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 footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended January 31, 2017 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 31, 2017. The balance sheet at July 31, 2016 has been derived from
the Company’s audited financial statements at that date but does not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements
and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2016, as filed
with the U.S. Securities and Exchange Commission (“SEC”).
The
Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal
year ending in the calendar year indicated (e.g., fiscal 2017 refers to the fiscal year ending July 31, 2017).
Note
2—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, Inc. (“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.
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 to its stockholders, one of which was Zedge. The remaining components of the reorganization
are subject to change in response to changed circumstance or intervening events, as well as both internal and third party contingencies,
and must receive final approval from the Company’s Board of Directors. The Company continues to advance the effort on the
remainder of the reorganization.
Zedge’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:
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Income before income taxes
|
|
$
|
—
|
|
|
$
|
1,976
|
|
|
$
|
—
|
|
|
$
|
2,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes attributable to IDT Corporation
|
|
$
|
—
|
|
|
$
|
1,757
|
|
|
$
|
—
|
|
|
$
|
1,978
|
|
Note
3—Investment in Cornerstone Pharmaceuticals, Inc.
Cornerstone
Pharmaceuticals, Inc. (“Cornerstone”) is a clinical stage, oncology-focused pharmaceutical company committed to the
development and commercialization of therapies targeting cancer metabolism that exploit the metabolic differences between normal
cells and cancer cells. The Company’s initial $2 million investment in Cornerstone was funded as follows: $500,000 upon
signing the Subscription and Loan Agreement on January 21, 2016, $50,000 on March 23, 2016, and $1.45 million on April 14, 2016.
The initial $2 million investment was in exchange for Cornerstone’s 3.5% convertible promissory notes due 2018. The remaining
$8 million was funded in August and September 2016. In September 2016, Cornerstone 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 previous funding.
On
January 4, 2017, the Compensation Committee of the Company’s Board of Directors approved an arrangement with Howard S. Jonas,
the Company’s Chairman of the Board, and Chairman of the Board of Cornerstone, pursuant to which, on March 2, 2017, the
Company sold 10% of the Company’s direct and indirect interest and rights in Cornerstone to Mr. Jonas for a purchase price
of $1 million. Howard Jonas and Deborah Jonas jointly own $525,000 of Series C Convertible Notes of Cornerstone, and The Howard
S. and Deborah Jonas Foundation owns an additional $525,000 of Series C Notes of Cornerstone.
The
Cornerstone 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 Cornerstone’s Series D Preferred Stock.
The Series D Note also includes a mandatory conversion into Cornerstone 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 Cornerstone representing in the aggregate up to 56% of the then issued and outstanding capital stock of Cornerstone,
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
and the remainder is owned by the Company. 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 Cornerstone, or such lesser amount as
represents 5% of the outstanding capital stock of Cornerstone, 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.
Cornerstone
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 Cornerstone that most significantly impact Cornerstone’s economic performance.
At January 31, 2017 and July 31, 2016, the Company’s investment in Cornerstone was $10.0 million and $2.0 million, respectively,
which was included in “Investments” in the accompanying consolidated balance sheets. At January 31, 2017, the Company’s
maximum exposure to loss as a result of its involvement with Cornerstone was its $10.0 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 January 31, 2017 and July 31, 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. 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 Cornerstone.
Note
4—Marketable Securities
The
following is a summary of marketable securities:
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit*
|
|
$
|
19,335
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
19,336
|
|
Federal Government Sponsored Enterprise notes
|
|
|
6,331
|
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
6,308
|
|
International agency notes
|
|
|
653
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
643
|
|
Mutual funds
|
|
|
5,223
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
|
5,237
|
|
Corporate bonds
|
|
|
3,290
|
|
|
|
6
|
|
|
|
(13
|
)
|
|
|
3,283
|
|
Equity
|
|
|
379
|
|
|
|
42
|
|
|
|
—
|
|
|
|
421
|
|
U.S. Treasury notes
|
|
|
5,035
|
|
|
|
2
|
|
|
|
(68
|
)
|
|
|
4,969
|
|
Municipal bonds
|
|
|
13,082
|
|
|
|
3
|
|
|
|
(9
|
)
|
|
|
13,076
|
|
Total
|
|
$
|
53,328
|
|
|
$
|
70
|
|
|
$
|
(125
|
)
|
|
$
|
53,273
|
|
July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 January 31, 2017, the Zedge shares owned by the Company
had a fair value of $77,000.
Proceeds
from maturities and sales of available-for-sale securities were $10.8 million and $9.9 million in the three months ended January
31, 2017 and 2016, respectively, and $16.8 million and $18.7 million in the six months ended January 31, 2017 and 2016, respectively.
In the three and six months ended January 31, 2017, gross realized gains included in earnings as a result of sales were $0.3 million.
In the six months ended January 31, 2016, gross realized gains included in earnings as a result of sales were $0.5 million. There
were no gross realized gains (losses) included in earnings as a result of sales in the three months ended January 31, 2016. The
Company uses the specific identification method in computing the gross realized gains and gross realized losses on the sales of
marketable securities.
The
contractual maturities of the Company’s available-for-sale debt securities at January 31, 2017 were as follows:
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Within one year
|
|
$
|
26,264
|
|
After one year through five years
|
|
|
18,266
|
|
After five years through ten years
|
|
|
2,369
|
|
After ten years
|
|
|
716
|
|
Total
|
|
$
|
47,615
|
|
The
following available-for-sale securities were in an unrealized loss position for which other-than-temporary impairments have not
been recognized:
|
|
Unrealized Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
January 31, 2017:
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
1
|
|
|
$
|
3,164
|
|
Federal Government Sponsored Enterprise notes
|
|
|
23
|
|
|
|
6,265
|
|
International agency notes
|
|
|
10
|
|
|
|
643
|
|
Mutual funds
|
|
|
1
|
|
|
|
2,600
|
|
Corporate bonds
|
|
|
13
|
|
|
|
2,239
|
|
U.S. Treasury notes
|
|
|
68
|
|
|
|
4,408
|
|
Municipal bonds
|
|
|
9
|
|
|
|
9,878
|
|
Total
|
|
$
|
125
|
|
|
$
|
29,197
|
|
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
January 31, 2017 and July 31, 2016, there were no securities in a continuous unrealized loss position for 12 months or longer.
Note
5—Fair Value Measurements
The
following tables present the balance of assets and liabilities measured at fair value on a recurring basis:
|
|
Level 1 (1)
|
|
|
Level 2 (2)
|
|
|
Level 3 (3)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
January 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
10,627
|
|
|
$
|
42,646
|
|
|
$
|
—
|
|
|
$
|
53,273
|
|
July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
12,445
|
|
|
$
|
40,504
|
|
|
$
|
—
|
|
|
$
|
52,949
|
|
(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, 2017 and July 31, 2016, the Company had $8.4 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 January 31, 2017 and July 31, 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 January 31, 2017 and July 31, 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 January 31, 2017 and July 31, 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 $15.4 million and $7.0 million at January 31, 2017
and July 31, 2016, respectively, which the Company believes was not impaired.
Note
6—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 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
|
|
Derivatives not designated or not qualifying as
|
|
Location of Gain (Loss)
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
hedging instruments
|
|
Recognized on Derivatives
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
Foreign exchange forwards
|
|
Other (expense) income, net
|
|
$
|
—
|
|
|
$
|
(123
|
)
|
|
$
|
—
|
|
|
$
|
(225
|
)
|
Note
7—Equity
Changes
in the components of equity were as follows:
|
|
Six Months Ended January 31,
2017
|
|
|
|
Attributable to IDT Corporation
|
|
|
Noncontrolling Interests
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance, July 31, 2016
|
|
$
|
123,797
|
|
|
$
|
406
|
|
|
$
|
124,203
|
|
Dividends declared ($0.38 per share)
|
|
|
(8,765
|
)
|
|
|
—
|
|
|
|
(8,765
|
)
|
Restricted Class B common stock purchased from employees
|
|
|
(1,838
|
)
|
|
|
—
|
|
|
|
(1,838
|
)
|
Exercise of stock options
|
|
|
835
|
|
|
|
—
|
|
|
|
835
|
|
Issuance of member interests in CS Pharma Holdings, LLC (see Note 3)
|
|
|
1,850
|
|
|
|
8,150
|
|
|
|
10,000
|
|
Distributions to noncontrolling interests
|
|
|
—
|
|
|
|
(817
|
)
|
|
|
(817
|
)
|
Stock-based compensation
|
|
|
2,128
|
|
|
|
—
|
|
|
|
2,128
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
22,794
|
|
|
|
758
|
|
|
|
23,552
|
|
Other comprehensive loss
|
|
|
(2,466
|
)
|
|
|
—
|
|
|
|
(2,466
|
)
|
Comprehensive income
|
|
|
20,328
|
|
|
|
758
|
|
|
|
21,086
|
|
Balance, January 31, 2017
|
|
$
|
138,335
|
|
|
$
|
8,497
|
|
|
$
|
146,832
|
|
Dividend
Payments
In
the six months ended January 31, 2017, the Company paid cash dividends of $0.38 per share on its Class A common stock and Class
B common stock, or $8.8 million in total. In the six months ended January 31, 2016, the Company paid cash dividends of $0.37 per
share on its Class A common stock and Class B common stock, or $8.6 million in total.
In
March 2017, the Company’s Board of Directors declared a dividend of $0.19 per share for the second 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 March 24,
2017 to stockholders of record as of the close of business on March 17, 2017.
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 the six months ended January 31, 2017. In the six months ended
January 31, 2016, the Company repurchased 398,376 shares of Class B common stock for an aggregate purchase price of $4.6 million.
At January 31, 2017, 8.0 million shares remained available for repurchase under the stock repurchase program.
In
the six months ended January 31, 2017 and 2016, the Company paid $1.8 million and $0.1 million, respectively, to repurchase 94,338
shares and 11,250 shares of Class B common stock, respectively, that were tendered by employees of the Company to satisfy the
employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such
shares were repurchased by the Company based on their fair market value on the trading day immediately prior to the vesting date.
2015
Stock Option and Incentive Plan
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.
The
Company received proceeds from the exercise of its stock options of $0.8 million in the six months ended January 31, 2017. There
were no stock option exercises in the six months ended January 31, 2016. In the six months ended January 31, 2017, the Company
issued 73,471 shares of its Class B common stock for the stock option exercises.
Note
8—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:
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Basic weighted-average number of shares
|
|
|
22,768
|
|
|
|
22,799
|
|
|
|
22,740
|
|
|
|
22,867
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
77
|
|
|
|
—
|
|
|
|
58
|
|
|
|
—
|
|
Non-vested restricted Class B common stock
|
|
|
118
|
|
|
|
—
|
|
|
|
133
|
|
|
|
17
|
|
Diluted weighted-average number of shares
|
|
|
22,963
|
|
|
|
22,799
|
|
|
|
22,931
|
|
|
|
22,884
|
|
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:
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
3
|
|
|
|
265
|
|
|
|
18
|
|
|
|
266
|
|
Note
9—Revolving Credit Loan Payable
The
Company’s subsidiary, IDT Telecom, Inc., entered into a credit agreement, dated July 12, 2012, with TD Bank, N.A. for a
line of credit facility for up to a maximum principal amount of $25.0 million. 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 January 31, 2018. At January 31, 2017 and July 31, 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 January 31, 2017 and July 31, 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 $105.0 million and $91.1 million, respectively.
Note
10—Accrued Severance Expense
In
July 2016, the Company completed a reduction of its workforce and incurred severance expense of $6.3 million in fiscal 2016. At
January 31, 2017 and July 31, 2016, there was accrued severance of $2.3 million and $5.7 million, respectively, included in “Accrued
expenses” in the accompanying consolidated balance sheets for the July 2016 workforce reduction.
Note
11—Accumulated Other Comprehensive Loss
The
accumulated balances for each classification of other comprehensive loss were as follows:
|
|
Unrealized Gain (Loss) on Available-for-Sale Securities
|
|
|
Foreign Currency Translation
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
Location of (Gain) Loss Recognized
|
|
|
(in thousands)
|
Balance, July 31, 2016
|
|
$
|
8
|
|
|
$
|
(3,752
|
)
|
|
$
|
(3,744
|
)
|
|
|
Other comprehensive income (loss) attributable to IDT Corporation before reclassifications
|
|
|
242
|
|
|
|
(2,403
|
)
|
|
|
(2,161
|
)
|
|
|
Less: reclassification for gain included in net income
|
|
|
(305
|
)
|
|
|
—
|
|
|
|
(305
|
)
|
|
Other (expense)
income, net
|
Net other comprehensive loss attributable to IDT Corporation
|
|
|
(63
|
)
|
|
|
(2,403
|
)
|
|
|
(2,466
|
)
|
|
|
Balance, January 31, 2017
|
|
$
|
(55
|
)
|
|
$
|
(6,155
|
)
|
|
$
|
(6,210
|
)
|
|
|
Note
12—Business Segment Information
The
Company has three reportable business segments, Telecom Platform Services, Unified Communications as a Service (“UCaaS”)
and Consumer Phone Services. 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 until July 31, 2016. Comparative results have been reclassified and restated as if
UCaaS was a separate segment in all periods presented.
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. 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. 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 are as follows:
(in thousands)
|
|
Telecom
Platform
Services
|
|
|
UCaaS
|
|
|
Consumer
Phone
Services
|
|
|
All Other
|
|
|
Corporate
|
|
|
Total
|
|
Three Months Ended January 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
358,528
|
|
|
$
|
7,142
|
|
|
$
|
1,396
|
|
|
$
|
490
|
|
|
$
|
—
|
|
|
$
|
367,556
|
|
Income (loss) from operations
|
|
|
6,948
|
|
|
|
(464
|
)
|
|
|
239
|
|
|
|
82
|
|
|
|
(3,677
|
)
|
|
|
3,128
|
|
Other operating expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(889
|
)
|
|
|
(889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
370,575
|
|
|
$
|
6,117
|
|
|
$
|
1,766
|
|
|
$
|
3,996
|
|
|
$
|
—
|
|
|
$
|
382,454
|
|
Income (loss) from operations
|
|
|
6,878
|
|
|
|
(576
|
)
|
|
|
289
|
|
|
|
1,845
|
|
|
|
(2,059
|
)
|
|
|
6,377
|
|
Other operating expense
|
|
|
(326
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended January 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
718,550
|
|
|
$
|
14,278
|
|
|
$
|
2,885
|
|
|
$
|
994
|
|
|
$
|
—
|
|
|
$
|
736,707
|
|
Income (loss) from operations
|
|
|
13,192
|
|
|
|
(639
|
)
|
|
|
540
|
|
|
|
172
|
|
|
|
(4,951
|
)
|
|
|
8,314
|
|
Other operating expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,088
|
)
|
|
|
(1,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended January 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
749,217
|
|
|
$
|
13,163
|
|
|
$
|
3,595
|
|
|
$
|
7,057
|
|
|
$
|
—
|
|
|
$
|
773,032
|
|
Income (loss) from operations
|
|
|
16,905
|
|
|
|
(878
|
)
|
|
|
629
|
|
|
|
2,275
|
|
|
|
(4,628
|
)
|
|
|
14,303
|
|
Other operating expense
|
|
|
(326
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(326
|
)
|
Note
13—Commitments and Contingencies
Legal
Proceedings
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. On November 17, 2016,
the Company filed a Notice of Appeal.
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.
Purchase
Commitments
The
Company had purchase commitments of $1.7 million at January 31, 2017.
Letters
of Credit
At
January 31, 2017, the Company had letters of credit outstanding totaling $0.1 million for IDT Telecom’s business. The letters
of credit outstanding at January 31, 2017 expire in the twelve-month period ending January 31, 2018.
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 January 31, 2017, the Company had aggregate performance bonds of $13.8 million outstanding.
Customer
Deposits
At
January 31, 2017 and July 31, 2016, “Customer deposits” in the Company’s consolidated balance sheets included
refundable customer deposits of $87.5 million and $95.8 million, respectively, related to IDT Financial Services Ltd., the Company’s
Gibraltar-based bank.
Substantially
Restricted Cash and Cash Equivalents
The
Company treats unrestricted cash and cash equivalents held by IDT Payment Services and IDT Financial Services Ltd. as substantially
restricted and unavailable for other purposes. At January 31, 2017 and July 31, 2016, “Cash and cash equivalents”
in the Company’s consolidated balance sheets included an aggregate of $10.7 million and $16.0 million, respectively, held
by IDT Payment Services and IDT Financial Services Ltd. that was unavailable for other purposes.
Restricted
Cash and Cash Equivalents
Restricted
cash and cash equivalents consist of the following:
|
|
January 31,
2017
|
|
|
July 31,
2016
|
|
|
|
(in thousands)
|
|
IDT Financial Services customer deposits
|
|
$
|
89,134
|
|
|
$
|
98,500
|
|
Related to letters of credit
|
|
|
97
|
|
|
|
122
|
|
Other
|
|
|
189
|
|
|
|
200
|
|
Total restricted cash and cash equivalents
|
|
$
|
89,420
|
|
|
$
|
98,822
|
|
Other
Contingencies
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. 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 been cooperating with the FCC in this matter and has responded to the letter of inquiry. In the three and six months ended
January 31, 2017, the Company incurred legal fees of $0.9 million and $1.1 million, respectively, related to this inquiry, which
is included in “Other operating expense” in the accompanying consolidated statements of income. As disclosed in Straight
Path’s filings with the SEC, Straight Path has entered into a consent decree with the FCC that terminates the FCC’s
related investigation against Straight Path.
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. Further, the Company could be the subject of a claim from Straight Path for indemnification
related to its liability related to the consent decree. The Company would vigorously defend against any such claims or actions.
Note
14—Other (Expense) Income, Net
Other
(expense) income, net consists of the following:
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Foreign currency transaction (losses) gains
|
|
$
|
(729
|
)
|
|
$
|
(1,096
|
)
|
|
$
|
1,330
|
|
|
$
|
(2,258
|
)
|
Gain on sale of marketable securities
|
|
|
305
|
|
|
|
—
|
|
|
|
305
|
|
|
|
543
|
|
Gain on investments
|
|
|
32
|
|
|
|
236
|
|
|
|
295
|
|
|
|
80
|
|
Other
|
|
|
(27
|
)
|
|
|
626
|
|
|
|
44
|
|
|
|
791
|
|
Total other (expense) income, net
|
|
$
|
(419
|
)
|
|
$
|
(234
|
)
|
|
$
|
1,974
|
|
|
$
|
(844
|
)
|
Note
15—Income Taxes
In
the six months ended January 31, 2017, the Company determined that its valuation allowance on the losses of Elmion Netherlands
B.V., a Netherlands subsidiary, was no longer required due to an internal reorganization that generated income and a projection
of net income in future periods. The Company recorded a benefit from income taxes of $16.6 million in the six months ended January
31, 2017 from the full recognition of the Elmion Netherlands B.V. deferred tax assets.
Note
16—Recently Issued Accounting Standard 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. The Company will adopt this standard on August 1, 2018. Entities have the option
of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company is evaluating
the impact that the standard will have on its consolidated financial statements.
In
January 2016, the FASB issued an Accounting Standards Update (“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
March 2016, the FASB issued an ASU to improve the accounting for employee share-based payments. The new standard 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 Company will adopt the new standard on August 1, 2017. 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.
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.