☒ Annual report pursuant to section
13 or 15(d) of the securities exchange act of 1934
☐ Transition report pursuant
to section 13 or 15(d) of the securities exchange act of 1934.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the voting and non-voting stock
held by non-affiliates of the registrant, based on the adjusted closing price on January 31, 2019 (the last business day of the
registrant’s most recently completed second fiscal quarter) of the Class B common stock of $7.18 per share, as reported on
the New York Stock Exchange, was approximately $148.2 million.
As of October 6, 2019, the registrant had outstanding 24,927,890
shares of Class B common stock and 1,574,326 shares of Class A common stock. Excluded from these numbers are 907,659 shares of
Class B common stock and 1,698,000 shares of Class A common stock held in treasury by IDT Corporation.
The definitive proxy statement relating to the registrant’s
Annual Meeting of Stockholders, to be held December 12, 2019, is incorporated by reference into Part III of this Form 10-K to the
extent described therein.
Part I
As used in this Annual Report, unless the context otherwise
requires, the terms the “Company,” “IDT,” “we,” “us,” and “our” refer
to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation,
and its subsidiaries, collectively. Each reference to a fiscal year in this Annual Report refers to the fiscal year ending in the
calendar year indicated (for example, fiscal 2019 refers to the fiscal year ended July 31, 2019).
Item 1. Business.
OVERVIEW
We are a multinational company with operations primarily in
the telecommunications and payment industries. We have two reportable business segments, Telecom & Payment Services and net2phone
(formerly net2phone-Unified Communications as a Service, or UCaaS). Our Telecom & Payment Services segment provides retail
telecommunications and payment offerings as well as wholesale international long-distance traffic termination. Our net2phone segment
provides unified cloud communications and telephony services to business customers. Operating segments not reportable individually
are included in All Other.
For fiscal 2019, we modified the business verticals within our
Telecom & Payment Services and net2phone segments to align more closely with our business strategy and operational structure.
The modification to the business verticals did not change the reportable business segments.
Our Telecom & Payment Services segment comprises Core and
Growth verticals:
|
●
|
Core includes our three largest communications
and payments offerings by revenue:
|
|
●
|
BOSS Revolution Calling, an international long-distance
calling service marketed primarily to immigrant communities in the United States;
|
|
●
|
Carrier Services, which provides international
long-distance termination and outsourced traffic management solutions to telecoms worldwide; and
|
|
●
|
Mobile Top-Up, which enables customers to transfer
airtime and bundles of airtime, messaging and data credits to mobile accounts internationally and domestically.
|
Core
also includes smaller communications and payments offerings - many in harvest mode.
|
●
|
Growth is comprised of:
|
|
●
|
National Retail Solutions, or NRS, which operates
a point-of-sale, or POS, terminal-based network for independent retailers;
|
|
●
|
BOSS Revolution Money Transfer, which provides
an international money remittance service for customers in the United States; and
|
|
●
|
BOSS Revolution Mobile, a mobile virtual network
operator which provides mobile phone service over a third-party network for customers in the United States.
|
Our
net2phone segment is comprised of two verticals:
|
●
|
net2phone-UCaaS, a unified cloud communications
service for businesses offered globally; and
|
|
●
|
net2phone-Platform Services, which leverages
a common technology platform to provide telephony services to cable operators and other businesses.
|
Financial information by segment is presented in Note 24 to
our Consolidated Financial Statements in Item 8 of this Annual Report.
Our headquarters are located at 520 Broad Street, Newark, New
Jersey 07102. The main telephone number at our headquarters is (973) 438-1000 and our corporate web site’s home page is www.idt.net.
We make available free of charge our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, and all beneficial ownership
reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity through the investor
relations page of our web site (http://ir.idt.net/) as soon as reasonably practicable after such material is electronically filed
with the Securities and Exchange Commission. Our web site also contains information not incorporated into this Annual Report on
Form 10-K or our other filings with the Securities and Exchange Commission.
KEY EVENTS IN OUR HISTORY
1990 – Howard S. Jonas, our founder, launched International
Discount Telephone to provide international call re-origination services.
1995 – We began selling wholesale carrier services to
other long-distance carriers by leveraging our access to favorable international telephone rates generated by our retail calling
traffic.
1996 – We successfully complete an initial public offering
of our common stock.
1997 – We began marketing prepaid calling cards to provide
convenient and affordable international long-distance calls.
2000 – We complete the sale of a stake in our net2phone
subsidiary, a pioneer in the development and commercialization of VoIP technologies and services, to AT&T for approximately
$1.1 billion in cash. We subsequently repurchased net2phone from AT&T.
2001 – Our common stock is listed on the New York Stock
Exchange, or NYSE.
2004 – We launch a retail energy business to provide electricity
and natural gas to residential and small business customers in New York.
2006 – We sell our Russian telecom business, Corbina,
for $129.9 million in cash.
2007 – We complete the sale of IDT Entertainment to Liberty
Media for $220 million in cash, stock and other considerations.
2008 –We launch BOSS Revolution PIN-less, a pay-as-you-go
international calling service. BOSS Revolution has since become our flagship brand, and the BOSS Revolution platform has been expanded
to include payment offerings.
2009 – We spin-off our CTM Media Holdings subsidiary to
our stockholders. CTM Media Holdings has been renamed IDW Media Holdings, and its stock is traded on the over-the-counter market
with the ticker symbol “IDWM”.
2011 – We spin-off our Genie Energy Ltd. subsidiary, which
provides electricity and natural gas and related services to residential and business customers in the US and overseas. Genie Energy’s
common stock is listed on the NYSE with the ticker symbol “GNE”.
2013 – We spin-off our Straight Path Communications, Inc.
subsidiary, including its wireless spectrum holdings, to our stockholders. Straight Path Communications was purchased in February
2018 by Verizon Communications Inc. for $3.1 billion in an all-stock transaction.
– We introduce the BOSS Revolution
Calling app for Android and iOS.
– We launch an international money
transfer service on the BOSS Revolution platform.
2014 – We sell our stake in Fabrix, a pioneer in cloud
storage and network delivery technologies, to Ericsson for $69 million.
2015 – net2phone launches its Unified Communications as
a Service, or UCaaS, offering in the United States
2016 – We spin-off our Zedge subsidiary to our stockholders.
Zedge provides one of the most popular content platforms for mobile device personalization including ringtones, wallpapers, home
screen icons and notification sounds. Zedge’s stock is listed on the NYSE American with the ticker symbol “ZDGE”.
– We launch NRS to provide POS-based
services to independent retailers in the United States.
– net2phone initiates global expansion
of its UCaaS offering with a launch in Brazil.
2017
– We introduce the BOSS Revolution Money app for Android and iOS.
– net2phone expands its cloud communications
service to Argentina.
2018 – We spin-off our Rafael Holdings, Inc. subsidiary
to our stockholders. Rafael Holdings holds real estate assets and stakes in early stage pharmaceuticals companies, including Rafael
Pharma, a privately held, clinical-stage, metabolic oncology therapeutics company. Rafael Holdings’ stock is listed on the
NYSE American with the ticker symbol “RFL”.
– net2phone expands its cloud communications
service to Mexico, Colombia and Hong Kong, and, through its acquisition of Versature Corp., enters the Canadian market.
2019 – net2phone’s cloud communications service
surpasses 100,000 service seats milestone.
– NRS adds its 10,000th
POS terminal to its retail network
OUR STRATEGY
Since our founding, we have focused on value creation by leveraging
potentially disruptive telecommunications, payment and other technologies to challenge entrenched business models. Outside of our
core businesses, we seek to select and incubate promising early stage businesses.
Since 2008, five non-core businesses have spun-off to our stockholders:
CTM Media (now IDW Media Holdings) (2009), Genie Energy (2011), Straight Path Communications (2013), Zedge (2016) and Rafael Holdings
(2018). Additionally, we have sold other assets to realize value for our shareholders including net2phone (subsequently repurchased),
IDT Entertainment, Corbina and Fabrix.
Our current revenue and income from operations are generated
predominantly by our three core offerings:
|
●
|
BOSS Revolution Calling;
|
We
believe that these businesses are synergistic and jointly leverage certain of our strategic assets including:
|
●
|
The BOSS Revolution and IDT brands;
|
|
●
|
A nationwide network of more than 42,000 BOSS
Revolution retailers;
|
|
●
|
Our retail customer base of more than eight
million, primarily in immigrant communities within the United States;
|
|
●
|
Our technology, global infrastructure and transaction
platforms;
|
|
●
|
Extensive VoIP and cloud services expertise;
and
|
|
●
|
Our staff of more than 1,200 working in over
20 offices on five continents.
|
Our
core services compete primarily in the mature pay-per-minute international voice communications market. Several long-term, industry-wide
trends have, for several years, been gradually reducing the size of the global market for these services including the growing
popularity of low-cost or free messaging services and other non-voice communications technologies, free peer-to-peer voice calls
available when both parties utilize broadband connections, and the prevalence of flat-rate international long distance plans offered
both by the largest mobile network operators and niche mobile virtual network operators. We believe that these trends have pressured
revenue and margin generated by our core offerings.
To
counter the sectoral challenges in the pay-per-minute market, we are pursuing a multi-pronged strategy:
|
●
|
Investing to scale a portfolio of what we believe
to be high-margin, rapidly growing businesses that leverage our core strategic assets to provide synergistic communications
and payments services, including:
|
|
●
|
net2phone, a provider of cloud communication
services for businesses globally;
|
|
●
|
National Retail Solutions, or NRS, an operator
of a POS platform serving independent retailers; and
|
|
●
|
BOSS Revolution Money Transfer, a provider of
international remittances through both retail and direct-to-consumer channels.
|
|
●
|
Diversification and enhancement of offerings
in our core market including:
|
|
●
|
BOSS Revolution Calling: Launching new and competitive
offerings such as unlimited, flat-rate calling plans;
|
|
●
|
BOSS Revolution Mobile, a mobile virtual network
operator, or MVNO, providing wireless communication services;
|
|
●
|
Mobile Top-Up: Developing bundles of voice,
data and messaging for recharging accounts internationally in addition to voice-only air-time top-up;
|
|
●
|
Carrier Services: Offering incumbent national
telecoms value-added services including outsourced management of international long-distance traffic and launch of a self-service
platform, IDT Express, for wholesale termination of international long-distance calls and purchase of direct inward dialing
numbers, or DIDs; and
|
|
●
|
BOSS Revolution Calling and BOSS Revolution
Money apps: both of which have strengthened our relationships with our retail customers, improved the economics of our offerings,
and increased opportunities to cross-market our services.
|
|
●
|
Reducing the underlying cost of providing our
services by:
|
|
●
|
Utilizing new technologies;
and
|
|
●
|
Reducing our selling,
general and administrative costs.
|
We
believe that this strategy has begun to offset the impact of the secular trends in the pay-per-minute market and to stabilize
our gross profit despite continued declines in our core revenue.
BUSINESS
DESCRIPTION
Telecom
& Payment Services
Our
Telecom & Payment Services, or TPS, segment, represented 96.6% and 97.7% of our total revenues in fiscal 2019 and fiscal 2018,
respectively. TPS offerings are classified in two verticals, Core and Growth, as follows:
|
●
|
Core includes our three
largest communications and payments offerings by revenue:
|
|
●
|
BOSS Revolution Calling
|
Core
also includes smaller communications and payments offerings.
|
●
|
Growth includes high-margin,
rapidly growing businesses that leverage our core strategic assets to provide synergistic communications and payments services,
including:
|
|
●
|
BOSS Revolution Money
Transfer; and
|
|
●
|
BOSS Revolution Mobile.
|
During fiscal 2019, our TPS segment generated $1,361.9 million
in revenues and income from operations of $14.3 million, as compared with revenues of $1,511.5 million in revenues and income from
operations of $25.8 million in fiscal 2018.
Telecom & Payment Services – Core
BOSS Revolution Calling
BOSS Revolution Calling’s revenue was $490.7 million in
fiscal 2019 compared to $529.7 million in fiscal 2018 (36.0% and 35.0% of TPS’ revenue in fiscal 2019 and fiscal 2018, respectively).
Our BOSS Revolution Calling business is a prepaid
international long-distance calling service marketed primarily to foreign-born and underbanked consumers in the United
States, with smaller retail operations serving customers in Europe, Asia, South America and Canada.
BOSS Revolution Calling offerings include our flagship ‘BOSS
Revolution’ branded international long-distance prepaid calling service as well as disposable hard cards sold under a variety
of brands. In the United States, BOSS Revolution Calling serves, as of July 31, 2019, approximately 3.7 million customers per month,
of which approximately 1.3 million use the BOSS Revolution Calling app (for iOS and Android).
Usage of our BOSS Revolution Calling App has been growing rapidly.
Nevertheless, the majority of our customers purchase BOSS Revolution Calling offerings through our nationwide network of approximately
42,000 BOSS Revolution resellers. These resellers are typically independent retailers serving foreign-born communities including
significant unbanked or under-banked populations. BOSS Revolution Calling allows users to place international long-distance calls
at affordable rates from the BOSS Revolution Calling app or by calling an access number. Regardless of how the call originates,
our customers must first establish and top-up a prepaid BOSS Revolution account that is linked to their phone. Once the account
is established and a call is placed, our platform recognizes the customer’s phone through its network-provided automatic
number identification and seamlessly links each call to the corresponding BOSS Revolution account. Callers then enter their destination
phone numbers. BOSS Revolution Calling customers’ account balances are debited at a fixed rate per minute or at a fixed
amount for unlimited calling to a specific country over a specified time period, typically one month. In contrast to many competitors,
BOSS Revolution Calling does not charge connection, usage or breakage fees. BOSS Revolution Calling’s per minute rates can
vary by the destination country, city, and whether the call is placed to a landline or mobile phone. Rates are published on the
BOSS Revolution consumer website and within the BOSS Revolution Calling app.
Customers with a credit card, debit card or store-bought top-up
voucher can open and add to their account balance directly through the BOSS Revolution Calling or BOSS Revolution Money apps, by
phone, or through the BOSS Revolution consumer website (www.bossrevolution.com).
Alternatively, customers can also open and top-up their account
balance at any BOSS Revolution retailer using cash, a debit card or a credit card. Our nationwide reseller network enables our
customers, many of whom we believe are unbanked, to purchase our offerings with cash.
In the United States, we distribute our retail products primarily
through our network of distributors that, either directly or through sub-distributors, sell to retail locations. In addition, our
internal sales force sells BOSS Revolution Calling and other platform products directly to retailers. Distributors, our internal
salespeople and retailers receive commissions based on the revenue generated by each transaction or fee per transaction, depending
on the product.
The BOSS Revolution retailer portal can be accessed on the world
wide web via a networked computer or by Android and iOS smartphones. The BOSS Revolution retailer portal enables retailers to create
accounts for new customers, add funds to existing customer balances and execute sales transactions. It provides a direct, real-time
interface with our retailers, resulting in a cost-effective and adaptable distribution model that allows us to target and promote
services directly to distributors and retailers, to introduce and cross-sell new offerings, and to rapidly respond to changes in
the business environment.
In the United States, the BOSS Revolution brand is supported
by national, regional and local marketing programs that include television and radio advertising, online advertising, print media,
and grass roots marketing at community and sporting events. In addition, we work closely with distributors and retailers on in-store
promotional programs and events.
BOSS Revolution Calling’s sales have traditionally been
strongest in the Northeastern United States and in Florida because of our extensive local distribution network and their large
foreign-born populations. We continue to grow distributor relationships and expand our retail network in other areas of the United
States, including the Southwest and West Coast, where we historically have not had as strong of a market presence.
Carrier Services
Carrier Services’ revenue was $514.2 million in fiscal
2019 compared to $639.0 million in fiscal 2018, contributing 37.8% and 42.3% of TPS’ revenue in fiscal 2019 and fiscal 2018,
respectively.
Our Carrier Services business is one of the largest wholesale
carriers of international long-distance minutes in the world.
Carrier Services’ telecommunications network is comprised
of interconnections and commercial relationships that reach virtually every significant carrier globally. These relationships enable
us to carry international telecommunications traffic to more than 190 countries around the world. The division’s customers
include our BOSS Revolution Calling business, net2phone, major and niche carriers around the globe, mobile network operators, and
other service providers such as call aggregators. For many of these customers, particularly the major carriers, we engage in buy-sell
relationships, terminating their customers’ traffic in exchange for terminating our wholesale and retail traffic with them.
We offer competitively priced international termination rates
at several quality levels. We can offer competitively priced termination services in part because of the large volumes of originating
minutes generated by our BOSS Revolution Calling business, our global platform powered by proprietary software, our team of professional
and experienced account managers and market makers, and the global network of interconnects and relationships with other telecom
system operators around the globe.
TPS terminated 22.4 billion minutes in fiscal 2019, as compared
to 25.5 billion minutes in fiscal 2018. Carrier Services accounted for 17.5 billion minutes and 19.7 billion minutes of the total
TPS’ minutes in fiscal 2019 and fiscal 2018, respectively.
Carrier Services has a significant number of direct connections
to Tier 1 providers in North America, Latin America, Asia, Africa, Europe and the Middle East. Tier 1 providers are the largest
recognized licensed carriers in a country. Direct connections improve the quality of the telephone calls and reduce the cost, thereby
enabling us to generate more traffic with higher margins to the associated foreign locales. We also have direct relationships with
mobile network operators, reflecting their growing share of the voice traffic market.
Termination rates charged by Tier 1 and other providers of international
long-distance traffic have been declining for many years. Nevertheless, termination rates charged to us by individual Tier 1 carriers
and mobile operators can be volatile. Termination price volatility on heavily trafficked routes can significantly impact our minutes
of use and wholesale revenues.
In addition to offering competitive rates to our carrier customers,
we emphasize our ability to offer the high-quality connections that these providers often require. To that end, we offer higher-priced
services in which we provide higher-quality connections, based upon a set of predetermined quality of service criteria. These services
meet a growing need for higher-quality connections for some of our customers who provide services to high-value, quality-conscious
retail customers. As of July 31, 2019, Carrier Services had more than 2,000 customers and has more than 340 carrier relationships
globally.
Carrier Services’ revenue is generated by sales to both
postpaid and prepaid customers. Postpaid customers typically include Tier 1 carriers, mobile network operators and our most credit
worthy customers. Prepaid customers are typically smaller telecommunication companies as well as independent call aggregators.
Carrier Services also provide outsourcing services to help fixed
and mobile telephony operators enhance the profitability and value of their international voice operations. Carrier Services offers
these operators customized solutions including full outsourcing, handing all inbound and outbound calls with or without switch
management, and hybrid arrangements whereby the operator retains certain routes or customers directly. Pursuant to these deals,
Carrier Services collaborates with the companies to provide a full range of international long-distance services to their respective
customers in-country and overseas.
Mobile Top-Up
Mobile Top-Up’s revenue was $272.0 million in fiscal 2019
compared to $253.6 million in fiscal 2018 (20.0% and 16.8% of TPS’ revenue in fiscal 2019 and fiscal 2018, respectively).
Our Mobile Top-Up offerings enable customers to transfer airtime
and bundles of airtime, messaging and data to recharge or ‘top-up’ mobile phone accounts internationally (International
Mobile Top-Up, or IMTU) and domestically (Domestic Mobile Top-Up, or DMTU). Mobile Top-Up’s offerings leverage our platform
capabilities, our distribution reach into foreign-born communities and our relationships with mobile operators around the world.
IMTU and DMTU offerings are sold under the BOSS Revolution brand
through the BOSS Revolution digital platforms, including our BOSS Revolution Calling and BOSS Revolution Money apps, as well as
through mobile operator branded top-up cards sold by our retail network. We offer Mobile Top-Up service for approximately 150 different
carriers in 90 countries. Most Mobile Top-Up revenue is generated by the sale of IMTU offerings.
Telecom & Payment Services – Growth
National Retail Solutions (NRS)
Our NRS business operates a point-of-sale, or POS, network that processes sales and provides business
management tools and other services to independent retailers in the United States. We believe that these services help independent
retailers increase sales and operate more efficiently and profitably, equipping them to compete more effectively against large
retail chains.
The POS terminals integrate hardware – including cash
registers, barcode scanners, retailer and customer-facing hi-definition screens, receipt printers and credit card readers –
with NRS’ proprietary software that includes features such as inventory management, sales tracking, and price book management.
The primary market for NRS POS terminals is the more than 200,000
independently owned convenience, liquor, grocery and tobacco stores in the United States.
At September 30, 2019, NRS had deployed more than 10,000 POS
terminals with bodegas and other retailers nationwide of which approximately 8,000 actively processed transactions during the month.
NRS is currently selling an additional 900 to 1,000 new terminals to its network per quarter. NRS sales and marketing is targeted,
in part, to our nationwide network of BOSS Revolution retailers. It has also secured partnerships with more than 100 wholesale
distributors including some of the largest cash-and-carry wholesalers in the United States.
NRS currently generates the majority of its revenue from retailers
through the sale of POS terminals and a monthly recurring fee for use of the POS software and customer support. In addition, NRS
charges retailers for certain premium POS services including payment processing services and monthly subscriptions for premium
POS features.
In addition, NRS leverages the nationwide scale of its POS network
to generate revenues from (1) the sale of data analytics and (2) out-of-home display advertising delivered through the terminals’
consumer-facing screens.
Data Analytics: NRS captures targeted, daily
POS data from independent retailers at scale. These retailers are concentrated in urban communities with significant immigrant
populations and, in the aggregate, constitute a significant but largely opaque market. NRS’ network tracks more than 35 million
monthly transactions in this sector that otherwise would be unavailable for analysis. NRS has built a data platform that allows
third parties to analyze trends at independent retailers and gain insights into this segment of the retail economy.
Display Advertising: The 15” high-definition
customer-facing screens on the NRS terminals are designed to engage customers during check-out. The screen enables retailers to
offer coupon deals and promotions on in-store products, and enables NRS to provide digital-out-of-home advertisers a display for
both static and video advertisements.
We believe that the NRS business is synergistic with our other
communications and payment services including BOSS Revolution Calling, BOSS Revolution Money Transfer and Mobile Top-Up, all of
which can be sold and provisioned by retailers directly from their NRS terminals.
BOSS Revolution Money Transfer
We believe that international money remittance is a significant
economic activity among our target market of foreign-born communities. Our BOSS Revolution Money Transfer business enables customers
in the United States to remit money to approximately 50 countries. The service is offered through licensed BOSS Revolution authorized
money transfer agents as well as through the BOSS Revolution direct-to-consumer channel via the Boss Revolution Money app and website.
Our money transfer service leverages the BOSS Revolution retail
network to afford unbanked and underbanked customers the ability to initiate transactions with cash. In order to provide our remittance
service, BOSS Revolution retailers must meet certain financial and other qualifications. To date, only a fraction of the BOSS Revolution
retail network has been approved to offer money transfer services. Our internal sales force is recruiting new money transfer retailers
to expand our origination network, and we continue to enhance our retail money transfer portal to facilitate adoption and utilization
of the money transfer offering by BOSS Revolution retailers.
BOSS Revolution Money Transfer offers its service directly to
consumers through our BOSS Revolution Money app and the BOSS Revolution website. Direct-to-consumer is the fastest growing channel,
led by significant increases in transaction volumes through corridors in Africa as well as Latin America. During fiscal 2019, approximately
two thirds of our transactions originated over our digital platform – primarily the BOSS Revolution Money app. The BOSS Revolution
Money app works seamlessly with the BOSS Revolution Calling app to enable customers with a debit or credit card to send money transfers
and mobile top-up easily and securely directly from their iOS or Android device.
BOSS Revolution Money Transfer’s payment network includes
payout locations in 49 countries and over 300,000 locations. In addition, remittances are offered to mobile wallets in some destinations.
BOSS Revolution Money Transfer generates revenues from a per-transaction
fee charged to the customer and from foreign exchange differentials. Transaction costs include commissions paid to the retail agent,
payment to the international disbursing agent, banking, compliance, foreign currency exchange costs and, in the case of direct-to-consumer
transfers, credit and debit card processing fees.
Boss Revolution Mobile
We launched Boss Revolution Mobile in the third quarter of fiscal
2018. Boss Revolution Mobile is a domestic mobile service operating on Sprint’s nationwide network offering an innovative,
low-cost model for mobile service under our Boss Revolution brand.
International Operations
Internationally, we are a provider of prepaid calling cards
including both private label and IDT-branded calling cards, which are sold through an extensive network of thousands of independent
retailers as well as through our own internal sales force. Additionally, we sell BOSS Revolution Calling, IMTU and payment services
in select global markets both through retailers and direct to consumers. Carrier Services’ products and services are marketed
and sold globally through our internal Carrier Services account management team.
In Europe, we market our prepaid calling products in the United
Kingdom, the Netherlands, Spain, Germany, Belgium, Italy, Sweden, Switzerland, Denmark, Norway, Austria and Luxembourg, seeking
to capitalize on the demographic opportunity presented by immigration from outside of Europe to these developed nations. Because
the immigrant market is fragmented, and due to the large number of markets in which we compete, we offer over 600 different prepaid
calling cards in Europe. In addition, we sell BOSS Revolution platform products through retailers, our mobile calling app, and
direct-to-consumer web sites in Germany, Spain and the United Kingdom.
Our operations in Europe also include Carrier Services. We maintain
our European corporate, prepaid calling and Carrier Services operations in London, England. We also operate satellite offices in
Germany, Spain, Italy, Ireland and Greece.
Our European operations, including Carrier Services and BOSS
Revolution Calling, generated $405.4 million of revenues in fiscal 2019, a 5.3% decline from the $428.1 million of revenues generated
during fiscal 2018. Our European operations’ revenues constituted 29.8% of TPS’ revenues in fiscal 2019, as compared
to 28.3% in fiscal 2018.
In Asia, we sell BOSS Revolution Calling direct to consumers
online and through our app in Australia, Hong Kong and Singapore and post-paid calling services direct to consumers and small businesses
in Hong Kong. In fiscal 2019, we generated $47.7 million in revenues from our operations in the Asia-Pacific region compared to
$55.5 million in fiscal 2018, primarily through our Carrier Services business. We maintain our Asia Pacific headquarters in Hong
Kong.
In Latin America, we market prepaid calling products in Argentina
and Brazil. We maintain our Latin American headquarters in Buenos Aires, Argentina. In fiscal 2019, we generated $0.7 million in
revenues from the sale of prepaid calling in Latin America compared to $1.5 million in fiscal 2018.
Sales, Marketing and Distribution
In the United States, we distribute our TPS retail products,
including prepaid calling, IMTU and DMTU, money transfer and bill payment services to retail outlets. Our retail products are provisioned
directly through the BOSS Revolution retailer portal or through our network of distributors and our internal sales force. In addition,
our private label calling cards as well as our IDT-branded calling cards are also marketed to retail chains and outlets through
our internal sales force, and from time to time, we may utilize third-party agents or brokers to acquire accounts.
We also market all of our most significant retail offerings,
including BOSS Revolution Calling, IMTU and DMTU, and BOSS Revolution Money Transfer, directly to the consumer via online channels
including the BOSS Revolution consumer website (www.bossrevolution.com) and mobile apps for iOS and Android.
In Europe and Latin America, we are a provider of prepaid calling
cards including both private label and IDT-branded calling cards, which are sold through a network of independent retailers as
well as through our own internal sales force. Additionally, we sell BOSS Revolution Calling and IMTU in select markets both through
retailers and directly to consumers. In Asia, we sell BOSS Revolution Calling direct to consumers online and through our BOSS Revolution
Calling app and postpaid services direct to consumers and small businesses. Carrier Services are marketed and sold through our
internal account management team. In Canada, we sell BOSS Revolution platform products through retailers, our mobile calling app
and direct-to-consumer web sites.
Telecommunications Network Infrastructure
We operate a global network to provide an array of telecommunications
and payment services to our customers worldwide using a combination of proprietary and third-party applications. Proprietary applications
include call routing and rating, customer provisioning, call management, e-commerce sites, product web pages, calling card features,
and payment services features. Proprietary applications provide the flexibility to adapt to evolving marketplace demands without
third-party software releases, and often provide advantages in capability or cost over third-party solutions.
Our core voice network utilizes VoIP and is interconnected,
where needed, through gateways to time-division multiplexing, or TDM, networks worldwide. This hybrid IP/TDM capability allows
us to interface with carriers using the lowest cost technology protocol available. To support our global reach, we operate voice
switches and/or points of presence in the United States, Europe, South America, Asia and Australia. We receive and terminate voice
traffic from every country in the world, including cellular, landline and satellite calls through direct and indirect interconnects.
The network includes data centers located in the United States, the United Kingdom and Hong Kong, which house equipment used for
both our voice and payment services, with smaller points of presence in several other countries. Our global network is monitored
and operated on a continual basis by our Network Operations Center in the United States. We also make use of one of the leading
cloud providers to serve as host for some of our application infrastructure.
net2phone
net2phone’s revenue
was $47.3 million in fiscal 2019 compared to $34.9 million in fiscal 2018. net2phone’s loss from operations was $6.5 million
in fiscal 2019 compared to $2.7 million in fiscal 2018.
net2phone’s
revenue is generated by several offerings including:
|
●
|
cloud-based unified
communications services offered primarily to small and mid-sized business customers;
|
|
●
|
Session Initiation Protocol,
or SIP trunking, which supports inbound and outbound domestic and international calling from an IP PBX; and
|
|
●
|
cable telephony, which
enables cable television providers to offer voice calling as part of their triple play (TV, telephony and internet) offerings.
|
net2phone
launched its Unified Communications as a Service, or UCaaS, offering in 2015, leveraging IDT’s deep expertise in VoIP communications,
established technology team, and global telephony network. net2phone’s UCaaS offering has become its primary growth engine
and strategic focus.
The
net2phone UCaaS solution converges communications across devices: desk phone, PC and mobile devices via the net2phone app, all
backed by client management tools and analytics. net2phone’s cloud-based platform replaces and improves upon on-premise
private branch exchanges, or PBXs, which many businesses maintain to operate their legacy phone systems. net2phone’s advanced
feature set includes its mobile app, Web RTC, SMS/MMS, live chat widget, voicemail to email transcription, and client analytics.
net2phone adds features and enhancements to its offering on a regular basis. In 2019, net2phone began deployment of its proprietary
platform to enhance system reliability and facilitate the development and deployment of additional features and third-party integrations.
At
its 2015 launch, net2phone’s UCaaS service was offered only in the United States. In 2016, net2phone began its international
expansion, offering cloud communications to businesses in Brazil. net2phone expanded to Argentina in May 2017, Colombia in May
2018 and Mexico in August 2018. In September 2018, net2phone entered the Canadian
market through its acquisition of Versature Corp., a Software as a Service, or SaaS, business
communications solutions and hosted VoIP provider serving the Canadian market.
We
expect that net2phone will continue to grow rapidly by focusing on expansion in its overseas markets. These markets are large
and characterized by low rates of UCaaS penetration, high levels of competitive fragmentation and, in many cases, by a lack of
significant attention from the global market leaders. Future growth catalysts include the continued roll-out of net2phone’s
proprietary platform, development and deployment of new features and functionality, expansion into additional geographic markets,
further customization for local markets, and, outside of Canada, the development of a direct-to-consumer channel.
Sales,
Marketing and Distribution
net2phone
is focused on the agent channel marketplace and acquires a substantial majority of its customers through its network of master
agents, telecom agents and managed service providers in the United States and internationally. Versature historically utilized
a direct-to-consumer channel model to acquire customers across Canada. In October 2019, Versature announced a channel market program,
leveraging net2phone’s channel relationships and experience.
net2phone’s
cloud-communications offering is priced on a per-seat basis, with each employee identity constituting a seat. Pricing is structured
on a monthly base fee per seat, with additional option-based charges including provisioning of pre-configured VoIP phones.
Competition
Telecom
& Payment Services
BOSS
Revolution Calling
Like
all international calling services, our BOSS Revolution Calling service is subject to fierce competition, and we do not expect
to grow revenues and/or margins without a successful strategy and sound execution. While virtually any company offering communication
services is a competitor, we face particularly strong competition from Tier 1 mobile network operators who offer flat-rate international
calling plans, other PIN-less prepaid voice offerings, prepaid calling card providers, mobile virtual network operators, and VoIP
and other “over the top”, or OTT, service providers. Outside the United States, we also compete with large foreign
state-owned or state sanctioned telephone companies.
Many
of these companies, such as AT&T, Verizon, T-Mobile and Sprint, are substantially larger and have greater financial, technical,
engineering, personnel and marketing resources, longer operating histories, greater name recognition and larger customer bases
than we do. The use by these competitors of their resources in or affecting the international prepaid calling market could significantly
impact our ability to compete against them successfully.
In
addition to these larger competitors, we face significant competition from smaller prepaid calling providers, who from time-to-time
offer rates that are substantially below our rates, and in some instances below what we believe to be the cost to provide the
service, to gain market share. This type of pricing by one or more competitors can adversely affect our revenues, as they gain
market share at our expense, and our gross margins, if we lower rates to better compete.
The
continued growth of OTT calling and messaging services such as Skype, Viber, and WhatsApp has adversely affected the sales of
BOSS Revolution and our other prepaid calling services. We expect the popularity of these IP-based services—many of which
offer voice communications for free provided both the caller and recipient have a broadband connection—to continue to increase,
which may result in increased substitution and pricing pressure on our BOSS Revolution and other international prepaid calling
service offerings.
Many
wireless operators offer unlimited international long-distance plans that include international destinations to which customers
can place direct calls from their mobile phones without time limitation. These plans now include some of our most popular international
destinations. The growth of these “international unlimited” plans adversely affects our revenues as these operators
gain subscriber market share.
In
our view, our ability to compete successfully against these operators depends on several factors. Our interconnect and termination
agreements, network infrastructure and least-cost-routing system enable us to offer low-cost, high quality services. Our extensive
distribution and retail networks provide us with a strong presence in communities of foreign-born residents, a significant portion
of which purchase our services with cash. Our BOSS Revolution brand is often highly visible in these communities and has a reputation
for quality service and competitive, transparent pricing. Finally, we also offer synergistic payment services over the BOSS Revolution
platform that customers can conveniently access from their accounts. In our view, these factors represent competitive advantages.
However,
some of our competitors have significantly greater financial resources and name recognition and can provide comparable service
levels and pricing through established brands. Consequently, our ability to maintain and/or to capture additional market share
will remain dependent upon our ability to continue to provide competitively priced services, expand our distribution and retail
networks, improve our ability to reach and sell to customers through mobile devices, develop successful new products and services
to fit the evolving needs of our customers, and continue to build the brand equity of BOSS Revolution.
Carrier
Services
The
wholesale carrier industry has numerous entities competing for the same customers, primarily based on price and quality of service.
In
our Carrier Services business, we participate in a global marketplace with:
|
●
|
interexchange carriers
and other long-distance resellers and providers, including large carriers such as T-Mobile, AT&T and Verizon;
|
|
●
|
historically state-owned
or state-sanctioned telephone companies such as Telefonica, France Telecom and KDDI;
|
|
●
|
on-line, spot-market
trading exchanges for voice minutes;
|
|
●
|
OTT internet telephony
providers;
|
|
●
|
other providers of international
long-distance services; and
|
|
●
|
alliances between large
multinational carriers that provide wholesale carrier services.
|
We
believe that our Carrier Services business derives a competitive advantage from several inter-related factors:
|
●
|
our BOSS Revolution
Calling business generates large volumes of originating minutes, which represents a desirable, negotiable asset that helps
us win return traffic and obtain beneficial pricing which we can offer in the wholesale arena;
|
|
●
|
the proprietary technologies
powering our wholesale platform and, in particular, the software that drives voice over internet protocols enables us to scale
up at a lower cost than many of our competitors;
|
|
●
|
our professional and
experienced account management; and
|
|
●
|
our extensive network
of interconnects around the globe, with the ability to connect in whichever format (IP or TDM) is most feasible.
|
In
aggregate, we believe that these factors provide us with a competitive advantage over some participants on certain routes.
Mobile
Top-Up
The
major competitors to Mobile Top-Up’s offerings include:
|
●
|
international mobile
operators, who seek to control more of their own distribution channel or create their own products that directly compete with
our international airtime top-up; and
|
|
●
|
other distributors,
who develop a more comprehensive product offering than our international airtime top-up offerings or aggressively discount
their product offerings that are like our international airtime top-up offerings.
|
BOSS
Revolution Money Transfer
BOSS
Revolution Money Transfer competes against traditional international money transfer services with established retail and disbursement
networks including Western Union, MoneyGram and Ria, as well as many niche money transfer organizations that serve specific destination
corridors. Our direct-to-consumer channel competes with these operators as well as with new entrants including Xoom, TransferWise
and World-Remit that seek to disrupt the retailer-based money transfer market.
National
Retail Solutions (NRS)
NRS competes against several nationwide POS companies that primarily
service other retail store segments, but also service NRS’ target market of independent convenience, liquor and tobacco stores
in the United States. These companies include, among others, Square, Clover and NCR. NRS believes that it has a competitive advantage
because other nationwide POS companies do not offer the complete suite of services that NRS has tailored to the specific needs
of independent retailers. In addition, we do not believe that these competitors have NRS’ reach into the ethnic retailer
market where many retailers have established relationships with us and sell our BOSS Revolution offerings.
NRS also competes with smaller, regional POS companies that
focus on convenience stores. However, these regional players generally do not offer a comparable suite of POS services, have limited
capacity to scale their platforms, and/or are not price competitive.
net2phone
Major
competitors to our net2phone offerings include other UCaaS and hosted voice providers such as Vonage Business, Nextiva, 8x8, LogMeIn
and Ring Central. Due to their longevity and substantial investments in the marketplace, these providers offer more widely recognized
brands, larger and more developed marketing and sales forces and/or channel agent networks, and a more advanced product sets including
features such as services designed specifically for call centers, video and chat. These competitors’ offerings typically
also support integration of their services with other well-known, third-party customer relationship management, or CRM, vendors
such as SalesForce and SugarCRM as well as with various Google applications.
REGULATION
The
following summary of regulatory developments and legislation is intended to describe what we believe to be the most important,
but not all, current and proposed international, federal, state and local laws, regulations, orders and legislation that are likely
to materially affect us.
Regulation
of Telecom in the United States
Telecommunications
services are subject to extensive government regulation at both the federal and state levels in the United States. Any violations
of the regulations may subject us to enforcement actions, including interest and penalties. The Federal Communications Commission,
or FCC, has jurisdiction over all telecommunications common carriers to the extent they provide interstate or international communications
services, including the use of local networks to originate or terminate such services. Each state regulatory commission has jurisdiction
over the same carriers with respect to their provision of local and intrastate communications services. Local governments often
indirectly regulate aspects of our communications business by imposing zoning requirements, taxes, permit or right-of-way procedures
or franchise fees. Significant changes to the applicable laws or regulations imposed by any of these regulators could have a material
adverse effect on our business, operating results and financial condition.
Regulation
of Telecom by the Federal Communications Commission
Universal
Service and Other Regulatory Fees and Charges
In
1997, the FCC issued an order, referred to as the Universal Service Order, that requires all telecommunications carriers providing
interstate telecommunications services to contribute to universal service support programs administered by the FCC (known as the
Universal Service Fund). In addition, beginning in October 2006, interconnected VoIP providers, such as our subsidiary net2phone,
are required to contribute to the Universal Service Fund. These periodic contributions are currently assessed based on a percentage
of each contributor’s interstate and international end user telecommunications revenues reported to the FCC. We also contribute
to several other regulatory funds and programs, most notably Telecommunications Relay Service, FCC Regulatory Fees, and Local
Number Portability (collectively, the Other Funds). We and most of our competitors pass through Universal Service Fund and Other
Funds contributions as part of the price of our services, either as part of the base rate or, to the extent allowed, as a separate
surcharge on customer bills. Due to the manner in which these contributions are calculated, we cannot be assured that we fully
recover from our customers all of our contributions. In addition, based on the nature of our current business, we receive certain
exemptions from federal Universal Service Fund contributions. Changes in our business could eliminate our ability to qualify for
some or all of these exemptions. As a result, our ability to pursue certain new business opportunities in the future may be constrained
in order to maintain these exemptions, the elimination of which could materially affect the rates we would need to charge for
existing services. Changes in regulation may also have an impact on the availability of some or all of these exemptions. If even
some of these exemptions become unavailable, they could materially increase our federal Universal Service Fund or Other Funds’
contributions and have a material adverse effect on the cost of our operations and, therefore, on our ability to continue to operate
profitably, and to develop and grow our business. We cannot be certain of the stability of the contribution factors for the Other
Funds. Significant increases in the contribution factor for the Other Funds in general and the Telecommunications Relay Service
Fund in particular can impact our profitability. Whether these contribution factors will be stable in the future is unknown, but
it is possible that we will be subject to significant increases.
Regulation
of Telecom by State Public Utility Commissions
Our
telecommunications services that originate and terminate within the same state, including both local and in-state long distance
services are subject to the jurisdiction of that state’s public utility commission. The Communications Act of 1934, as amended,
generally preempts state statutes and regulations that prevent the provision of competitive services but permits state public
utility commissions to regulate the rates, terms and conditions of intrastate services, so long as such regulation is not inconsistent
with the requirements of federal law. We are certified to provide facilities-based and/or resold long-distance service in all
50 states and facilities-based and resold local exchange service in 45 states. In addition to requiring certification, state regulatory
authorities may impose tariff and filing requirements, consumer protection measures, and obligations to contribute to universal
service and other funds. Rates for intrastate switched access services, which we both pay to local exchange companies and collect
from long-distance companies for terminating in-state toll calls, are subject to the jurisdiction of the state commissions. State
commissions also have jurisdiction to approve negotiated rates, or establish rates through arbitration, for interconnection, including
rates for unbundled network elements. Changes in those access charges or rates for unbundled network elements could have a substantial
and material impact on our business.
Regulation
of Telecom—International
In
connection with our international operations, we have obtained licenses or are otherwise authorized to provide telecommunications
services in various foreign countries. We have obtained licenses or authorizations in Argentina, Australia, Belgium, Brazil, Canada,
Chile, Denmark, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, Peru, Singapore, South Africa, Spain, Sweden, Switzerland,
the United Kingdom and Uruguay. In numerous countries where we operate or plan to operate, we are subject to many local laws and
regulations that, among other things, may restrict or limit the ability of telecommunications companies to provide telecommunications
services in competition with state-owned or state-sanctioned dominant carriers.
Regulation
of Internet Telephony
The
use of the Internet and private IP networks to provide voice communications services is generally less regulated than traditional
switch-based telephony within the United States and abroad and, in many markets, is not subject to the imposition of certain taxes
and fees that increase our costs. As a result, we are able, in many markets, to offer VoIP communications services at rates that
are more attractive than those applicable to traditional telephone services. However, in the U.S. and abroad, there have been
efforts by legislatures and regulators to harmonize the regulatory structures between traditional switch-based telephony and VoIP.
This could result in additional fees, charges, taxes and regulations on IP communications services that could materially increase
our costs and may limit or eliminate our competitive pricing advantages. Additionally, several foreign governments have adopted
laws and/or regulations that could restrict or prohibit the provision of voice communications services over the Internet or private
IP networks. These efforts could likewise harm our ability to offer VoIP communications services.
Money
Transmitter and Payment Instrument Laws and Regulations
Our
consumer payment services offerings include money transfer and various network branded, also called “open loop”, prepaid
card offerings. These industries are heavily regulated. Accordingly, we, and the products and services that we market in consumer
payment services, are subject to a variety of federal and state laws and regulations, including:
|
●
|
Banking laws and regulations;
|
|
●
|
Money transmitter and
payment instrument laws and regulations;
|
|
●
|
Anti-money laundering
laws;
|
|
●
|
Privacy and data security
laws and regulations;
|
|
●
|
Consumer protection
laws and regulations;
|
|
●
|
Unclaimed property laws;
and
|
|
●
|
Card association and
network organization rules.
|
In
connection with the development of our money transmission services and the expansion of our network branded prepaid card offerings,
we have actively pursued our own money transmitter licenses. At July 31, 2019, we had received a money transmitter license in
48 of the 49 U.S. states that require such a license, as well as in Puerto Rico and Washington, D.C.
Regulation
of Other Businesses
We
operate other smaller or early-stage initiatives and operations, which may be subject to federal, state, local or foreign law
and regulation.
INTELLECTUAL
PROPERTY
We
own numerous patents, trademarks, domain names and other intellectual property rights necessary to conduct our business. We actively
pursue the filing and registration of patents, domain names, trademarks and service marks to protect our intellectual property
rights within the United States and abroad; in particular our registered trademarks and brands: IDT®, BOSS Revolution®,
and Net2Phone®. From time to time we have also acquired or licensed intellectual property relating to present and future business
strategy. We believe that our technological position significantly depends on the technical experience, expertise, and creative
ability of our employees to maintain both our current businesses and pursue future business development. Our corporate policies
require all employees to assign intellectual property rights developed in the scope of, or in relation to our business to us,
and to protect all intellectual property and proprietary information and materials as confidential.
Our global telecommunications switching and transmission infrastructure enables us to provide an array of telecommunications,
Internet access and Internet telephony services to our customers worldwide. We rely upon domestic and foreign patents, patent
applications, and other intellectual property rights, regarding our infrastructure and global telecommunication network for our
international telecommunications traffic and the international traffic of other telecommunications companies.
EMPLOYEES
As
of October 1, 2019, we had a total of approximately 1,285 employees, of which approximately 1,270 were full-time employees.
Item
1A. Risk Factors.
RISK
FACTORS
Our
business, operating results or financial condition could be materially adversely affected by any of the following risks as well
as the other risks highlighted elsewhere in this document, particularly the discussions about regulation, competition and intellectual
property. The trading price of our Class B common stock could decline due to any of these risks.
Risks
Related to Our Businesses
Each
of our telecommunications lines of business is highly sensitive to declining prices, which may adversely affect our revenues and
margins.
The
worldwide telecommunications industry is characterized by intense price competition, which has resulted in declines in both our
average per-minute price realizations and our average per-minute termination costs. Many of our competitors continue to aggressively
price their services. The intense competition has led to continued erosion in our pricing power, in both our retail and wholesale
markets, and we have generally had to pass along all or some of the savings we achieve on our per-minute costs to our customers
in the form of lower prices. In the case of some international calling locations, when average per minute termination cost decline
to a nominal amount, indirect competitors, such as wireless carriers, may include calls to those locations at no extra cost, which
increases our risk of losing customers. For example, in fiscal 2016 following regulatory changes intended to increase domestic
competition in the Mexican telecommunications market, the cost of terminating international calls to Mexico declined significantly.
As a result, many of our competitors, including some of the large U.S. mobile operators, began offering unlimited Mexico calling
as part of their monthly pricing plans, which caused a substantial and severe decline in our minutes of use and revenue.
Any
price increase by us may result in our prices not being as attractive, which may result in a reduction of revenue. If these trends
in pricing continue or accelerate, it could have a material adverse effect on the revenues generated by our telecommunications
businesses and/or our gross margins.
Because
our BOSS Revolution Calling and other prepaid calling products generate a significant portion of our revenue, our results of operations
are substantially dependent upon these products.
Our
results of operations are substantially dependent upon our BOSS Revolution Calling and other prepaid calling products that currently
generate a significant portion of our revenue. We compete in the international prepaid calling market with Tier 1 mobile network
operators who offer flat rate international calling plans, other PIN-less prepaid voice offerings, prepaid calling card providers,
mobile virtual network operators with aggressive international rate plans, and VoIP and other OTT service providers.
Many
of these companies, such as AT&T, Verizon, T-Mobile and Sprint, are substantially larger and have greater financial, technical,
engineering, personnel and marketing resources, longer operating histories, greater name recognition and larger customer bases
than we do. The use by these competitors of their resources in or affecting the international prepaid calling market could significantly
impact our ability to compete against them successfully.
In
addition to these larger competitors, we face significant competition from smaller prepaid calling providers, who from time-to-time
offer rates that are substantially below our rates, and in some instances below what we believe to be the cost to provide the
service, to gain market share. This type of pricing by one or more competitors can adversely affect our revenues, as they gain
market share at our expense, and our gross margins, if we lower rates to better compete.
The
continued growth of OTT calling and messaging services, such as Skype, Viber, and WhatsApp has adversely affected the sales of
BOSS Revolution and our other prepaid calling services. We expect the popularity of IP-based services—many of which offer
voice communications for free provided both the caller and recipient have a broadband connection—to continue to increase,
which will result in increased substitution and pricing pressure on our BOSS Revolution and other international prepaid calling
service offerings.
Many
wireless operators offer unlimited international long-distance plans that include international destinations to which customers
can place direct calls from their mobile phones without time limitation. These plans now include some of our most popular international
destinations. The growth of these “international unlimited” plans adversely affects our revenues as these operators
gain subscriber market share.
If
we are unable to compete effectively with our BOSS Revolution Calling and other prepaid calling products, it could have a material
adverse effect on the revenues generated by our telecommunications businesses, our gross margins and/or our profits.
We
may not be able to obtain sufficient or cost-effective termination capacity to particular destinations, which could adversely
affect our revenues and profits.
Most
of our telecommunications traffic is terminated through third-party providers. In order to support our minutes-of-use demands
and geographic footprint, we may need to obtain additional termination capacity or destinations. We may not be able to obtain
sufficient termination capacity from high-quality carriers to particular destinations or may have to pay significant amounts to
obtain such capacity. This could result in our not being able to support our minutes-of-use demands or in higher cost-per-minute
to particular destinations, which could adversely affect our revenues and profits.
The
termination of our carrier agreements with foreign partners or our inability to enter into carrier agreements in the future could
materially and adversely affect our ability to compete, which could reduce our revenues and profits.
We
rely upon our carrier agreements with foreign partners in order to provide our telecommunications services to our customers. These
carrier agreements are for finite terms and, therefore, there can be no guarantee that these agreements will be renewed at all
or on favorable terms to us. Our ability to compete would be adversely affected if our carrier agreements were terminated or we
were unable to enter into carrier agreements in the future to provide our telecommunications services to our customers, which
could result in a reduction of our revenues and profits.
Our
customers, particularly our Carrier Services customers, could experience financial difficulties, which could adversely affect
our revenues and profitability if we experience difficulties in collecting our receivables.
As
a provider of international long-distance services, we depend upon sales of transmission and termination of traffic to other long-distance
providers and the collection of receivables from these customers. The wholesale telecommunications market continues to feature
many smaller, less financially stable companies. If weakness in the telecommunications industry or the global economy reduces
our ability to collect our accounts receivable from our major customers, particularly our wholesale customers, our profitability
may be substantially reduced. While our most significant customers, from a revenue perspective, vary from quarter to quarter,
our five largest Carrier Services customers collectively accounted for 8.2% and 10.3% of total consolidated revenues in fiscal
2019 and fiscal 2018, respectively. Our Carrier Services customers with the five largest receivables balances collectively accounted
for 19.3% and 18.7% of the consolidated gross trade accounts receivable at July 31, 2019 and 2018, respectively. This concentration
of revenues and receivables increases our exposure to non-payment by our larger customers, and we may experience significant write-offs
if any of our large customers fail to pay their outstanding balances, which could adversely affect our revenues and profitability.
Our
revenues and profits will suffer if our distributors and sales representatives fail to effectively market and distribute our BOSS
Revolution voice and payment services, as well as our traditional disposable calling cards.
We
rely on our distributors and representatives to market and distribute our BOSS Revolution products, our traditional disposable
prepaid calling card products, our IMTU offerings and other payment services. We utilize a network of several hundred sub-distributors
that sell our BOSS Revolution products, traditional disposable prepaid calling cards, and IMTU to retail outlets throughout most
of the United States. In foreign countries, we are dependent upon our distributors and independent sales representatives, many
of which sell services or products for other companies. As a result, we cannot control whether these foreign distributors and
sales representatives will devote sufficient efforts to selling our services. In addition, we may not succeed in finding capable
distributors, retailers and sales representatives in new markets that we may enter. If our distributors or sales representatives
fail to effectively market or distribute our BOSS Revolution products, prepaid calling card products, IMTU offerings and other
services, our ability to generate revenues and profits and grow our customer base could be substantially impaired.
Natural
or man-made disasters could have an adverse effect on our technological infrastructure, which could have a material adverse effect
on our results of operations, financial condition, revenues and profits.
Natural
disasters, terrorist acts, acts of war, cyber-attacks or other breaches of network or information technology security may cause
equipment failures or disrupt our operations. Although we make significant efforts towards
managing disaster recovery and business continuity plans, our inability to operate our telecommunications networks because
of such events, even for a limited period of time, may result in loss of revenue, significant expenses and/or loss of market share
to other communications providers, which could have a material adverse effect on our results of operations and financial condition.
Certain
functions related to our business depend on a single supplier or small group of suppliers to carry out our business, and the inability
to do business with some or all of these suppliers could have a materially adverse effect on our business and financial results.
If
the services of any of the single suppliers or small group of suppliers that we depend on were unavailable, or available only
in decreased capacity or at less advantageous terms, this could result in interruptions to our ability to provide certain services,
could cause reduction in service and/or quality as the function is transitioned to an alternate provider, if an alternate provider
is available, or could increase our cost, which in the current competitive environment, we may not be able to pass along to customers.
For
example, and without limitation, the platforms that support our hosted PBX business and our money remittance business are each
leased from a third party. These platforms are susceptible to, and have incurred, service interruptions, which can occur frequently
and can be lengthy in duration. Any such service interruption of the platform could effectively temporarily cease or otherwise
materially impair operations of our applicable business. In addition, if these platforms became permanently unavailable for any
reason, including, without limitation, because the third-party owner of such platform no longer provided the service for any reason,
then our applicable business would be materially negatively affected.
Accordingly,
any of these events could materially and negatively impact our business, our revenues, our profits and our relationships with
customers.
We
could be harmed by network disruptions, security breaches, or other significant disruptions or failures of our IT infrastructure
and related systems or of those we operate for certain of our customers, which could have a materially adverse effect on our results
of operations, financial condition, revenues and profits.
To
be successful, we need to continue to have available, for our and our customers’ use, a high capacity, reliable and secure
network. We face the risk, as does any company, of a security breach, whether through cyber-attacks, malware, computer viruses,
sabotage, or other significant disruption of our IT infrastructure and related systems. As such, there is a risk of a security
breach or disruption of the systems we operate, including possible unauthorized access to our and our customers’ proprietary
or classified information. We are also subject to breaches of our network resulting in unauthorized utilization of our services
or products, which subject us to the costs of providing those products or services, which are likely not recoverable. The secure
maintenance and transmission of our and our customer’s information is a critical element of our operations. Our information
technology and other systems that maintain and transmit customer information, or those of service providers or business partners,
may be compromised by a malicious third-party penetration of our network security, or that of a third-party service provider or
business partner, or impacted by advertent or inadvertent actions or inactions by our employees, or those of a third-party service
provider or business partner. As a result, our or our customers’ information may be lost, disclosed, accessed or taken without
the customers’ consent, or our products and services may be used without payment.
Although
we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no
assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not
be successful or damaging, especially in light of the growing sophistication of cyber-attacks and intrusions sponsored
by state or other interests. We may be unable to anticipate all potential types of attacks or intrusions or to implement
adequate security barriers or other preventative measures. Certain of our business units have been the subject of attempted and
successful cyber-attacks in the past. We have researched the situations and do not believe any material internal or customer information
has been compromised.
Network
disruptions, security breaches and other significant failures of the above-described systems could (i) disrupt the proper functioning
of our networks and systems and therefore our operations or those of certain of our customers; (ii) result in the unauthorized
use of our services or products without payment, (iii) result in the unauthorized access to, and destruction, loss, theft, misappropriation
or release of proprietary, confidential, sensitive or otherwise valuable information of ours or our customers, including trade
secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
(iv) require significant management attention or financial resources to remedy the damages that result or to change our systems
and processes; (v) subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies;
or (vi) result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional
regulatory scrutiny or expose us to litigation. Any or all of which could have a negative impact on our results of operations,
financial condition and cash flows.
We
could fail to comply with requirements imposed on us by certain third parties, including regulators, which could have a materially
adverse effect on our results of operations, financial condition, revenues and profits.
A
significant and increasing portion of our transactions are processed using credit cards and similar payment methods. The banks,
credit card companies and other relevant parties impose strict system and other requirements to participate in such parties’
payment systems. We are required to comply with the privacy provisions of various federal and state privacy statutes and regulations,
and the Payment Card Industry Data Security Standard, each of which is subject to change at any time. Compliance with these requirements
is often difficult and costly, and our failure, or our distributors’ failure, to comply may result in significant fines
or civil penalties, regulatory enforcement action, liability under or termination of necessary agreements related to our payment
services business, each of which could have a material adverse effect on our financial position and/or operations and that of
our distributors who could be liable as well. Further, our payment services are subject to stringent requirements by regulators
and trade organizations in various jurisdictions. Our payment services unit is subject to federal and state banking regulations
and we are also subject to further regulation by those states in which we are licensed as a money transmitter. We may not be able
to comply with all such requirements in a timely manner or remain in compliance. If we are not in compliance, we could be subject
to penalties or the termination of our rights to participate in such payment systems or provide such services, which could have
a material negative impact on our ability to carry on and grow our businesses and our revenues and profits.
Our
U.K.-based businesses and business between the U.K. and other countries face risks related to the United Kingdom leaving the European
Union (“Brexit”).
We
operate our business worldwide, including meaningful operations in the United Kingdom. Accordingly, we are subjected to risks
from changes in the regulatory environment in various countries. On June 23, 2016, the electorate in the United Kingdom voted
in favor of leaving the European Union, or EU, (commonly referred to as “Brexit”). Thereafter, on March 29, 2017,
the United Kingdom formally notified the EU of its intention to withdraw, triggering a two-year negotiation period for exiting
the EU. At present, the withdrawal of the United Kingdom from the EU is scheduled to take effect on October 31, 2019. If no agreement
is entered into between the United Kingdom and the EU, and no extension of Brexit is agreed upon, the withdrawal will proceed
without an agreement, and transitional provisions may or may not be put in place to ease the process.
The
effects of Brexit will depend on agreements, if any, the United Kingdom makes to retain access to EU markets either during a transitional
period or more permanently. Brexit creates an uncertain political and economic environment in the United Kingdom and potentially
across other EU member states for the foreseeable future, including while the terms of Brexit are being negotiated, and such uncertainties
could impair or limit our ability to transact business in the member EU states.
Further,
Brexit could adversely affect European and worldwide economic or market conditions and could contribute to instability in global
financial markets, and the value of the Pound Sterling currency or other currencies, including the Euro. We are exposed to the
economic, market and fiscal conditions in the United Kingdom and the EU and to changes in any of these conditions. Depending on
the terms reached regarding Brexit, it is possible that there may be adverse practical and/or operational implications on our
business.
A
significant amount of the regulatory regime that applies to us in the United Kingdom is derived from EU directives and regulations.
Brexit could change the legal and regulatory framework within the United Kingdom where we operate and is likely to lead to legal
uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which EU laws to replace
or replicate. Consequently, no assurance can be given as to the impact of Brexit and, in particular, no assurance can be given
that our operating results, financial condition and prospects would not be adversely impacted by the result.
IDT
Financial Services Limited, or IDTFS, our Gibraltar-based bank, currently operates under a license from the Gibraltar Financial
Services Commission. As an overseas British Territory, following Brexit, the passporting rights enjoyed by IDTFS under EU law
will cease to be in effect. Absent other arrangements or accommodations provided by the EU or individual member states, IDTFS
will not be permitted to provide services to customers in EU countries. We are currently seeking an e-money license issued by
an EU country, but we cannot assure that any such license will be issued in a timely manner, if at all, or if the conditions of
any such license that is issued will impact the operations of IDTFS. If IDTFS does not obtain a license in a timely manner, its
operations and ability to service its customers would be materially and adversely affected.
If
we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results, and current and potential stockholders may lose confidence in our financial reporting which could have
a negative effect on the trading price of our stock.
We
are required by the Securities and Exchange Commission to establish and maintain adequate internal control over financial reporting
that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements
in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness
of our internal controls and to disclose any changes and material weaknesses in those internal controls. A material weakness is
a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis
In
our Annual Report on Form 10-K for the year ended July 31, 2019, we reported that we had a material weakness because management’s
review controls associated with non-income related taxes related to one of our foreign entities were not effective. Notwithstanding
the material weakness described above, we have performed additional analyses and other procedures to enable management to conclude
that our financial statements included in this Form 10-K fairly present, in all material respects, our financial condition and
results of operations as of and for the year ended July 31, 2019. Since July 31, 2019, we developed a remediation plan to address
the identified material weakness as follows: (1) explore engaging an independent third party to assist in our evaluation of all
non-income related taxes, relating to material foreign subsidiaries; (2) provide additional outside training to employees responsible
for tax compliance; and (3) enhance internal documentation support related to the Company’s tax position. Management and
our Audit Committee will monitor these remedial measures and the effectiveness of our internal controls and procedures.
Although
we believe that these efforts will strengthen our internal control over financial reporting and address the concern that gave
rise to the material weakness as of July 31, 2019, we cannot be certain that our expanded knowledge and revised internal control
practices will ensure that we maintain adequate internal control over our financial reporting in future periods. Any failure to
maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis.
If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if
our financial statements are not filed on a timely basis as required by the Securities and Exchange Commission and The New York
Stock Exchange, we could face severe consequences from those authorities. In either case, there could result a material adverse
effect on our business. Inferior internal controls could also cause investors to lose confidence in our reported financial information,
which could have a negative effect on the trading price of our stock.
Risks
Related to Our Financial Condition
We
hold cash, cash equivalents, debt securities and equity investments that are subject to various market risks.
At
July 31, 2019, we had cash, cash equivalents, debt securities, and current equity investments of $88.4 million. Debt securities
and equity investments carry a degree of risk, as there can be no assurance that we can redeem the equity investments at any time
and that our investment managers will be able to accurately predict the course of price movements and, in general, the securities
markets have in recent years been characterized by great volatility and unpredictability. As a result of these different market
risks, our holdings of cash, cash equivalents, debt securities and equity investments could be materially and adversely affected.
We
may need additional capital to sustain or accelerate our operations, which we may not be able to obtain on acceptable terms or
at all. If we are unable to raise additional capital, as needed, the future growth of our business and operations could be adversely
affected.
We
currently expect our cash from operations in fiscal 2020 and the balance of cash, cash equivalents, debt securities, and equity
investments that we held on July 31, 2019 to be sufficient to meet our currently anticipated working capital and capital expenditure
requirements during fiscal 2020. However, we may require, or otherwise seek, additional financing to fund operations, accelerate
our growth or for other purposes. If we raise additional funds through the issuance of equity or convertible debt securities,
the percentage ownership held by existing stockholders will be reduced and our stockholders may experience significant dilution.
In addition, new securities may contain rights, preferences or privileges that are senior to those of our common stock. If we
raise additional capital by incurring debt, this will result in increased interest expense. There can be no assurance that acceptable
financing necessary to further implement our plan of operation can be obtained on suitable terms, if at all. Our ability to develop
our business could suffer if we are unable to raise additional funds on acceptable terms, which would have the effect of limiting
our ability to increase our revenues, develop our products or attain profitable operations.
Intellectual
Property, Tax, Regulatory and Litigation Risks
We
provide communications and payment services to consumers and are therefore subject to various Federal and state laws and regulations.
As
a provider of communications and payment services to consumers, such as our BOSS Revolution Calling service or our BOSS Revolution
Money Transfer service, we are subject to various Federal and state laws and regulations relating to the manner in which we advertise
our services, describe and present the terms of our services, and communicate with our customers and consumers in general. Compliance
with these laws requires us to be constantly vigilant as they often vary from state to state. Failure to comply with these laws
could result in action being taken by Federal and state agencies or offices responsible for consumer protection, like the Federal
Trade Commission which could have a materially adverse effect on our results of operations, financial condition, revenues and
profits.
We
may be adversely affected if we fail to protect our proprietary technology.
We
depend on proprietary technology and other intellectual property rights in conducting our various business operations. We rely
on a combination of patents, copyrights, trademarks and trade secret protection and contractual rights to establish and protect
our proprietary rights. Circumstances outside our control could pose a threat to our intellectual property rights. For example,
effective intellectual property protection may not be available in every country in which our products and services are distributed.
Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment
of our intellectual property rights could harm our business or our ability to compete. Also, protecting our intellectual property
rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive
to do business and harm our operating results. Failure of our patents, copyrights, trademarks and trade secret protection, non-disclosure
agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors
to more effectively compete with us and have an adverse effect on our business, financial condition and results of operations.
In
addition, we may be required to litigate in the future to enforce our intellectual property rights, to protect our trade secrets,
to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity.
Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our
business, financial condition or results of operations, and there can be no assurances that we will be successful in any such
litigation.
We
may be subject to claims of infringement of intellectual property rights of others, which could have a material adverse effect
on our results of operations, financial condition, revenues and profits.
Companies
in the telecommunications industry and other industries in which we compete own large numbers of patents, copyrights and trademarks
and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights.
As we face increasing competition, the possibility of intellectual property claims against us grows. Although we do not believe
that we infringe upon the intellectual property rights of others, our technologies may not be able to withstand any third-party
claims or rights against their use. From time to time we may be subject to claims and legal proceedings from third parties regarding
alleged infringement by us of trademarks, copyrights, patents and other intellectual property rights. Such suits can be expensive
and time consuming and could distract us and our management from focusing on our businesses. Further, loss of such suits could
result in financial burdens and the requirement to modify our modes of operation, which could materially adversely affect our
business.
We
are subject to tax and regulatory audits which could result in the imposition of liabilities that may or may not have been reserved.
We
are subject to audits by taxing and regulatory authorities with respect to certain of our income and operations. These audits
can cover periods for several years prior to the date the audit is undertaken and could result in the imposition of liabilities,
interest and penalties if our positions are not accepted by the auditing entity.
Our
2017 FCC Form 499-A, which reports our calendar year 2016 revenue, related to payments due to the FCC, is currently under audit
by the Internal Audit Division of the Universal Service Administrative Company. At July 31, 2019, our accrued expenses included
$44.7 million for these regulatory fees for the years covered by the audit, as well as prior and subsequent years. If we do not
properly calculate, or have not properly calculated, the amount payable by us to the FCC, we may be subject to interest and penalties.
We
are subject to value added tax, or VAT, audits from time-to-time in various jurisdictions. In the conduct of such audits, we may
be required to disclose information of a sensitive nature and, in general, to modify the way we have conducted business with our
distributors until the present, which may affect our business in an adverse manner.
We
are also subject to audits in various jurisdictions for various other taxes, including utility excise tax, sales and use tax,
communications services tax, gross receipts tax and property tax.
We
may be subject to state sales taxes that we have not paid, collected from our customers or reserved for on our financial statements,
which could materially and adversely affect our business,
financial condition and operating results.
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. We
are evaluating our state tax filings with respect to the recent Wayfair decision and are in the process of reviewing our collection
practices. It is possible that one or more jurisdictions may assert that we have liability for periods for which we have not collected
sales, use or other similar taxes, and if such an assertion or assertions were successful it could materially and adversely affect
our business, financial condition and operating results. One or more jurisdictions may change their laws or policies to apply
their sales, use or other similar taxes to our operations, and if such changes were made it could materially and adversely affect
our business, financial condition and operating results.
Our
business is subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure
to comply with such laws, or abuse of our programs for purposes of money laundering or terrorist financing, could have a material
adverse impact on our business, financial condition and operating results.
Provisions
of the USA PATRIOT Act, the Bank Secrecy Act and other federal laws impose substantial regulations on financial institutions that
are designed to prevent money laundering and the financing of terrorist organizations. Increasing regulatory scrutiny of our industry
with respect to money laundering and terrorist financing matters could result in more aggressive enforcement of these laws or
the enactment of more onerous regulation, which could have a material adverse impact on our business. In addition, abuse of our
money transfer services or prepaid card programs for purposes of money laundering or terrorist financing, notwithstanding our
efforts to prevent such abuse through our regulatory compliance and risk management programs, could cause reputational or other
harm that would have a material adverse impact on our business, financial condition and operating results.
Our
business is subject to a wide range of laws and regulations intended to help detect and prevent illegal or illicit activity and
our failure, or the failure of one of our disbursement partners or payment processors to comply with those laws and regulations
could harm our business, financial condition and operating results.
Our
money transfer and network branded prepaid card services are subject to a strict set of legal and regulatory requirements intended
to help detect and prevent money laundering, terrorist financing, fraud and other illicit activity. The interpretation of those
requirements by judges, regulatory bodies and enforcement agencies is changing, often quickly and with little notice. Economic
and trade sanctions programs that are administered by the U.S. Treasury Department’s Office of Foreign Assets Control, or
OFAC, prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances,
with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers and terrorists
or terrorist organizations. As federal, state and foreign legislative regulatory scrutiny and enforcement action in these areas
increase, we expect our costs to comply with these requirements will increase, perhaps substantially. Failure to comply with any
of these requirements by us, our regulated retailers or our disbursement partners could result in the suspension or revocation
of a money transmitter license, the limitation, suspension or termination of our services, the seizure and/or forfeiture of our
assets and/or the imposition of civil and criminal penalties, including fines.
Furthermore,
failure by us or our agents to comply with applicable laws and regulations could also result in termination of contracts with
our banks and/or merchant payment processor. Termination of services by one of our retail banks would seriously diminish our ability
to collect funds from our BOSS Revolution agents. Likewise, termination of services by our merchant processor would negatively
impact our ability to process payments in our digital channels.
The
foregoing laws and regulations are constantly evolving, unclear and inconsistent across various jurisdictions, making compliance
challenging. If we fail to update our compliance system to reflect legislative or regulatory developments, we could incur penalties.
New legislation, changes in laws or regulations, implementing rules and regulations, litigation, court rulings, changes in industry
practices or standards, changes in systems rules or requirements or other similar events could expose us to increased compliance
costs, liability, reputational damage, and could reduce the market value of our money transfer and network branded prepaid card
services or render them less profitable or obsolete.
The
Dodd-Frank Act, as well as the regulations required by the Dodd-Frank Act, and the Consumer Financial Protection Bureau could
harm us and the scope of our activities, and could harm our operations, results of operations and financial condition.
The
Dodd-Frank Act, which became law in the United States on July 21, 2010, calls for significant structural reforms and substantive
regulation across the financial services industry. In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau,
or CFPB, whose purpose is to issue and enforce consumer protection initiatives governing financial products and services, including
money transfer services.
We
may be subject to examination by the CFPB, which has broad authority to enforce consumer financial laws. The CFPB has a large
budget and staff and has broad authority with respect to our money transfer service and related business. It is authorized to
collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer
complaints, request data and promote the availability of financial services to underserved consumers and communities. In addition,
the CFPB may adopt other regulations governing consumer financial services, including regulations defining unfair, deceptive or
abusive acts or practices, and new model disclosures. The CFPB’s authority to change regulations adopted in the past by
other regulators, or to rescind or alter past regulatory guidance, could increase our compliance costs and litigation exposure.
The
Dodd-Frank Act establishes a Financial Stability Oversight Counsel that is authorized to designate as “systemically important”
non-bank financial companies and payment systems. Companies designated under either standard will become subject to new regulation
and regulatory supervision. If we were designated under either standard, the additional regulatory and supervisory requirements
could result in costly new compliance burdens or may require changes in the way we conduct business that could harm our business,
financial condition and operating results.
We
are subject to licensing and other requirements imposed by U.S. state regulators, and the U.S. federal government. If we were
found to be subject to or in violation of any laws or regulations governing money transmitters, we could lose our licenses, be
subject to liability or be forced to change our business practices, which could harm our operations, results of operations and
financial condition.
A
number of states and territories have enacted legislation regulating money transmitters, with 49 states requiring a license a,
s of July 31, 2019. At July 31, 2019, we had obtained licenses to operate as a money transmitter in 48 U.S. states, Washington,
D.C. and Puerto Rico. We are also registered as money services businesses with the Financial Crimes Enforcement Network of the
U.S. Department of the Treasury, or FinCEN. As a licensed money transmitter, we are subject to bonding requirements, liquidity
requirements, restrictions on our investment of customer funds, reporting requirements and inspection by state and foreign regulatory
agencies. If we were found to be subject to and in violation of any banking or money services laws or regulations, we could be
subject to liability or additional restrictions, such as increased liquidity requirements. In addition, our licenses could be
revoked, or we could be forced to cease doing business or change our practices in certain states or jurisdictions or be required
to obtain additional licenses or regulatory approvals that could impose a substantial cost on us. Regulators could also impose
other regulatory orders and sanctions on us. Any change to our business practices that makes our service less attractive to customers
or prohibits use of our services by residents of a particular jurisdiction could decrease our transaction volume and harm our
business, financial condition and operating results.
Our
disbursement partners generally are regulated institutions in their home jurisdiction, and money transfers are regulated by governments
in both the United States and in the jurisdiction of the recipient. If our disbursement partners fail to comply with applicable
laws, it could harm our business., results of operations and financial condition
Money
transfers are regulated by state, federal and foreign governments. Many of our disbursement partners are banks that are heavily
regulated by their home jurisdictions. Our non-bank disbursement partners are also subject to money transfer regulations. We require
regulatory compliance as a condition to our continued relationship, perform due diligence on our disbursement partners and monitor
them periodically with the goal of meeting regulatory expectations. However, there are limits to the extent to which we can monitor
their regulatory compliance. Any determination that our disbursement partners or their sub-disbursement partners have violated
laws and regulations could seriously damage our reputation, resulting in diminished revenue and profit and increased operating
costs. While our services are not directly regulated by governments outside the United States, except with respect to our Gibraltar
bank as discussed below, it is possible that in some cases we could be liable for the failure of our disbursement partners or
their sub-disbursement partners to comply with laws, which also could harm our business, financial condition and results of operations.
Our
bank in Gibraltar is regulated by the Gibraltar Financial Services Commission, or the FSC, and, as such, is subject to Gibraltarian
and European Union laws relating to financial institutions. As an issuer of prepaid debit cards for programs operated by other
entities, commonly known as program managers, the bank is responsible, inter alia, for anti-money laundering laws oversight and
compliance. If we were to fail to implement the requisite controls or follow the rules and procedures mandated by the FSC and
applicable law, we could be subject to regulatory fines, and even the loss of our banking license. In fiscal 2016, a referendum
took place in the United Kingdom in which a majority voted in favor of the United Kingdom’s exit from the European Union
– commonly referred to as “Brexit”. As a bank licensed in Europe, our bank in Gibraltar currently benefits from
its ability to passport its license to operate in any European Union member state. However, as a British territory, if Brexit
occurs, and no alternative arrangements are established with respect to licensing of British banks in the European Union, our
bank in Gibraltar may not be able to passport its license into European Union member states.
We
receive, store, process and use personal information and other data, which subjects us to governmental regulation and other legal
obligations related to privacy. Our actual or perceived failure to comply with such obligations could harm our business, financial
condition and results of operations.
We
receive, store and process personal information and other customer data, including bank account numbers, credit and debit card
information, identification numbers and images of government identification cards. As a result, we are required to comply with
the privacy provisions of the Gramm-Leach-Bliley Act of 1999, or the Gramm-Leach-Bliley Act, and the Payment Card Industry Data
Security Standard. There are also numerous other federal, state, local and international laws , such as the California Consumer
Privacy Act (CCPA) and the European Union’s General Data Protection Regulation (GDPR), regarding privacy and the storing,
sharing, use, processing, disclosure and protection of personal information and other customer data, the scope of which are changing,
subject to differing interpretations, and may be inconsistent among different jurisdictions or conflict with other applicable
rules. It is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction
to another and may conflict with other rules or our business practices.
Additionally,
with advances in computer capabilities and data protection requirements to address ongoing threats, we may be required to expend
significant capital and other resources to protect against potential security breaches or to alleviate problems caused by security
breaches.
Any
failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other
third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release
or transfer of personally identifiable information or other customer data, may result in governmental enforcement actions, fines
or litigation. If there is a breach of credit or debit card information that we store, we could also be liable to the issuing
banks for their cost of issuing new cards and related expenses. In addition, a significant breach could result in our being prohibited
from processing transactions for any of the relevant network organizations, such as Visa or MasterCard, which would harm our business.
If any third parties with whom we work, such as marketing partners, vendors or developers, violate applicable laws or our policies,
such violations may put our customers’ information at risk and could harm our business. Any negative publicity arising out
of a data breach or failure to comply with applicable privacy requirements could damage our reputation and cause our customers
to lose trust in us, which could harm our business, results of operations, financial position and potential for growth.
Federal
and state regulations may be passed that could harm our business, financial condition and results of operations.
Our
ability to provide VoIP communications services at attractive rates arises in large part from the fact that VoIP services are
not currently subject to the same level of regulation as traditional, switch-based telephony. The use of the Internet and private
IP networks to provide voice communications services is largely unregulated within the United States, although several foreign
governments have adopted laws and/or regulations that could restrict or prohibit the provision of voice communications services
over the Internet or private IP networks. If interconnected VoIP services become subject to state regulation and/or additional
regulation by the FCC, such regulation will likely lead to higher costs and reduce or eliminate the competitive advantage interconnected
VoIP holds, by virtue of its lesser regulatory oversight, over traditional telecommunications services. More aggressive regulation
of the Internet in general, and Internet telephony providers and services specifically, may materially and adversely affect our
business, financial condition and results of operations.
Our
ability to offer services outside of the United States is subject to the local regulatory environment, which may be unfavorable,
complicated and often uncertain.
Regulatory
treatment outside the United States varies from country to country. We distribute our products and services through resellers
that may be subject to telecommunications regulations in their home countries. The failure of these resellers to comply with these
laws and regulations could reduce our revenue and profitability or expose us to audits and other regulatory proceedings. Regulatory
developments such as these could have a material adverse effect on our operating results.
In
many countries in which we operate, or our services are sold, the status of the laws that may relate to our services is unclear.
We cannot be certain that our customers, resellers, or other affiliates are currently in compliance with regulatory or other legal
requirements in their respective countries, that they or we will be able to comply with existing or future requirements, and/or
that they or we will continue in compliance with any requirements. Our failure or the failure of those with whom we transact business
to comply with these requirements could materially adversely affect our business, financial condition and results of operations.
While
we expect additional regulation of our industry in some or all of these areas, and we expect continuing changes in the regulatory
environment as new and proposed regulations are reviewed, revised and amended, we cannot predict with certainty what impact new
laws in these areas will have on us, if any. For a complete discussion of what we believe are the most material regulations impacting
our business, see Item 1 to Part I “Business-Regulation” included elsewhere in this Annual Report.
We
are subject to legal proceedings in the ordinary course of business that may have a material adverse effect on our business, results
of operations, cash flows or financial condition.
Various
legal proceedings that have arisen or may arise in the ordinary course of business have not been finally adjudicated, which may
have a material adverse effect on our results of operations, cash flows or financial condition (see Item 3 to Part I “Legal
Proceedings” included elsewhere in this Annual Report).
Risks
Related to Our Capital Structure
Holders
of our Class B common stock have significantly less voting power than holders of our Class A common stock.
Holders
of our Class B common stock are entitled to one-tenth of a vote per share on all matters on which our stockholders are entitled
to vote, while holders of our Class A common stock are entitled to three votes per share. As a result, the ability of holders
of our Class B common stock to influence our management is limited.
We
are controlled by our principal stockholder, which limits the ability of other stockholders to affect our management.
Howard
S. Jonas, our Chairman of the Board and founder, has voting power over 4,162,118 shares of our common stock (which includes 1,574,326
shares of our Class A common stock, which are convertible into shares of our Class B common stock on a 1-for-1 basis, and 2,587,792
shares of our Class B common stock), representing approximately 69.5% of the combined voting power of our outstanding capital
stock, as of October 7, 2019. In addition, Mr. Jonas holds an option to purchase 1,000,000 shares of our Class B common stock,
which is fully vested and exercisable. Mr. Jonas is able to control matters requiring approval by our stockholders, including
the election of all of the directors and the approval of significant corporate matters, including any merger, consolidation or
sale of all or substantially all of our assets. As a result, the ability of any of our other stockholders to influence our management
is limited.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Our
headquarters is located in a building in Newark, New Jersey that is owned by Rafael Holdings. We lease approximately 80,000 square
feet of office space plus a portion of the 800-car public parking garage located across the street from the building. We also
lease approximately 3,600 square feet of office space in Jerusalem, Israel that is also owned by Rafael Holdings. The Newark lease
expires in April 2025 and the Israel lease expires in July 2025.
We
lease space in New York, New York for corporate purposes as well as a number of other locations in metropolitan areas. These leased
spaces are utilized primarily to house telecommunications equipment and retail operations.
We
maintain our European headquarters in London, England. We also maintain other international office locations and telecommunications
facilities in regions of Europe, Latin America, the Middle East, Asia and Africa where we conduct operations.
Item
3. Legal Proceedings.
On
April 12, 2019, Scarleth Samara filed a putative class action against IDT Telecom in the U.S. District Court for the Eastern District
of Louisiana alleging certain violations of the Telephone Consumer Protection Act of 1991. The plaintiff alleges that in October
of 2017, IDT Telecom sent unauthorized marketing messages to her cellphone. IDT Telecom filed a motion to compel arbitration.
On or about August 19, 2019, the plaintiff agreed to dismiss the pending court action and the parties intend to proceed with arbitration.
At this stage, we are unable to estimate our potential liability, if any. We intend to vigorously defend the claim.
On
January 22, 2019, Jose Rosales filed a putative class action against IDT America, IDT Domestic Telecom and IDT International in
California state court alleging certain violations of employment law. The plaintiff alleges that these companies failed to compensate
members of the putative class in accordance with California law. We are evaluating the claims, and at this stage, are unable to
estimate our potential liability, if any. We intend to vigorously defend the claims. In August 2019, we filed a cross complaint
against Rosales alleging trade secret and other violations.
On
May 21, 2018, Erik Dennis filed a putative class action against IDT Telecom and us in the U.S. District Court for the Northern
District of Georgia alleging violations of Do Not Call Regulations promulgated by the U.S. Federal Trade Commission. We are evaluating
the claim, and at this stage, are unable to estimate our potential liability, if any. On August 13, 2018, we and IDT Telecom filed
a motion to dismiss or in the alternative to strike class allegations. The plaintiff opposed the motion. The motion to dismiss
was denied. We intend to vigorously defend this matter.
On
May 2, 2018, Jean Carlos Sanchez filed a putative class action against IDT Telecom in the U.S. District Court for the Northern
District of Illinois alleging that we sent unauthorized marketing messages to cellphones in violation of the Telephone Consumer
Protection Act of 1991. On July 26, 2018, the parties filed a stipulation of dismissal. We are evaluating the claim, and at this
stage, are unable to estimate our potential liability, if any. We intend to vigorously defend this matter.
On
April 24, 2018, Sprint Communications Company L.P. filed a patent infringement claim against us and certain of our 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. We are
evaluating the underlying claim, and at this stage, are unable to estimate our potential liability, if any. We intend 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 we 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 us related to potential indemnification claims
concerning Straight Path’s obligations under the Consent Decree it entered into with the FCC, as well as the sale of Straight
Path’s subsidiary Straight Path IP Group, Inc. to us in connection with that settlement. That action was consolidated with
a similar action that was initiated by The Arbitrage Fund. The Plaintiffs are seeking, among other things, (i) a declaration that
the action may be maintained as a class action or in the alternative, that demand on the Straight Path Board is excused; (ii)
that the term sheet is invalid; (iii) awarding damages for the unfair price stockholders 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 us to disgorge any profits for the benefit of the class Plaintiffs. On August 28, 2017, the Plaintiffs
filed an amended complaint. On September 24, 2017, we filed a motion to dismiss the amended complaint. Following closing of the
transaction, the Delaware Chancery Court denied the motion to dismiss. On February 22, 2019, the Delaware Supreme Court affirmed
the denial of the motion to dismiss. We intend to vigorously defend this matter. At this stage, we are unable to estimate our
potential liability, if any.
In addition to the foregoing, we are subject to other legal proceedings that have arisen in the ordinary
course of business and have not been finally adjudicated. Although there can be no assurance in this regard, we believe that none
of the other legal proceedings to which we are a party will have a material adverse effect on our results of operations, cash
flows or financial condition.
Item
4. Mine Safety Disclosures.
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1—Description of Business and Summary of Significant Accounting Policies
Description
of Business
IDT
Corporation (the “Company”) is a multinational company with operations primarily in the telecommunications and payment
industries.
The Company has two reportable business segments, Telecom &
Payment Services and net2phone (formerly net2phone-Unified Communications as a Service (“UCaaS”)). The Telecom &
Payment Services segment provides retail telecommunications and payment offerings as well as wholesale international long-distance
traffic termination. The net2phone segment provides unified cloud communications and telephony services to business customers.
Operating segments not reportable individually were included in All Other.
Basis
of Consolidation and Accounting for Investments
The
method of accounting applied to long-term investments, whether consolidated, equity or cost, involves an evaluation of the significant
terms of each investment that explicitly grant or suggest evidence of control or influence over the operations of the investee
and also includes the identification of any variable interests in which the Company is the primary beneficiary. The consolidated
financial statements include the Company’s controlled subsidiaries. All significant intercompany accounts and transactions
between the consolidated subsidiaries are eliminated.
Investments in businesses that the Company does not control,
but in which the Company has the ability to exercise significant influence over operating and financial matters, are accounted
for using the equity method. Investments in which the Company does not have the ability to exercise significant influence over
operating and financial matters are accounted for using the cost method. Investments in hedge funds are accounted for using the
equity method unless the Company’s interest is so minor that it has virtually no influence over operating and financial policies,
in which case these investments are accounted for using the cost method. At July 31, 2019 and 2018, the Company had $5.4 million
and $4.7 million, respectively, in investments accounted for using the equity method, and nil and $1.9 million, respectively, in
investments accounted for using the cost method. Equity and cost method investments are included in noncurrent “Equity investments”
in the accompanying consolidated balance sheets. The Company periodically evaluates its equity and cost method investments for
impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is other
than temporary, then a charge to earnings is recorded in “Other income (expense), net” in the accompanying consolidated
statements of income, and a new basis in the investment is established.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those estimates.
Revenue
Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2014-09, Revenue from Contracts with Customers (Topic 606), and has since issued amendments thereto (collectively referred
to as “ASC 606”). Results for the reporting periods beginning after August 1, 2018 are presented under ASC 606 (see
Note 2), while prior period results are not adjusted and continue to be reported in accordance with historic accounting under
ASC Topic 605. The Company applied ASC 606 only to those contracts that were not completed as of August 1, 2018. The core principle
of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and
the guidance defines a five-step process to achieve this core principle. The five-step process to achieve this principle is as
follows: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s),
(iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s),
and (v) recognize revenue when, or as, the entity satisfies a performance obligation. ASC 606 also mandates additional disclosure
about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Prior
to August 1, 2018, the Company applied ASC Topic 605 as follows. Telephone service, which includes domestic and international
long distance, local service, and wholesale carrier telephony service, was recognized as revenue when services were provided,
primarily based on usage and/or the assessment of fees. Revenue from BOSS Revolution international calling service and from sales
of calling cards, net of customer discounts, was deferred until the service or the cards were used or, calling card administrative
fees were imposed, thereby reducing the Company’s outstanding obligation to the customer, at which time revenue was recognized.
Domestic and international airtime top-up revenue was recognized upon redemption. International airtime top-up enables customers
to purchase airtime for a prepaid mobile telephone in another country.
The
Company enters into Notification of Reciprocal Transmission (“NORT”) transactions, in which the Company commits to
purchase a specific number of wholesale carrier minutes to other specific destinations at specified rates, and the counterparty
commits to purchase from the Company a specific number of minutes to specific destinations at specified rates. The number of minutes
purchased and sold is not necessarily the same. The rates in these reciprocal transactions are generally not at prevailing market
rates, and the amounts paid to the counterparty in excess of market rates are reflected as a reduction in revenue received from
the customer. In addition, the Company enters into transactions in which it swaps minutes with another carrier. The Company recognized
revenue and the related direct cost of revenue for these reciprocal and swap transactions based on the fair value of the minutes.
Direct
Cost of Revenues
Direct
cost of revenues consists primarily of termination and origination costs, toll-free costs, and network costs—including customer/carrier
interconnect charges and leased fiber circuit charges. These costs include an estimate of charges for which invoices have not
yet been received, and estimated amounts for pending disputes with other carriers. Direct cost of revenues also includes the cost
of airtime top-up minutes. Direct cost of revenues excludes depreciation and amortization expense.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Company
Restricted Cash and Cash Equivalents
The
Company treats unrestricted cash and cash equivalents held by IDT Payment Services, which provides the Company’s international
money transfer services in the United States, as substantially restricted and unavailable for other purposes. At July 31, 2019
and 2018, “Cash and cash equivalents” in the Company’s consolidated balance sheets included an aggregate of
$13.4 million and $10.7 million, respectively, held by IDT Payment Services that was unavailable for other purposes.
Debt
Securities
The Company’s investments in debt securities are classified
as “available-for-sale.” Available-for-sale debt securities are required to be carried at their fair value, with unrealized
gains and losses (net of income taxes) that are considered temporary in nature recorded in “Accumulated other comprehensive
loss” in the accompanying consolidated balance sheets. The Company uses the specific identification method in computing the
gross realized gains and gross realized losses on the sales of marketable securities. The Company periodically evaluates its investments
in debt securities for impairment due to declines in market value considered to be other than temporary. Such impairment evaluations
include, in addition to persistent, declining market prices, general economic and Company-specific evaluations. If the Company
determines that a decline in market value is other than temporary, then a charge to operations is recorded in “Other income
(expense), net” in the accompanying consolidated statements of income and a new cost basis in the investment is established.
Equity
Investments
On
August 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10), Recognition
and Measurement of Financial Assets and Financial Liabilities, that requires the Company to provide more information about
recognition, measurement, presentation and disclosure of financial instruments. The ASU included, 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 recognize unrealized holding
gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability
exception is available for equity investments that do not have readily determinable fair values and do not qualify for the net
asset value practical expedient (the “measurement alternative”). 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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property,
Plant and Equipment and Intangible Assets
Equipment, computer software, and furniture and fixtures are
recorded at cost and are depreciated on a straight-line basis over their estimated useful lives, which range as follows: equipment—5,
7 or 20 years; computer software—2, 3 or 5 years; and furniture and fixtures—5, 7 or 10 years. Leasehold improvements
are recorded at cost and are depreciated on a straight-line basis over the term of their lease or their estimated useful lives,
whichever is shorter.
The
fair value of non-compete agreement, customer relationships and tradename acquired in a business combination accounted for under
the purchase method are amortized over their estimated useful lives (see Notes 6 and 12).
The
Company tests the recoverability of its property, plant and equipment and intangible assets with finite useful lives whenever
events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company tests for
recoverability based on the projected undiscounted cash flows to be derived from such asset. If the projected undiscounted future
cash flows are less than the carrying value of the asset, the Company will record an impairment loss, if any, based on the difference
between the estimated fair value and the carrying value of the asset. The Company generally measures fair value by considering
sale prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate discount rate.
Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should the estimates
and assumptions prove to be incorrect, the Company may be required to record impairments in future periods and such impairments
could be material.
Goodwill
Goodwill is the excess of the acquisition cost of businesses over
the fair value of the identifiable net assets acquired. Goodwill and other indefinite lived intangible assets are not amortized.
These assets are reviewed annually (or more frequently under various conditions) for impairment using a fair value approach. The
Company performs its annual, or interim, goodwill impairment test by comparing the fair value of its reporting units with their
carrying amounts. The Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting
unit. Additionally, the Company considers income tax effects from any tax-deductible goodwill on the carrying amount of its reporting
unit when measuring the goodwill impairment loss, if applicable. The fair value of the reporting units is estimated using discounted
cash flow methodologies, as well as considering third party market value indicators. The Company’s use of a discounted cash
flow methodology includes estimates of future revenue based upon budgets and projections. The Company also develops estimates
for future levels of gross and operating profits and projected capital expenditures. The Company’s methodology also
includes the use of estimated discount rates based upon industry and competitor analysis as well as other factors. Calculating
the fair value of the reporting units requires significant estimates and assumptions by management. Should the estimates and assumptions
regarding the fair value of the reporting units prove to be incorrect, the Company may be required to record impairments to its
goodwill in future periods and such impairments could be material.
The
Company has the option to perform a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill
impairment test. However, the Company may elect to perform the quantitative goodwill impairment test even if no indications of
a potential impairment exist.
Advertising
Expense
Cost
of advertising is charged to selling, general and administrative expenses in the period in which it is incurred. In fiscal 2019,
fiscal 2018 and fiscal 2017, advertising expense was $17.7 million, $16.3 million and $17.4 million, respectively.
Capitalized
Internal Use Software Costs
The Company capitalizes the cost of internal-use software that
has a useful life in excess of one year. These costs consist of payments made to third parties and the salaries of employees working
on such software development. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to
the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs
are expensed in the period in which they are incurred. Capitalized internal use software costs are amortized on a straight-line
basis over their estimated useful lives. Amortization expense related to such capitalized software in fiscal 2019, fiscal 2018
and fiscal 2017 was $16.3 million, $16.1 million and $14.2 million, respectively. Unamortized capitalized internal use software
costs at July 31, 2019 and 2018 were $21.9 million and $24.9 million, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Repairs
and Maintenance
The
Company charges the cost of repairs and maintenance, including the cost of replacing minor items not constituting substantial
betterment, to selling, general and administrative expenses as these costs are incurred.
Foreign
Currency Translation
Assets and liabilities of foreign subsidiaries denominated in
foreign currencies are translated to U.S. Dollars at end-of-period rates of exchange, and their monthly results of operations are
translated to U.S. Dollars at the average rates of exchange for that month. Gains or losses resulting from such foreign currency
translations are recorded in “Accumulated other comprehensive loss” in the accompanying consolidated balance sheets.
Foreign currency transaction gains and losses are reported in “Other income (expense), net” in the accompanying consolidated
statements of income.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance
is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate
realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary
differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date of such change.
The
Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The
Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position
has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant information. Tax positions that meet the more-likely-than-not recognition
threshold are measured to determine the amount of tax benefit to recognize in the financial statements. The tax position is measured
at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences
between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or
more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a
reduction in a deferred tax asset, or an increase in a deferred tax liability.
The
Company classifies interest and penalties on income taxes as a component of income tax expense.
Contingencies
The
Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates
that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can
reasonably be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range,
the Company records its best estimate within the range. When no amount within the range is a better estimate than any other amount,
the Company accrues the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when
it is at least reasonably possible that a loss may have been incurred.
Earnings
Per Share
Basic
earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the
weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per
share is determined in the same manner as basic earnings per share, except that the number of shares is increased to include restricted
stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock
method, unless the effect of such increase is anti-dilutive.
The
weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s
common stockholders consists of the following:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Basic weighted-average number of shares
|
|
|
25,293
|
|
|
|
24,655
|
|
|
|
23,182
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
9
|
|
|
|
44
|
|
Non-vested restricted Class B common stock
|
|
|
15
|
|
|
|
54
|
|
|
|
83
|
|
Diluted weighted-average number of shares
|
|
|
25,308
|
|
|
|
24,718
|
|
|
|
23,309
|
|
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following outstanding stock options were excluded from the
calculation of diluted earnings per share because the exercise prices of the stock options were greater than the average market
price of the Company’s stock during the period:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
1,204
|
|
|
|
1,142
|
|
|
|
22
|
|
Stock-Based
Compensation
The
Company recognizes compensation expense for all of its grants of stock-based awards based on the estimated fair value on the grant
date. Compensation cost for awards is recognized using the straight-line method over the vesting period. Stock-based compensation
is included in selling, general and administrative expense.
On
August 1, 2019, the Company adopted ASU No. 2018-07, Compensation—Stock Compensation (Topic 718), Improvements
to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based
payment transactions by expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees. The requirements of Topic 718 are applied to nonemployee awards except for specific guidance on inputs to an
option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the
pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions
in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based
payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide
(1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under Topic 606, Revenue from Contracts with Customers. The adoption of this ASU will not impact the Company’s
consolidated financial statements.
Vulnerability
Due to Certain Concentrations
Financial
instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents,
restricted cash and cash equivalents, debt securities, equity investments, and trade accounts receivable. The Company holds cash
and cash equivalents at several major financial institutions, which often exceed FDIC insurance limits. Historically, the Company
has not experienced any losses due to such concentration of credit risk. The Company’s temporary cash investments policy
is to limit the dollar amount of investments with any one financial institution and monitor the credit ratings of those institutions.
While the Company may be exposed to credit losses due to the nonperformance of the holders of its deposits, the Company does not
expect the settlement of these transactions to have a material effect on its results of operations, cash flows or financial condition.
Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of customers in various geographic regions and industry segments comprising the Company’s
customer base. No single customer accounted for more than 10% of consolidated revenues in fiscal 2019, fiscal 2018 or fiscal 2017.
However, the Company’s five largest customers collectively accounted for 13.6%, 12.5% and 12.4% of its consolidated revenues
in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. The Company’s customers with the five largest receivables balances
collectively accounted for 20.6% and 18.7% of the consolidated gross trade accounts receivable at July 31, 2019 and 2018, respectively.
This concentration of customers increases the Company’s risk associated with nonpayment by those customers. In an effort
to reduce such risk, the Company performs ongoing credit evaluations of its significant customers. In addition, the Company attempts
to mitigate the credit risk related to specific carrier services customers by also buying services from the customer, in order
to create an opportunity to offset its payables and receivables and reduce its net trade receivable exposure risk. When it is practical
to do so, the Company will increase its purchases from carrier services customers with receivable balances that exceed the Company’s
applicable payables in order to maximize the offset and reduce its credit risk.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance
for Doubtful Accounts
The
Company estimates the balance of its allowance for doubtful accounts by analyzing accounts receivable balances by age and applying
historical write-off and collection trend rates. The Company’s estimates include separately providing for customer
receivables based on specific circumstances and credit conditions, and when it is deemed probable that the balance is uncollectible. Account
balances are written off against the allowance when it is determined that the receivable will not be recovered. The change in
the allowance for doubtful accounts is as follows:
Year ended July 31
(in thousands)
|
|
Balance at beginning of year
|
|
|
Additions charged to costs and expenses
|
|
|
Deductions
(1)
|
|
|
Balance at end of year
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
5,358
|
|
|
$
|
2,028
|
|
|
$
|
(1,942
|
)
|
|
$
|
5,444
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
5,207
|
|
|
$
|
2,199
|
|
|
$
|
(2,048
|
)
|
|
$
|
5,358
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
4,818
|
|
|
$
|
686
|
|
|
$
|
(297
|
)
|
|
$
|
5,207
|
|
|
(1)
|
Primarily
uncollectible accounts written off, net of recoveries.
|
Fair
Value Measurements
Fair
value of financial and non-financial assets and liabilities is defined as an exit price, which is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The three-tier hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure
fair value, is as follows:
Level 1 –
|
quoted
prices (unadjusted) in active markets for identical assets or liabilities.
|
Level 2
–
|
quoted
prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either
directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
|
Level 3 –
|
unobservable
inputs based on the Company’s assumptions used to measure assets and liabilities at fair value.
|
A
financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement
requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair
value hierarchy.
In
fiscal 2019, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement, that modifies the disclosure requirements for fair value measurements.
The adoption of this ASU did not impact the fair value measurement disclosures in the Company’s consolidated financial statements
for fiscal 2019.
Leases
On August 1, 2019, the Company adopted ASU No. 2016-02, Leases
(Topic 842), and the amendments thereto, related to the accounting for leases (collectively referred to as “ASC 842”).
ASC 842 establishes a right-of-use (“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 are classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. Entities have the option to continue
to apply historical accounting under Topic 840, including its disclosure requirements, in comparative periods presented in the
year of adoption. An entity that elects this option will recognize a cumulative effect adjustment to the opening balance of retained
earnings in the period of adoption instead of the earliest period presented. The Company elected to apply the optional ASC 842
transition provisions beginning on August 1, 2019. Accordingly, the Company will continue to apply Topic 840 prior to August 1,
2019, including Topic 840 disclosure requirements, in the comparative periods presented. The Company elected the package of practical
expedients for all its leases that commenced before August 1, 2019. Based on the Company’s current agreements, the Company
expects that it will report an operating lease liability of $12.4 million and corresponding ROU assets as of August 1, 2019 based
on the present value of the remaining minimum rental payments associated with the Company’s leases. As the Company’s
leases do not provide an implicit rate, nor is one readily available, the Company used its incremental borrowing rate based on
information available at August 1, 2019 to determine the present value of its future minimum rental payments. The adoption of
ASC 842 will not have a material impact on the Company’s results of operations or total cash flows.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Hedge Accounting
On August 1, 2019, the Company adopted ASU No. 2017-12, Derivatives
and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, which is intended to improve the
financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities
in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge
accounting guidance in U.S. GAAP. Entities will apply the amendments to cash flow and net investment hedge relationships that
exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied
prospectively. The adoption of this ASU will not impact the Company’s consolidated financial statements at adoption.
Recently
Issued Accounting Standard Not Yet Adopted
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 “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.
Note
2—Revenue Recognition
Modified
Retrospective Method of Adoption and Cumulative Effect Adjustment
The
Company adopted ASC 606 as of August 1, 2018, using the modified retrospective method. As this method requires that the cumulative
effect of initially applying ASC 606 be recognized at the date of adoption, at August 1, 2018, the Company recorded an aggregate
$9.1 million reduction to “Accumulated deficit” for the cumulative effect of the adoption. The cumulative effect adjustment
included changes to the accounting for breakage and the costs to obtain and fulfill contracts with customers.
The adjustment for the change in accounting for breakage was primarily
from the Company’s BOSS Revolution international calling service, traditional calling cards, and international and domestic
Mobile Top-Up. A customer’s nonrefundable prepayment gives the customer a right to receive a good or service in the future
(and obliges the Company to stand ready to transfer that good or service). However, customers may not exercise all of their contractual
rights to receive that good or service. Those unexercised rights are referred to as breakage. Prior to the adoption of ASC 606,
the Company recorded breakage revenue when the likelihood of the customer exercising its remaining rights became remote. The Company
generally deemed the likelihood remote after 12 or 24 months of no activity (depending on the revenue stream). Per ASC 606, if
an entity expects to be entitled to a breakage amount, the entity should recognize the expected breakage amount as revenue in
proportion to the pattern of rights exercised by the customer, but only to the extent that it is probable that a significant reversal
in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the breakage is subsequently
resolved. The Company determined that $8.6 million included in its opening balance of “Deferred revenue” would have
been recognized as breakage revenue under ASC 606 in prior periods, and accordingly, as of August 1, 2018, recorded an $8.6 million
reduction to “Deferred revenue”, a $0.8 million decrease in “Deferred income tax assets,” and an offsetting
$7.8 million reduction to “Accumulated deficit.”
ASC 606 changed the accounting for costs to obtain and fulfill
contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers are
deferred and amortized consistent with the transfer of the related good or service. The Company incurs incremental costs of obtaining
a customer contract, it does not incur direct costs to fulfill contracts. The Company determined that the cumulative effect of
initially applying ASC 606 to defer its incremental costs of obtaining a customer contract was $1.3 million, primarily related
to its net2phone-UCaaS business. Accordingly, as of August 1, 2018, the Company recorded an increase in “Other current assets”
of $0.6 million and an increase in “Other assets” of $0.7 million, with an offsetting reduction to “Accumulated
deficit” of $1.3 million.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Breakage
Revenue: Methods, Inputs and Assumptions
The Company’s inputs for recording breakage revenue was its
aging of the deferred revenue balance for its BOSS Revolution international calling service, traditional calling cards, Mobile
Top-Up, and other revenue streams with deferred revenue balances. Upon the adoption of ASC 606, the Company’s method changed
to an estimate of expected breakage revenue by revenue stream recorded each month, based on inputs and assumptions about usage
of the deferred revenue balances. The Company used its historical deferred revenue usage data by revenue stream to calculate the
percentage of deferred revenue by month that will become breakage. The historical data indicated that customers utilize a very
high percentage of minutes purchased in the first three months. The Company reviews its estimates quarterly based on updated data
and adjusts the monthly estimates accordingly.
Contracts
with Customers
The Company earns revenue from contracts
with customers, primarily through the provision of retail telecommunications and payment offerings as well as wholesale international
long-distance traffic termination. The Telecom & Payment Services segment markets and distributes the following communications
and payment services: (1) retail communications, which includes international long-distance calling products primarily to foreign-born
communities, with its core markets in the United States; (2) wholesale carrier services terminating international long distance
calls around the world for Tier 1 fixed line and mobile network operators, as well as other service providers; and (3) payment
services, such as Mobile Top-Up, domestic bill payment and international money transfer, and National Retail Solutions, the Company’s
merchant services offerings through point-of-sale terminals. The net2phone segment is comprised of cloud-based communications services,
Session Initiation Protocol (“SIP”) trunking, and cable telephony.
The Company’s most significant
revenue streams are from its BOSS Revolution international calling service, Mobile Top-Up, and wholesale termination provided
by its Carrier Services business. The BOSS Revolution international calling service and Mobile Top-Up are sold direct-to-consumers
and through distributors and retailers.
BOSS
Revolution international calling service direct-to-consumers
BOSS
Revolution international calling service direct-to-consumers is offered on a pay-as-you-go basis or in unlimited plans. The customer
prepays for service in both cases, which results in a contract liability (deferred revenue). The contract term for pay-as-you-go
plans is minute-to-minute that includes separate performance obligations for the series of material rights to renew the contract.
The performance obligation is satisfied immediately after it arises, and the amount of consideration is known when the obligation
is satisfied. Since the Company’s satisfaction of its performance obligation and the customer’s use of the service
occur simultaneously, the Company recognizes revenue at the point in time when minutes are utilized, since the customer obtained
control and the Company has a present right to payment. For unlimited plans, the Company has a stand ready obligation to provide
service over time for an agreed upon term. Unlimited plans include fixed consideration over the term. Plan fees for unlimited
plans are generally refundable up to three days after payment if there was no usage. Since the Company’s satisfaction of
its performance obligation and the customer’s use of the service occur over the term, the Company recognizes revenue over
a period of time as the service is rendered. The Company uses an output method as time elapses because it reflects the pattern
by which the Company satisfies its performance obligation through the transfer of service to the customer. The fixed upfront consideration
is recognized evenly over the service period, which is generally 24 hours, 7 days, or one month.
BOSS
Revolution international calling service sold through distributors and retailers
BOSS Revolution international calling service sold through distributors
and retailers is the same service as BOSS Revolution international calling service direct-to-consumers. The Company sells capacity
to international calling minutes to retailers, or to distributors who resell to retailers. The retailer or distributor is the
Company’s customer in these transactions. The Company’s sales price to retailers and distributors is less than the
end user rate for BOSS Revolution international calling service minutes. The customer or the Company may terminate their agreement
at any time upon thirty days written notice without penalty. Retailers may sell the BOSS Revolution international calling service
on a pay-as-you-go basis or in unlimited plans. As described above, for pay-as-you-go, the Company recognizes revenue at the point
in time when minutes are utilized, and for unlimited plans, the Company recognizes revenue over a period of time as the service
is rendered. Retailers and distributors also receive renewal commissions when certain end users subsequently purchase minutes
directly from the Company. Renewal commission payments are accounted for as a reduction of the transaction price over time as
the end user uses the service.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Mobile Top-Up
Mobile Top-Up is sold direct-to-consumers and through distributors
and retailers in the same manner as the BOSS Revolution international calling service. The Company does not terminate the minutes
in its Mobile Top-Up transactions. The Company’s performance obligation is to recharge (top-up) the airtime balance of a
mobile account on behalf of the Company’s customer. The Company has contracts with various mobile operators or aggregators
to provide the Mobile Top-Up service. The Company determined that it is the principal in primarily all its Mobile Top-Up transactions
as the Company controls the service to top-up a mobile account on behalf of the Company’s customer. However, for a portion
of its domestic Mobile Top-Up business where the Company has no customer service responsibilities, no inventory risk, and does
not establish the price, the Company determined that, as the Company is not considered to control the arrangement, it acts as
an agent of the mobile operators. The Company records gross revenues based on the amount billed to the customer when it is the
principal in the arrangement and records revenue net of the associated costs incurred when it acts as an agent in the arrangement.
The performance obligation is satisfied, and revenue is recognized when the recharge of the mobile account occurs. Accordingly,
transfer of control happens at the point in time that the airtime is recharged, which is when the Company has a right to payment
and the customer has accepted the service.
Carrier
Services
Carrier
Services are offered to both postpaid and prepaid customers. Postpaid customers are billed in arrears and typically consist of
credit-worthy companies such as Tier 1 carriers and mobile network operators. Prepaid customers are typically smaller communications
companies and independent call aggregators. There is no performance obligation until the transport and termination of international
long-distance calls commences. The initial contract durations range from six months to one year with successive extensions. During
the initial term, the contract can only be terminated in certain instances (such as bankruptcy of either party, damage to the
other party’s network, fraud, or breach of contract). However, no penalties are applied if the agreement is terminated in
the initial term. After the initial term has expired, either party may terminate the agreement with notice of 30 days to 60 days
depending on the agreement. The term of the contract is essentially minute-to-minute as there is no penalty for an early termination
and no obligation to send traffic.
Each
iteration is a separate optional purchase that is occurring over the contract duration (that is, minute-by-minute). The satisfaction
of the performance obligation is occurring at a point in time (as the minutes are transferred) because the provision of the service
and the satisfaction of the performance obligation are essentially occurring simultaneously. Revenue is recognized at the point
in time upon delivery of the service.
The
Company has not generally entered into contracts that have retroactive pricing features. Additionally, as the performance obligations
are considered minute-by-minute obligations in the original contract, any modification of the original contract that leads to
a conclusion that there is a new contract would not result in any adjustment related to the original contract’s consideration.
The
Company provides discounts to its larger customers based on the expectation of a significant volume of minutes that are consistent
with that class of customer in the wholesale carrier market. The discounts do not provide a material right to the customer because
the customer receives the same pricing for all usage under the contract.
Carrier
Services’ contracts may include tiered pricing based on minute volumes. The Company determined that its retroactive tiered
pricing should be accounted for as variable consideration because the final transaction price is unknown until the customer completes
or fails to complete the specified threshold. Currently, contracts with retroactive tiered pricing are not material. The Company
estimates the amount of variable consideration to include in the transaction price only to the extent that it is probable that
a subsequent change in the estimate would not result in a significant revenue reversal.
Carrier
Services’ NORT contracts include the promise of minimum guaranteed amounts of traffic. The performance obligation represents
a stand ready obligation to provide the specified number of minutes over the contractual term. The initial terms of NORT contracts
generally range from one month to six months. Since the Company’s satisfaction of its performance obligation of routing
calls to their destination includes a minimum guaranteed amount of traffic, the Company recognizes revenue over a period of time
as the service is rendered. The customer simultaneously receives and consumes the benefits provided by the Company’s performance
as the Company performs. The Company uses an output method as the usage of minutes occur because it reflects the pattern by which
the Company satisfies its performance obligation through the transfer of service to the customer.
Disaggregated
Revenues
The
Company’s core operations are mostly minute-based, paid-voice communications services, and revenue is primarily recognized
at a point in time. The Company’s Telecom & Payment Services’ growth initiatives and net2phone-UCaaS are technology-driven,
synergistic businesses that leverage the core assets, and revenue in some cases is recognized over time.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following table shows the Company’s revenues disaggregated by business segment and service offered to customers:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Core Operations:
|
|
|
|
|
|
|
|
|
|
BOSS Revolution Calling
|
|
$
|
490,649
|
|
|
$
|
529,713
|
|
|
$
|
549,312
|
|
Carrier Services
|
|
|
514,202
|
|
|
|
639,028
|
|
|
|
599,934
|
|
Mobile Top-Up
|
|
|
271,995
|
|
|
|
253,524
|
|
|
|
219,763
|
|
Other
|
|
|
55,629
|
|
|
|
67,903
|
|
|
|
85,812
|
|
Growth
|
|
|
29,433
|
|
|
|
21,305
|
|
|
|
15,166
|
|
Total Telecom & Payment Services
|
|
|
1,361,908
|
|
|
|
1,511,473
|
|
|
|
1,469,987
|
|
net2phone-UCaaS
|
|
|
24,482
|
|
|
|
13,276
|
|
|
|
7,037
|
|
net2phone-Platform Services
|
|
|
22,782
|
|
|
|
21,581
|
|
|
|
22,413
|
|
Total net2phone
|
|
|
47,264
|
|
|
|
34,857
|
|
|
|
29,450
|
|
All Other
|
|
|
—
|
|
|
|
1,165
|
|
|
|
2,292
|
|
TOTAL
|
|
$
|
1,409,172
|
|
|
$
|
1,547,495
|
|
|
$
|
1,501,729
|
|
The
following tables show the Company’s revenues disaggregated by geographic region, which is determined based on selling location:
(in thousands)
|
|
Telecom
& Payment
Services
|
|
|
net2phone
|
|
|
All Other
|
|
|
Total
|
|
Year ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
901,997
|
|
|
$
|
33,857
|
|
|
$
|
—
|
|
|
$
|
935,854
|
|
Outside the United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
195,661
|
|
|
|
21
|
|
|
|
—
|
|
|
|
195,682
|
|
Netherlands
|
|
|
192,284
|
|
|
|
—
|
|
|
|
—
|
|
|
|
192,284
|
|
Other
|
|
|
71,966
|
|
|
|
13,386
|
|
|
|
—
|
|
|
|
85,352
|
|
Total outside the United States
|
|
|
459,911
|
|
|
|
13,407
|
|
|
|
—
|
|
|
|
473,318
|
|
TOTAL
|
|
$
|
1,361,908
|
|
|
$
|
47,264
|
|
|
$
|
—
|
|
|
$
|
1,409,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,021,004
|
|
|
$
|
27,161
|
|
|
$
|
1,165
|
|
|
$
|
1,049,330
|
|
Outside the United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
220,257
|
|
|
|
3
|
|
|
|
—
|
|
|
|
220,260
|
|
Netherlands
|
|
|
191,076
|
|
|
|
—
|
|
|
|
—
|
|
|
|
191,076
|
|
Other
|
|
|
79,136
|
|
|
|
7,693
|
|
|
|
—
|
|
|
|
86,829
|
|
Total outside the United States
|
|
|
490,469
|
|
|
|
7,696
|
|
|
|
—
|
|
|
|
498,165
|
|
TOTAL
|
|
$
|
1,511,473
|
|
|
$
|
34,857
|
|
|
$
|
1,165
|
|
|
$
|
1,547,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,009,194
|
|
|
$
|
22,309
|
|
|
$
|
2,292
|
|
|
$
|
1,033,795
|
|
Outside the United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
211,249
|
|
|
|
—
|
|
|
|
—
|
|
|
|
211,249
|
|
Netherlands
|
|
|
175,869
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,869
|
|
Other
|
|
|
73,675
|
|
|
|
7,141
|
|
|
|
—
|
|
|
|
80,816
|
|
Total outside the United States
|
|
|
460,793
|
|
|
|
7,141
|
|
|
|
—
|
|
|
|
467,934
|
|
TOTAL
|
|
$
|
1,469,987
|
|
|
$
|
29,450
|
|
|
$
|
2,292
|
|
|
$
|
1,501,729
|
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Remaining
Performance Obligations
The
Company’s revenue is generally recognized in the same period that its performance obligations are satisfied. The Company
does not have any significant revenue from performance obligations satisfied or partially satisfied in previous reporting periods,
or transaction price to be allocated to performance obligations that are unsatisfied (or partially unsatisfied) at the end of
a reporting period.
Accounts
Receivable and Contract Balances
The timing of revenue recognition may
differ from the time of billing to the Company’s customers. Trade accounts receivable in the Company’s consolidated
balance sheets represent unconditional rights to consideration. An entity records a contract asset when revenue is recognized in
advance of the entity’s right to bill and receive consideration. The Company has not identified any contract assets.
Contract liabilities arise when the
Company receives consideration or bills its customers prior to providing the goods or services promised in the contract. The primary
component of the Company’s contract liability balance is the payments received for its prepaid BOSS Revolution international
calling service, traditional calling cards, and Mobile Top-Up services. Contract liabilities are recognized as revenue when services
are provided to the customer. The contract liability balances are presented in the Company’s consolidated balance sheet
as “Deferred revenue”. The Company’s revenue recognized in fiscal 2019 from amounts included in the contract
liability balance at August 1, 2018 was $41.3 million.
Deferred
Customer Contract Acquisition and Fulfillment Costs
ASC 606 changed the accounting for costs to obtain and fulfill
contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers are deferred
and amortized consistent with the transfer of the related good or service. The Company’s incremental costs of obtaining a
customer contract are sales commissions paid to acquire customers. For Telecom & Payment Services, the Company applies the
practical expedient whereby the Company primarily charges these costs to expense when incurred because the amortization period
would be one year or less for the asset that would have been recognized from deferring these costs. For net2phone-UCaaS sales,
employees and third parties receive commissions on sales to end users. The Company amortizes the deferred costs over the expected
customer relationship period when it is expected to exceed one year.
At July 31, 2019, the Company’s deferred customer contract
acquisition costs were $3.2 million, of which $1.5 million were included in “Other current assets” and $1.7 million
were included in “Other assets” in the Company’s consolidated balance sheet. For fiscal 2019, the Company amortized
$1.8 million of deferred customer contract acquisition costs.
Note
3—Cash, Cash Equivalents, and Restricted Cash and Cash Equivalents
On
August 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, related
to the classification and presentation of changes in restricted cash in the statement of cash flows. The following table provides
a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported in the consolidated balance sheet
that equals the total of the same amounts reported in the consolidated statement of cash flows:
July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
80,168
|
|
|
$
|
73,981
|
|
Restricted cash and cash equivalents
|
|
|
177,031
|
|
|
|
129,216
|
|
TOTAL CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AND CASH EQUIVALENTS
|
|
$
|
257,199
|
|
|
$
|
203,197
|
|
At July 31, 2019 and 2018,
restricted cash and cash equivalents included $176.8 million and $128.9 million, respectively, in cash and cash equivalents held
by IDT Financial Services Limited, the Company’s Gibraltar-based bank.
Note
4—Rafael Holdings, Inc. Spin-Off
On March 26, 2018, the Company completed a pro rata distribution
of the common stock that the Company held in the Company’s subsidiary, Rafael Holdings, Inc. (“Rafael”), to the
Company’s stockholders of record as of the close of business on March 13, 2018 (the “Rafael Spin-Off”). The Rafael
Spin-Off did not meet the criteria to be reported as a discontinued operation and accordingly, Rafael’s assets, liabilities,
results of operations and cash flows have not been reclassified. In connection with the Rafael Spin-Off, each of the Company’s
stockholders received one share of Rafael Class A common stock for every two shares of the Company’s Class A common stock
and one share of Rafael Class B common stock for every two shares of the Company’s Class B common stock, held of record as
of the close of business on March 13, 2018. The Company received a legal opinion that the Rafael Spin-Off should qualify as a tax-free
transaction for U.S. federal income tax purposes.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At the time of the Rafael Spin-Off, Rafael owned the commercial
real estate assets and interests in two clinical stage pharmaceutical companies that were previously held by the Company. The
commercial real estate holdings consisted of the Company’s headquarters building and its associated public garage in Newark,
New Jersey, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices
for the Company and certain affiliates. The pharmaceutical holdings included debt interests and warrants in Rafael Pharmaceuticals,
Inc. (“Rafael Pharma”), which, at the time, was a clinical stage, oncology-focused pharmaceutical company committed
to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells,
and a majority equity interest in Lipomedix Pharmaceuticals Ltd. (“Lipomedix”), which, at the time, was a pharmaceutical
development company based in Israel.
In
March 2018, in connection with the Rafael Spin-Off, each holder of options to purchase an aggregate of 1.3 million shares of the
Company’s Class B common stock shared ratably in a pool of options to purchase 0.6 million shares of Rafael Class B common
stock. The Company accounted for the grant of the new options in Rafael as a modification. In fiscal 2018, the Company recorded
stock-based compensation expense for the aggregate incremental value from the modification of $0.2 million.
The
carrying amounts of Rafael’s assets and liabilities included as part of the disposal group in the Rafael Spin-Off were as
follows:
(in thousands)
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,287
|
|
Debt securities
|
|
|
32,989
|
|
Trade accounts receivable
|
|
|
53
|
|
Other current assets
|
|
|
2,329
|
|
Property, plant and equipment, net
|
|
|
50,624
|
|
Investments
|
|
|
17,650
|
|
Other assets
|
|
|
2,240
|
|
Current liabilities
|
|
|
(159
|
)
|
Other liabilities
|
|
|
(94
|
)
|
Noncontrolling interests
|
|
|
(8,653
|
)
|
Rafael equity
|
|
$
|
106,266
|
|
Rafael’s
(loss) income before income taxes and (loss) income before income taxes attributable to the Company, which was included in the
accompanying consolidated statements of income, were as follows:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
$
|
—
|
|
|
$
|
(2,410
|
)
|
|
$
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES ATTRIBUTABLE TO IDT CORPORATION
|
|
$
|
—
|
|
|
$
|
(2,107
|
)
|
|
$
|
517
|
|
In
September 2016, Rafael Pharma 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 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 a prior
funding.
On
March 2, 2017, the Company sold 10% of the Company’s direct and indirect interests and rights in Rafael Pharma to Howard
S. Jonas, the Company’s Chairman of the Board, and Chairman of the Board of Rafael, for a purchase price of $1 million.
As a result of this transaction, the Company recorded an increase of $1.2 million in “Noncontrolling interests” and
a decrease of $0.2 million in “Additional paid-in capital” in the accompanying consolidated balance sheet.
The
Company’s former 90%-owned non-operating subsidiary, IDT-Rafael Holdings, LLC (“IDT-Rafael Holdings”), had the
contractual right to receive additional shares of Rafael Pharma representing 10% of the outstanding capital stock of Rafael Pharma
that will be issued upon the occurrence of certain events, none of which had been satisfied at the time of the Rafael Spin-Off.
On September 14, 2017, IDT-Rafael Holdings distributed this right to its members on a pro rata basis such that the Company received
the right to 9% of the outstanding capital stock of Rafael Pharma and Howard S. Jonas received the right to 1% of the outstanding
capital stock of Rafael Pharma. In addition, as compensation for assuming the role of Chairman of the Board of Rafael Pharma,
and to create additional incentive to contribute to the success of Rafael Pharma, on September 19, 2017, the Company transferred
its right to receive 9% of the outstanding capital stock of Rafael Pharma to Mr. Jonas.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Company and CS Pharma held warrants to purchase shares of capital stock of Rafael Pharma representing in the aggregate up to 56%
of the then issued and outstanding capital stock of Rafael Pharma, on an as-converted and fully diluted basis.
Rafael
Pharma was a variable interest entity, however, the Company determined that it was not the primary beneficiary as the Company
did not have the power to direct the activities of Rafael Pharma that most significantly impacted Rafael Pharma’s economic
performance.
In
addition to interests issued to the Company, CS Pharma issued member interests to third parties in exchange for cash
investment in CS Pharma of $10 million. In fiscal 2017, the Company recorded additional paid-in capital of $2.8 million and
noncontrolling interests of $7.2 million upon the issuance of these member interests.
In
November 2017, the Company purchased additional shares of Lipomedix that increased the Company’s ownership to 50.6% of the
issued and outstanding ordinary shares of Lipomedix. The Company began consolidating Lipomedix because of this share purchase.
Note
5—IDT Financial Services Holding Limited Previously Recorded as Held for Sale
On
June 22, 2017, the Company’s wholly-owned subsidiary IDT Telecom, Inc. (“IDT Telecom”) entered into a Share
Purchase Agreement (the “Agreement”) with JAR Fintech Limited (“JAR Fintech”) and JAR Capital Limited
to sell the capital stock of IDT Financial Services Holding Limited, a company incorporated under the laws of Gibraltar and a
wholly-owned subsidiary of IDT Telecom (“IDTFS Holding”), to JAR Fintech. IDTFS Holding is the sole shareholder of
IDT Financial Services Limited, a Gibraltar-based bank and e-money issuer, providing prepaid card solutions across the European
Economic Area. The sale was subject to regulatory approval and other conditions. The proposed sale of IDTFS Holding did not meet
the criteria to be reported as a discontinued operation and accordingly, its results of operations and cash flows were not reclassified.
Beginning in fiscal 2017, IDTFS Holding’s assets and liabilities were classified as held for sale in the consolidated balance
sheet.
In April 2019, Brexit (the withdrawal of the U.K. from the EU)
was postponed. The pending nature of Brexit necessitated negotiation of further changes to the terms of the sale. As a result of
the continued uncertainty pertaining to Brexit, the significant passage of time since the termination of the Agreement, and absence
of any formal binding agreement with the buyer, the Company determined that the sale was no longer probable to close within twelve
months. As a result, as of April 30, 2019, IDTFS Holding was reclassified as held and used in the consolidated balance sheet for
all periods presented. There was no impact on the Company’s results of operations, cash flows, and segments. The Company
is no longer pursuing a transaction with JAR Fintech and the Company is continuing to invest in and operate IDT Financial Services
Limited as part of its portfolio of businesses.
Note
6—Acquisition of Versature Corp.
On
September 14, 2018, the Company acquired 100% of the outstanding shares of Versature Corp., a UCaaS provider serving the Canadian
market, for cash of $5.9 million. The acquisition expanded the Company’s UCaaS business into Canada. Versature’s operating
results from the date of acquisition, which were not significant, are included in the Company’s consolidated financial statements.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
impact of the acquisition’s purchase price allocations on the Company’s consolidated balance sheet and the acquisition
date fair value of the total consideration transferred were as follows (in thousands):
(in thousands)
|
|
|
|
Trade accounts receivable
|
|
$
|
370
|
|
Prepaid expenses
|
|
|
65
|
|
Property, plant and equipment
|
|
|
1,826
|
|
Non-compete agreement
|
|
|
600
|
|
Customer relationships
|
|
|
3,003
|
|
Tradename
|
|
|
490
|
|
Other assets
|
|
|
486
|
|
Trade accounts payable
|
|
|
(81
|
)
|
Accrued expenses
|
|
|
(523
|
)
|
Other liabilities
|
|
|
(710
|
)
|
Net assets excluding cash acquired
|
|
$
|
5,526
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
Cash paid
|
|
$
|
5,943
|
|
Cash acquired
|
|
|
(417
|
)
|
Total consideration, net of cash acquired
|
|
$
|
5,526
|
|
The
following table presents unaudited pro forma information of the Company as if the acquisition occurred on August 1, 2016:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
1,410,056
|
|
|
$
|
1,553,815
|
|
|
$
|
1,506,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
121
|
|
|
$
|
5,148
|
|
|
$
|
9,185
|
|
Note
7—Debt Securities
The
following is a summary of marketable debt securities:
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit*
|
|
$
|
2,234
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,234
|
|
Municipal bonds
|
|
|
300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
300
|
|
TOTAL
|
|
$
|
2,534
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,534
|
|
July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit*
|
|
$
|
3,032
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,032
|
|
U.S. Treasury notes
|
|
|
1,693
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
1,692
|
|
Municipal bonds
|
|
|
888
|
|
|
|
—
|
|
|
|
—
|
|
|
|
888
|
|
TOTAL
|
|
$
|
5,613
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
5,612
|
|
|
*
|
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.
|
Equity securities with a fair value of $0.4 million at July 31,
2018 were reclassified to current “Equity investments” to conform to the current year presentation (see Note 8).
Proceeds from maturities and sales of available-for-sale securities
were $5.3 million, $41.5 million and $48.0 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Realized gains from
sales of available-for-sale securities were nil, nil and $0.3 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
Realized losses from sales of available-for-sale securities were nil, $16,000 and nil in fiscal 2019, fiscal 2018 and fiscal 2017,
respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
contractual maturities of the Company’s available-for-sale debt securities at July 31, 2019 were as follows:
(in thousands)
|
|
Fair Value
|
|
Within one year
|
|
$
|
2,534
|
|
After one year through five years
|
|
|
—
|
|
After five years through ten years
|
|
|
—
|
|
After ten years
|
|
|
—
|
|
TOTAL
|
|
$
|
2,534
|
|
The following available-for-sale debt securities were in an
unrealized loss position for which other-than-temporary impairments were not recognized:
(in thousands)
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
July 31, 2018
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
1
|
|
|
$
|
1,692
|
|
At
July 31, 2019 and 2018, there were no securities in a continuous unrealized loss position for 12 months or longer.
Note
8—Equity Investments
At August 1, 2018, the cumulative effect of adopting ASU No. 2016-01,
Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial
Liabilities (see Note 1) was a $1.2 million increase in noncurrent “Equity investments”, a $33,000 decrease in
“Accumulated other comprehensive loss” and a $1.1 million decrease in “Accumulated deficit”, primarily
from the measurement at fair value of the Company’s shares of Visa Inc. Series C Convertible Participating Preferred Stock
(“Visa Series C Preferred”) and the derecognition of unrealized holding losses on equity securities classified as
available-for-sale.
Equity
investments consist of the following:
July 31
(dollars in thousands)
|
|
2019
|
|
|
2018
|
|
Zedge, Inc. Class B common stock, 42,282 shares at July 31, 2019 and 2018
|
|
$
|
68
|
|
|
$
|
125
|
|
Rafael Class B common stock, 27,419 and 25,803 shares at July 31, 2019 and 2018, respectively
|
|
|
567
|
|
|
|
235
|
|
Mutual funds
|
|
|
5,053
|
|
|
|
—
|
|
Current “Equity investments”
|
|
$
|
5,688
|
|
|
$
|
360
|
|
|
|
|
|
|
|
|
|
|
Visa Series C Preferred
|
|
$
|
3,619
|
|
|
$
|
1,580
|
|
Hedge funds
|
|
|
5,475
|
|
|
|
4,787
|
|
Other
|
|
|
225
|
|
|
|
266
|
|
Noncurrent “Equity investments”
|
|
$
|
9,319
|
|
|
$
|
6,633
|
|
On
June 1, 2016, the Company completed a pro rata distribution of the common stock that the Company held in the Company’s subsidiary
Zedge, Inc. to the Company’s stockholders of record as of the close of business on May 26, 2016 (the “Zedge Spin-Off”).
The Company received the Zedge and Rafael shares in connection with the lapsing of restrictions on Zedge and Rafael restricted
stock held by certain of the Company’s employees and the Company’s payment of taxes related thereto.
In June 2016, upon the acquisition of Visa Europe Limited by
Visa, Inc., IDT Financial Services Limited received 1,830 shares of Visa Series C Preferred among other consideration. Each share
of Visa Series C Preferred is convertible into 13.886 shares of Visa Class A common stock at Visa’s option starting in June
2020 and will be convertible at the holder’s option beginning in June 2028.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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:
Year ended July 31, 2019
(in thousands)
|
|
|
|
Balance at July 31, 2018
|
|
$
|
1,883
|
|
Adoption of change in accounting for equity investments
|
|
|
1,213
|
|
Balance at August 1, 2018
|
|
|
3,096
|
|
Adjustment for observable transactions involving a similar investment from the same issuer
|
|
|
826
|
|
Redemptions
|
|
|
(3
|
)
|
Impairments
|
|
|
—
|
|
BALANCE AT JULY 31, 2019
|
|
$
|
3,919
|
|
In fiscal 2019, the Company increased the carrying value of
the 1,830 shares of Visa Series C Preferred it held by $0.8 million based on the fair value of Visa Class A common stock and a
discount for lack of current marketability.
Unrealized
gains and losses for all equity investments included the following:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net gains (losses) recognized during the period on equity investments
|
|
$
|
1,779
|
|
|
$
|
(6
|
)
|
|
$
|
355
|
|
Less: net gains recognized during the period on equity investments redeemed during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
(378
|
)
|
Unrealized gains (losses) recognized during the period on equity investments still held at the reporting date
|
|
$
|
1,779
|
|
|
$
|
(6
|
)
|
|
$
|
(23
|
)
|
Note
9—Fair Value Measurements
The
following table presents the balance of assets measured at fair value on a recurring basis:
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
—
|
|
|
$
|
2,534
|
|
|
$
|
—
|
|
|
$
|
2,534
|
|
Equity investments included in current assets
|
|
|
5,688
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,688
|
|
Equity investments included in noncurrent assets
|
|
|
—
|
|
|
|
—
|
|
|
|
3,619
|
|
|
|
3,619
|
|
TOTAL
|
|
$
|
5,688
|
|
|
$
|
2,534
|
|
|
$
|
3,619
|
|
|
$
|
11,841
|
|
July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
1,692
|
|
|
$
|
3,920
|
|
|
$
|
—
|
|
|
$
|
5,612
|
|
Equity investments included in current assets
|
|
|
360
|
|
|
|
—
|
|
|
|
—
|
|
|
|
360
|
|
TOTAL
|
|
$
|
2,052
|
|
|
$
|
3,920
|
|
|
$
|
—
|
|
|
$
|
5,972
|
|
At July 31, 2019 and 2018, the Company had $5.5 million and
$4.8 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.
At
July 31, 2019 and 2018, the Company did not have any liabilities measured at fair value on a recurring basis.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following tables summarize the change in the balance of the Company’s assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3). There were no liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) in fiscal 2019, 2018 or 2017.
Year ended July 31,
|
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Balance, beginning of period
|
|
$
|
—
|
|
|
$
|
6,300
|
|
|
$
|
2,000
|
|
Transfer into Level 3 from adoption of change in accounting for equity investments
|
|
|
2,793
|
|
|
|
—
|
|
|
|
—
|
|
Total gains included in “Other income (expense), net”
|
|
|
826
|
|
|
|
—
|
|
|
|
—
|
|
Total gains included in other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
2,100
|
|
Purchases
|
|
|
—
|
|
|
|
—
|
|
|
|
2,200
|
|
Rafael Spin-Off
|
|
|
—
|
|
|
|
(6,300
|
)
|
|
|
—
|
|
BALANCE, END OF PERIOD
|
|
$
|
3,619
|
|
|
$
|
—
|
|
|
$
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period
|
|
$
|
826
|
|
|
$
|
—
|
|
|
$
|
—
|
|
At July 31, 2017, the fair value of the Rafael Pharma convertible
promissory notes, which were classified as Level 3, was estimated based on a valuation of Rafael Pharma and other factors that
could not be corroborated by the market.
Fair
Value of Other Financial Instruments
The
estimated fair value of the Company’s other financial instruments was determined using available market information or other
appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates
of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid
in a current market exchange.
Cash
and cash equivalents, restricted cash and cash equivalents, other current assets, customer deposits, and other current liabilities.
At July 31, 2019 and 2018, the carrying amount of these assets and liabilities approximated fair value because of the short
period of time to maturity. The fair value estimates for cash, cash equivalents and restricted cash and cash equivalents were
classified as Level 1 and other current assets, customer deposits, and other current liabilities were classified as Level 2 of
the fair value hierarchy.
Other
assets and other liabilities. At July 31, 2019 and 2018, 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
10—Property, Plant and Equipment
Property,
plant and equipment consist of the following:
July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
Equipment
|
|
$
|
78,172
|
|
|
$
|
73,872
|
|
Computer software
|
|
|
122,289
|
|
|
|
107,223
|
|
Leasehold improvements
|
|
|
1,384
|
|
|
|
839
|
|
Furniture and fixtures
|
|
|
403
|
|
|
|
351
|
|
|
|
|
202,248
|
|
|
|
182,285
|
|
Less accumulated depreciation and amortization
|
|
|
(167,893
|
)
|
|
|
(146,205
|
)
|
Property, plant and equipment, net
|
|
$
|
34,355
|
|
|
$
|
36,080
|
|
Depreciation and amortization expense of property, plant and
equipment was $22.3 million, $22.7 million and $21.4 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
11—Goodwill
The
table below reconciles the change in the carrying amount of goodwill by operating segment for the period from July 31, 2017 to
July 31, 2019:
(in thousands)
|
|
Telecom
& Payment
Services
|
|
Balance as of July 31, 2017
|
|
$
|
11,326
|
|
Foreign currency translation adjustments
|
|
|
(11
|
)
|
Balance as of July 31, 2018
|
|
|
11,315
|
|
Foreign currency translation adjustments
|
|
|
(106
|
)
|
Balance as of July 31, 2019
|
|
$
|
11,209
|
|
Note
12—Other Intangible Assets
The
table below presents information on the Company’s amortized intangible assets:
(in thousands)
|
|
Weighted
Average
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Balance
|
|
July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
17.0 years
|
|
$
|
970
|
|
|
$
|
(320
|
)
|
|
$
|
650
|
|
Non-compete agreement
|
|
5.0 years
|
|
|
595
|
|
|
|
(104
|
)
|
|
|
491
|
|
Customer relationships
|
|
11.9 years
|
|
|
6,136
|
|
|
|
(3,081
|
)
|
|
|
3,055
|
|
TOTAL
|
|
12.0 years
|
|
$
|
7,701
|
|
|
$
|
(3,505
|
)
|
|
$
|
4,196
|
|
July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
4.7 years
|
|
$
|
398
|
|
|
$
|
(173
|
)
|
|
$
|
225
|
|
Customer relationships
|
|
4.8 years
|
|
|
3,154
|
|
|
|
(2,883
|
)
|
|
|
271
|
|
TOTAL
|
|
4.8 years
|
|
$
|
3,552
|
|
|
$
|
(3,056
|
)
|
|
$
|
496
|
|
Amortization expense of intangible assets was $0.3 million,
$0.1 million and $0.3 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. The Company estimates that amortization
expense of intangible assets with finite lives will be $0.4 million, $0.4 million, $0.3 million, $0.3 million and $0.2 million
in fiscal 2020, fiscal 2021, fiscal 2022, fiscal 2023 and fiscal 2024, respectively.
Note 13—Other Operating Expense, Net
The following table summarizes the other operating expense,
net by business segment:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Corporate — gain (losses) related to Straight Path Communications Inc.
|
|
$
|
326
|
|
|
$
|
(1,655
|
)
|
|
$
|
(10,436
|
)
|
Corporate—gain (losses) related to other legal matters
|
|
|
—
|
|
|
|
(628
|
)
|
|
|
24
|
|
net2phone—indemnification claim and other, net
|
|
|
(267
|
)
|
|
|
(115
|
)
|
|
|
—
|
|
Telecom & Payment Services—accrual for non-income related taxes related to a foreign subsidiary
|
|
|
(8,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Telecom & Payment Services—gain on sale of calling card business in Asia
|
|
|
215
|
|
|
|
—
|
|
|
|
—
|
|
Telecom & Payment Services—adjustment to gain on sale of member interest in Visa Europe Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
(63
|
)
|
TOTAL
|
|
$
|
(7,726
|
)
|
|
$
|
(2,398
|
)
|
|
$
|
(10,475
|
)
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Straight
Path Communications Inc. Class Action
On July 31, 2013, the Company completed a pro rata distribution
of the common stock of the Company’s subsidiary Straight Path Communications Inc. (“Straight Path”) to the Company’s
stockholders of record as of the close of business on July 25, 2013 (the “Straight Path Spin-Off”). As discussed in
Note 21, a putative class action on behalf of Straight Path’s stockholders and derivative complaint was filed naming the
Company, among others. In fiscal 2019 and fiscal 2018, the Company incurred legal fees of $2.0 million and $1.7 million, respectively,
related to this action. Also, in fiscal 2019, the Company recorded insurance proceeds for this matter of $2.3 million.
Indemnification Claim
In June 2019, as part of a commercial resolution, the Company
indemnified a net2phone cable telephony customer related to patent infringement claims brought against the customer. The Company
recorded expense of $0.3 million in fiscal 2019 for this indemnification.
Accrual for Non-Income Related Taxes
In fiscal 2019, the Company recorded an $8.0
million accrual for non-income related taxes related to one of its foreign subsidiaries. A portion of the accrual related to each
of the fiscal quarters in fiscal 2019 as follows:
Quarter Ended
(in thousands)
|
|
Other operating expense
|
|
|
Accrued expense
|
|
|
Deferred income tax assets
|
|
|
Provision for income taxes
|
|
Increase (Decrease)
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31
|
|
$
|
1,100
|
|
|
$
|
1,100
|
|
|
$
|
250
|
|
|
$
|
(250
|
)
|
January 31
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
500
|
|
|
|
(500
|
)
|
April 30
|
|
|
2,300
|
|
|
|
2,300
|
|
|
|
600
|
|
|
|
(600
|
)
|
July 31
|
|
|
2,600
|
|
|
|
2,600
|
|
|
|
650
|
|
|
|
(650
|
)
|
TOTAL
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
|
$
|
2,000
|
|
|
$
|
(2,000
|
)
|
Accordingly, the Company corrected its consolidated financial
statements for its fiscal quarters ended October 31, 2018, January 31, 2019, and April 30, 2019 to include the accrued expense
and the related income tax benefit. The Company has determined that the adjustments were not material to its previously issued
quarterly financial statements. The impact of the correction on the Company’s previously issued consolidated financial statements
was as follows:
Quarter Ended October 31, 2018
(in thousands, except per share data)
|
|
Previously Reported
|
|
|
Error Correction
|
|
|
As Adjusted
|
|
Consolidated Statement of Income:
|
|
|
|
|
|
|
|
|
|
Other operating expense
|
|
$
|
(195
|
)
|
|
$
|
(1,100
|
)
|
|
$
|
(1,295
|
)
|
Provision for income taxes
|
|
$
|
(1,189
|
)
|
|
$
|
250
|
|
|
$
|
(939
|
)
|
Net loss
|
|
$
|
(1,148
|
)
|
|
$
|
(850
|
)
|
|
$
|
(1,998
|
)
|
Net loss attributable to IDT Corporation
|
|
$
|
(1,449
|
)
|
|
$
|
(850
|
)
|
|
$
|
(2,299
|
)
|
Loss per share attributable to IDT Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
Quarter Ended January 31, 2019
(in thousands, except per share data)
|
|
Previously Reported
|
|
|
Error Correction
|
|
|
As Adjusted
|
|
Consolidated Statement of Income:
|
|
|
|
|
|
|
|
|
|
Other operating expense
|
|
$
|
(90
|
)
|
|
$
|
(2,000
|
)
|
|
$
|
(2,090
|
)
|
Provision for income taxes
|
|
$
|
(1,736
|
)
|
|
$
|
500
|
|
|
$
|
(1,236
|
)
|
Net income (loss)
|
|
$
|
489
|
|
|
$
|
(1,500
|
)
|
|
$
|
(1,011
|
)
|
Net income (loss) attributable to IDT Corporation
|
|
$
|
189
|
|
|
$
|
(1,500
|
)
|
|
$
|
(1,311
|
)
|
Earnings (loss) per share attributable to IDT Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Quarter Ended April 30, 2019
(in thousands, except per share data)
|
|
Previously Reported
|
|
|
Error Correction
|
|
|
As Adjusted
|
|
Consolidated Statement of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expense
|
|
$
|
(120
|
)
|
|
$
|
(2,300
|
)
|
|
$
|
(2,420
|
)
|
Benefit from income taxes
|
|
$
|
871
|
|
|
$
|
600
|
|
|
$
|
1,471
|
|
Net income
|
|
$
|
4,157
|
|
|
$
|
(1,700
|
)
|
|
$
|
2,457
|
|
Net income attributable to IDT Corporation
|
|
$
|
3,870
|
|
|
$
|
(1,700
|
)
|
|
$
|
2,170
|
|
Earnings per share attributable to IDT Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.08
|
|
Straight
Path Communications Inc. Settlement Agreement and Mutual Release
The
Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including a Separation and Distribution
Agreement to affect the separation and provide a framework for the Company’s relationship with Straight Path after the spin-off.
On September 20, 2016, the Company received a letter of inquiry from the Enforcement Bureau of the Federal Communications Commission
(“FCC”) requesting certain information and materials related to an investigation of potential violations by Straight
Path Spectrum LLC (formerly a subsidiary of the Company and Straight Path) in connection with licenses to operate on the 28 GHz
and 39 GHz bands of the Fixed Microwave Services. The Company has cooperated with the FCC in this matter and has responded to
the letter of inquiry. If the FCC were to pursue separate action against the Company, the FCC could seek to fine or impose regulatory
penalties or civil liability on the Company related to activities during the period of ownership by the Company.
The
Separation and Distribution Agreement provides for the Company and Straight Path to indemnify each other for certain liabilities.
The Company and Straight Path each communicated that it was entitled to indemnification from the other in connection with the
inquiry described above and related matters. On October 24, 2017, the Company, Straight Path, Straight Path IP Group, Inc. (“SPIP”)
and PR-SP IP Holdings LLC (“PR-SP”), an entity owned by Howard S. Jonas, entered into a Settlement Agreement and Release
that provides for, among other things, the settlement and mutual release of potential liabilities and claims that may exist or
arise under the Separation and Distribution Agreement between the Company and Straight Path. In exchange for the mutual release,
in October 2017, the Company paid Straight Path an aggregate of $16 million in cash, Straight Path transferred to the Company
its majority ownership interest in Straight Path IP Group Holding, Inc. (“New SPIP”), which holds the equity of SPIP,
the entity that holds intellectual property primarily related to communications over computer networks, subject to the right to
receive 22% of the net proceeds, if any, received by SPIP from licenses, settlements, awards or judgments involving any of the
patent rights and certain transfers of the patents or related rights, that will be retained by Straight Path’s stockholders
(such equity interest, subject to the retained interest right, the “IP Interest”), and the Company undertook certain
funding and other obligations related to SPIP. The Settlement Agreement and Release allocates (i) $10 million of the payment and
the retained interest right to the settlement of claims and the mutual release and (ii) $6 million to the transfer of the IP Interest. In
fiscal 2017, the Company recorded a liability of $10.0 million related to this settlement and mutual release. In addition, in
fiscal 2017, the Company incurred legal fees of $0.9 million related to the FCC investigation and the settlement and mutual release,
and the Company received insurance proceeds related to the FCC investigation of $0.5 million.
On
October 24, 2017, the Company sold its entire majority interests in New SPIP to PR-SP in exchange for $6 million and the assumption
by PR-SP of the funding and other obligations undertaken by the Company.
Note
14—Revolving Credit Facility
IDT Telecom had a credit agreement, dated as of October 31,
2018, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million until its maturity
date on July 15, 2019. The principal outstanding incurred interest per annum at the LIBOR rate adjusted by the Regulation D maximum
reserve requirement plus 125 basis points. IDT Telecom paid a quarterly unused commitment fee of 0.3% per annum on the average
daily balance of the unused portion of the $25.0 million commitment.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
IDT
Telecom entered into a credit agreement, dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum
principal amount of $25.0 million. The credit agreement was terminated on July 20, 2018. The principal outstanding incurred interest
per annum, at the option of IDT Telecom, at either (a) the U.S. Prime Rate less 125 basis points, or (b) the LIBOR rate adjusted
by the Regulation D maximum reserve requirement plus 125 basis points. IDT Telecom paid a quarterly unused commitment fee of 0.325%
per annum on the average daily balance of the unused portion of the $25.0 million commitment.
Note
15—Accrued Expenses
Accrued
expenses consist of the following:
July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
Carrier minutes termination
|
|
$
|
39,155
|
|
|
$
|
49,289
|
|
Carrier network connectivity, toll-free and 800 services
|
|
|
1,569
|
|
|
|
1,753
|
|
Regulatory fees and taxes
|
|
|
55,005
|
|
|
|
45,771
|
|
Compensation costs
|
|
|
12,971
|
|
|
|
12,552
|
|
Legal and professional fees
|
|
|
3,249
|
|
|
|
5,247
|
|
Other
|
|
|
15,885
|
|
|
|
15,613
|
|
TOTAL
|
|
$
|
127,834
|
|
|
$
|
130,225
|
|
Note 16—Other Income (Expense), Net
Other income (expense), net consists of the following:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Foreign currency transaction (losses) gains
|
|
$
|
(696
|
)
|
|
$
|
(2,107
|
)
|
|
$
|
287
|
|
(Loss) gain on marketable securities
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
323
|
|
Gain (loss) on investments
|
|
|
1,779
|
|
|
|
(6
|
)
|
|
|
355
|
|
Other
|
|
|
(401
|
)
|
|
|
781
|
|
|
|
(148
|
)
|
TOTAL
|
|
$
|
682
|
|
|
$
|
(1,348
|
)
|
|
$
|
817
|
|
Note
17—Income Taxes
On December 22, 2017, the U.S. government enacted “An
Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”,
which is commonly referred to as “The Tax Cuts and Jobs Act” (the “Tax Act”). The Tax Act reduced the U.S.
federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, required companies to pay a one-time repatriation
tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and made other
changes to the U.S. income tax code. Due to the Company’s July 31 fiscal year-end, the lower corporate income tax rate is
phased in, resulting in a blended U.S. federal statutory tax rate of approximately 26.9% for the Company’s fiscal 2018, and
21.0% for the Company’s fiscal years thereafter.
The
Company has completed its accounting for the income tax effects of the Tax Act. In fiscal 2018, the Company estimated the effect
of the Tax Act on its existing AMT credit carry-over and transition tax. Because the AMT credit will be refundable if not utilized
in the four years subsequent to fiscal 2018, the Company reversed the valuation allowance that offset the AMT credit. As a result,
the Company recorded a noncurrent receivable and an income tax benefit of $3.3 million for the anticipated refund. The reduction
in the corporate tax rate did not impact the Company’s results of operations or financial position because the income tax
benefit from the reduced rate was offset by the valuation allowance.
The transition tax is based on total post-1986 earnings and
profits which were previously deferred from U.S. income taxes. In fiscal 2018, the Company estimated that it would utilize $12
million of federal net operating loss carryforwards to offset the transition tax that it expected to incur. In fiscal 2019, the
Company adjusted this amount to $11 million of federal net operating loss carryforwards usage. These net operating loss carryforwards
have a full valuation allowance and as such there was no impact on the Company’s results of operations.
The global intangible low taxed income (“GILTI”) and
base erosion anti-abuse tax (“BEAT”) became effective for the Company on August 1, 2018. The Company booked an inclusion
to its U.S. income of $0.6 million to reflect the impact. As a result of the Company’s fully reserved net operating losses
in the United States, there was no impact on its tax provision as a result of GILTI. The Company also had no impact from the BEAT.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company anticipates that its assumptions may change as a
result of future guidance and interpretation from the Internal Revenue Service or other taxing jurisdictions, and any additional
adjustments will be made at that time.
The Company’s cumulative undistributed foreign earnings are
included in accumulated deficit in the Company’s consolidated balance sheets and consisted of approximately $337 million
at July 31, 2019. The Company has concluded that the earnings remain permanently reinvested. The Tax Act moved toward a territorial
tax system through the provision of a 100% dividends received deduction for the foreign-source portions of dividends received
from controlled foreign subsidiaries.
The
components of income before income taxes are as follows:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
$
|
6,827
|
|
|
$
|
910
|
|
|
$
|
(3,161
|
)
|
Foreign
|
|
|
(6,374
|
)
|
|
|
7,191
|
|
|
|
10,781
|
|
INCOME BEFORE INCOME TAXES
|
|
$
|
453
|
|
|
$
|
8,101
|
|
|
$
|
7,620
|
|
Significant
components of the Company’s deferred income tax assets consist of the following:
July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
Bad debt reserve
|
|
$
|
540
|
|
|
$
|
455
|
|
Accrued expenses
|
|
|
3,134
|
|
|
|
3,758
|
|
Stock options and restricted stock
|
|
|
866
|
|
|
|
1,070
|
|
Charitable contributions
|
|
|
734
|
|
|
|
946
|
|
Depreciation
|
|
|
151
|
|
|
|
349
|
|
Unrealized gain
|
|
|
(231
|
)
|
|
|
—
|
|
Net operating loss
|
|
|
72,625
|
|
|
|
75,110
|
|
Transaction taxes
|
|
|
2,000
|
|
|
|
—
|
|
Deferred revenue
|
|
|
(1,060
|
)
|
|
|
—
|
|
Total deferred income tax assets
|
|
|
78,759
|
|
|
|
81,688
|
|
Valuation allowance
|
|
|
(74,170
|
)
|
|
|
(76,020
|
)
|
NET DEFERRED INCOME TAX ASSETS
|
|
$
|
4,589
|
|
|
$
|
5,668
|
|
In
fiscal 2018, in addition to the reduction in the Company’s deferred tax assets as a result of the reduction in the corporate
tax rate and the transition tax, the Company’s deferred tax assets and offsetting valuation allowance each decreased by
$6 million due to the Rafael Spin-Off.
The
(provision for) benefit from income taxes consists of the following:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
3,294
|
|
|
$
|
—
|
|
State and local
|
|
|
(15
|
)
|
|
|
(34
|
)
|
|
|
(26
|
)
|
Foreign
|
|
|
971
|
|
|
|
11
|
|
|
|
(282
|
)
|
|
|
|
956
|
|
|
|
3,271
|
|
|
|
(308
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,536
|
)
|
State and local
|
|
|
1
|
|
|
|
12
|
|
|
|
(66
|
)
|
Foreign
|
|
|
(1,080
|
)
|
|
|
(6,185
|
)
|
|
|
11,931
|
|
|
|
|
(1,079
|
)
|
|
|
(6,173
|
)
|
|
|
2,329
|
|
(PROVISION FOR) BENEFIT FROM INCOME TAXES
|
|
$
|
(123
|
)
|
|
$
|
(2,902
|
)
|
|
$
|
2,021
|
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:
Year ended July 31
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
U.S. federal income tax at statutory rate
|
|
$
|
(95
|
)
|
|
$
|
(2,186
|
)
|
|
$
|
(2,667
|
)
|
Transition tax on foreign earnings
|
|
|
92
|
|
|
|
(3,360
|
)
|
|
|
—
|
|
Valuation allowance
|
|
|
2,008
|
|
|
|
58,798
|
|
|
|
626
|
|
Foreign tax rate differential
|
|
|
(2,835
|
)
|
|
|
(4,272
|
)
|
|
|
3,107
|
|
Nondeductible expenses
|
|
|
(657
|
)
|
|
|
213
|
|
|
|
457
|
|
Other
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
64
|
|
Prior year tax benefit
|
|
|
2,271
|
|
|
|
575
|
|
|
|
494
|
|
Tax law changes
|
|
|
(896
|
)
|
|
|
(52,631
|
)
|
|
|
—
|
|
State and local income tax, net of federal benefit
|
|
|
(12
|
)
|
|
|
(16
|
)
|
|
|
(60
|
)
|
(PROVISION FOR) BENEFIT FROM INCOME TAXES
|
|
$
|
(123
|
)
|
|
$
|
(2,902
|
)
|
|
$
|
2,021
|
|
At July 31, 2019, the Company had federal net operating loss carryforwards
of approximately $155 million. These carry-forward losses are available to offset future U.S. federal taxable income. The net
operating loss carryforwards started to expire in fiscal 2018. The Company has foreign net operating losses of approximately $143
million, of which approximately $120 million does not expire, approximately $22 million expires in two to ten years and $1 million
expires in twenty years. These foreign net operating losses are available to offset future taxable income in the countries in
which the losses were incurred. The Company’s subsidiary, net2phone, which provides voice over Internet protocol communications
services, has additional federal net operating losses of approximately $70 million, which will expire through fiscal 2027. With
the reacquisition of net2phone by the Company in March 2006, its losses were limited under Internal Revenue Code Section 382 to
approximately $7 million per year. The net operating losses do not include any excess benefits related to stock options or restricted
stock.
The
change in the valuation allowance is as follows:
Year ended July 31
(in thousands)
|
|
Balance at
beginning of
year
|
|
|
Additions
charged to
costs and
expenses
|
|
|
Deductions
|
|
|
Balance at
end of year
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from deferred income taxes, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
76,020
|
|
|
$
|
—
|
|
|
$
|
(1,850
|
)
|
|
$
|
74,170
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from deferred income taxes, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
129,872
|
|
|
$
|
—
|
|
|
$
|
(53,852
|
)
|
|
$
|
76,020
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves deducted from deferred income taxes, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
130,498
|
|
|
$
|
16,017
|
|
|
$
|
(16,643
|
)
|
|
$
|
129,872
|
|
In
fiscal 2017, the Company determined that its valuation allowance on the losses of Elmion Netherlands B.V., a Netherlands subsidiary,
was no longer required due to an internal reorganization that generated income and a projection of net income in future periods.
The Company recorded a benefit from income taxes of $16.6 million in fiscal 2017 from the full recognition of the Elmion Netherlands
B.V. deferred tax assets. In addition, in fiscal 2017, the Company determined that it would not be able to utilize its deferred
tax assets in the United States and recorded a valuation allowance of $11.1 million against them.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At
July 31, 2019 and 2018, the Company did not have any unrecognized income tax benefits. There were no changes in the balance of
unrecognized income tax benefits in fiscal 2019, fiscal 2018 and fiscal 2017. At July 31, 2019, the Company did not expect any
changes in unrecognized income tax benefits during the next twelve months. In fiscal 2019, fiscal 2018 and fiscal 2017, the Company
did not record any interest and penalties on income taxes. At July 31, 2019 and 2018, there was no accrued interest included in
current income taxes payable.
In September 2017, the Company, IDT Domestic Telecom, Inc.
(a subsidiary of the Company) and certain other affiliates, were certified by the New Jersey Economic Development Authority as
having met all of the requirements of the Grow New Jersey Assistance Act Tax Credit Program. The corporation business tax credits
to be received are a maximum of $21.1 million. The Company may claim a portion of the tax credit each tax year for ten years beginning
in 2018. The tax credit can be applied to 100% of the Company’s New Jersey tax liability each year, and the unused amount
of the annual credit can be carried forward. In addition, the Company may apply for a tax credit transfer certificate to sell
unused tax credits to another business. The tax credits must be sold for no less than 75% of the value of the tax credits. The
tax credits are subject to reduction, forfeiture and recapture if, among other things, the number of full-time employees declines
below the program or statewide minimum. The Company has yet to receive the credit.
The Company currently remains subject to examinations of its tax
returns as follows: U.S. federal tax returns for fiscal 2016 to fiscal 2019, state and local tax returns generally for fiscal
2015 to fiscal 2019 and foreign tax returns generally for fiscal 2015 to fiscal 2019.
Note
18—Equity
Correction of Noncontrolling Interests
In the fourth quarter
of fiscal 2019, the Company corrected the noncontrolling interests and the accumulated deficit of one of its subsidiaries. The
net loss attributable to noncontrolling interests for this subsidiary had not been recorded since its inception in fiscal 2016.
Accordingly, as of August 1, 2018, the Company recorded a reduction in “Noncontrolling interests” and an offsetting
reduction to “Accumulated deficit” of $2.0 million.
Class
A Common Stock and Class B Common Stock
The
rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights
and restrictions on transferability. The holders of Class A common stock and Class B common stock receive identical dividends
per share when and if declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and
Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common
stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes
per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common
stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common
stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock.
Dividend
Payments
In fiscal 2018, the Company paid aggregate cash dividends of $0.56
per share on its Class A common stock and Class B common stock, or $13.9 million in total. In fiscal 2017, the Company paid aggregate
cash dividends of $0.76 per share on its Class A common stock and Class B common stock, or $17.9 million in total. In fiscal 2018,
the Company’s Board of Directors discontinued the Company’s quarterly dividend, electing instead to repurchase shares
of the Company’s Class B common stock when warranted by market conditions, available resources, and the Company’s
business outlook and results, as well as invest in the Company’s growth business initiatives. Accordingly, no dividends
were paid in fiscal 2019.
Sales
of Shares of Class B Common Stock to Howard S. Jonas
On
December 21, 2018, the Company sold 2,546,689 shares of its Class B common stock that were held in treasury to Howard S. Jonas
for aggregate consideration of $14.8 million. The price per share of $5.89 was equal to the closing price of the Company’s
Class B common stock on April 16, 2018, the last closing price before approval of the sale by the Company’s Board of Directors
and its Corporate Governance Committee. On May 31, 2018, Mr. Jonas paid $1.5 million of the purchase price, and he paid the balance
of the purchase price on December 21, 2018 after approval of the sale by the Company’s stockholders at the 2018 annual meeting
of stockholders. The purchase price was reduced by approximately $0.2 million, which was the amount of dividends paid on 2,546,689
shares of the Company’s Class B common stock whose record date was between April 16, 2018 and the issuance of the shares.
On
June 9, 2017, the Company sold 1.0 million shares of its Class B common stock to Howard S. Jonas for aggregate consideration of
$14.9 million. The price per share of $14.93 was equal to the closing price of the Class B common stock on May 1, 2017, the day
prior to the approval of the sale by the Company’s Board of Directors and Corporate Governance Committee.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On
April 11, 2017, the Company sold 728,332 treasury shares of its Class B common stock to Howard S.
Jonas for aggregate consideration of $10.0 million. The price per share of $13.73 was equal to the closing price of the Company’s
Class B common stock on April 10, 2017.
Stock
Repurchases
The
Company has an existing stock repurchase program authorized by its Board of Directors for the repurchase of up to an aggregate
of 8.0 million shares of the Company’s Class B common stock. In fiscal 2019, the Company repurchased 729,110 shares of Class
B common stock for an aggregate purchase price of $3.9 million. In fiscal 2018, the Company repurchased 367,484 shares of Class
B common stock for an aggregate purchase price of $1.9 million. There were no repurchases under the program in fiscal 2017. At
July 31, 2019, 6.9 million shares remained available for repurchase under the stock repurchase program.
In fiscal 2019, fiscal 2018 and fiscal 2017, the Company paid
$28,000, $0.4 million and $1.8 million, respectively, to repurchase shares of Class B common stock that were tendered by employees
of the Company to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards
of restricted stock. Such shares are repurchased by the Company based on their fair market value on the trading day immediately
prior to the vesting date. In fiscal 2019, fiscal 2018 and fiscal 2017, the Company repurchased 3,748; 57,081 and 94,338 shares
of Class B common stock, respectively, from employees.
Note
19—Stock-Based Compensation
Stock-Based
Compensation Plan
The 2015 Stock Option and Incentive Plan is intended to provide
incentives to officers, employees, directors and consultants of the Company, including stock options, stock appreciation rights,
limited rights, deferred stock units, and restricted stock. On December 13, 2018 and December 14, 2017, the Company’s stockholders
approved amendments 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 and 0.3 million shares, respectively.
At July 31, 2019, the Company had 1.1 million shares of Class B common stock reserved for award under its 2015 Stock Option and
Incentive Plan and 0.3 million shares were available for future grants.
On September 12, 2019, the Company’s Board of Directors
amended the Company’s 2015 Stock Option and Incentive Plan to increase the number of shares of the Company’s Class
B common stock available for the grant of awards thereunder by an additional 0.4 million shares. The amendment is subject to approval
by the Company’s stockholders at its annual meeting of stockholders on December 12, 2019.
In
fiscal 2019, fiscal 2018 and fiscal 2017, there was no income tax benefit resulting from tax deductions in excess of the compensation
cost recognized for the Company’s stock-based compensation.
Stock
Options
Option
awards are generally granted with an exercise price equal to the market price of the Company’s stock on the date of grant.
Option awards generally vest on a graded basis over three years of service and have ten-year contractual terms. The fair value
of stock options was estimated on the date of the grant using a Black-Scholes valuation model and the assumptions in the following
table. No option awards were granted in fiscal 2019 or fiscal 2018. Expected volatility is based on historical volatility of the
Company’s Class B common stock and other factors. The Company uses historical data on exercise of stock options, post vesting
forfeitures and other factors to estimate the expected term of the stock-based payments granted. The risk-free rate is based on
the U.S. Treasury yield curve in effect at the time of grant.
Year ended July 31
|
|
2017
|
|
ASSUMPTIONS
|
|
|
|
|
Average risk-free interest rate
|
|
|
1.82
|
%
|
Expected dividend yield
|
|
|
5.09
|
%
|
Expected volatility
|
|
|
40.0
|
%
|
Expected term
|
|
|
4.0 years
|
|
Weighted-average grant date fair value
|
|
$
|
3.26
|
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A
summary of stock option activity for the Company is as follows:
|
|
Number of
Options
(in thousands)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at July 31, 2018
|
|
|
1,243
|
|
|
$
|
14.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited
|
|
|
(20
|
)
|
|
|
13.72
|
|
|
|
|
|
|
|
|
|
OUTSTANDING AT JULY 31, 2019
|
|
|
1,223
|
|
|
$
|
14.23
|
|
|
|
3.0
|
|
|
$
|
—
|
|
EXERCISABLE AT JULY 31, 2019
|
|
|
861
|
|
|
$
|
14.15
|
|
|
|
3.0
|
|
|
$
|
—
|
|
The total intrinsic value of options exercised during fiscal
2019, fiscal 2018 and fiscal 2017 was nil, nil, and $0.4 million, respectively. At July 31, 2019, there was $0.8 million of total
unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average
period of 0.5 years.
On December 14, 2017, the Company’s stockholders ratified
the grant to Howard S. Jonas of options to purchase up to 1.0 million shares of the Company’s Class B common stock at an
exercise price of $14.93 per share. The options were immediately exercisable and will expire on May 1, 2022. Subject to certain
vesting provisions in Mr. Jonas’ employment agreement with the Company, the unexercised portion of the options will terminate
should Mr. Jonas cease to provide services as an officer or director of the Company or one or more of its subsidiaries. The
Company will have the right to repurchase the Class B common stock issued upon exercise of the options at a purchase price equal
to the exercise price of the option should Mr. Jonas cease to provide services as an officer or director of the Company or one
or more of its subsidiaries. The Company’s repurchase right will lapse as to 333,334 shares underlying the option on May
2, 2020. Mr. Jonas will be prohibited from transferring any shares of the Class B common stock issued on exercise of the
option that are subject to the Company’s repurchase right. The Company’s repurchase right is essentially a forfeiture
provision. The options were not granted under the Company’s 2015 Stock Option and Incentive Plan, but, except to the extent
otherwise provided in the related grant agreement, are subject to the terms of the 2015 Stock Option and Incentive Plan. The Company
estimated that the fair value of the options on the date of grant was $3.3 million, which is being recognized on a straight-line
basis over the requisite three-year service period ending in May 2020.
Restricted
Stock
The
fair value of restricted shares of the Company’s Class B common stock is determined based on the closing price of the Company’s
Class B common stock on the grant date. Share awards generally vest on a graded basis over three years of service.
A
summary of the status of the Company’s grants of restricted shares of Class B common stock is presented below:
(in thousands)
|
|
Number of
Non-vested
Shares
|
|
|
Weighted-
Average
Grant-
Date Fair
Value
|
|
Non-vested shares at July 31, 2018
|
|
|
49
|
|
|
$
|
16.28
|
|
Granted
|
|
|
208
|
|
|
|
4.41
|
|
Vested
|
|
|
(51
|
)
|
|
|
14.37
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
NON-VESTED SHARES AT JULY 31, 2019
|
|
|
206
|
|
|
$
|
4.84
|
|
At July 31, 2019, there was $0.8 million of total unrecognized
compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over a weighted-average
period of 1.2 years. The total grant date fair value of shares vested in fiscal 2019, fiscal 2018 and fiscal 2017 was $0.7 million,
$3.4 million and $4.1 million, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effective as of June 19, 2019, the Compensation Committee of
the Company’s Board of Directors approved an equity grant of 170,000 restricted shares of the Company’s Class B common
stock to Shmuel Jonas, the Company’s Chief Executive Officer, and 20,000 restricted shares of the Company’s Class
B common stock to the Company’s Executive Vice President of Strategy and Legal Affairs, which vest in full on January 5,
2022 only if the closing price of the Company’s Class B common stock on the preceding trading day is $13.00 or above. The
minimum price of $13.00 per share shall be adjusted by the Compensation Committee if there is a spin-off or significant stock
buybacks prior to January 5, 2022.
Deferred
Stock Units Equity Incentive Program
On June 5, 2019, the Compensation Committee of the Company’s
Board of Directors approved an equity incentive program in the form of deferred stock units (“DSUs”) that, upon vesting,
will entitle the grantees to receive shares of the Company’s Class B common stock. In June 2019, the Company granted 410,900
DSUs to certain of its executive officers and employees. Subject to continued full time employment or other service to the Company,
the DSUs will vest in three equal amounts on each of January 6, 2020, January 5, 2021, and January 5, 2022. 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 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 November 29, 2019
for the January 6, 2020 vesting date, and no later than November 30, 2020 for the January 5, 2021 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.
The Company estimated that the fair value of the DSUs on the
date of grant was $4.3 million, which will be recognized on a graded vesting basis over the requisite service periods ending in
January 2022. The Company used a Monte Carlo simulation in its fair value estimate. The weighted average grant date fair value
per DSU was $10.35. At July 31, 2019, there was $3.6 million of total unrecognized compensation cost related to non-vested DSUs,
which is expected to be recognized over a weighted-average period of 0.9 years.
Note
20—Accumulated Other Comprehensive Loss
The
accumulated balances for each classification of other comprehensive income (loss) were as follows:
(in thousands)
|
|
Unrealized
(loss) gain on
available-for-
sale securities
|
|
|
Foreign
currency
translation
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
Location of (Gain) Loss Recognized
|
Balance at July 31, 2016
|
|
$
|
8
|
|
|
$
|
(3,752
|
)
|
|
$
|
(3,744
|
)
|
|
|
Other comprehensive income (loss) attributable to IDT Corporation before reclassification
|
|
|
2,449
|
|
|
|
(725
|
)
|
|
|
1,724
|
|
|
|
Less: reclassification for gain included in net income
|
|
|
(323
|
)
|
|
|
—
|
|
|
|
(323
|
)
|
|
Other income (expense), net
|
Net other comprehensive income (loss) attributable to IDT Corporation (1)
|
|
|
2,126
|
|
|
|
(725
|
)
|
|
|
1,401
|
|
|
|
Balance at July 31, 2017
|
|
|
2,134
|
|
|
|
(4,477
|
)
|
|
|
(2,343
|
)
|
|
|
Rafael Spin-Off
|
|
|
(1,991
|
)
|
|
|
(279
|
)
|
|
|
(2,270
|
)
|
|
|
Other comprehensive loss attributable to IDT Corporation before reclassification
|
|
|
(193
|
)
|
|
|
(182
|
)
|
|
|
(375
|
)
|
|
|
Less: reclassification for loss included in net income
|
|
|
16
|
|
|
|
—
|
|
|
|
16
|
|
|
Other income (expense), net
|
Net other comprehensive loss attributable to IDT Corporation
|
|
|
(177
|
)
|
|
|
(182
|
)
|
|
|
(359
|
)
|
|
|
Balance at July 31, 2018
|
|
|
(34
|
)
|
|
|
(4,938
|
)
|
|
|
(4,972
|
)
|
|
|
Adjustment from the adoption of change in accounting for equity investments (see Note 8)
|
|
|
33
|
|
|
|
—
|
|
|
|
33
|
|
|
|
Adjusted balance at August 1, 2018
|
|
|
(1
|
)
|
|
|
(4,938
|
)
|
|
|
(4,939
|
)
|
|
|
Other comprehensive income attributable to IDT Corporation
|
|
|
1
|
|
|
|
80
|
|
|
|
81
|
|
|
|
BALANCE AT JULY 31, 2019
|
|
$
|
—
|
|
|
$
|
(4,858
|
)
|
|
$
|
(4,858
|
)
|
|
|
|
(1)
|
In
fiscal 2017, net other comprehensive income attributable to IDT Corporation from unrealized
gains on available-for-sale securities included unrealized gains on the Rafael convertible
promissory notes of $2.1 million and unrealized gains, net on marketable securities of
$26,000.
|
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
21—Commitments and Contingencies
Legal
Proceedings
On April 12, 2019, Scarleth Samara filed a putative
class action against IDT Telecom in the U.S. District Court for the Eastern District of Louisiana alleging certain violations
of the Telephone Consumer Protection Act of 1991. Plaintiff alleges that in October of 2017, IDT Telecom sent unauthorized marketing
messages to her cellphone. IDT Telecom filed a motion to compel arbitration. On or about August 19, 2019, the plaintiff agreed
to dismiss the pending court action and the parties intend to proceed with arbitration. At this stage, the Company is unable to
estimate its potential liability, if any. The Company intends to vigorously defend the claim.
On January 22, 2019, Jose Rosales filed a putative class action
against IDT America, IDT Domestic Telecom and IDT International in California state court alleging certain violations of employment
law. Plaintiff alleges that these companies failed to compensate members of the putative class in accordance with California law.
The Company is evaluating the claims, and at this stage, is unable to estimate its potential liability, if any. The Company intends
to vigorously defend the claims. In August 2019, the Company filed a cross complaint against Rosales alleging trade secret and
other violations.
On May 21, 2018, Erik Dennis filed a putative class action against
IDT Telecom and the Company in the U.S. District Court for the Northern District of Georgia alleging violations of Do Not Call
Regulations promulgated by the U.S. Federal Trade Commission. The Company is evaluating the claim, and at this stage, is unable
to estimate its potential liability, if any. On August 13, 2018, IDT Telecom and the Company filed a motion to dismiss or in the
alternative to strike class allegations. The plaintiff opposed the motion. The motion to dismiss was denied. The Company intends
to vigorously defend this matter.
On
May 2, 2018, Jean Carlos Sanchez filed a putative class action against IDT Telecom in the U.S. District Court for the Northern
District of Illinois alleging that the Company sent unauthorized marketing messages to cellphones in violation of the Telephone
Consumer Protection Act of 1991. On July 26, 2018, the parties filed a stipulation of dismissal. The Company is evaluating the
claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend this
matter.
On
April 24, 2018, Sprint Communications 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.
Following closing of the transaction, the Delaware Chancery Court denied the motion to dismiss. On February 22, 2019, the Delaware
Supreme Court affirmed the denial of the motion to dismiss. The Company intends to vigorously defend this matter. In fiscal 2019
and fiscal 2018, the Company incurred legal fees of $2.0 million and $1.7 million, respectively, related to this putative class
action. Also, in fiscal 2019, the Company recorded insurance proceeds for this matter of $2.3 million (see Note 13). 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. The Company is evaluating its state tax filings with respect to the recent Wayfair decision and is in the process of
reviewing its collection practices. It is possible that one or more jurisdictions may assert that the Company has liability for
periods for which it has not collected sales, use or other similar taxes, and if such an assertion or assertions were successful
it could materially and adversely affect the Company’s business, financial condition 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 condition and operating
results.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Regulatory
Fees Audit
The Company’s 2017 FCC Form 499-A, which reports its calendar
year 2016 revenue, related to payments due to the FCC, is currently under audit by the Internal Audit Division of the Universal
Service Administrative Company. At July 31, 2019 and 2018, the Company’s accrued expenses included $44.7 million and $43.9
million, respectively, for these regulatory fees for the year covered by the audit, as well as prior and subsequent years.
Purchase
Commitments
At July 31, 2019, the Company had purchase commitments of $39.2
million, including the aggregate commitment of $36.1 million under the telecom services commitments described below.
Telecom
Services Commitments
In May 2019, the Company entered into a MOU with a telecom
operator in Central America for among other things, termination of inbound and outbound international long-distance voice calls.
The MOU is effective until December 31, 2019, unless superseded by the execution of a definitive agreement. The Company has committed
to pay such telecom operator monthly committed amounts during the term of the MOU. The parties intend to draft and execute a definitive
agreement as soon as practicable.
In
August 2017, the Company entered into a Reciprocal Services Agreement with a telecom operator in Central America for a full range
of services, including, but not limited to, termination of inbound and outbound international long-distance voice calls. The Company
has committed to pay such telecom operator monthly committed amounts during the term of the agreement. In addition, under certain
limited circumstances, the parties may renegotiate the amount of the monthly payments. In the event the parties do not agree on
re-pricing terms after good faith negotiations, then either party has the right to terminate the agreement. Pursuant to the agreement,
the Company deposited $9.2 million into an escrow account as security for the benefit of the telecom operator, which is included
in “Other current assets” in the accompanying consolidated balance sheet based on the terms and conditions of the
agreement.
Lease
Commitments
The
future minimum payments for operating leases as of July 31, 2019 were as follows:
(in thousands)
|
|
|
|
Year ending July 31:
|
|
|
|
2020
|
|
$
|
6,876
|
|
2021
|
|
|
3,558
|
|
2022
|
|
|
2,585
|
|
2023
|
|
|
2,108
|
|
2024
|
|
|
1,869
|
|
Thereafter
|
|
|
1,459
|
|
Total payments
|
|
$
|
18,455
|
|
Rental expense under operating leases was $4.8 million, $2.7
million and $2.9 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. In addition, connectivity charges under service
agreements were $4.4 million, $5.0 million and $6.4 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
The Company leases office space and parking in Rafael’s
building and parking garage located at 520 Broad St, Newark, New Jersey. The Company also leases office space in Israel from Rafael.
The Newark lease expires in April 2025 and the Israel lease expires in July 2025. The future minimum payments for these leases
are included in the table above. In fiscal 2019, and fiscal 2018 (after the Rafael Spin-Off), the Company incurred rent expense
of $1.8 million and $0.6 million, respectively, in connection with the Rafael leases, which is included in the total rent expense
above.
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 July 31, 2019, the Company had aggregate performance bonds of $16.4 million outstanding.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
22—Related Party Transactions
Rafael
Holdings, Inc. including Rafael Pharmaceuticals, Inc.
The
Company entered into various agreements with Rafael prior to the Rafael Spin-Off including a Separation and Distribution Agreement
to effect the separation and provide a framework for the Company’s relationship with Rafael after the Rafael Spin-Off, and
a Tax Separation Agreement, which sets forth the responsibilities of the Company and Rafael with respect to, among other things,
liabilities for federal, state, local and foreign taxes for periods before and including the Rafael Spin-Off, the preparation
and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to
the Separation and Distribution Agreement, the Company indemnifies Rafael and Rafael indemnifies the Company for losses related
to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement.
Pursuant to the Tax Separation Agreement, the Company indemnifies Rafael from all liability for the Company’s taxes, other
than Rafael and its subsidiaries, for any taxable period, and from all liability for taxes due to the Rafael Spin-Off.
In connection with the Rafael Spin-Off, the Company and Rafael
entered into a Transition Services Agreement pursuant to which the Company provides to Rafael certain administrative and other
services. The Company charged Rafael $0.4 million in fiscal 2019 and $0.2 million in fiscal 2018 subsequent to the Rafael Spin-Off
for services provided. In addition, in fiscal 2019 and fiscal 2018 subsequent to the Rafael Spin-Off, the Company collected cash
of $0.2 million and $0.3 million, respectively, on behalf of Rafael related to Rafael’s parking garage and third-party tenants,
while Rafael was in the process of changing its billing and collection systems. At July 31, 2019, other current assets reported
in the Company’s consolidated balance sheet included net receivable from Rafael of $0.1 million. At July 31, 2018, the Company
owed Rafael $0.4 million for cash collected in excess of services rendered.
At July 31, 2019 and 2018, the Company held 27,419 and 25,803
shares, respectively, of Rafael Class B common stock (see Note 8).
The Company provided certain administrative and other services
to Rafael Pharma. The Company charged Rafael Pharma $0.4 million and $0.6 million in fiscal 2018 and fiscal 2017, respectively,
for services. At July 31, 2018, other current assets reported in the Company’s consolidated balance sheet included receivable
from Rafael Pharma of $1.0 million.
See
Note 4 for certain transactions between the Company and Howard S. Jonas related to Rafael. See Note 21 for the Company’s
lease commitments with Rafael.
Zedge,
Inc.
In connection with the Zedge Spin-Off, the Company and Zedge
entered into a Transition Services Agreement pursuant to which the Company provides to Zedge certain administrative and other services.
The Company charged Zedge $0.1 million, $0.3 million and $1.0 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively,
for services provided. In addition, in fiscal 2019, Zedge charged the Company $0.1 million for certain services. At July 31, 2019
and 2018, other current assets reported in the Company’s consolidated balance sheet included receivables from Zedge of $16,000
and $34,000, respectively.
At July 31, 2019 and 2018, the Company held 42,282 shares of
Zedge Class B common stock (see Note 8).
Straight
Path Communications Inc.
The
Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including a Separation and Distribution
Agreement to effect the separation and provide a framework for the Company’s relationship with Straight Path after the spin-off,
and a Tax Separation Agreement, which sets forth the responsibilities of the Company and Straight Path with respect to, among
other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation
and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to
the Separation and Distribution Agreement, the Company indemnifies Straight Path and Straight Path indemnifies the Company for
losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set
forth in the agreement. Pursuant to the Tax Separation Agreement, the Company indemnifies Straight Path from all liability for
taxes of Straight Path or any of its subsidiaries or relating to the Straight Path business with respect to taxable periods ending
on or before the Straight Path Spin-Off, from all liability for taxes of the Company, other than Straight Path and its subsidiaries,
for any taxable period, and from all liability for taxes due to the Straight Path Spin-Off.
On April 9, 2017, the Company and Straight Path entered into
a binding term sheet providing for the settlement and mutual release of potential indemnification and other claims asserted by
each of the Company and Straight Path (see Note 13). In addition, on July 5, 2017, certain of Straight Path stockholders filed
a putative class action and derivative complaint against the Company and others (see Note 21).
See
Note 13 for the Company’s sale of its ownership interest in New SPIP to PR-SP.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Genie
Energy Ltd.
On October 28, 2011, the Company completed a pro rata distribution
of the common stock of the Company’s subsidiary, Genie Energy Ltd. (“Genie”), to the Company’s stockholders
of record as of the close of business on October 21, 2011 (the “Genie Spin-Off”). The Company entered into a Transition
Services Agreement with Genie prior to the Genie Spin-Off, which provides for certain services to be performed by the Company and
Genie. The Company charged Genie $1.0 million, $1.3 million and $1.6 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively,
for services provided and other items, net of the amounts charged by Genie to the Company. At July 31, 2019 and 2018, other current
assets reported in the Company’s consolidated balance sheet included receivables from Genie of $0.2 million and $0.3 million,
respectively.
Other
Related Party Transactions
The Company provides office space, certain connectivity and
other services to Jonas Media Group, a publishing firm owned by Howard S. Jonas. Billings for such services were $15,000, $17,000
and $22,000 in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. The balance owed to the Company by Jonas Media Group was
$15,000 and $17,000 as of July 31, 2019 and 2018, respectively.
The
Company obtains insurance policies from several insurance brokers, one of which is IGM Brokerage Corp. (“IGM”). IGM
was, until his death in October 2009, owned by Irwin Jonas, father of Howard S. Jonas, and the Company’s General Counsel,
Joyce J. Mason. IGM is currently owned by Irwin Jonas’ widow—the mother of Howard S. Jonas and Joyce Mason. Jonathan
Mason, husband of Joyce Mason and brother-in-law of Howard S. Jonas, provides insurance brokerage services via IGM. Based on information
the Company received from IGM, the Company believes that IGM received commissions and fees from payments made by the Company to
third party brokers in the aggregate amounts of $29,000 in fiscal 2019, $29,000 in fiscal 2018, and $24,000 in fiscal 2017, which
fees and commissions inured to the benefit of Mr. Mason. Neither Howard S. Jonas nor Joyce Mason has any ownership or other interest
in IGM or the commissions paid to IGM other than via the familial relationships with their mother and Jonathan Mason.
Mason and Company Consulting, LLC (“Mason and Co.”),
a company owned solely by Jonathan Mason, receives an annual fee for the insurance brokerage referral and placement of the Company’s
health benefit plan with Brown & Brown Metro, Inc. Based on information the Company received from Jonathan Mason, the Company
believes that Mason and Co. received from Brown & Brown Metro, Inc. commissions and fees from payments made by the Company
in the amount of $24,000 in fiscal 2019, $22,000 in fiscal 2018, and $22,000 in fiscal 2017. Neither Howard S. Jonas nor Joyce
Mason has any ownership or other interest in Mason and Co. or the commissions paid to Mason and Co., other than via the familial
relationships with Jonathan Mason.
Since August 2009, IDT Domestic Telecom, Inc., a subsidiary
of the Company, has leased space in a building in the Bronx, New York. Howard S. Jonas and Shmuel Jonas are members of the limited
liability company that owns the building. The latest lease, which became effective November 1, 2012, had a one-year term with a
one-year renewal option. The parties have continued IDT Domestic Telecom’s occupancy of the space on the same terms. Aggregate
annual rent under the lease was $60,900.
The Company had loans receivable outstanding from employees
aggregating $0.2 million at July 31, 2019 and 2018, which are included in “Other current assets” in the accompanying
consolidated balance sheets.
See
Note 18 for sales of shares of the Company’s Class B Common Stock to Howard S. Jonas. See Note 19 for the grant to Howard
S. Jonas of options to purchase shares of the Company’s Class B Common Stock.
Note
23—Defined Contribution Plans
The Company maintains a 401(k) Plan available to all employees
meeting certain eligibility criteria. The Plan permits participants to contribute up to 20% of their salary, not to exceed the
limits established by the Internal Revenue Code. The Plan provides for discretionary matching contributions of 50%, up to the first
6% of compensation. The discretionary matching contributions vest over the first five years of employment. The Plan permits the
discretionary matching contributions to be granted as of December 31 of each year. All contributions made by participants vest
immediately into the participant’s account. In fiscal 2019, fiscal 2018 and fiscal 2017, the Company’s expense related
to the Plan was $1.2 million, $1.1 million and $1.2 million, respectively. The Company’s Class A common stock and Class B
common stock are not investment options for the Plan’s participants.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
24—Business Segment Information
The
Company has two reportable business segments, Telecom & Payment Services and net2phone. The Company’s reportable segments
are distinguished by types of service, customers and methods used to provide their services. The operating results of these business
segments are regularly reviewed by the Company’s chief operating decision maker. The accounting policies of the segments
are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments
based primarily on income (loss) from operations.
Effective
at the beginning of fiscal 2019, the Company modified the way it reports its business verticals within its Telecom & Payment
Services and net2phone segments to align more closely with its business strategy and operational structure. The modification to
the business verticals did not change the reportable business segments.
The Telecom & Payment Services segment provides retail telecommunications
and payment offerings as well as wholesale international long-distance traffic termination. The net2phone segment provides unified
cloud communications and telephony services to business customers. Depreciation and amortization are allocated to Telecom &
Payment Services and net2phone because the related assets are not tracked separately by segment. There are no other significant
asymmetrical allocations to segments.
Operating segments that are not reportable individually are
included in All Other, which included the Company’s real estate holdings and other investments that were included in the
Rafael Spin-Off.
Corporate
costs include compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll,
corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations,
corporate insurance, corporate legal, business development, charitable contributions, travel and other corporate-related general
and administrative expenses. 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:
(in thousands)
|
|
Telecom
& Payment
Services
|
|
|
net2phone
|
|
|
All Other
|
|
|
Corporate
|
|
|
Total
|
|
Year ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,361,908
|
|
|
$
|
47,264
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,409,172
|
|
Income (loss) from operations
|
|
|
14,330
|
|
|
|
(6,479
|
)
|
|
|
—
|
|
|
|
(8,856
|
)
|
|
|
(1,005
|
)
|
Depreciation and amortization
|
|
|
16,084
|
|
|
|
6,544
|
|
|
|
—
|
|
|
|
4
|
|
|
|
22,632
|
|
Severance
|
|
|
1,438
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,438
|
|
Other operating (expense) gains, net
|
|
|
(7,785
|
)
|
|
|
(267
|
)
|
|
|
—
|
|
|
|
326
|
|
|
|
(7,726
|
)
|
Year ended July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,511,473
|
|
|
$
|
34,857
|
|
|
$
|
1,165
|
|
|
$
|
—
|
|
|
$
|
1,547,495
|
|
Income (loss) from operations
|
|
|
25,821
|
|
|
|
(2,677
|
)
|
|
|
(2,600
|
)
|
|
|
(12,166
|
)
|
|
|
8,378
|
|
Depreciation and amortization
|
|
|
16,312
|
|
|
|
5,271
|
|
|
|
1,214
|
|
|
|
4
|
|
|
|
22,801
|
|
Severance
|
|
|
4,534
|
|
|
|
—
|
|
|
|
—
|
|
|
|
96
|
|
|
|
4,630
|
|
Other operating expense
|
|
|
—
|
|
|
|
(115
|
)
|
|
|
—
|
|
|
|
(2,283
|
)
|
|
|
(2,398
|
)
|
Year ended July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,469,987
|
|
|
$
|
29,450
|
|
|
$
|
2,292
|
|
|
$
|
—
|
|
|
$
|
1,501,729
|
|
Income (loss) from operations
|
|
|
25,513
|
|
|
|
(1,865
|
)
|
|
|
142
|
|
|
|
(18,241
|
)
|
|
|
5,549
|
|
Depreciation and amortization
|
|
|
16,134
|
|
|
|
3,875
|
|
|
|
1,683
|
|
|
|
12
|
|
|
|
21,704
|
|
Other operating expense, net
|
|
|
(63
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,412
|
)
|
|
|
(10,475
|
)
|
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Total
assets for the reportable segments are not provided because a significant portion of the Company’s assets are servicing
multiple segments and the Company does not track such assets separately by segment.
Geographic
Information
Net
long-lived assets and total assets held outside of the United States, which are located primarily in Western Europe, were as follows:
(in thousands)
|
|
United
States
|
|
|
Foreign
Countries
|
|
|
Total
|
|
July 31, 2019
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
25,797
|
|
|
$
|
8,558
|
|
|
$
|
34,355
|
|
Total assets
|
|
|
103,113
|
|
|
|
340,590
|
|
|
|
443,703
|
|
July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
31,400
|
|
|
$
|
4,680
|
|
|
$
|
36,080
|
|
Total assets
|
|
|
82,400
|
|
|
|
317,197
|
|
|
|
399,597
|
|
July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
82,706
|
|
|
$
|
6,312
|
|
|
$
|
89,018
|
|
Total assets
|
|
|
203,548
|
|
|
|
315,415
|
|
|
|
518,963
|
|
Note
25—Selected Quarterly Financial Data (Unaudited)
The
table below presents selected quarterly financial data of the Company for its fiscal quarters in fiscal 2019 and fiscal 2018:
Quarter Ended
(in thousands,
except per share data)
|
|
Revenues
|
|
|
Direct cost
of revenues
|
|
|
Income (loss)
from
operations
|
|
|
Net (loss) income
|
|
|
Net (loss) income
attributable
to IDT
Corporation
|
|
|
Net (loss) income
per share –basic
|
|
|
Net (loss) income
per share – diluted
|
|
2019(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31(b)
|
|
$
|
362,316
|
|
|
$
|
304,693
|
|
|
$
|
182
|
|
|
$
|
(1,998
|
)
|
|
$
|
(2,299
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.10
|
)
|
January 31
|
|
|
349,473
|
|
|
|
291,178
|
|
|
|
(457
|
)
|
|
|
(1,011
|
)
|
|
|
(1,311
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
April 30
|
|
|
341,255
|
|
|
|
282,791
|
|
|
|
449
|
|
|
|
2,457
|
|
|
|
2,170
|
|
|
|
0.08
|
|
|
|
0.08
|
|
July 31(c)
|
|
|
356,128
|
|
|
|
295,353
|
|
|
|
(1,179
|
)
|
|
|
882
|
|
|
|
1,574
|
|
|
|
0.06
|
|
|
|
0.06
|
|
TOTAL
|
|
$
|
1,409,172
|
|
|
$
|
1,174,015
|
|
|
$
|
(1,005
|
)
|
|
$
|
330
|
|
|
$
|
134
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31
|
|
$
|
393,555
|
|
|
$
|
336,510
|
|
|
$
|
83
|
|
|
$
|
(1,797
|
)
|
|
$
|
(2,092
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
January 31(d)
|
|
|
395,883
|
|
|
|
337,229
|
|
|
|
(480
|
)
|
|
|
1,690
|
|
|
|
1,516
|
|
|
|
0.06
|
|
|
|
0.06
|
|
April 30 (e)
|
|
|
365,410
|
|
|
|
307,165
|
|
|
|
(1,693
|
)
|
|
|
(3,230
|
)
|
|
|
(3,458
|
)
|
|
|
(0.14
|
)
|
|
|
(0.14
|
)
|
July 31(f)
|
|
|
392,647
|
|
|
|
325,133
|
|
|
|
10,468
|
|
|
|
8,536
|
|
|
|
8,242
|
|
|
|
0.33
|
|
|
|
0.33
|
|
TOTAL
|
|
$
|
1,547,495
|
|
|
$
|
1,306,037
|
|
|
$
|
8,378
|
|
|
$
|
5,199
|
|
|
$
|
4,208
|
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
(a)
|
In fiscal 2019, the Company recorded an $8.0 million accrual for non-income related taxes related to one of its foreign subsidiaries.
A portion of the accrual related to each of the fiscal quarters in fiscal 2019 (see Note 13). Accordingly, the Company corrected
its consolidated financial statements for its fiscal quarters ended October 31, 2018, January 31, 2019, and April 30, 2019
to include the accrued expense and the related income tax benefit. The Company has determined that the adjustments were not
material to its previously issued quarterly financial statements.
|
|
|
(b)
|
Included in net loss was foreign currency transaction losses of $1.2 million and provision for income
taxes of $1.2 million.
|
|
(c)
|
Included in net income was gain on investments of $1.1 million and included in net income attributable
to IDT Corporation was net loss attributable to noncontrolling interests of $0.7 million.
|
|
(d)
|
Included in net income was a benefit from income taxes
of $3.3 million for an anticipated AMT credit refund.
|
|
(e)
|
Included in loss from operations was severance expense
of $3.7 million.
|
|
(f)
|
Included in revenues was $9.5 million related to a change
in estimate for recognizing certain breakage revenue. The Company recorded breakage revenue when the likelihood of the customer
exercising its remaining rights became remote. In the fourth quarter of 2018, the Company changed when it generally deemed the
likelihood remote from 24 or 36 months of no activity to 12 or 24 months of no activity. Included in income from operations was
severance expense of $0.3 million and other operating losses, net of $0.4 million.
|
F-42