 | | |
July 31, 2022 | |
| |
(in thousands) | |
Operating lease liabilities included in “Other current liabilities” | |
$ | 2,917 | | |
$ | 2,899 | |
Operating lease liabilities included in noncurrent liabilities | |
| 4,243 | | |
| 4,606 | |
Total | |
$ | 7,160 | | |
$ | 7,505 | |
Future
minimum maturities of operating lease liabilities were as follows (in thousands):
Schedule of Future Minimum Maturities of Operating Lease Liabilities
| |
| | |
Twelve-month period ending January 31: | |
| | |
2024 | |
$ | 3,135 | |
2025 | |
| 2,739 | |
2026 | |
| 1,076 | |
2027 | |
| 454 | |
2028 | |
| 137 | |
Thereafter | |
| — | |
Total lease payments | |
| 7,541 | |
Less imputed interest | |
| (381 | ) |
Total operating lease liabilities | |
$ | 7,160 | |
Note
5—Cash, Cash Equivalents, and Restricted Cash and Cash Equivalents
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported in the consolidated
balance sheets that equals the total of the same amounts reported in the consolidated statements of cash flows:
Schedule of Cash, Cash Equivalents, and Restricted Cash and Cash Equivalents
| |
| | | |
| | |
| |
January 31, 2023 | | |
July 31, 2022 | |
| |
(in thousands) | |
Cash and cash equivalents | |
$ | 117,811 | | |
$ | 98,352 | |
Restricted cash and cash equivalents | |
| 89,867 | | |
| 91,210 | |
Total cash, cash equivalents, and restricted cash and cash equivalents | |
$ | 207,678 | | |
$ | 189,562 | |
At
January 31, 2023 and July 31, 2022, restricted cash and cash equivalents included $87.7 million and $86.6 million, respectively, in restricted
cash and cash equivalents for customer deposits held by IDT Financial Services. Certain of the electronic money financial services regulations
in Gibraltar require IDT Financial Services to safeguard cash held for customer deposits, segregate cash held for customer deposits from
any other cash that IDT Financial Services holds and utilize the cash only for the intended payment transaction.
Company
Restricted Cash and Cash Equivalents
The
Company treats unrestricted cash and cash equivalents held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC, which
provide the Company’s international money transfer services in the United States, as substantially restricted and unavailable for
other purposes. At January 31, 2023 and July 31, 2022, “Cash and cash equivalents” in the Company’s consolidated balance
sheets included an aggregate of $31.2 million and $17.3 million, respectively, held by IDT Payment Services, Inc. and IDT Payment Services
of New York, LLC, that was unavailable for other purposes.
Note
6—Debt Securities
The
following is a summary of available-for-sale debt securities:
Schedule of Available-for-sale Securities
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Fair Value | |
| |
(in thousands) | |
January 31, 2023: | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury bills and notes | |
$ | 23,854 | | |
$ | 4 | | |
$ | (94 | ) | |
$ | 23,764 | |
Government sponsored enterprises notes | |
| | |
| | |
| ) | |
| |
Corporate bonds | |
| 3,991 | | |
| 1 | | |
| (487 | ) | |
| 3,505 | |
Total | |
$ | 30,357 | | |
$ | 5 | | |
$ | (585 | ) | |
$ | 29,777 | |
| |
| | | |
| | | |
| | | |
| | |
July 31, 2022: | |
| | | |
| | | |
| | | |
| | |
Certificates of deposit* | |
$ | 2,000 | | |
$ | — | | |
$ | (14 | ) | |
$ | 1,986 | |
U.S. Treasury bills and notes | |
| 13,848 | | |
| — | | |
| (114 | ) | |
| 13,734 | |
Corporate bonds | |
| 3,966 | | |
| 1 | | |
| (416 | ) | |
| 3,551 | |
Municipal bonds | |
| 3,035 | | |
| — | | |
| (3 | ) | |
| 3,032 | |
Total | |
$ | 22,849 | | |
$ | 1 | | |
$ | (547 | ) | |
$ | 22,303 | |
* | 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. |
Proceeds
from maturities and sales of debt securities and redemptions of equity investments were $16.1 million and $2.2 million in the three months
ended January 31, 2023 and 2022, respectively, and $27.5 million and $6.1 million in the six months ended January 31, 2023 and 2022,
respectively. There were no realized gains or realized losses from sales of debt securities in the three and six months ended January
31, 2023 and 2022. The Company uses the specific identification method in computing the realized gains and realized losses on the sales
of debt securities.
The
contractual maturities of the Company’s available-for-sale debt securities at January 31, 2023 were as follows:
Schedule of Contractual Maturities of Available-for-sale Debt Securities
| |
| | |
| |
Fair Value | |
| |
(in thousands) | |
Within one year | |
$ | 22,521 | |
After one year through five years | |
| 5,973 | |
After five years through ten years | |
| 1,236 | |
After ten years | |
| 47 | |
Total | |
$ | 29,777 | |
The
following available-for-sale debt securities were in an unrealized loss position for which other-than-temporary impairments were not
recognized:
Schedule of Available-for-sale Securities, Unrealized Loss Position
| |
Unrealized
Losses | | |
Fair
Value | |
| |
(in thousands) | |
January 31, 2023: | |
| | | |
| | |
U.S. Treasury bills and notes | |
$ | 94 | | |
$ | 11,315 | |
Government sponsored enterprises notes | |
| | |
| |
Corporate bonds | |
| 487 | | |
| 3,450 | |
Total | |
$ | 585 | | |
$ | 17,273 | |
| |
| | | |
| | |
July 31, 2022: | |
| | | |
| | |
Certificates of deposit | |
$ | 14 | | |
$ | 1,986 | |
U.S. Treasury bills and notes | |
| 114 | | |
| 13,734 | |
Corporate bonds | |
| 416 | | |
| 3,514 | |
Municipal bonds | |
| 3 | | |
| 2,412 | |
Total | |
$ | 547 | | |
$ | 21,646 | |
The
following available-for-sale debt securities included in the tables above were in a continuous unrealized loss position for 12 months
or longer:
Schedule of Continuous Unrealized Loss Position for 12 Months or Longer
| |
Unrealized Losses | | |
Fair Value | |
| |
(in thousands) | |
January 31, 2023: | |
| | | |
| | |
U.S. Treasury bills and notes | |
$ | 87 | | |
$ | 874 | |
Corporate bonds | |
| 475 | | |
| 3,286 | |
Total | |
$ | 562 | | |
$ | 4,160 | |
| |
| | | |
| | |
July 31, 2022: | |
| | | |
| | |
U.S. Treasury bills and notes | |
$ | 72 | | |
$ | 892 | |
Corporate bonds | |
| 234 | | |
| 1,731 | |
Total | |
$ | 306 | | |
$ | 2,623 | |
At
January 31, 2023 and July 31, 2022, the Company did not intend to sell any of the debt securities included in the table above, and it
is not more likely than not that the Company will be required to sell any of these securities before recovery of the unrealized losses,
which may be at maturity.
Note
7—Equity Investments
Equity
investments consist of the following:
Schedule of Equity Investments
| |
| | | |
| | |
| |
January 31, 2023 | | |
July 31, 2022 | |
| |
(in thousands) | |
Zedge, Inc. Class B common stock, 42,282 shares at January 31, 2023 and July 31, 2022 | |
$ | 93 | | |
$ | 117 | |
Rafael Holdings, Inc. Class B common stock, 278,810
and 290,214 shares at January 31, 2023 and July 31, 2022, respectively | |
| 574 | | |
| 586 | |
Other marketable equity securities | |
| 1,872 | | |
| 4,089 | |
Fixed income mutual funds | |
| 6,674 | | |
| 12,299 | |
Current equity investments | |
$ | 9,213 | | |
$ | 17,091 | |
| |
| | | |
| | |
Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”) | |
$ | 1,225 | | |
$ | 1,132 | |
Visa Inc. Series A Convertible Participating Preferred Stock (“Visa Series A Preferred”) | |
| — | | |
| 1,230 | |
Series B and Series C convertible preferred stock—equity method investment | |
| — | | |
| 1,001 | |
Hedge funds | |
| 3,137 | | |
| 3,238 | |
Other | |
| 2,325 | | |
| 825 | |
Noncurrent equity investments | |
$ | 6,687 | | |
$ | 7,426 | |
The
Company received the shares of Zedge, Inc. (“Zedge”) Class B common stock and 28,320 of the shares of Rafael Class B common
stock set forth in the table above in connection with the lapsing of restrictions on Zedge and Rafael restricted stock held by certain
of the Company’s employees and the Company’s payment of taxes on behalf of its employees related thereto. The Company purchased
261,894 shares of Rafael Class B common stock in fiscal 2021. The Company sold 11,404 shares of Rafael Class B common stock in November
2022. Howard S. Jonas is the Vice-Chairman of the Board of Directors of Zedge.
On
July 28, 2022, in connection with Visa Inc.’s second mandatory release assessment, the Company received 58 shares of Visa Series
A Preferred and the conversion adjustment for Visa Series C Preferred was reduced to 3.645. In August 2022, the 58 shares of Visa Series
A Preferred were converted into 5,800 shares of Visa Class A common stock, which the Company sold for $1.3 million.
The
changes in the carrying value of the Company’s equity investments without readily determinable fair values for which the Company
elected the measurement alternative was as follows:
Schedule of Carrying Value of Equity Investments
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Balance,
beginning of period | |
$ | 1,374 | | |
$ | 2,397 | | |
$ | 1,401 | | |
$ | 2,743 | |
Adjustment
for observable transactions involving a similar investment from the same issuer | |
| 120 | | |
| 142 | | |
| 93 | | |
| (204 | ) |
Impairments | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Balance,
end of the period | |
$ | 1,494 | | |
$ | 2,539 | | |
$ | 1,494 | | |
$ | 2,539 | |
The
Company increased the carrying value of the shares of Visa Series C Preferred it held by $0.1 million in each of the three months
ended January 31, 2023 and 2022 and in the six months ended January 31, 2023, and the Company decreased the carrying value of the shares
of Visa Series C Preferred it held by $0.2
million
in the six months ended January 31, 2022, based on the fair value of Visa Class A common stock, including a discount
for lack of current marketability.
Unrealized
gains and losses for all equity investments measured at fair value included the following:
Schedule of Unrealized (losses) Gains for All Equity Investments
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Net
losses recognized during the period on equity investments | |
$ | (228 | ) | |
$ | (2,952 | ) | |
$ | (2,169 | ) | |
$ | (17,446 | ) |
Less:
net gains recognized during the period on equity investments sold during the period | |
| 22 | | |
| 25 | | |
| 18 | | |
| 10 | |
| |
| | | |
| | | |
| | | |
| | |
Unrealized
losses recognized during the period on equity investments still held at the reporting date | |
$ | (250 | ) | |
$ | (2,977 | ) | |
$ | (2,187 | ) | |
$ | (17,456 | ) |
The
unrealized gains and losses for all equity investments measured at fair value in the table above included the following:
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in thousands) | |
Unrealized gains (losses) recognized during the period on equity investments: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Rafael Class B common stock | |
$ | 82 | | |
$ | (993 | ) | |
$ | 9 | | |
$ | (13,486 | ) |
| |
| | | |
| | | |
| | | |
| | |
Zedge Class B common stock | |
$ | 3 | | |
$ | (168 | ) | |
$ | (24 | ) | |
$ | (330 | ) |
Unrealized losses recognized during the period on equity investments still held at the reporting date | |
$ | (250 | ) | |
$ | (2,977 | ) | |
$ | (2,187 | ) | |
$ | (17,456 | ) |
Equity
Method Investment
On
February 2, 2021, the Company paid $4.0 million to purchase shares of series B convertible preferred stock of a communications company
(the equity method investee, or “EMI”), and on August 10, 2021, the Company paid $1.1 million to purchase shares of the EMI’s
series C convertible preferred stock and additional shares of the EMI’s series B convertible preferred stock. The initial shares
purchased represented 23.95% of the outstanding shares of the EMI on an as converted basis. The subsequent purchases increased the Company’s
ownership to 26.57% on an as converted basis.
The
Company accounts for this investment using the equity method since the series B and series C convertible preferred stock are in-substance
common stock, and the Company can exercise significant influence over the operating and financial policies of the EMI.
The
Company determined that on the dates of the acquisitions, there were differences of $3.4 million and $1.0 million between its investment
in the EMI and its proportional interest in the equity of the EMI, which represented the share of the EMI’s customer list on the
dates of the acquisitions attributed to the Company’s interest in the EMI. These basis differences are being amortized over the
6-year estimated life of the customer list. In the accompanying consolidated statements of income, amortization of equity method
basis difference is included in the equity in the net loss of investee, which is recorded in “Other income (expense), net” (see Note
17).
As
of January 31, 2023 and July 31, 2022, the Company was the holder of secured promissory notes made by the EMI in exchange for loans of an aggregate
of $3.7
million and $2.5
million, respectively. The notes provide for interest on the principal amount at 15%
per annum payable monthly. The notes were due and payable in February
2023. The Company, the EMI, and the EMI’s other lenders are in the process of converting all the EMI’s equity and
promissory notes into new shares of the EMI’s participating preferred stock. As of January 31, 2023 and July 31, 2022, the
notes were included in “Other current assets” in the accompanying consolidated balance sheets.
The
following table summarizes the change in the balance of the Company’s equity method investment:
Summary of Changes in Equity Method Investments
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Balance,
beginning of period | |
$ | 349 | | |
$ | 3,329 | | |
$ | 1,001 | | |
$ | 2,901 | |
Purchase
of convertible preferred stock | |
| — | | |
| — | | |
| — | | |
| 1,051 | |
Equity
in the net loss of investee | |
| (542 | ) | |
| (639 | ) | |
| (1,012 | ) | |
| (1,080 | ) |
Amortization
of equity method basis difference | |
| (181 | ) | |
| (181 | ) | |
| (363 | ) | |
| (363 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance,
end of the period | |
$ | (374 | ) | |
$ | 2,509 | | |
$ | (374 | ) | |
$ | 2,509 | |
As of January 31, 2023, the balance
of the Company’s investment in the EMI was included in “Other current liabilities” in the accompanying
consolidated balance sheet.
Summarized
financial information of the EMI was as follows:
Summary of Statements of Operations
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
| |
| |
Revenues | |
$ | 1,818 | | |
$ | 1,380 | | |
$ | 3,691 | | |
$ | 3,071 | |
Costs
and expenses: | |
| | | |
| | | |
| | | |
| | |
Direct
cost of revenues | |
| 1,535 | | |
| 1,443 | | |
| 3,228 | | |
| 2,905 | |
Selling,
general and administrative | |
| 1,772 | | |
| 774 | | |
| 3,408 | | |
| 2,663 | |
| |
| | | |
| | | |
| | | |
| | |
Total
costs and expenses | |
| 3,307 | | |
| 2,217 | | |
| 6,636 | | |
| 5,568 | |
| |
| | | |
| | | |
| | | |
| | |
Loss
from operations | |
| (1,489 | ) | |
| (837 | ) | |
| (2,945 | ) | |
| (2,497 | ) |
Other
expense | |
| (498 | ) | |
| — | | |
| (842 | ) | |
| (1 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net
loss | |
$ | (1,987 | ) | |
$ | (837 | ) | |
$ | (3,787 | ) | |
$ | (2,498 | ) |
Note
8—Fair Value Measurements
The
following table presents the balance of assets and liabilities measured at fair value on a recurring basis:
Schedule of Balance of Assets Measured at Fair Value on a Recurring Basis
| |
Level
1 (1) | | |
Level
2 (2) | | |
Level
3 (3) | | |
Total | |
| |
(in
thousands) | |
January 31, 2023 | |
| | |
| | |
| | |
| |
Debt
securities | |
$ | 23,764 | | |
$ | 6,013 | | |
$ | — | | |
$ | 29,777 | |
Equity
investments included in current assets | |
| 9,213 | | |
| — | | |
| — | | |
| 9,213 | |
Equity
investments included in noncurrent assets | |
| — | | |
| — | | |
| 1,225 | | |
| 1,225 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 32,977 | | |
$ | 6,013 | | |
$ | 1,225 | | |
$ | 40,215 | |
| |
| | | |
| | | |
| | | |
| | |
Acquisition
consideration included in: | |
| | | |
| | | |
| | | |
| | |
Other
current liabilities | |
$ | — | | |
$ | — | | |
$ | (2,275 | ) | |
$ | (2,275 | ) |
Other
noncurrent liabilities | |
| — | | |
| — | | |
| (4,334 | ) | |
| (4,334 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | — | | |
$ | — | | |
$ | (6,609 | ) | |
$ | (6,609 | ) |
| |
| | | |
| | | |
| | | |
| | |
July
31, 2022 | |
| | | |
| | | |
| | | |
| | |
Debt
securities | |
$ | 13,734 | | |
$ | 8,569 | | |
$ | — | | |
$ | 22,303 | |
Equity
investments included in current assets | |
| 17,091 | | |
| — | | |
| — | | |
| 17,091 | |
Equity
investments included in noncurrent assets | |
| — | | |
| 1,230 | | |
| 1,132 | | |
| 2,362 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 30,825 | | |
$ | 9,799 | | |
$ | 1,132 | | |
$ | 41,756 | |
| |
| | | |
| | | |
| | | |
| | |
Acquisition
consideration included in: | |
| | | |
| | | |
| | | |
| | |
Other
current liabilities | |
$ | — | | |
$ | — | | |
$ | (2,578 | ) | |
$ | (2,578 | ) |
Other
noncurrent liabilities | |
| — | | |
| — | | |
| (5,968 | ) | |
| (5,968 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | — | | |
$ | — | | |
$ | (8,546 | ) | |
$ | (8,546 | ) |
(1) | – quoted
prices in active markets for identical assets or liabilities |
(2) | – observable
inputs other than quoted prices in active markets for identical assets and liabilities |
(3) | – no observable
pricing inputs in the market |
At
January 31, 2023 and July 31, 2022, the Company had $3.1 million and $3.2 million, respectively, in investments in hedge funds, which
were included in noncurrent “Equity investments” in the accompanying consolidated balance sheets. The Company’s investments
in hedge funds were accounted for using the equity method, therefore they were not measured at fair value.
The
following table summarizes the change in the balance of the Company’s assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3):
Schedule of Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Balance,
beginning of period | |
$ | 1,105 | | |
$ | 2,119 | | |
$ | 1,132 | | |
$ | 2,465 | |
Total
gains (losses) recognized in “Other income (expense), net” | |
| 120 | | |
| 142 | | |
| 93 | | |
| (204 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance,
end of period | |
$ | 1,225 | | |
$ | 2,261 | | |
$ | 1,225 | | |
$ | 2,261 | |
| |
| | | |
| | | |
| | | |
| | |
Change
in unrealized gains or losses for the period included in earnings for assets held at the end of the period | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
The
following table summarizes the change in the balance of the Company’s liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3):
Schedule of Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Balance,
beginning of period | |
$ | 6,603 | | |
$ | 1,015 | | |
$ | 8,546 | | |
$ | 1,025 | |
Payments | |
| — | | |
| — | | |
| (375 | ) | |
| — | |
Total
(gains) losses included in: | |
| | | |
| | | |
| | | |
| | |
“Other
operating gain (expense), net” | |
| — | | |
| (303 | ) | |
| (1,565 | ) | |
| (303 | ) |
“Foreign
currency translation adjustment” | |
| 6 | | |
| (9 | ) | |
| 3 | | |
| (19 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance,
end of period | |
$ | 6,609 | | |
$ | 703 | | |
$ | 6,609 | | |
$ | 703 | |
| |
| | | |
| | | |
| | | |
| | |
Change
in unrealized gains or losses for the period included in earnings for liabilities held at the end of the period | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
In
the six months ended January 31, 2023, the Company paid an aggregate of $0.4 million in contingent consideration related to prior acquisitions.
In addition, in the six months ended January 31, 2023, the Company determined that the requirements for a portion of the contingent consideration
payments related to the acquisition of Leaf would not be met, and, in the three months ended January 31, 2022, the Company determined
that the requirements for a contingent consideration payment related to an acquisition in December 2019 would not be met before the expiration
date. The Company recorded gains of $1.6 million and $0.3 million on the write-off of these contingent consideration payment obligations,
which were included in “Other operating gain (expense), net” in the accompanying consolidated statements of income. There
were no other changes in the estimated fair value of contingent consideration in the six months ended January 31, 2023 and 2022.
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
January 31, 2023 and July 31, 2022, 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 January 31, 2023 and July 31, 2022, 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.
Note
9—Variable Interest Entity
The
Company is the primary beneficiary of a VIE that operates money transfer businesses. The Company determined that, effective May 31, 2021,
it had the power to direct the activities of the VIE that most significantly impact its economic performance, and the Company has the
obligation to absorb losses of and the right to receive benefits from the VIE that could potentially be significant to it. As a result,
the Company consolidates the VIE. The Company does not currently own any interest in the VIE and thus the net income incurred by the
VIE was attributed to noncontrolling interests in the accompanying consolidated statements of income.
The
VIE’s net income (loss) and aggregate funding (repaid to) provided by the Company were as
follows:
Schedule of Net Income and Aggregate Funding Repaid to the Company by VIE
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Net
income (loss) of the VIE | |
$ | 25 | | |
$ | (144 | ) | |
$ | 165 | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
Aggregate
funding (repaid to) provided by the Company, net | |
$ | (10 | ) | |
$ | (93 | ) | |
$ | 87 | | |
$ | (96 | ) |
The
VIE’s summarized consolidated balance sheet amounts are as follows:
VIE’s Summarized Consolidated Balance Sheet
| |
January
31,2023 | | |
July
31,2022 | |
| |
(in
thousands) | |
Assets: | |
| | |
| |
Cash
and equivalents | |
$ | 3,286 | | |
$ | 1,808 | |
Restricted
cash | |
| 2,064 | | |
| 4,490 | |
Trade
accounts receivable, net | |
| 13 | | |
| 31 | |
Prepaid
expenses | |
| 179 | | |
| 14 | |
Other
current assets | |
| 1,038 | | |
| 1,387 | |
Due
from the Company | |
| — | | |
| 86 | |
Property,
plant, and equipment, net | |
| 375 | | |
| 467 | |
Other
intangibles, net | |
| 813 | | |
| 889 | |
| |
| | | |
| | |
Total
assets | |
$ | 7,768 | | |
$ | 9,172 | |
| |
| | | |
| | |
Liabilities
and noncontrolling interests: | |
| | | |
| | |
Trade
accounts payable | |
$ | — | | |
$ | — | |
Accrued
expenses | |
| 25 | | |
| 20 | |
Other
current liabilities | |
| 3,990 | | |
| 5,559 | |
Due
to the Company | |
| 1 | | |
| — | |
Accumulated
other comprehensive loss | |
| (15 | ) | |
| (9 | ) |
Noncontrolling
interests | |
| 3,767 | | |
| 3,602 | |
| |
| | | |
| | |
Total
liabilities and noncontrolling interests | |
$ | 7,768 | | |
$ | 9,172 | |
The
VIE’s assets may only be used to settle the VIE’s obligations and may not be used for other consolidated entities. The VIE’s
liabilities are non-recourse to the general credit of the Company’s other consolidated entities.
Note
10—Other Operating Gain (Expense), Net
The
following table summarizes the other operating gain (expense), net by business segment:
Schedule of Other Operating Expense, Net
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Corporate—Straight
Path Communications Inc. class action legal fees | |
$ | (1,597 | ) | |
$ | (2,694 | ) | |
$ | (4,109 | ) | |
$ | (3,671 | ) |
Corporate—Straight
Path Communications Inc. class action insurance claims | |
| 1,263 | | |
| 1,972 | | |
| 2,988 | | |
| 2,887 | |
Fintech—write-off
of contingent consideration liability | |
| — | | |
| — | | |
| 1,565 | | |
| — | |
Fintech—
government grants | |
| 349 | | |
| — | | |
| 382 | | |
| — | |
net2phone—write-off
of contingent consideration liability | |
| — | | |
| 303 | | |
| — | | |
| 303 | |
net2phone—other | |
| — | | |
| (10 | ) | |
| — | | |
| (10 | ) |
Traditional
Communications— cable telephony customer indemnification claim | |
| (1 | ) | |
| (12 | ) | |
| (12 | ) | |
| (36 | ) |
Traditional
Communications—other | |
| 3 | | |
| (1 | ) | |
| 2 | | |
| (3 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total
other operating gain (expense), net | |
$ | 17 | | |
$ | (442 | ) | |
$ | 816 | | |
$ | (530 | ) |
Straight
Path Communications Inc. Class Action
As
discussed in Note 16, the Company (as well as other defendants) has been named in a pending class action on behalf of the stockholders
of the Company’s former subsidiary, Straight Path Communications Inc. (“Straight Path”).
The Company incurred legal fees and recorded offsetting gains from insurance claims related to this action in the three and six months
ended January 31, 2023 and 2022.
Write-off
of Contingent Consideration Liabilities
In
the six months ended January 31, 2023, the Company determined that the requirements for a portion of the contingent consideration payments
related to the Leaf acquisition would not be met. In addition, in the three months ended January 31, 2022, the Company determined that
the requirements for a contingent consideration payment related to an acquisition in December 2019 would not be met before the expiration
date. The Company recognized gains on the write-off of these contingent consideration payment obligations in the Fintech and net2phone
segments, respectively.
Government Grants
In the three and six months ended January
31, 2023, Leaf received payments from government grants for the development and commercialization of blockchain-backed financial technologies.
Indemnification
Claim
Beginning
in June 2019, as part of a commercial resolution, the Company indemnified a cable telephony customer related to patent infringement claims
brought against the customer.
Note
11—Revolving Credit Facility
The
Company’s subsidiary, IDT Telecom, Inc. (“IDT Telecom”), entered into a credit agreement, dated as of May 17,
2021, with TD Bank, N.A. for a revolving credit facility for up to a maximum principal amount of $25.0
million. IDT Telecom may use the proceeds to finance working capital requirements and for certain closing costs of the facility. At
January 31, 2023 and July 31, 2022, there were no
amounts outstanding under this facility. In the six months ended January 31, 2023 and 2022, IDT Telecom borrowed and repaid an aggregate of $2.4 million and $2.5 million,
respectively, under the facility. The revolving credit facility is secured by primarily all of IDT Telecom’s assets. The
principal outstanding bears interest per annum at the Intercontinental Exchange Benchmark Administration Ltd. LIBOR multiplied by
the Regulation D maximum reserve requirement plus 125 to 175 basis points, depending upon IDT Telecom’s leverage ratio as
computed for the most recent fiscal quarter. Interest is payable monthly, and all outstanding principal and any accrued and unpaid
interest is due on May 16, 2024. IDT Telecom pays a quarterly unused commitment fee on the average daily balance of the unused
portion of the $25.0
million commitment of 30 to 85 basis points, depending upon IDT Telecom’s leverage ratio as computed for the most recent
fiscal quarter. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain
targets based on financial ratios during the term of the revolving credit facility. As of January 31, 2023 and July 31, 2022, IDT
Telecom was in compliance with all of the covenants.
Note
12—Equity
Stock
Issued to Certain Executive Officers for Bonus Payments
In
the six months ended January 31, 2023, certain executive officers of the Company received performance bonuses for fiscal 2022 of an aggregate
of $1.2 million, of which one-half was paid in cash and one-half was paid in shares of the Company’s Class B common stock. The
Company issued 24,543 shares of its Class B common stock with an issue date value of $0.6 million for the bonus payments.
2015
Stock Option and Incentive Plan
On
December 14, 2022, 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 50,000 shares.
In
the six months ended January 31, 2023, the Company received cash from the exercise of stock options of $0.2 million, for which the Company
issued 12,500 shares of its Class B common stock. There were no stock option exercises in the six months ended January 31, 2022.
In
the six months ended January 31, 2023, the Company granted 15,000 shares of its Class B common stock to an employee. The Company recorded
stock-based compensation expense and an increase in “Additional paid-in capital” of $0.4 million for this grant, which was
the fair value of the shares on the grant date.
Stock
Repurchases
The
Company has an existing stock repurchase program authorized by its Board of Directors for the repurchase of shares of the Company’s
Class B common stock. The Board of Directors authorized the repurchase of up to 8.0 million shares in the aggregate. In the six months
ended January 31, 2023, the Company repurchased 203,436 shares of its Class B common stock for an aggregate purchase price of $5.0 million.
There were no repurchases under the program in the six months ended January 31, 2022. At January 31, 2023, 5.0 million shares remained
available for repurchase under the stock repurchase program.
In
the six months ended January 31, 2023 and 2022, the Company paid $0.3 million and $9.0 million, respectively, to repurchase 13,403 and
200,438 shares, respectively, of the Company’s Class B common stock that were tendered by employees of the Company to satisfy the
employees’ tax withholding obligations in connection with shares issued for bonus payments, the vesting of deferred stock units
(“DSUs”), and lapsing of restrictions on restricted stock. Such shares were repurchased by the Company based on their fair
market value as of the close of business on the trading day immediately prior to the vesting date.
Deferred
Stock Units Equity Incentive Program
On
November 30, 2022, the Company adopted an equity incentive program (under its 2015 Stock Option and Incentive Plan) in the form of
grants of DSUs that, upon vesting, will entitle the grantees to receive shares of the Company’s Class B common stock. On
December 5, 2022, the Company granted 187,975
DSUs to certain of its executive officers and other employees. Subject to continued full time employment or other service to the
Company, the DSUs are scheduled to vest in three equal amounts on each of May 17, 2023, February 21, 2024, and February 25, 2025.
The number of shares that will be issuable on each vesting date will vary between 50% to 200% of the number of DSUs that vest on
that vesting date, depending on the market price for the underlying Class B common stock on the vesting date relative to the price
approved by the Compensation Committee of the Company’s Board of Directors of $25.45 per share (which was based on the market
price at the time of the grant). In addition, the grantee will have the right to elect a later vesting date no later than April 14,
2023 for the May 17, 2023 vesting date, and no later than January 19, 2024 for the February 21, 2024 vesting date. A grantee will
have the option to elect a later vesting date for one-half or all of the shares scheduled to vest on the then upcoming vesting date
and any DSUs that do not vest based on the grantee’s election, will be eligible to vest on the subsequent scheduled vesting
date. The Company estimated that the fair value of the DSUs on the date of grant was $5.1
million, which is being recognized on a graded vesting basis over the requisite service periods ending in February 2025. The Company
used a risk neutral Monte Carlo simulation method in its valuation of the DSUs, which simulated the range of possible future values
of the Company’s Class B common stock over the life of the DSUs. The weighted average grant date fair value per DSU was
$27.20.
At January 31, 2023, there was $4.2
million of total unrecognized compensation cost related to non-vested DSUs.
The
Company had an existing equity incentive program in the form of DSUs that, upon vesting, entitled the grantees to receive shares of the
Company’s Class B common stock. On January 5, 2022, the third and final vesting date under the program, the Company issued 301,296
shares of its Class B common stock in respect of DSUs that vested on that date.
Note
13—Redeemable Noncontrolling Interest
On
September 29, 2021, NRS sold shares of its Class B common stock representing 2.5% of its outstanding capital stock on a fully diluted
basis to Alta Fox Opportunities Fund LP (“Alta Fox”) for cash of $10 million. Alta Fox has the right to request that NRS
redeem all or any portion of the NRS common shares that it purchased at the per share purchase price during a period of 182 days following
the fifth anniversary of this transaction. The redemption right shall terminate upon the consummation of (i) a sale of NRS or its assets
for cash or securities that are listed on a national securities exchange, (ii) a public offering of NRS’ securities, or (iii) a
distribution of NRS’ capital stock following which NRS’ common shares are listed on a national securities exchange.
The
shares of NRS’ Class B common stock sold to Alta Fox have been classified as mezzanine equity in the accompanying consolidated
balance sheets because they may be redeemed at the option of Alta Fox, although the shares are not mandatorily redeemable. The carrying
amount of the shares includes the noncontrolling interest in the net income of NRS. The net income attributable to the mezzanine equity’s
noncontrolling interest during the periods were as follows:
Schedule
of Net Income Attributable to Mezzanine Equity’s Noncontrolling Interest
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Net
income of NRS attributable to the mezzanine equity’s noncontrolling interest | |
$ | 65 | | |
$ | 53 | | |
$ | 198 | | |
$ | 63 | |
Note
14— Earnings Per Share
Basic
earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted
average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed
in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject
to risk of forfeiture 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:
Schedule of Weighted-average Number of Shares Used in the Calculation of Basic and Diluted Earnings Per Share
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Basic
weighted-average number of shares | |
| 25,510 | | |
| 25,652 | | |
| 25,556 | | |
| 25,609 | |
Effect
of dilutive securities: | |
| | | |
| | | |
| | | |
| | |
Stock
options | |
| 9 | | |
| 715 | | |
| 11 | | |
| 711 | |
Non-vested
restricted Class B common stock | |
| 19 | | |
| 175 | | |
| 10 | | |
| 260 | |
| |
| | | |
| | | |
| | | |
| | |
Diluted
weighted-average number of shares | |
| 25,538 | | |
| 26,542 | | |
| 25,577 | | |
| 26,580 | |
There
were no shares excluded from the calculation of diluted earnings per share in the three and six months ended January 31, 2023
and 2022.
Note
15—Accumulated Other Comprehensive Loss
The
accumulated balances for each classification of other comprehensive loss were as follows:
Schedule of Accumulated Balances for Each Classification of Other Comprehensive Loss
| |
Unrealized
Loss on Available-for-Sale Securities | | |
Foreign
Currency Translation | | |
Accumulated
Other Comprehensive Loss | |
| |
(in
thousands) | |
Balance,
July 31, 2022 | |
$ | (546 | ) | |
$ | (10,759 | ) | |
$ | (11,305 | ) |
Other
comprehensive loss attributable to IDT Corporation | |
| (34 | ) | |
| (2,372 | ) | |
| (2,406 | ) |
| |
| | | |
| | | |
| | |
Balance, January
31, 2023 | |
$ | (580 | ) | |
$ | (13,131 | ) | |
$ | (13,711 | ) |
Note
16—Commitments and Contingencies
Coronavirus
Disease (COVID-19)
The
Company continues to monitor and respond to the impacts of the COVID-19 pandemic on all aspects of its business, including its customers,
employees, suppliers, vendors, and business partners.
Operationally,
the Company’s employees transitioned to work-from-home during the third quarter of fiscal 2020. Beginning in the fourth quarter of fiscal 2021, certain of the Company’s employees returned to work in the Company’s
offices on a hybrid basis. The Company’s salespeople, customer service employees, technicians, and delivery employees continue
to serve its independent retailers, channel partners, and customers with minimal interruption.
COVID-19
had mixed financial impacts on the Company beginning in the third quarter of fiscal 2020 and continuing through the third quarter of
fiscal 2022.
Legal
Proceedings
On
April 24, 2018, Sprint Communications Company L.P. filed a patent infringement claim against the Company and certain of its affiliates
in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,298,064; 6,330,224; 6,343,084; 6,452,932;
6,463,052; 6,473,429; 6,563,918; 6,633,561; 6,697,340; 6,999,463; 7,286,561; 7,324,534; 7,327,728; 7,505,454; and 7,693,131. Plaintiff
was seeking damages and injunctive relief. On June 28, 2018, Sprint dismissed the complaint without prejudice. The Company is evaluating
the underlying claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend
any claim of infringement of the listed patents.
On
July 5, 2017, plaintiff JDS1, LLC, on behalf of itself and all other similarly situated stockholders of Straight Path, and
derivatively on behalf of Straight Path as nominal defendant, filed a putative class action and derivative complaint in the Court of
Chancery of the State of Delaware against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas that held record
and beneficial ownership of certain shares of Straight Path he formerly held), Howard S. Jonas, and each of Straight Path’s
directors. The complaint alleges that the Company aided and abetted Straight Path Chairman of the Board and Chief Executive Officer
Davidi Jonas, and Howard S. Jonas in his capacity as controlling stockholder of Straight Path, in breaching their fiduciary duties
to Straight Path in connection with the settlement of claims between Straight Path and the Company related to potential
indemnification claims concerning Straight Path’s obligations under the Consent Decree it entered into with the Federal
Communications Commission (“FCC”), as well as the sale of Straight Path’s subsidiary Straight Path IP Group, Inc.
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 received in the merger between Straight Path and Verizon Communications Inc. for their
shares of Straight Path’s Class B common stock; and (iv) ordering Howard S. Jonas, Davidi Jonas, and the Company to disgorge
any profits for the benefit of the class Plaintiffs. On August 28, 2017, the Plaintiffs filed an amended complaint. On September 24,
2017, the Company filed a motion to dismiss the amended complaint, which was ultimately denied, and which denial was affirmed by the
Delaware Supreme Court. On February 17, 2022, the court denied the Company’s motion for summary judgment. On March 10, 2022,
JDS1, LLC withdrew its application to serve as class representative and lead plaintiff. On May 16, 2022, the court denied The
Arbitrage Fund’s motion to serve as class representative and lead plaintiff, and approved intervenor Ardell Howard’s
motion to serve as class representative. The trial commenced on August 29, 2022 for a period of five days, followed by another
five-day period in December 2022. The parties are in the midst of post-trial briefing. Closing statements are scheduled to take
place in May 2023. The Company is vigorously defending this matter (see Note 10). At this stage, the Company is unable to estimate
its potential liability, if any.
In
addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and
have not been finally adjudicated. Although there can be no assurance in this regard, the Company believes that none of the other legal
proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows
or financial condition.
Sales
Tax Contingency
On
June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require
a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in
the state, overturning certain existing court precedent. It is possible that one or more jurisdictions may assert that the
Company has liability for periods for which it has not collected sales, use or other similar taxes, and if such an assertion or assertions
were successful it could materially and adversely affect the Company’s business, financial position, and operating results. One
or more jurisdictions may change their laws or policies to apply their sales, use or other similar taxes to the Company’s operations,
and if such changes were made it could materially and adversely affect the Company’s business, financial position, and operating
results.
Regulatory
Fees Audit
The
Company’s 2017 FCC Form 499-A, which reports its calendar year 2016 revenue, was audited by the Universal Service
Administrative Company (“USAC”). The Internal Audit Division of USAC issued preliminary audit findings and the Company,
in accordance with USAC’s audit procedures, appealed certain of the findings. USAC issued a final decision, and the final
decision overturned one of the initial findings but left the remaining initial findings in place. The reversal will result in the
elimination of a $1.8
million charge by the Universal Service Fund. The final decision upheld the imposition of a $2.9 million charge to the Federal
Telecommunications Fund. The Company intends to appeal the USAC’s final decision to the FCC, and does not intend to remit
payment for the Federal Telecommunications Fund fees unless and until a negative decision on its appeal has been issued. In response to the aforementioned
preliminary audit findings, the Company made certain changes to its filing policies and procedures for years that remain potentially
under audit. At January 31, 2023 and July 31, 2022, the Company’s accrued expenses included $31.4
million and $33.2
million, respectively, for FCC-related regulatory fees for the year covered by the audit, as well as prior and subsequent
years.
Purchase
Commitments
At
January 31, 2023, the Company had purchase commitments of $5.9 million primarily for equipment and services.
Performance
Bonds
The
Company has performance bonds issued through third parties for the benefit of various states in order to comply with the states’
financial requirements for money remittance licenses and telecommunications resellers. At January 31, 2023, the Company had aggregate
performance bonds of $24.2 million outstanding.
Note
17—Other Income (Expense), Net
Other
income (expense), net consists of the following:
Schedule
of Other (Expense) Income, Net
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three
Months Ended January
31, | | |
Six
Months Ended January
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(in
thousands) | |
Foreign
currency transaction gains | |
$ | 2,480 | | |
$ | 848 | | |
$ | 1,451 | | |
$ | 598 | |
Equity
in net loss of investee | |
| (723 | ) | |
| (820 | ) | |
| (1,375 | ) | |
| (1,443 | ) |
Losses
on investments, net | |
| (228 | ) | |
| (2,952 | ) | |
| (2,169 | ) | |
| (17,446 | ) |
Other | |
| 84 | | |
| (25 | ) | |
| (136 | ) | |
| (874 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total
other income (expense), net | |
$ | 1,613 | | |
$ | (2,949 | ) | |
$ | (2,229 | ) | |
$ | (19,165 | ) |
Note
18—Income Taxes
At
January 31, 2023, the Company’s best estimate of the effective tax rate expected to be applicable for fiscal 2023 was 27.7%
compared to 16.9%
at July 31, 2022. The changes in the estimated
effective tax rate were mainly due to stock-based compensation and
differences in the amount of taxable income earned in the various taxing jurisdictions.
Note
19—Recently Issued Accounting Standards Not Yet Adopted
In
June 2022, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No.
2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,
that clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of
the equity security and, therefore, is not considered in measuring fair value. The ASU also requires specific disclosures related to
equity securities that are subject to contractual sales restrictions. The Company will adopt the amendments in this ASU prospectively
on August 1, 2024. The Company is evaluating the impact that this ASU will have on its consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables,
loans and other instruments, entities will be required to use a new forward-looking current expected credit loss model that generally
will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities
will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions
in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances,
credit quality indicators, and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained
earnings. The Company will adopt the new standard on August 1, 2023. The Company does not expect the new standard to have a material
impact on its consolidated financial statements.