| 7/11 | 7/12 | 7/13 | 7/14 | 7/15 | 7/16 | |||||||||||||||||||
| IDT Corporation | 100.00 | 78.98 | 173.49 | 160.13 | 194.94 | 220.89 | ||||||||||||||||||
| NYSE Composite | 100.00 | 99.97 | 125.40 | 143.37 | 148.94 | 151.55 | ||||||||||||||||||
| S&P Telecommunication Services | 100.00 | 130.65 | 137.93 | 150.04 | 147.44 | 186.39 | ||||||||||||||||||
| 7/13 | 7/14 | 7/15 | 7/16 | 7/17 | 7/18 | |||||||
| IDT Corporation | 100.00 | 92.30 | 112.36 | 127.32 | 129.72 | 66.32 | ||||||
| NYSE Composite | 100.00 | 114.33 | 118.77 | 120.85 | 137.54 | 152.67 | ||||||
| S&P Telecommunication Services | 100.00 | 108.78 | 106.89 | 135.13 | 125.63 | 122.54 |
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases by us of our shares during the fourth quarter of fiscal 2016.2018.
| Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |||||||||||||
| May 1 – 31, 2018 | — | — | — | 8,000,000 | ||||||||||||
| June 1 – 30, 2018 | — | — | — | 8,000,000 | ||||||||||||
| July 1 – 31, 2018 (2) | 419,395 | 5.785 | 367,484 | 7,632,516 | ||||||||||||
| Total | 419,395 | 5.785 | 367,484 | — | ||||||||||||
| Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||||||||||
| May 1 - 31, 2016 | – | $ | – | – | 8,000,000 | |||||||||||
| June 1 - 30, 2016 | – | $ | – | – | 8,000,000 | |||||||||||
| July 1 - 31, 2016 | – | $ | – | – | 8,000,000 | |||||||||||
| Total | – | $ | – | – | ||||||||||||
| (1) | On January 22, 2016, our Board of Directors approved a stock repurchase program to purchase up to 8.0 million shares of our Class B common stock and cancelled the previous stock repurchase program originally approved by the Board of Directors on June 13, 2006, which had 4,636,741 shares remaining available for repurchase. |
| (2) | Total number of shares purchased includes 51,911 shares of our Class B common stock that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares are repurchased by us based on their fair market value on the trading day immediately prior to the vesting date. |
Item 6. Selected Financial Data.
The selected consolidated financial data presented below at July 31, 2018 and 2017, and for each of the fiscal years then ended have been derived from our Consolidated Financial Statements, which have been audited by BDO USA, LLP, independent registered public accounting firm. The selected consolidated financial data presented below at July 31, 2016, 2015, and 2014, and for each of the fiscal years in the five-yearthree-year period ended July 31, 2016, has been derived from our Consolidated Financial Statements, which have been audited by Grant Thornton LLP, independent registered public accounting firm. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information appearing elsewhere in this Annual Report.
| Year Ended July 31, (in millions, except per share data) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
| STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||
| Revenues | $ | 1,496.3 | $ | 1,596.8 | $ | 1,651.5 | $ | 1,620.6 | $ | 1,506.3 | ||||||||||
| Income from continuing operations (a) | 25.4 | 86.1 | 21.0 | 18.1 | 30.9 | |||||||||||||||
| Income from continuing operations per common share—basic | 1.03 | 3.69 | 0.85 | 0.77 | 1.45 | |||||||||||||||
| Income from continuing operations per common share—diluted | 1.03 | 3.63 | 0.82 | 0.72 | 1.36 | |||||||||||||||
| Cash dividends declared per common share (b) | 0.75 | 2.03 | 0.51 | 0.83 | 0.66 | |||||||||||||||
| As of July 31, (in millions) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
| BALANCE SHEET DATA: | ||||||||||||||||||||
| Total assets | $ | 469.7 | $ | 485.7 | $ | 480.9 | $ | 435.4 | $ | 451.1 | ||||||||||
| Note payable—long term portion | — | — | 6.4 | 6.6 | 29.7 | |||||||||||||||
| Year Ended July 31, (in millions, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||
| Revenues | $ | 1,547.5 | $ | 1,501.7 | $ | 1,496.3 | $ | 1,596.8 | $ | 1,651.5 | ||||||||||
| Net income (a) | 5.2 | 9.6 | 25.4 | 86.1 | 21.0 | |||||||||||||||
| Income per common share—basic | 0.17 | 0.35 | 1.03 | 3.69 | 0.85 | |||||||||||||||
| Income per common share—diluted | 0.17 | 0.35 | 1.03 | 3.63 | 0.82 | |||||||||||||||
| Cash dividends declared per common share (b) | 0.56 | 0.76 | 0.75 | 2.03 | 0.51 | |||||||||||||||
| At July 31, (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| BALANCE SHEET DATA: | ||||||||||||||||||||
| Total assets | $ | 399.6 | $ | 519.0 | $ | 469.7 | $ | 485.7 | $ | 480.9 | ||||||||||
| Note payable—long term portion | — | — | — | — | 6.4 | |||||||||||||||
| (a) | Included in net income in fiscal 2018 was a benefit from |
| (b) | Cash dividends declared per common share in fiscal 2015 included special dividends of $0.68 per share and $0.64 per share paid in November 2014 and January 2015, respectively. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in this Annual Report. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.
OVERVIEW
We are a multinational holding company with operations primarily in the telecommunications and payment industries. We have two reportable business segments, Telecom Platform& Payment Services and net2phone-UCaaS. Telecom & Payment Services and net2phone-UCaaS comprise the IDT Telecom division.
Beginning in the first quarter of fiscal 2018, the Telecom & Payment Services segment includes Consumer Phone Services. Telecom Platform Services, provides retail telecommunications and payment offeringswhich was previously reported as well as wholesale international long distance traffic termination.a separate segment. Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Telecom Platform ServicesComparative results have been reclassified and restated as if Consumer Phone Services comprisewas included in Telecom & Payment Services in all periods presented.
On March 26, 2018, we completed the Rafael Spin-Off, which was a pro rata distribution of the common stock of our IDT Telecom division. subsidiary, Rafael, to our stockholders of record as of the close of business on March 13, 2018. The disposition of Rafael 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. At the time of the Rafael Spin-Off, Rafael owned the commercial real estate assets and interests in two clinical stage pharmaceutical companies that we previously held. The commercial real estate holdings consisted of our headquarters building and its associated public garage in Newark, New Jersey, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices for us and certain affiliates. The pharmaceutical holdings included debt interests and warrants in Rafael Pharma, which is a clinical stage, oncology-focused pharmaceutical company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells, and a majority equity interest in Lipomedix, a pharmaceutical development company based in Israel. In addition, prior to the Rafael Spin-Off, we transferred assets to Rafael such that, at the time of the Rafael Spin-Off, Rafael had $42.3 million in cash, cash equivalents, and marketable securities, plus approximately $6 million in hedge fund and other investments.
We lease office space and parking in Rafael’s building and parking garage located at 520 Broad St, Newark, NJ. We also lease office space in Israel from Rafael. The leases expire in April 2025. In fiscal 2018, we incurred rent expense subsequent to the Rafael Spin-Off of $0.6 million in connection with the Rafael leases.
Operating segments that are not reportable individually are included in All Other. Prior to the Zedge Spin-Off, All Other included Zedge, which provides a content platform that enables consumers to personalize their mobile devices with free high quality ringtones, wallpapers, home screen app icons and notification sounds. Beginning in fiscal 2018, All Other also includes only Zedge and our real estate holdings and other smaller businesses. Untilinvestments that were included in the sale of FabrixRafael Spin-Off. A small business that was previously included in October 2014, All Other also included Fabrix, a software development company offering a cloud-based scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and delivery.
On June 1, 2016, we completed a pro rata distribution of the common stock that we held in our subsidiary Zedgehas been reclassified to our stockholders of record as of the close of business on May 26, 2016. The disposition of Zedge did not meet the criteria to be reported as a discontinued operation and accordingly, its assets, liabilities, results of operations and cash flows have not been reclassified. In connection with the Zedge Spin-Off, each of our stockholders received one share of Zedge Class A common stock for every three shares of our Class A common stock, and one share of Zedge Class B common stock for every three shares of our Class B common stock, held of record as of the close of business on May 26, 2016. We received a legal opinion that the Zedge Spin-Off should qualify as a tax-free transaction for U.S. federal income tax purposes.
We entered into various agreements with Zedge prior to the Zedge Spin-Off including (1) a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Zedge after the Zedge Spin-Off, (2) a Tax Separation Agreement, which sets forth the responsibilities of us and Zedge with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Zedge Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods, and (3) a TransitionTelecom & Payment Services, Agreement, which provides for certain services to be performed by us to facilitate Zedge’s transition into a separate publicly-traded company. Pursuant to the Separation and Distribution Agreement, among other things, the Company indemnifies Zedge and Zedge indemnifies the Company for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, Zedge indemnifies the Company from all liability for taxes of Zedge and any of Zedge’s subsidiaries or relating to Zedge’s business accruing after the Zedge Spin-Off, and the Company indemnifies Zedge from all liability for taxes of Zedge and any of Zedge’s subsidiaries or relating to Zedge’s business with respect to taxable periods ending on or before the Zedge Spin-Off. Pursuant to the Transition Services Agreement, we provide to Zedge certain administrative and other services, among other things, including services relating to payroll processing and employee benefits administration, finance, accounting, tax, internal audit, investor relations and legal.
In August 2015, our Board of Directors approved a plan to reorganize us into three separate entities by spinning off two business units to our stockholders, one of which was Zedge. The remaining components of the reorganization are subject to change as well as both internal and third party contingencies, and must receive final approval from our Board of Directors and certain third parties. We continueother cost centers have been reclassified to advance the effort on the remainder of the reorganization.
On December 7, 2015, we approved an investment of up to $10 millionCorporate. Comparative results have been reclassified and restated as if these businesses and costs were included in Cornerstone Pharmaceuticals, Inc.,Telecom & Payment Services or Cornerstone, which is a clinical stage, oncology-focused pharmaceutical company committed to the development and commercialization of therapies targeting cancer metabolism that exploit the metabolic differences between normal cells and cancer cells. The initial $2 million investment was funded as follows: $500,000 upon signing the Subscription and Loan Agreement on January 21, 2016, $50,000 on March 23, 2016, and $1.45 million on April 14, 2016. The initial $2 million investment wasCorporate in exchange for Cornerstone’s 3.5% convertible promissory notes due 2018. The remaining $8 million was funded in August and September 2016. In September 2016, Cornerstone issued to our controlled 50%-owned subsidiary, CS Pharma Holdings, LLC, or CS Pharma, a convertible promissory note with a principal amount of $10 million (the Series D Note) representing the $8 million investment funded on such date plus the conversion of the $2 million principal amount convertible promissory notes issued in connection with the previous funding. The Cornerstone Series D Note earns interest at 3.5% per annum, with principal and accrued interest due and payable on September 16, 2018. The Series D Note is convertible at the holder’s option into shares of Cornerstone’s Series D Preferred Stock. The Series D Note also includes a mandatory conversion into Cornerstone common stock upon a qualified initial public offering, and conversion at the holder’s option upon an unqualified financing event. In all cases, the Series D Note conversion price is based on the applicable financing purchase price. We and CS Pharma were issued warrants to purchase shares of capital stock of Cornerstone representing up to 56% of the then issued and outstanding capital stock of Cornerstone, on an as-converted and fully diluted basis. The right to exercise warrants as to the first $10 million thereof is held by CS Pharma and the remainder is owned by us. The minimum initial and subsequent exercises of the warrant shall be for such number of shares that will result in at least $5 million of gross proceeds to Cornerstone, or such lesser amount as represents 5% of the outstanding capital stock of Cornerstone, or such lesser amount as may then remain unexercised. The warrant will expire upon the earlier of December 31, 2020 or a qualified initial public offering or liquidation event.
In addition to interests issued to us, CS Pharma has issued member interests to third parties in exchange for cash investment in CS Pharma of $10 million. At July 31, 2016, CS Pharma had received $8.8 million of such investment and the remaining $1.2 million was received in September 2016. We hold a 50% interest in CS Pharma and we are the managing member. It is expected that CS Pharma will use its cash to invest in Cornerstone.
Howard Jonas, our Chairman of the Board and former Chief Executive Officer, is a director of Cornerstone and was appointed its Chairman of the Board in April 2016. Howard and Deborah Jonas jointly own $525,000 of Series C Convertible Notes of Cornerstone, and The Howard S. and Deborah Jonas Foundation owns an additional $525,000 of Series C Notes.
Cornerstone is a variable interest entity, however, we have determined that we are not the primary beneficiary as we do not have the power to direct the activities of Cornerstone that most significantly impact Cornerstone’s economic performance.periods presented.
IDT Telecom
Since our inception, we have derived the majority of our revenues
Our Telecom & Payment Services segment, which represented 97.7%, 97.9% and operating expenses from IDT Telecom’s businesses. IDT Telecom’s revenues represented 99.2%, 99.0% and 98.5%97.5% of our total revenues from continuing operations in fiscal 2016,2018, fiscal 20152017 and fiscal 2014, respectively.
Telecom Platform Services, which represented 99.5%, 99.4% and 99.3% of IDT Telecom’s total revenues in fiscal 2016, fiscal 2015 and fiscal 2014, respectively, markets and distributes multiple communications and payment services across fourthree broad business verticals:
| Retail Communications provides international long-distance calling products primarily to foreign-born communities, |
| Wholesale Carrier Services is a global telecom carrier, terminating international long distance calls around the world for Tier 1 fixed line and mobile network operators, as well as other service providers; and |
| Payment Services provides payment offerings, including international and domestic airtime top-up, domestic bill payment and international money |
Boss Revolution PIN-less,Our net2phone-UCaaS segment is comprised of (1) cloud-based PBX services offered to enterprise customers mainly through value-added resellers, service providers, telecom agents and managed service providers, (2) SIP trunking, which allowssupports inbound and outbound domestic and international calling from an IP PBX, and (3) cable telephony. Our net2phone-UCaaS segment represented 2.3%, 2.0% and 1.8% of our customers to call overseas without the need to enter a PIN, has largely replacedtotal revenues from our traditional disposable calling cards. Internationalin fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Retail Communications’ services and international and domestic airtime top-up which enables customers to purchase airtime for a prepaid mobile telephone in another country, appeals to residents of developed countries such as the United States who regularly communicate with or financially support friends or family members in a developing country. Boss Revolution PIN-less and international airtime top-up represent successful efforts to leverage our existing capabilities and distribution. Although Boss Revolution PIN-less and international airtime top-up generally have lower gross margins than our traditional disposable calling cards, we believe that customers tend to continue using these products over a longer period of time thereby allowing us to generate higher revenues and longer lifetime value per user. The Boss Revolution platform provides us with a direct, real-time relationship with all of our participating retailers, resulting in a cost-effective and adaptable distribution model that can rapidly respond to changes in the business environment.
Our Consumer Phone Services segment provides consumer local and long distance services in the United States. Since calendar 2005, this business has been in harvest mode, wherein we seek to retain existing customers but do not actively market to new customers, and we attempt to maximize profits by optimally managing both the life-cycle of our customer base as well as the costs associated with operating this business.
Our international prepaid calling business worldwide sells the great majority of its productsare sold to distributors at a discount to their face value,value. Revenue from Retail Communications’ services is deferred and records the sales as deferred revenues. These deferred revenues are recognized as revenues when telecommunications services are provided, and/or administrative fees are imposed.
International prepaid calling revenues tend to be somewhat seasonal, with the second fiscal quarter (which contains Christmas and New Year’s Day) and the fourth fiscal quarter (which contains Mother’s Day and Father’s Day) typically showing higher minute volumes.
Direct costs related to our telecomIDT Telecom businesses consist primarily of three major categories: termination and origination costs, toll-free costs and network costs.
Termination and origination costs represent costs associated with the transmission and termination of international and domestic long distance services. We terminate our traffic via the arbitrage market or through direct interconnections with other carriers. This cost is primarily variable, with a price paid on a per-minute basis. Origination costs relating to our Consumer Phone Services segment consists primarily ofRetail Communications’ services include fixed charges for local access telephone numbers and may include per-minute usage charges. Origination costs also include leased lines from the RBOCs, which are billed to us as a monthly fee.
Toll-free costs are variable costs paid to providers of toll-free services.
Network costs, which are also called connectivity costs, are fixed for a range of minutes of use, and include customer/carrier interconnect charges and leased fiber circuit charges. Local circuits are generally leased for a 12 to 24 month term, while long haul circuits generally are leased for longer terms. Although these are not purely variable costs, where the cost increases for each additional minute carried on our suppliers’ networks, increases in minutes will likely result in incrementally higher network costs.
Direct costs related to our telecom businessIDT Telecom businesses include an estimate of charges for which invoices have not yet been received, and estimated amounts for pending disputes with other carriers. Subsequent adjustments to these estimates may occur after the invoices are received for the actual costs incurred, but these adjustments generally are not material to our results of operations.
Direct cost of revenues for IDT Telecom also includes the cost of airtime top-up minutes.
Selling expenses in IDT Telecom consist primarily of sales commissions paid to internal salespersons and independent agents, and advertising costs, which are the primary costs associated with the acquisition of customers. General and administrative expenses include employee compensation, benefits, professional fees, rent and other administrative costs. IDT Telecom’s Retail Communications offeringsand Payment Services generally have higher selling, general and administrative expenses than the Wholesale Carrier Services business.
Concentration of Customers
Our most significant customers typically include telecom carriers to whom IDT Telecom provides wholesale telecommunications services and distributors of IDT Telecom’s international prepaid calling products. While they may vary from quarter to quarter, our five largest customers collectively accounted for 11.2%12.5%, 11.2%12.4% and 12.0%11.2% of total consolidated revenues in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively. Our customers with the five largest receivables balances collectively accounted for 23.0%18.7% and 24.1%35.4% of the consolidated gross trade accounts receivable at July 31, 20162018 and 2015,2017, respectively. This concentration of customers increases our risk associated with nonpayment by those customers. In an effort to reduce our risk, we perform ongoing credit evaluations of our significant retail, wholesale and cable telephony customers, and in some cases, do not offer credit terms to customers, choosing instead to require prepayment. Historically, when we have issued credit, we have not required collateral to support trade accounts receivables from our customers. However, when necessary, IDT Telecom haswe have imposed stricter credit restrictions on itsour customers. In some cases, this has resulted in IDT Telecomour sharply curtailing, or ceasing completely, sales to certain customers. IDT Telecom attemptsWe attempt to mitigate itsour credit risk related to specific wholesale carrier services customers by also buying services from the customer, in order to create an opportunity to offset itsour payables and receivables with the customer. In this way, IDT Telecomwe can continue to sell services to these customers while reducing itsour receivable exposure risk. When it is practical to do so, IDT Telecomwe will increase itsour purchases from wholesale carrier services customers with receivable balances that exceed IDT Telecom’sour applicable payables in order to maximize the offset and reduce itsour credit risk.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts, goodwill, valuation of long-lived and intangible assets, income taxes and regulatory agency fees, and IDT Telecom direct cost of revenues—disputed amounts. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant accounting policies.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses that result from the inability or unwillingness of our customers to make required payments. The
Our allowance for doubtful accounts was $4.8$3.2 million and $5.6$2.7 million at July 31, 20162018 and 2015,2017, respectively. The allowance for doubtful accounts as a percentage of gross trade accounts receivable increased to 8.9%4.4% at July 31, 20162018 from 8.8%3.9% at July 31, 2015 as a result of a 15.7% decrease in2017 mostly due to the gross accounts receivable balance and a 14.6% declineincrease in the allowance for doubtful accounts balance.
We estimate the balance of our allowance for doubtful accounts by analyzing accounts receivable balances by age and applying historical write-off and collection trend rates. Our 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 based on known troubled accounts, historical experience and other currently available evidence.that the receivable will not be recovered. Our estimates of recoverability of customer accounts may change due to new developments, changes in assumptions or changes in our strategy, which may impact our allowance for doubtful accounts balance. We continually assess the likelihood of potential amounts or ranges of recoverability and adjust our allowance accordingly; however, actual collections and write-offs of trade accounts receivables may materially differ from our estimates.
Goodwill
Our goodwill balance of $11.2$11.3 million at July 31, 20162018 and 2017 was attributable to our Retail Communications reporting unit in our Telecom Platform& Payment Services segment. Goodwill and other intangible assets deemed to have indefinite lives areis not amortized. These assets areInstead, goodwill is reviewed annually (or more frequently under various conditions) for impairment using a fair value approach. Intangible assets with finite useful lives are amortized over their estimated useful lives.
TheWe perform our annual, or interim, goodwill impairment assessment involves estimatingtest by comparing the fair value of our reporting unit with its carrying amount. We would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit. Additionally, we consider income tax effects from any tax deductible goodwill on the carrying amount of our reporting unit when measuring the goodwill impairment loss, if applicable. The fair value of the reporting unit and comparing it to its carrying amount, which is known as Step 1. If the carrying value of the reporting unit exceeds its estimated fair value, Step 2 is performed to determine if an impairment of goodwill is required. We estimate the fair value of our reporting units using discounted cash flow methodologies, as well as considering third party market value indicators. Goodwill impairment is measured by the excess of the carrying amount of the reporting unit’s goodwill over its implied fair value.
We haveThe annual impairment tests for Retail Communications in fiscal 2018 and fiscal 2017 resulted in no goodwill impairment, since its estimated fair value substantially exceeded its carrying value at those times. In addition, we do not believe Retail Communications is currently at risk of goodwill impairment. In fiscal 2017, we adopted the option to perform a qualitative assessment to determine whether it is necessary to performAccounting Standards Update, or ASU, that simplified the two-step quantitativesubsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. However, we may elect to perform the two-step quantitative goodwill impairment test even if no indications of a potential impairment exist.
For Retail Communications’ annual impairment test in fiscal 2016, since its estimated fair value substantially exceeded its carrying value in Step 1, it was not necessary to perform Step 2. For Retail Communications’ annual impairment test in fiscal 2015, we qualitatively assessed whether it was more likely than not that a goodwill impairment existed and concluded that a goodwill impairment did not exist. In fiscal 2015, Zedge’s estimated fair value substantially exceeded its carrying value in Step 1, therefore it was not necessary to perform Step 2. In addition, we do not believe Retail Communications is currently at risk of failing Step 1. Calculating the fair value of the reporting units, and allocating the estimated fair value to all of the tangible assets, intangible assets and liabilities,unit requires significant estimates and assumptions by management. Should ourthe estimates orand assumptions regarding the fair value of ourthe reporting unitsunit prove to be incorrect, we may be required to record impairments ofto our goodwill in future periods and such impairments could be material.
We have the option to perform a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test. However, we may elect to perform the quantitative goodwill impairment test even if no indications of a potential impairment exist.
Valuation of Long-Lived Assets including Intangible Assets with Finite Useful Lives
We test the recoverability of our long-lived assets including identifiable intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of any such asset may not be recoverable. Such events or changes in circumstances include:
| significant actual underperformance relative to expected performance or projected future operating results; |
| significant changes in the manner or use of the asset or the strategy of our overall business; |
| significant adverse changes in the business climate in which we operate; and |
| loss of a significant contract. |
If we determine that the carrying value of certain long-lived assets may not be recoverable, we test for impairment based on the projected undiscounted cash flows to be derived from such asset. If the projected undiscounted future cash flows are less than the carrying value of the asset, we will record an impairment loss based on the difference between the estimated fair value and the carrying value of the asset. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from the asset using an appropriate discount rate. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should our estimates and assumptions prove to be incorrect, we may be required to record impairments in future periods and such impairments could be material.
Income Taxes and Regulatory Agency Fees
Our current and deferred income taxes and associated valuation allowance, as well as telecom regulatory agency fee accruals, are impacted by events and transactions arising in the normal course of business as well as in connection with special and non-routine items. Assessment of the appropriate amount and classification of income taxes and certain regulatory agency fees is dependent on several factors, including estimates of the timing and realization of deferred income tax assets, the results of regulatory fee-related audits, changes in tax laws or regulatory agency rules and regulations, as well as unanticipated future actions impacting related accruals of regulatory agency fees.
The valuation allowance on our deferred income tax assets was $158.4$76.0 million and $155.4$129.9 million at July 31, 20162018 and 2015,2017, respectively. In fiscal 2014,2017, we determined that our valuation allowance on the losses of IDT Global,Elmion Netherlands B.V., a U.K.Netherlands subsidiary, werewas no longer required due to an internal reorganization that generated income and a projection that theof net income would continue.in future periods. We recorded a benefit from income taxes of $4.1$16.6 million in fiscal 20142017 from the full recognition of the IDT GlobalElmion Netherlands B.V. deferred tax assets.
We have In addition, in fiscal 2017, we determined that we would not be able to utilize our deferred tax assets in the United States and recorded a valuation allowance of $11.1 million against them.
On December 22, 2017, the U.S. income tax expensegovernment enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, which is commonly referred to as “The Tax Cuts and Jobs Act”, or the Tax Act. At July 31, 2018, all of our foreign earnings as such earnings areremain permanently reinvested outside the United States. However, we did calculate the estimated transition tax as required by the Tax Act and made a reduction to our federal net operating losses of $12 million. We are currently working to complete various earnings and profits analyses to finalize our estimate. The cumulative undistributed foreign earnings are included in accumulated deficit in our consolidated balance sheets and consisted of approximately $324$395 million and $353$375 million at July 31, 20162018 and 2015,2017, respectively. Upon distribution of these foreign earnings to our domestic entities, we may be subject to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would be paid.
Our 2017 FCC Form 499-A, filings forwhich reports our calendar years 2000 through 2006year 2016 revenue, related to payments due to the FCC, is currently under audit by the Internal Audit Division of the Universal Service Fund have been audited by the IAD of USAC, which concluded that we incorrectly reported certain revenues on Forms 499-A. USAC’s revisions to our filing methodology resulted in additional regulatory payments for the years covered by the audits. While we believe in the accuracy of our filing methodology and our Request for Review remains pending, we have implemented some of the revisions set forth in the IAD’s filings beginning with our calendar year 2010 Form 499-A. We have accrued for all regulatory fees we believe may be incurred under IAD’s methodology from 2002 through the present, in the event our Request for Review is denied and/or our methodology is not upheld on appeal, and we have made certain payments on amounts that have been invoiced to us by USAC and/or other agencies. As ofAdministrative Company. At July 31, 20162018 and 2015,2017, our accrued expenses included $47.5$43.9 million and $49.9$43.5 million, respectively, for these regulatory fees for the years covered by the audit and subsequent years. Until a final decision is reached in our disputes, we will continue to accrue in accordance with IAD’s methodology. If we do not properly calculate, or have not properly calculated, the amount payable by us, to the Universal Service Fund, we may be subject to interest and penalties.
IDT Telecom Direct Cost of Revenues—Disputed Amounts
IDT Telecom’s direct cost of revenues includes estimated amounts for pending disputes with other carriers. The billing disputes typically arise from differences in minutes of use and/or rates charged by carriers that provide service to us. At July 31, 20162018 and 2015,2017, there was $21.3$22.6 million and $22.6$26.1 million, respectively, in outstanding carrier payable disputes, for which we recorded direct cost of revenues of $9.0$9.3 million and $9.6$9.3 million, respectively. We consider various factors to determine the amount to accrue for pending disputes, including (1) our historical experience in dispute resolution, (2) the basis of disputes, (3) the financial status and our current relationship with vendors and (4) our aging of prior disputes. Subsequent adjustments to our estimates may occur when disputes are resolved or abandoned, but these adjustments are generally not material to our results of operations. However, there can be no assurance that revisions to our estimates will not be material to our results of operations in the future.
RECENTLY ISSUEDADOPTED ACCOUNTING STANDARD NOT YET ADOPTEDSTANDARDS
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606), and has since issued amendments thereto (collectively referred to as ASC 606). 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 International Accounting Standards Board jointly issuedguidance defines a comprehensive newfive-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 recognition standard thatwhen, or as, the entity satisfies a performance obligation. We adopted ASC 606 as of August 1, 2018 using the modified retrospective method, which will supersede mostbe reflected in our financial statements beginning in the first quarter of fiscal 2019. We identified our main revenue streams, which include Boss Revolution international calling revenue, wholesale carrier services revenue, and domestic and international airtime top-up revenue. We substantially completed the review and analysis of contracts and other relevant documents related to our Boss Revolution calling service retailer and direct to consumer revenue streams, wholesale carrier services revenue, domestic and international airtime top-up revenue, and other significant revenue streams to determine how to apply ASC 606 to these revenue streams.
At August 1, 2018, the cumulative effect of initially applying ASC 606 is expected to be a $8.6 million reduction to “Deferred revenue”, with an offsetting reduction to “Accumulated deficit”. This adjustment is primarily due to a change in accounting for breakage primarily from our Boss Revolution international calling service, traditional calling cards, and international and domestic top-up. A customer’s nonrefundable prepayment gives the customer a right to receive a good or service in the future (and obliges us to stand ready to transfer a good or service). However, customers may not exercise all of their contractual rights. Those unexercised rights are referred to as breakage. Prior to the adoption of ASC 606, we recorded breakage revenue when the likelihood of the currentcustomer exercising its remaining rights became remote. We generally deemed the likelihood remote after 12 or 24 months of no activity. Per ASC 606, if an entity expects to be entitled to a breakage amount, the entity should recognize the expected breakage amount as revenue recognition guidancein 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. We determined that $8.6 million included in our opening balance of “Deferred revenue” would have been recognized as breakage revenue under U.S. GAAPASC 606 in prior periods, and International Financial Reporting Standards, or IFRS. The goalsaccordingly, recorded the cumulative effect adjustment as of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. We will adopt this standard on August 1, 2018. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard.
We are evaluatingcurrently reviewing future required disclosures and updating our accounting policy, which is expected to be completed for our financial statements beginning in the impact that the standard will have on our consolidated financial statements.first quarter of fiscal 2019.
In January 2016, the FASB issued an Accounting Standards Update, or ASU to provide more information about recognition, measurement, presentation and disclosure of financial instruments. We adopted the amendments in this ASU on August 1, 2018. The amendments in the ASU include, among other changes, the following: (1) equity investments (except those accounted for under the equity method or that result in consolidation) will be measured at fair value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period to identify impairment of equity investments without readily determinable fair values, (3) financial assets and financial liabilities will be presented separately by measurement category and form of financial asset on the balance sheet or the notes to the financial statements, and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability exception will be available for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. These investments may be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will have to reassess at each reporting period whether an investment qualifies for this practicability exception. At August 1, 2018, the cumulative effect of adopting this ASU is expected to be a $1.2 million increase in “Investments”, a $0.1 million decrease in “Accumulated other comprehensive loss” and a $1.1 million reduction to “Accumulated deficit”, primarily from the measurement at fair value of our shares of Visa Inc. Series C preferred stock and the derecognition of unrealized holding losses on equity securities classified as available-for-sale.
In November 2016, the FASB issued an ASU that includes specific guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. We will adoptadopted the amendments in this ASU on August 1, 2018. We2018 using the retrospective transition method. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash flows. Beginning in the first quarter of fiscal 2019, the adoption will impact the beginning of the period and end of the period cash and cash equivalents balance in the statement of cash flows, as well as the net cash provided by or used in operating activities. At July 31, 2018, the aggregate cash, cash equivalents and restricted cash and cash equivalents was $203.2 million, which included $134.8 million included in current “Assets held for sale” and $0.3 million included in “Other current assets” in the accompanying consolidated balance sheet.
In January 2017, the FASB issued an ASU to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are evaluatingpresent. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the impact thatFASB has developed more stringent criteria for sets without outputs. Lastly, the ASU will havenarrows the definition of the term output. We adopted the amendments in this ASU prospectively on August 1, 2018. There was no impact on our consolidated financial statements.statements upon adoption.
In May 2017, the FASB issued an ASU to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification); (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. We adopted the amendments in this ASU prospectively to awards modified on or after on August 1, 2018. There was no impact on our consolidated financial statements upon adoption.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In February 2016, the FASB issued an ASU No. 2016-02,Leases (Topic 842), and has since issued amendments thereto, related to the accounting for leases. The new standard establishes a right-of-use, or ROU, model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. We will adopt the new standard on August 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are evaluatingEntities have the impactoption 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 new standard will have on our consolidated financial statements.
In March 2016,opening balance of retained earnings in the FASB issued an ASU to improve the accounting for employee share-based payments. The new standard simplifies several aspectsperiod of adoption instead of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We will adopt the new standard on August 1, 2017.earliest period presented. We are evaluating the impact that the new standard will have on our consolidated financial statements.
In June 2016, the FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. We will adopt the new standard on August 1, 2020. We are evaluating the impact that the new standard will have on our consolidated financial statements.
In August 2017, the FASB issued an ASU intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge accounting guidance in U.S. GAAP. The amendments in this ASU are effective for us on August 1, 2019. Early application is permitted. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. We are evaluating the impact that this ASU will have on our consolidated financial statements.
In June 2018, the FASB issued an ASU to simplify several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718,Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 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 amendments in this ASU are effective for us on August 1, 2019. We are evaluating the impact that this ASU will have on our consolidated financial statements.
In August 2018, the FASB issued an ASU that modifies the disclosure requirements for fair value measurements. The amendments in this ASU are effective for us on August 1, 2020. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. We expect to adopt this ASU for our financial statements beginning in the first quarter of fiscal 2019. The adoption of this ASU will only impact the fair value measurement disclosures in our consolidated financial statements.
RESULTS OF OPERATIONS
Year Ended July 31, 20162018 compared to Years Ended July 31, 20152017 and 20142016
The following table sets forth certain items in our statements of income as a percentage of our total revenues from continuing operations:revenues:
| Year ended July 31, | 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||
| REVENUES: | ||||||||||||||||||||||||
| IDT Telecom | 99.2 | % | 99.0 | % | 98.5 | % | 99.9 | % | 99.8 | % | 99.2 | % | ||||||||||||
| All Other | 0.8 | 1.0 | 1.5 | 0.1 | 0.2 | 0.8 | ||||||||||||||||||
| TOTAL REVENUES | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||||||||
| COSTS AND EXPENSES: | ||||||||||||||||||||||||
| Direct cost of revenues (exclusive of depreciation and amortization) | 83.3 | 83.2 | 82.8 | 84.4 | 85.0 | 83.3 | ||||||||||||||||||
| Selling, general and administrative | 13.7 | 13.9 | 13.9 | 13.1 | 12.5 | 13.7 | ||||||||||||||||||
| Depreciation and amortization | 1.4 | 1.2 | 1.0 | 1.5 | 1.4 | 1.4 | ||||||||||||||||||
| Research and development | — | 0.1 | 0.6 | |||||||||||||||||||||
| Severance | 0.4 | 0.5 | — | 0.3 | — | 0.4 | ||||||||||||||||||
| TOTAL COSTS AND EXPENSES | 98.8 | 98.9 | 98.3 | 99.3 | 98.9 | 98.8 | ||||||||||||||||||
| Other operating (losses) gains, net | (0.2 | ) | (0.7 | ) | 0.1 | |||||||||||||||||||
| Gain on sale of member interest in Visa Europe, Ltd | 0.5 | — | — | — | — | 0.5 | ||||||||||||||||||
| Gain on sale of interest in Fabrix Systems, Ltd | 0.1 | 4.8 | — | |||||||||||||||||||||
| Other operating (losses) gains, net | — | (0.1 | ) | 0.1 | ||||||||||||||||||||
| INCOME FROM OPERATIONS | 1.8 | 5.8 | 1.8 | 0.5 | 0.4 | 1.8 | ||||||||||||||||||
| Interest income (expense), net | 0.1 | — | — | |||||||||||||||||||||
| Other income (expense), net | 0.1 | — | (0.3 | ) | ||||||||||||||||||||
| Interest income, net | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||
| Other (expense) income, net | (0.1 | ) | — | 0.1 | ||||||||||||||||||||
| INCOME BEFORE INCOME TAXES | 2.0 | % | 5.8 | % | 1.5 | % | 0.5 | % | 0.5 | % | 2.0 | % | ||||||||||||
We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.
Telecom & Payment Services Segment
IDT Telecom—Beginning in fiscal 2018, the Telecom Platform& Payment Services andsegment includes Consumer Phone Services, Segmentswhich was previously reported as a separate segment. Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Also beginning in fiscal 2018, the Telecom & Payment Services segment includes a small business that was previously included in All Other. Comparative results have been reclassified and restated as if Consumer Phone Services and the other small business were included in Telecom & Payment Services in all periods presented.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||
| Telecom Platform Services | $ | 1,477.9 | $ | 1,572.7 | $ | 1,615.6 | $ | (94.8 | ) | (6.0 | )% | $ | (42.9 | ) | (2.7 | )% | ||||||||||||
| Consumer Phone Services | 6.9 | 8.6 | 11.0 | (1.7 | ) | (20.3 | ) | (2.4 | ) | (21.7 | ) | |||||||||||||||||
| Total revenues | $ | 1,484.8 | $ | 1,581.3 | $ | 1,626.6 | $ | (96.5 | ) | (6.1 | )% | $ | (45.3 | ) | (2.8 | )% | ||||||||||||
| (in millions) | 2018 change from 2017 | 2017 change from 2016 | ||||||||||||||||||||||||||
| Year ended July 31, | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||||
| Revenues | $ | 1,511.5 | $ | 1,470.0 | $ | 1,458.4 | $ | 41.5 | 2.8 | % | $ | 11.6 | 0.8 | % | ||||||||||||||
| Direct cost of revenues | (1,294.8 | ) | (1,263.8 | ) | (1,232.2 | ) | (31.0 | ) | (2.5 | ) | (31.6 | ) | (2.6 | ) | ||||||||||||||
| Selling, general and administrative | (170.1 | ) | (164.5 | ) | (177.4 | ) | (5.6 | ) | (3.4 | ) | 12.9 | 7.3 | ||||||||||||||||
| Depreciation and amortization | (16.3 | ) | (16.1 | ) | (15.8 | ) | (0.2 | ) | (1.1 | ) | (0.3 | ) | (2.2 | ) | ||||||||||||||
| Severance | (4.5 | ) | — | (6.2 | ) | (4.5 | ) | nm | 6.2 | 100.0 | ||||||||||||||||||
| (Adjustment to) gain on sale of member interest in Visa Europe Ltd. | — | (0.1 | ) | 7.5 | 0.1 | 100.0 | (7.6 | ) | (100.8 | ) | ||||||||||||||||||
| Other | — | — | (0.3 | ) | — | — | 0.3 | 100.0 | ||||||||||||||||||||
| Income from operations | $ | 25.8 | $ | 25.5 | $ | 34.0 | $ | 0.3 | 1.2 | % | $ | (8.5 | ) | (25.0 | )% | |||||||||||||
nm—not meaningful
Revenues.IDT Telecom revenues decreased in fiscal 2016 and fiscal 2015 compared to the prior fiscal year due to decreases in both Telecom Platform Services’ and Consumer Phone Services’ revenues. Telecom Platform& Payment Services’ revenues, minutes of use and average revenue per minute for fiscal 2016,2018, fiscal 20152017 and fiscal 20142016 consisted of the following:
| (in millions, except revenue per minute) | 2016 change from 2015 | 2015 change from 2014 | 2018 change from 2017 | 2017 change from 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $/# | % | $/# | % | 2018 | 2017 | 2016 | $/# | % | $/# | % | ||||||||||||||||||||||||||||||||||||||||||
| Telecom Platform Services Revenues | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Telecom & Payment Services revenues | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retail Communications | $ | 672.2 | $ | 735.0 | $ | 695.8 | $ | (62.8 | ) | (8.6 | )% | $ | 39.2 | 5.6 | % | $ | 582.3 | $ | 615.6 | $ | 671.7 | $ | (33.3 | ) | (5.4 | )% | $ | (56.1 | ) | (8.4 | )% | |||||||||||||||||||||||||
| Wholesale Carrier Services | 555.1 | 590.9 | 672.3 | (35.8 | ) | (6.1 | ) | (81.4 | ) | (12.1 | ) | 645.5 | 609.1 | 567.4 | 36.4 | 6.0 | 41.7 | 7.4 | ||||||||||||||||||||||||||||||||||||||
| Payment Services | 219.2 | 208.3 | 202.3 | 10.9 | 5.2 | 6.0 | 3.0 | 283.7 | 245.3 | 219.3 | 38.4 | 15.7 | 26.0 | 11.8 | ||||||||||||||||||||||||||||||||||||||||||
| Hosted Platform Solutions | 31.4 | 38.5 | 45.2 | (7.1 | ) | (18.5 | ) | (6.7 | ) | (14.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Total Telecom Platform Services revenues | $ | 1,477.9 | $ | 1,572.7 | $ | 1,615.6 | $ | (94.8 | ) | (6.0 | )% | $ | (42.9 | ) | (2.7 | )% | ||||||||||||||||||||||||||||||||||||||||
| Total Telecom & Payment Services revenues | $ | 1,511.5 | $ | 1,470.0 | $ | 1,458.4 | $ | 41.5 | 2.8 | % | $ | 11.6 | 0.8 | % | ||||||||||||||||||||||||||||||||||||||||||
| Minutes of use | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retail Communications | 8,351 | 9,138 | 9,638 | (787 | ) | (8.6 | )% | (500 | ) | (5.2 | )% | 5,534 | 6,686 | 8,071 | (1,152 | ) | (17.2 | )% | (1,385 | ) | (17.2 | )% | ||||||||||||||||||||||||||||||||||
| Wholesale Carrier Services | 19,226 | 19,443 | 19,345 | (217 | ) | (1.1 | ) | 98 | 0.5 | 20,010 | 19,901 | 19,338 | 109 | 0.6 | 563 | 2.9 | ||||||||||||||||||||||||||||||||||||||||
| Hosted Platform Solutions | 673 | 728 | 798 | (55 | ) | (7.5 | ) | (70 | ) | (8.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Total minutes of use | 28,250 | 29,309 | 29,781 | (1,059 | ) | (3.6 | )% | (472 | ) | (1.6 | )% | 25,544 | 26,587 | 27,409 | (1,043 | ) | (3.9 | )% | (822 | ) | (3.0 | )% | ||||||||||||||||||||||||||||||||||
| Average revenue per minute | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retail Communications | $ | 0.0805 | $ | 0.0804 | $ | 0.0722 | $ | 0.0001 | 0.1 | % | $ | 0.0082 | 11.4 | % | $ | 0.1052 | $ | 0.0921 | $ | 0.0832 | $ | 0.0131 | 14.3 | % | $ | 0.0089 | 10.6 | % | ||||||||||||||||||||||||||||
| Wholesale Carrier Services | 0.0289 | 0.0304 | 0.0348 | (0.0015 | ) | (5.0 | ) | (0.0044 | ) | (12.5 | ) | 0.0323 | 0.0306 | 0.0293 | 0.0017 | 5.4 | 0.0013 | 4.3 | ||||||||||||||||||||||||||||||||||||||
Retail Communications’ revenue decreased 8.6%5.4% and 8.4% in fiscal 20162018 and fiscal 2017, respectively, compared to the prior fiscal 2015.year, and Retail Communications’ minutes of use decreased 17.2% and 17.2% in fiscal 2018 and fiscal 2017, respectively, compared to the prior fiscal year. Revenue from our Boss Revolution international calling service, which is Retail Communications’ most significant offering, declined 2.9%3.6% and 5.4% in fiscal 20162018 and fiscal 2017, respectively, compared to the prior fiscal 2015 due primarily to a decline inyear, and Boss Revolution’s minutes of use declined 14.3% and revenue from calls made13.1% in fiscal 2018 and fiscal 2017, respectively, compared to the prior fiscal year. Our Boss Revolution calling service continues to be negatively impacted by persistent, market-wide, trends including the proliferation of unlimited calling plans offered by wireless carriers and mobile virtual network operators, increasing penetration of free and paid over-the-top voice and messaging services, and decreased immigration into the U.S. and terminating in Mexico. FollowingIn 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,In July 2016, we significantly reduced Boss Revolution’s U.S. to Mexico calling rate because many of our competitors, including some of the large U.S. mobile operators, began offering unlimited Mexico calling as part of their monthly pricing plans, which caused a decline in our minutes of use and revenue. In July 2016, we significantly reduced Boss Revolution’s U.S. to Mexico calling rate, which accelerated the decline in our revenue.plans. In addition, the decrease in Retail Communications’ revenue and minutes of use in fiscal 20162018 and fiscal 2017 compared to the prior fiscal 2015year was due to continuing revenue declines in Europe, South America and Asia, and continuing revenue declines from traditional disposable calling cards in the U.S. Retail Communications’ minutes of use decreased 8.6% in fiscal 2016 compared to fiscal 2015 because of decreases in Boss Revolution and traditional disposable calling cards’ minutes of use. In addition, minutes of use decreased in Europe, South America and Asia in fiscal 2016 compared to fiscal 2015. We are currently beta testing the next version of the Boss Revolution app that includes free peer-to-peer voice calling and instant messaging. We expect the updated app will increase Boss Revolution’s market penetration and enhance the brand. Retail Communications’ revenues grew 5.6% in fiscal 2015 compared to fiscal 2014 due to increased penetration of Boss Revolution within our U.S. retail distribution network, partially offset by continued declines in sales of traditional disposable calling cards and retail sales in Europe. Retail Communications minutes of use decreased 5.2% in fiscal 2015 compared to fiscal 2014 because the increase in Boss Revolution minutes of use in the U.S. was more than offset by the decrease in traditional disposable calling cards’ minutes of use plus the decrease in minutes of use in Europe and Asia. Retail Communications revenue comprised 45.5%38.5%, 46.7%41.9% and 43.1%46.1% of Telecom Platform& Payment Services’ revenue in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively.
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.
Wholesale Carrier Services’ revenues declined 6.1% and 12.1%revenue increased 6.0% in fiscal 2018 compared to fiscal 2017, and Wholesale Carrier Services’ minutes of use increased 0.6% in fiscal 2018 compared to fiscal 2017, due to an increase in traditional carrier minutes of use and revenues. Wholesale Carrier Services’ revenues increased 7.4% in fiscal 2017 compared to fiscal 2016 due to an increase in traditional carrier revenues, primarily from growth in traffic carried to higher revenue per minute destinations in Africa and the Middle East. Wholesale Carrier Services minutes of use increased 2.9% in fiscal 2017 compared to fiscal 2016 due to increases in traditional carrier minutes of use and minutes of use from our web-based, prepaid termination services portal. Wholesale Carrier Services revenue comprised 42.7%, 41.4% and 38.9 % of Telecom & Payment Services’ revenue in fiscal 2018, fiscal 2017 and fiscal 2015,2016, respectively.
Payment Services’ revenue increased 15.7% and 11.8% in fiscal 2018 and fiscal 2017, respectively, compared to the prior fiscal year. Inyear due to increases in revenue from our international and domestic airtime top-up service, our international money transfer service (specifically transactions originating from our direct to consumer channels), and our National Retail Solutions’ merchant services and advertising business. International and domestic airtime top-up service revenue represented 90%, 91% and 93% of Payment Services’ revenue in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The increase in revenues from airtime top-up in fiscal 2018 and fiscal 20152017 compared to the prior fiscal year the traffic mix shifted towards lower revenue per minute destinationsreflected growth from new mobile partners and certain exchange rate driven arbitrage-pricing opportunities in Latin America declined. Wholesale Carrier Services minutesdiversification of use decreased 1.1% in fiscal 2016 compared to fiscal 2015 and increased 0.5% in fiscal 2015 compared to fiscal 2014. The decrease in fiscal 2016 minutes of use compared to fiscal 2015 was primarily due to a decrease in carrier sales partially offset by an increase in our web-based prepaid termination service. The increase in fiscal 2015 minutes of use compared to fiscal 2014 was primarily due to a slight increase in carrier sales as well as an increase in our web-based prepaid termination service. Wholesale Carrier Services revenue comprised 37.6%, 37.6% and 41.6 % of Telecom Platform Services’ revenue in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
Payment Services’ revenues grew 5.2% and 3.0% in fiscal 2016 and fiscal 2015, respectively, compared to the prior fiscal year. The increase in fiscal 2016 compared to fiscal 2015 was primarily due to an increase in international airtime top-up revenue, as well as an increase in revenue from our international money transfer service. The increase in fiscal 2015 compared to fiscal 2014 was due to an increase in international and domestic airtime top-up revenue, as well as increases in revenue from our international money transfer service and from IDT Financial Services Ltd., our Gibraltar-based bank. In fiscal 2014, we initiated an international money transfer service on a limited basis over our Boss Revolution platform. At July 31, 2016, we hadofferings. We have money transmitter licenses in 4547 of the 47 U.S.49 states that require such a license, as well as in Puerto Rico and Washington, D.C., and have an application pending Future growth in one additional state. Future growthPayment Services is expected from geographic expansion of ourthe Boss Revolution Money app that features international money transfer service,transfers, airtime top-up and electronic gift cards. National Retail Solutions is also expected to increase its revenue from sales of additional services, such as welldisplay advertising and payment processing, as from the launch of a Boss Revolution mobile app for payments, including money transfer and international airtime top-up.its POS network continues to expand. Payment ServicesServices’ revenue comprised 14.8%18.8%, 13.3%16.7% and 12.5%15.0% of Telecom Platform& Payment Services’ revenue in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively.
| Year ended July 31, | 2018 | 2017 | 2016 | 2018 change from 2017 | 2017 change from 2016 | |||||||||||||||
| Telecom & Payment Services | ||||||||||||||||||||
| Direct cost of revenues as a percentage of revenues | 85.7 | % | 86.0 | % | 84.5 | % | (0.3 | )% | 1.5 | % | ||||||||||
Hosted Platform Solutions’
Direct Cost of Revenues. Direct cost of revenues declined 18.5% and 14.9%in Telecom & Payment Services increased in fiscal 20162018 and fiscal 2015, respectively, compared to the prior fiscal year. The declines were due to decreases in revenues from managed services and from our cable telephony business. Within our cable telephony business, we renewed multi-year contracts with key cable telephony customers in the second half of fiscal 2014, but at lower rates, reflecting the long-term decline in the underlying costs of hosted telephony services. In addition, several of our other hosted managed services operators are continuing to experience attrition in their customer base. From a product perspective, we continue to develop our Net2Phone Hosted PBX, SIP trunking and other telephony cloud-based solutions to try to increase our revenues. Hosted Platform Solutions revenue comprised 2.1%, 2.4% and 2.8% of Telecom Platform Services’ revenues in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Hosted Platform Solutions minutes of use decreased 7.5% and 8.7% in fiscal 2016 and fiscal 2015, respectively, compared to the prior fiscal year. In fiscal 2016 compared to fiscal 2015, the decrease was primarily the result of the decline in minutes of use from managed services. In fiscal 2015 compared to fiscal 2014, the decrease was primarily a result of the decline in minutes of use from managed services and cable telephony customers. In general, since our Hosted Platform Solutions business’ revenues and cash flows are driven far more by the number of existing subscribers in the form of a per-subscriber fee rather than by subscriber minutes of use, we do not view Hosted Platform Solutions minutes of use as a significant metric for evaluating that business’ performance.
Consumer Phone Services’ revenues declined 20.3% and 21.7% in fiscal 2016 and fiscal 2015, respectively,2017 compared to the prior fiscal year as we continueddue to operate the businessincreases in harvest mode. This strategy has been in effect since calendar 2005 when the FCC decided to terminate the UNE-P pricing regime, which resulted in significantly inferior economics in the operating model for this business. The customer base for our bundled, unlimited localWholesale Carrier Services’ and long distance services business was approximately 4,200 at July 31, 2016 compared to 5,100 at July 31, 2015 and 6,200 at July 31, 2014. We currently offer local service in the following 11 states: New York, New Jersey, Pennsylvania, Maryland, Delaware, Massachusetts, New Hampshire, West Virginia, Maine, Rhode Island and California. In addition, the customer base for our long distance-only services was approximately 18,100 at July 31, 2016 compared to 22,700 at July 31, 2015 and 28,500 at July 31, 2014. We anticipate that Consumer PhonePayment Services’ customer base and revenues will continue to decline. Minutes of use relating to our Consumer Phone Services segment is not tracked as a meaningful business metric as the domestic traffic generated by this segment is not carried on our network, and the international traffic generated by this segment, though carried on our own network, is insignificant.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Direct cost of revenues | ||||||||||||||||||||||||||||
| Telecom Platform Services | $ | 1,242.5 | $ | 1,322.3 | $ | 1,358.6 | $ | (79.8 | ) | (6.0 | )% | $ | (36.3 | ) | (2.7 | )% | ||||||||||||
| Consumer Phone Services | 3.1 | 4.0 | 4.9 | (0.9 | ) | (23.6 | ) | (0.9 | ) | (17.9 | ) | |||||||||||||||||
| Total direct cost of revenues | $ | 1,245.6 | $ | 1,326.3 | $ | 1,363.5 | $ | (80.7 | ) | (6.1 | )% | $ | (37.2 | ) | (2.7 | )% | ||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | 2016 change from 2015 | 2015 change from 2014 | |||||||||||||||||||||||
| Direct cost of revenues as a percentage of revenues | ||||||||||||||||||||||||||||
| Telecom Platform Services | 84.1 | % | 84.1 | % | 84.1 | % | —% | —% | ||||||||||||||||||||
| Consumer Phone Services | 44.9 | 46.8 | 44.6 | (1.9 | ) | 2.2 | ||||||||||||||||||||||
| Total | 83.9 | % | 83.9 | % | 83.8 | % | —% | 0.1 | % | |||||||||||||||||||
Direct Cost of Revenues. Directdirect cost of revenues in Telecom Platform Services decreased in fiscal 20162018 and fiscal 20152017 compared to the prior fiscal year, mainly due to the decreasespartially offset by a decrease in Telecom Platform Services’Retail Communications’ direct cost of revenues and minutes of use in fiscal 20162018 and fiscal 20152017 compared to the prior fiscal year. Direct cost of revenues as a percentage of revenues in Telecom Platform& Payment Services was unchangeddecreased 30 basis points in fiscal 2016 and fiscal 20152018 compared to fiscal 2017 primarily because the prior fiscal year. The lossincrease in Payment Services’ revenues exceeded the increase in its direct cost of revenue from the relatively high margin exchange-rate driven arbitrage pricing opportunities in Latin American, the decline in margin contribution from the cable telephony business, and pricing pressure on airtime top-up offerings in fiscal 2016 and fiscal 2015 compared to the prior fiscal year wererevenues, partially offset by an increase in Retail Communications’ average revenue per minute.
Wholesale Carrier Services’ direct cost of revenues that exceeded the increase in its revenues. Direct cost of revenues as a percentage of revenues in our Consumer PhoneTelecom & Payment Services segment decreasedincreased 150 basis points in fiscal 2016 and fiscal 20152017 compared to the prior fiscal year2016 primarily because the increase in Wholesale Carrier Services’ direct cost of revenues exceeded the increase in its revenues.
In the fourth quarter of fiscal 2018, we changed our estimates for recognizing certain breakage revenue and accrued regulatory fee expense, which increased revenues and direct cost of revenues $9.5 million and $4.5 million, respectively. We recorded breakage revenue when the likelihood of the declining customer base.exercising its remaining rights became remote. In the fourth quarter of 2018, we changed when we generally deemed the likelihood remote from 24 or 36 months of no activity to 12 or 24 months of no activity. The estimated accrued regulatory fee expense changed as a result of rate increases.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||||
| Telecom Platform Services | $ | 186.6 | $ | 199.6 | $ | 198.8 | $ | (13.0 | ) | (6.5 | )% | $ | 0.8 | 0.4 | % | |||||||||||||
| Consumer Phone Services | 2.6 | 3.3 | 4.3 | (0.7 | ) | (22.9 | ) | (1.0 | ) | (22.6 | ) | |||||||||||||||||
| Total selling, general and administrative expenses | $ | 189.2 | $ | 202.9 | $ | 203.1 | $ | (13.7 | ) | (6.8 | )% | $ | (0.2 | ) | (0.1 | )% | ||||||||||||
Selling, General and Administrative. Selling, general and administrative expense in our Telecom & Payment Services segment increased in fiscal 2018 compared to fiscal 2017 primarily due to increases in employee compensation and credit card charges, partially offset by a decrease in marketing expense. The increase in credit card charges relates to increases in Boss Revolution and international money transfer direct to consumer transactions. Selling, general and administrative expenses in our Telecom Platform& Payment Services segment decreased in fiscal 20162017 compared to fiscal 20152016 primarily due to a decrease in employee compensation. The decreases in employee compensation marketing and advertising costs, call center expenses, internal sales commissions and facilities expense. The decrease in employee compensationfiscal 2017 compared to fiscal 2016 was the result of headcount reductions in fiscal 20152016 that were partially offset by annual payroll increases. Selling, general and administrative expenses in our Telecom Platform Services segment increased slightly in fiscal 2015 compared to fiscal 2014 primarily due to increases in marketing, advertising and internal commission costs partially offset by a decrease in employee compensation. The employee compensation decrease was the result of the workforce reduction in February and March 2015 that was partially offset by annual payroll increases. As a percentage of Telecom Platform& Payment Services’ revenues, Telecom Platform& Payment Services’ selling, general and administrative expenses were 12.6%11.3%, 12.7%11.2% and 12.3%12.2% in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively.
Selling, general and administrative expenses in our Consumer Phone Services segment decreased in fiscal 2016 and fiscal 2015 compared to the prior fiscal year as the cost structure for this segment continued to be right-sized to the needs of its declining revenue base.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||||
| Telecom Platform Services | $ | 18.5 | $ | 16.2 | $ | 13.8 | $ | 2.3 | 14.7 | % | $ | 2.4 | 17.4 | % | ||||||||||||||
| Consumer Phone Services | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total depreciation and amortization | $ | 18.5 | $ | 16.2 | $ | 13.8 | $ | 2.3 | 14.7 | % | $ | 2.4 | 17.4 | % | ||||||||||||||
Depreciation and Amortization. The increase in depreciation and amortization expense in fiscal 20162018 and fiscal 20152017 compared to the prior fiscal year was due to increases in depreciation of capitalized costs of consultants and employees developing internal use software.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Severance expense | ||||||||||||||||||||||||||||
| Telecom Platform Services | $ | 6.2 | $ | 7.7 | $ | — | $ | (1.5 | ) | (19.4 | )% | $ | 7.7 | nm | ||||||||||||||
| Consumer Phone Services | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total severance expense | $ | 6.2 | $ | 7.7 | $ | — | $ | (1.5 | ) | (19.4 | )% | $ | 7.7 | nm | ||||||||||||||
nm—not meaningful
Severance Expense. In Julyfiscal 2018, Telecom & Payment Services commenced an adjustment to its workforce and incurred severance expense of $4.5 million. In fiscal 2016, we completed a reductionseparate reductions of our workforce, and IDT Telecom & Payment Services incurred severance expense of $6.2 million. In addition, in February and March 2015, we completed a reduction of our workforce. As a result, IDT Telecom incurred severance expense of $5.8 million in fiscal 2015. In addition, severance expense in fiscal 2015 included $1.9 million due to a downsizing of certain Telecom Platform Services’ sales and administrative functions in Europe and the U.S.
| (in millions) Year ended July 31, | 2016 | 2015 | 2014 | |||||||||
| Telecom Platform Services: | ||||||||||||
| Gain on sale of member interest in Visa Europe Ltd. | $ | 7.5 | $ | — | $ | — | ||||||
(Adjustment to) Gain on Sale of Member Interest in Visa Europe Ltd. In June 2016, Visa Inc. acquired Visa Europe Limited for cash, shares of Visa Inc. Series C preferred stock and a deferred cash payment. IDT Financial Services Ltd.,Limited, our Gibraltar-based bank, was a member of Visa Europe and received cash of €5.0 million ($5.6 million on the acquisition date), 1,830 shares of Series C preferred stock and deferred payment receivable of €0.4 million ($0.5 million on the acquisition date). At July 31, 2016,2018 and 2017, the carrying value of the shares of Visa Inc. Series C preferred stock was $1.6 million. The 1,830 shares of Visa Inc. Series C preferred stock are convertible into 25,532 shares of Visa Inc. Class A common stock. The shares of preferred stock become fully convertible in 2028. Beginning in 2020, Visa Inc. will assess whether it is appropriate to effectaffect a partial conversion. The preferred stock shares may only be transferred to other former Visa Europe members, or to existing qualifying holders of Visa Inc.’s Class B common stock. In addition, the preferred stock will not be registered under the U.S. Securities Act of 1933 and therefore is not transferable unless such transfer is registered or an exemption from registration is available. The deferred payment receivable plus 4% compounded annual interest is due in June 2019. In fiscal 2016, we recorded a gain of $7.5 million in our Telecom Platform& Payment Services segment from the sale of our member interest in Visa Europe, which iswas included in the segment’s income from operations. In fiscal 2017, we recorded an adjustment to the gain of $0.1 million, which reduced the segment’s income from operations.
| (in millions) Year ended July 31, | 2016 | 2015 | 2014 | |||||||||
| Telecom Platform Services-Other operating (loss) gain: | ||||||||||||
| Loss on disposal of property, plant and equipment | $ | (0.3 | ) | $ | — | $ | — | |||||
| Gain related to a legal matter | — | — | 0.7 | |||||||||
| Total other operating (loss) gain | $ | (0.3 | ) | $ | — | $ | 0.7 | |||||
Other Operating (Loss) Gain.Loss. The Telecom Platform& Payment Services segment’s income from operations in fiscal 2016 included a loss on disposal of property, plant and equipment of $0.3 million due to the write-off of capitalized costs of certain projects that were terminated prior to completion. The Telecom Platform Services segment’s income from operations
net2phone—UCaaS Segment
| (in millions) | 2018 change from 2017 | 2017 change from 2016 | ||||||||||||||||||||||||||
| Year ended July 31, | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||||
| Revenues | $ | 34.9 | $ | 29.5 | $ | 26.4 | $ | 5.4 | 18.4 | % | $ | 3.1 | 11.8 | % | ||||||||||||||
| Direct cost of revenues | 11.3 | 12.0 | 13.4 | (0.7 | ) | (5.6 | ) | (1.4 | ) | (10.7 | ) | |||||||||||||||||
| Selling, general and administrative | 20.9 | 15.5 | 11.8 | 5.4 | 34.7 | 3.7 | 31.2 | |||||||||||||||||||||
| Depreciation | 5.3 | 3.9 | 2.8 | 1.4 | 36.0 | 1.1 | 40.4 | |||||||||||||||||||||
| Other | 0.1 | — | — | 0.1 | 100.0 | — | — | |||||||||||||||||||||
| Loss from operations | $ | (2.7 | ) | $ | (1.9 | ) | $ | (1.6 | ) | $ | (0.8 | ) | (43.6 | )% | $ | (0.3 | ) | (16.6 | )% | |||||||||
Revenues. net2phone-UCaaS’ revenues increased in fiscal 2014 included a gain2018 compared to fiscal 2017 primarily due to continued growth from its cloud-based communications offering – both in the U.S. and in South America. In light of $0.7 million relatedthe strong growth in the cloud-based communications offering in Argentina and Brazil that were launched in fiscal 2017, net2phone-UCaaS introduced its cloud-based communications offering in Colombia in May 2018 and in Mexico in August 2018. net2phone-UCaaS’ revenue increased in fiscal 2017 compared to a legal matter.fiscal 2016 due to increases in its cloud-based communications offering, SIP trunking, and cable telephony revenues. net2phone-UCaaS’ cloud-based communications offering was launched in Brazil and Argentina in January 2017 and May 2017, respectively.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||||
| Telecom Platform Services | $ | 31.2 | $ | 27.0 | $ | 45.1 | $ | 4.2 | 15.8 | % | $ | (18.1 | ) | (40.2 | )% | |||||||||||||
| Consumer Phone Services | 1.2 | 1.3 | 1.8 | (0.1 | ) | (3.2 | ) | (0.5 | ) | (30.0 | ) | |||||||||||||||||
| Total income from operations | $ | 32.4 | $ | 28.3 | $ | 46.9 | $ | 4.1 | 15.0 | % | $ | (18.6 | ) | (39.8 | )% | |||||||||||||
In October 2018, net2phone launched a new business communication platform built on an internally developed, proprietary stack that integrates voice, text, messaging and web chat services across devices.
| Year ended July 31, | 2018 | 2017 | 2016 | 2018 change from 2017 | 2017 change from 2016 | |||||||||||||||
| net2phone-UCaaS | ||||||||||||||||||||
| Direct cost of revenues as a percentage of revenues | 32.4 | % | 40.6 | % | 50.8 | % | (8.2 | )% | (10.2 | )% | ||||||||||
Direct Cost of Revenues. Direct cost of revenues in net2phone-UCaaS decreased in fiscal 2018 and fiscal 2017 compared to the prior fiscal year primarily because of decreases in the direct cost of revenues in cable telephony service and SIP trunking, partially offset by an increase in the direct cost of revenues of cloud-based communications. Direct cost of revenues as a percentage of revenues in net2phone-UCaaS decreased 820 and 1,020 basis points in fiscal 2018 and fiscal 2017 compared to the prior fiscal year primarily because of decreases in direct cost of revenues as a percentage of revenues in cloud-based communications, cable telephony service, and SIP trunking.
Selling, General and Administrative. Selling, general and administrative expense in our net2phone-UCaaS segment increased in fiscal 2018 and fiscal 2017 compared to the prior fiscal year due to an increase in employee compensation, resulting from an increase in the number of sales and information technology employees, as well as an increase in sales commissions. We increased employees and compensation in our net2phone-UCaaS segment as we invested in the growth of net2phone-UCaaS’ lines of business. As a percentage of net2phone-UCaaS’ revenues, net2phone-UCaaS’ selling, general and administrative expenses were 59.8%, 52.6% and 44.8% in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Depreciation. The increase in depreciation expense in fiscal 2018 and fiscal 2017 compared to the prior fiscal year was due to increases in depreciation of capitalized costs of consultants and employees developing internal use software to support our new products.
All Other
Currently, we report aggregate results for all ofBeginning in fiscal 2018, All Other includes only Zedge and our operating businessesreal estate holdings and other than IDT Telecominvestments that were included in the Rafael Spin-Off. A small business that was previously included in All Other.Other has been reclassified to Telecom & Payment Services, and certain other cost centers have been reclassified to Corporate. Comparative results have been reclassified and restated as if these businesses and costs were included in Telecom & Payment Services or Corporate in all periods presented. On March 26, 2018, we completed the Rafael Spin-Off, and on June 1, 2016, we completed the Zedge Spin-Off. The dispositiondispositions of Rafael and Zedge did not meet the criteria to be reported as a discontinued operationoperations and accordingly, itstheir assets, liabilities, results of operations and cash flows have not been reclassified. In addition, Fabrix was included in All Other until it was sold in October 2014. Therefore, in fiscal 2015, All Other included two months of Fabrix’ results of operations compared to none in fiscal 2016 and twelve months in fiscal 2014.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Revenues | $ | 11.5 | $ | 15.4 | $ | 24.9 | $ | (3.9 | ) | (25.5 | )% | $ | (9.5 | ) | (38.3 | )% | ||||||||||||
| Direct cost of revenues | (1.0 | ) | (2.0 | ) | (3.7 | ) | 1.0 | 49.3 | 1.7 | 45.8 | ||||||||||||||||||
| Selling, general and administrative | (5.4 | ) | (8.3 | ) | (11.0 | ) | 2.9 | 35.4 | 2.7 | 24.6 | ||||||||||||||||||
| Depreciation | (2.0 | ) | (2.3 | ) | (2.5 | ) | 0.3 | 11.4 | 0.2 | 10.7 | ||||||||||||||||||
| Research and development | — | (1.7 | ) | (10.0 | ) | 1.7 | 100.0 | 8.3 | 83.5 | |||||||||||||||||||
| Gain on sale of interest in Fabrix Systems Ltd. | 1.1 | 76.9 | — | (75.8 | ) | (98.6 | ) | 76.9 | nm | |||||||||||||||||||
| Other operating gain | — | — | 0.6 | — | — | (0.6 | ) | (100.0 | ) | |||||||||||||||||||
| Income (loss) from operations | $ | 4.2 | $ | 78.0 | $ | (1.7 | ) | $ | (73.8 | ) | (94.7 | )% | $ | 79.7 | nm | |||||||||||||
nm—not meaningful
| (in millions) | 2018 change from 2017 | 2017 change from 2016 | ||||||||||||||||||||||||||
| Year ended July 31, | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||||
| Revenues | $ | 1.2 | $ | 2.3 | $ | 11.5 | $ | (1.1 | ) | (49.1 | )% | $ | (9.2 | ) | (80.0 | )% | ||||||||||||
| Direct cost of revenues | — | — | (1.0 | ) | — | — | 1.0 | 100.0 | ||||||||||||||||||||
| Selling, general and administrative | (2.6 | ) | (0.5 | ) | (5.6 | ) | (2.1 | ) | (446.5 | ) | 5.1 | 91.6 | ||||||||||||||||
| Depreciation | (1.2 | ) | (1.7 | ) | (2.0 | ) | 0.5 | 27.9 | 0.3 | 14.8 | ||||||||||||||||||
| Other | — | — | 1.1 | — | — | (1.1 | ) | (100.0 | ) | |||||||||||||||||||
| (Loss) income from operations | $ | (2.6 | ) | $ | 0.1 | $ | 4.0 | $ | (2.7 | ) | nm | $ | (3.9 | ) | (96.5 | )% | ||||||||||||
Following is the results of operations of Zedge, which were included in All Other until the Zedge Spin-Off on June 1, 2016:
Zedge
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||
| Revenues | $ | 9.5 | $ | 9.0 | $ | 6.5 | $ | 0.5 | 4.6 | % | $ | 2.5 | 38.6 | % | $ | — | $ | — | $ | 9.5 | ||||||||||||||||||||
| Direct cost of revenues | 1.0 | 1.1 | 0.9 | (0.1 | ) | (7.7 | ) | 0.2 | 17.1 | — | — | 1.0 | ||||||||||||||||||||||||||||
| Selling, general and administrative | 5.9 | 6.8 | 4.3 | (0.9 | ) | (14.2 | ) | 2.5 | 58.8 | — | — | 5.9 | ||||||||||||||||||||||||||||
| Depreciation | 0.3 | 1.0 | 1.0 | (0.7 | ) | (70.8 | ) | — | 4.0 | — | — | 0.3 | ||||||||||||||||||||||||||||
| Income from operations | $ | 2.3 | $ | 0.1 | $ | 0.3 | $ | 2.2 | nm | $ | (0.2 | ) | (68.1 | )% | $ | — | $ | — | $ | 2.3 | ||||||||||||||||||||
nm—not meaningful
Revenues. In April 2016, a subsidiary of Rafael entered into two leases with tenants for space in Rafael’s building at 520 Broad Street, Newark, New Jersey. Rental income from the first lease commenced in December 2016, and rental income from the second lease commenced in March 2017. In addition, in April 2017, a subsidiary of Rafael entered into a third lease for space in Rafael’s building at 520 Broad Street. Rental income from the third lease commenced in March 2018. Effective with the Rafael Spin-Off, we no longer own the 520 Broad Street building and we no longer record rental income from the building.
Following isSelling, General and Administrative. Selling, general and administrative expense increased in fiscal 2018 compared to fiscal 2017 primarily due to an increase in expenses related to Rafael, including Lipomedix, and Rafael’s commercial real estate. Rafael began consolidating Lipomedix in November 2017 after Rafael purchased additional shares and increased its ownership to 50.6% of the resultsissued and outstanding ordinary shares of operationsLipomedix. Selling, general and administrative expense of Fabrix, which were includedLipomedix in All Other until itfiscal 2018 was sold in October 2014:$0.6 million.
Fabrix
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| Revenues | $ | — | $ | 4.2 | $ | 16.6 | $ | (4.2 | ) | (100.0 | )% | $ | (12.4 | ) | (74.9 | )% | ||||||||||||
| Direct cost of revenues | — | 0.9 | 2.8 | (0.9 | ) | (100.0 | ) | (1.9 | ) | (67.2 | ) | |||||||||||||||||
| Selling, general and administrative | — | 0.6 | 4.1 | (0.6 | ) | (100.0 | ) | (3.5 | ) | (86.1 | ) | |||||||||||||||||
| Depreciation | — | 0.1 | 0.4 | (0.1 | ) | (100.0 | ) | (0.3 | ) | (81.7 | ) | |||||||||||||||||
| Research and development | — | 1.7 | 10.0 | (1.7 | ) | (100.0 | ) | (8.3 | ) | (83.5 | ) | |||||||||||||||||
| Income (loss) from operations | $ | — | $ | 0.9 | $ | (0.7 | ) | $ | (0.9 | ) | (100.0 | )% | $ | 1.6 | 228.3 | % | ||||||||||||
Other Operating Income.
Gain on Sale of Interest in Fabrix Systems Ltd.On October 8, 2014, we completed the sale of our interest in Fabrix Systems Ltd., or Fabrix, to Ericsson. The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working capital and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price was $69.2 million, after reflecting the impact of working capital and other adjustments. We and the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims, of which $6.5 million was released in October 2015 and $6.5 million was released in April 2016.Telefonaktiebolget LM Ericsson (publ). In fiscal 2016, we recorded a gain on the sale of our interest in Fabrix of $1.1 million, which represented adjustments to our share of Fabrix’ working capital and estimated transaction costs. In fiscal 2015, we recorded a gain on the sale of our interest in Fabrix of $76.9 million.
Other Operating Gain. In fiscal 2014, we received proceeds from insurance of $0.6 million related to water damage to portions of our building and improvements at 520 Broad Street, Newark, New Jersey. The damage occurred in a prior period. We recorded a gain of $0.6 million from this insurance claim.
In fiscal 2014, we began renovations of the first four floors of our 520 Broad Street building in order to move our personnel and offices located at 550 Broad Street, Newark, New Jersey to 520 Broad Street. In April and May 2015, we moved our Newark operations back into our building at 520 Broad Street and vacated the leased office space at 550 Broad Street. In April 2016, we entered into two leases for space in the building. The first lease is for a portion of the sixth floor for an eleven year term, of which the first six years are non-cancellable. The second lease is for a portion of the ground floor and basement for a term of ten years, seven months. The tenant under this lease has the right to extend the term for three consecutive periods of five years each. The leases will commence after the completion of our work to prepare the space for the tenant’s possession.
Corporate
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | ||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | |||||||||||||||||||||
| General and administrative expenses | $ | 10.1 | $ | 10.9 | $ | 14.8 | $ | (0.8 | ) | (7.8 | )% | $ | (3.9 | ) | (26.1 | )% | ||||||||||||
| Severance expense | 0.3 | 0.6 | — | (0.3 | ) | (50.8 | ) | 0.6 | nm | |||||||||||||||||||
| Other operating loss | — | 1.6 | 0.5 | (1.6 | ) | (100.0 | ) | 1.1 | 242.0 | |||||||||||||||||||
| Loss from operations | $ | 10.4 | $ | 13.1 | $ | 15.3 | $ | (2.7 | ) | (20.8 | )% | $ | (2.2 | ) | (14.1 | )% | ||||||||||||
Beginning in fiscal 2018, Corporate includes certain cost centers that were previously included in All Other. Comparative results have been reclassified and restated as if these costs were included in Corporate in all periods presented.
| (in millions) | 2018 change from 2017 | 2017 change from 2016 | ||||||||||||||||||||||||||
| Year ended July 31, | 2018 | 2017 | 2016 | $ | % | $ | % | |||||||||||||||||||||
| General and administrative expenses | $ | 9.8 | $ | 7.8 | $ | 9.9 | $ | 2.0 | 25.2 | % | $ | (2.1 | ) | (21.2 | )% | |||||||||||||
| Severance expense | 0.1 | — | 0.3 | 0.1 | nm | (0.3 | ) | (100.0 | ) | |||||||||||||||||||
| Other operating loss | 2.3 | 10.4 | — | (8.1 | ) | (78.1 | ) | 10.4 | nm | |||||||||||||||||||
| Loss from operations | $ | 12.2 | $ | 18.2 | $ | 10.2 | $ | (6.0 | ) | (33.3 | )% | $ | 8.0 | 78.0 | % | |||||||||||||
nm—not meaningful
Corporate costs include compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, charitable contributions, travel and other corporate-related general and administrative expenses, including, among others, facilities costs, charitable contributions and travel, as well as depreciation expense on corporate assets.expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
General and Administrative. The increase in Corporate general and administrative expense in fiscal 2018 compared to fiscal 2017 was primarily due to increases in legal fees and employee compensation. The decrease in Corporate general and administrative expenses in fiscal 20162017 compared to fiscal 20152016 was primarily due to decreases in insurance, stock-based compensation,payroll and the charitable contributions accrual,related expense and legal fees, partially offset by an increase in payroll and related expense. The decrease in Corporate general and administrative expenses in fiscal 2015 compared to fiscal 2014 was primarily due to decreases in stock-based compensation legal and consulting fees, and the charitable contributions accrual. In fiscal 2016, fiscal 2015 and fiscal 2014, we accrued $0.8 million, $1.1 million and $1.4 million, respectively, for contributions to the IDT Charitable Foundation.expense. As a percentage of our total consolidated revenues, Corporate general and administrative expenses was 0.7%0.6%, 0.7%0.5% and 0.9%0.7% in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively.
Severance expense. In fiscal 2018, we commenced an adjustment to our workforce, for which Corporate incurred severance expense of $0.1 million. In July 2016, we completed a reductionseparate reductions of our workforce, andfor which Corporate incurred severance expense of $0.3 million. In February and March 2015, we completed a reduction of our workforce. As a result, Corporate incurred severance expense of $0.6 million in fiscal 2015.
Other Operating Loss. Corporate’s loss from operations in On July 31, 2013, we completed a pro rata distribution of the common stock of our former subsidiary Straight Path Communications Inc., or Straight Path, to our stockholders. In fiscal 2015 included a loss2018, we incurred legal fees of $1.5$1.7 million related to the Straight Path stockholders’ putative class action and derivative complaint. In addition, in fiscal 2018, we incurred fees of $0.6 million related to other legal matters. In April 2017, we recorded a liability of $10.0 million for the settlement and mutual release of potential liabilities and claims that may exist or arise under the Separation and Distribution Agreement between us and Straight Path. In addition, in fiscal 2017, we incurred legal fees of $0.9 million related to the FCC investigation of potential license violations by Straight Path Spectrum LLC (formerly a subsidiary of ours) and the settlement and mutual release, and we received insurance proceeds related to the FCC investigation of $0.5 million.
Consolidated
In July 2016, we completed a reduction of our workforce and incurred severance expense of $6.3 million in fiscal 2016. Severance expense in fiscal 2016 also included $0.2 million unrelated to the July 2016 workforce reduction. In February and March 2015, we completed a reduction of our workforce and incurred severance expense of $6.2 million in fiscal 2015. In addition, severance expense in fiscal 2015 included $1.9 million due to a downsizing of certain IDT Telecom sales and administrative functions in Europe and the U.S. in the first quarter of fiscal 2015, and an additional $0.2 million in the fourth quarter of fiscal 2015.
The following is a discussion of our consolidated stock-based compensation expense, and our consolidated income and expense line items below income from operations.
Stock-Based Compensation Expense. Stock-based compensation expense included in consolidated selling, general and administrative expenses was $2.7$3.6 million, $5.2$3.7 million and $5.4$2.7 million in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively. At July 31, 2016,2018, unrecognized compensation cost related to non-vested stock-based compensation, including stock options and restricted stock, was an aggregate of $4.2$2.4 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting period that ends in 2020.
| (in millions) | 2016 change from 2015 | 2015 change from 2014 | 2018 change from 2017 | 2017 change from 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended July 31, | 2016 | 2015 | 2014 | $ | % | $ | % | 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Income from operations | $ | 26.2 | $ | 93.1 | $ | 29.8 | $ | (66.9 | ) | (71.8 | )% | $ | 63.3 | 211.8 | % | $ | 8.4 | $ | 5.5 | $ | 26.2 | $ | 2.9 | 51.0 | % | $ | (20.7 | ) | (78.8 | )% | ||||||||||||||||||||||||||
| Interest income (expense), net | 1.2 | (0.2 | ) | (0.1 | ) | 1.4 | 864.8 | (0.1 | ) | (7.4 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 2.0 | (0.7 | ) | (4.7 | ) | 2.7 | 397.8 | 4.0 | 85.4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | (4.1 | ) | (6.1 | ) | (4.0 | ) | 2.0 | 32.5 | (2.1 | ) | (52.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Interest income, net | 1.1 | 1.3 | 1.2 | (0.2 | ) | (14.6 | ) | 0.1 | 3.1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other (expense) income, net | (1.4 | ) | 0.8 | 2.0 | (2.2 | ) | (265.0 | ) | (1.2 | ) | (60.1 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| (Provision for) benefit from income taxes | (2.9 | ) | 2.0 | (4.1 | ) | (4.9 | ) | (243.6 | ) | 6.1 | 149.2 | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | 25.3 | 86.1 | 21.0 | (60.8 | ) | (70.6 | ) | 65.1 | 309.9 | 5.2 | 9.6 | 25.3 | (4.4 | ) | (46.1 | ) | (15.7 | ) | (62.0 | ) | ||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (1.8 | ) | (1.6 | ) | (2.2 | ) | (0.2 | ) | (13.5 | ) | 0.6 | 27.0 | (1.0 | ) | (1.4 | ) | (1.8 | ) | 0.4 | 32.3 | 0.4 | 20.6 | ||||||||||||||||||||||||||||||||||
| Net income attributable to IDT Corporation | $ | 23.5 | $ | 84.5 | $ | 18.8 | $ | (61.0 | ) | (72.2 | )% | $ | 65.7 | 349.8 | % | $ | 4.2 | $ | 8.2 | $ | 23.5 | $ | (4.0 | ) | (48.5 | )% | $ | (15.3 | ) | (65.2 | )% | |||||||||||||||||||||||||
Other (Expense) Income, (Expense), net. Other (expense) income, (expense), net consists of the following:
| (in millions) Year ended July 31, | 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||
| Foreign currency transaction gains (losses) | $ | 1.0 | $ | (1.7 | ) | $ | (5.9 | ) | ||||||||||||||||
| Gain (loss) on marketable securities | 0.5 | (0.1 | ) | (0.1 | ) | |||||||||||||||||||
| (Loss) gain on investments | (0.4 | ) | 1.5 | 1.3 | ||||||||||||||||||||
| Foreign currency transaction (losses) gains | $ | (2.1 | ) | $ | 0.3 | $ | 1.0 | |||||||||||||||||
| Gain on marketable securities | — | 0.3 | 0.5 | |||||||||||||||||||||
| Gain (loss) on investments | — | 0.4 | (0.4 | ) | ||||||||||||||||||||
| Other | 0.9 | (0.4 | ) | — | 0.8 | (0.2 | ) | 0.9 | ||||||||||||||||
| TOTAL | $ | 2.0 | $ | (0.7 | ) | $ | (4.7 | ) | $ | (1.4 | ) | $ | 0.8 | $ | 2.0 | |||||||||
Income Taxes. The Tax Act enacted on December 22, 2017 provides for comprehensive tax legislation that reduces the U.S. federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, requires companies to pay a one-time repatriation tax, or transition tax, on earnings of certain foreign subsidiaries that were previously tax deferred, and makes other changes to the U.S. income tax code. Due to our July 31 fiscal year-end, the lower corporate income tax rate is phased in, resulting in a blended U.S. federal statutory tax rate of approximately 26.9% for our fiscal 2018, and 21.0% for our fiscal years thereafter.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, or SAB 118, expressing its views regarding the FASB’s Accounting Standards Codification 740,Income Taxes, in the reporting period that includes the enactment date of the Tax Act. SAB 118 recognizes that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. Specifically, SAB 118 allows a company to report provisional estimates in the reporting period that includes the enactment date if the company does not have the necessary information available, prepared, or fully analyzed for certain income tax effects of the Tax Act. The provisional estimates would be adjusted during a measurement period not to exceed 12 months from the enactment date of the Tax Act, at which time the accounting for the income tax effects of the Tax Act is required to be completed.
As of July 31, 2018, we had not completed our accounting for the income tax effects of the Tax Act; however, we had made a reasonable estimate of the effect on our existing AMT credit carry-over and transition tax. Because the AMT credit will be refundable if not utilized in the next four years, we reversed the valuation allowance that offset the AMT credit. As a result, in fiscal 2018, we recorded a noncurrent receivable and an income tax benefit of $3.3 million for the anticipated refund.
The transition tax is based on total post-1986 earnings and profits which were previously deferred from U.S. income taxes. In fiscal 2018, we have estimated we will utilize $12 million of federal net operating loss carryforwards to offset the transition tax that we expect we will incur. We are currently working to complete various earnings and profits analyses to finalize our estimate. At July 31, 2018, the undistributed earnings of our foreign subsidiaries continued to be permanently reinvested. The cumulative undistributed foreign earnings are included in accumulated deficit in our consolidated balance sheets and consisted of approximately $395 million at July 31, 2018.
We continue to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”), which were not effective until August 1, 2018. We did not record any impact associated with either GILTI or BEAT in fiscal 2018. We are reviewing the proposed guidance that was issued by the Internal Revenue Service in September 2018.
We anticipate that our assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, we anticipate that the U.S. state jurisdictions will continue to determine and announce their conformity or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to our provisional estimates when the accounting for the income tax effects of the Tax Act is completed. We will continue to evaluate the impact of the Tax Act on our financial statements and will record the effect of any reasonable changes in our estimates and adjustments.
In fiscal 2017, we determined that our valuation allowance on the losses of Elmion Netherlands B.V., or Elmion, a Netherlands subsidiary, was no longer required due to an internal reorganization that generated income and a projection that the income would continue. We recorded a benefit from income taxes of $16.6 million in fiscal 2017 from the full recognition of the Elmion deferred tax assets.
In fiscal 2016, the gains on the sale of our member interest in Visa Europe Ltd. of $7.5 million in fiscal 2016, and on the sale of our interest in Fabrix of $1.1 million and $76.9 million in fiscal 2016 and fiscal 2015, respectively, were recorded by certain of our wholly-owned non-U.S. subsidiaries. The gains are not taxable in the subsidiary’s tax domicile and are not subject to U.S. tax until repatriated. There are no current plans to repatriate the proceeds of the sales.
The decreasechange in income tax expense in fiscal 20162018 and fiscal 2017 compared to the prior fiscal 2015 was primarily due to a decrease in foreign income tax expense, partially offset by an increase in federal income tax expense. These changes reflectyear, excluding the changes in our income beforebenefit from income taxes in fiscal 2016 compared to2018 and fiscal 2015. The increase in income tax expense2017, and the non-taxable gains in fiscal 2015 compared to fiscal 20142016 described above, was primarily due to an increase in foreign income tax expense, partially offset by a decrease in federal income tax expense. Foreign income tax expense increased in fiscal 2015 compared to fiscal 2014 primarily due to a benefit from income taxes of $4.1 million recorded in fiscal 2014 from the full recognition of the IDT Global deferred tax assets. In fiscal 2014, we determined that our valuation allowance on the losses of IDT Global were no longer required due to an internal reorganization that generated income and a projection that the income would continue. Federal income tax expense decreasedgenerally due to the decreasedifferences in domestic income before income taxesrates in fiscal 2015 compared to fiscal 2014.the jurisdictions where the results were recorded.
Net Income Attributable to Noncontrolling Interests. The increasechange in the net income attributable to noncontrolling interests in fiscal 20162018 compared to fiscal 20152017 was primarily due to sale of Fabrix in fiscal 2015 and the change in Zedge’s results of operations from net loss to net income, partially offset by the decrease in net income of certain IDT Telecom subsidiaries. Thea decrease in the net income attributable to noncontrolling interests in fiscal 2015 compared to fiscal 2014 was due to the decrease in net income of certain IDT Telecom subsidiaries due to a decrease in the increase in Fabrix’net income of these subsidiaries, partially offset by the net loss andattributable to the noncontrolling interests in Lipomedix in fiscal 2018. We began consolidating Lipomedix in November 2017. The change in the net income attributable to noncontrolling interests in fiscal 2017 compared to fiscal 2016 was primarily due to the noncontrolling interests in the net income of Zedge, which was included in our results of operations until the Zedge Spin-Off on June 1, 2016. In addition, the change in Zedge’s results of operations fromfiscal 2017 compared to fiscal 2016 was due to a decrease in the net income attributable to noncontrolling interests in certain IDT Telecom subsidiaries due to a decrease in the net loss.income of these subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
General
We currently expect our cash from operations in fiscal 20172019 and the balance of cash, cash equivalents and marketable securities that we held on July 31, 20162018 to be sufficient to meet our currently anticipated working capital and capital expenditure requirements during fiscal 2017.2019.
At July 31, 2016,2018, we had cash, cash equivalents and marketable securities of $162.5$74.1 million and a deficit in working capital deficit (current liabilities in excess of current assets) of $4.8$38.1 million. At July 31, 2016,2018, we also had $8.1$4.8 million in investments in hedge funds, which were included in “Investments” in our consolidated balance sheet.
We treat unrestricted cash and cash equivalents held by IDT Financial Services Ltd., our Gibraltar-based bank, and IDT Payment Services as substantially restricted and unavailable for other purposes. At July 31, 2016,2018, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of $16.0$10.7 million held by IDT Financial Services Ltd. and IDT Payment Services that was unavailable for other purposes.
At July 31, 2016, we had restricted cash and cash equivalents of $98.8 million, all of which was included in “Restricted cash and cash equivalents” in2018, our consolidated balance sheet. Our restricted cash and cash equivalents primarily include customer deposits related to IDT Financial Services Ltd. and restricted balances pursuant to banking regulatory and other requirements.
We have not recorded U.S. income tax expense for foreign earnings, since such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings are included in accumulated deficit in our consolidated balance sheets and consisted of approximately $324 million at July 31, 2016. Upon distribution of$395 million. If these foreign earnings were to be distributed to our domestic entities, we may be subject to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would be paid.taxes.
| (in millions) Year ended July 31, | 2016 | 2015 | 2014 | 2018 | 2017 | 2016 | ||||||||||||||||||
| Cash flows provided by (used in) | ||||||||||||||||||||||||
| Operating activities | $ | 49.1 | $ | 30.5 | $ | 45.7 | $ | 6.9 | $ | 19.0 | $ | 49.1 | ||||||||||||
| Investing activities | (16.5 | ) | 2.9 | (18.9 | ) | (1.6 | ) | (39.6 | ) | (16.5 | ) | |||||||||||||
| Financing activities | (27.6 | ) | (70.2 | ) | (25.4 | ) | (26.6 | ) | 6.8 | (27.6 | ) | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (5.8 | ) | (6.7 | ) | 0.8 | (0.8 | ) | 0.3 | (5.8 | ) | ||||||||||||||
| (Decrease) increase in cash and cash equivalents | $ | (0.8 | ) | $ | (43.5 | ) | $ | 2.2 | ||||||||||||||||
| Decrease in cash and cash equivalents | $ | (22.1 | ) | $ | (13.5 | ) | $ | (0.8 | ) | |||||||||||||||
Operating Activities
Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable.
Gross trade accounts receivable increased to $72.6 million at July 31, 2018 from $67.6 million at July 31, 2017 primarily due to amounts billed in fiscal 2018 in excess of collections during the period. Gross trade accounts receivable increased to $67.6 million at July 31, 2017 from $51.2 million at July 31, 2016 primarily due to amounts billed in fiscal 2017 in excess of collections during the period. In December 2015, MasterCard Europe releasedparticular, revenues from certain large wholesale customers increased for which portions of the receivable balances were collected subsequent to July 31, 2017.
Deferred revenue arises from IDT Telecom’s sales of prepaid products. Deferred revenue varies from period to period depending on the mix and the timing of revenues. Deferred revenue decreased to $55.0 million at July 31, 2018 and $76.5 million at July 31, 2017 from $85.7 million at July 31, 2016 primarily due to decreases in the Boss Revolution related balance.
On September 20, 2016, we received a security depositletter of inquiry from the Enforcement Bureau of the FCC requesting certain information and materials related to an investigation of potential violations by Straight Path Spectrum LLC (formerly a subsidiary of ours and currently a subsidiary of Straight Path) in connection with licenses to operate on the 28 GHz and 39 GHz bands of the Fixed Microwave Services. We have cooperated with the FCC in this matter and have responded to the letter of inquiry. The FCC could seek to fine or impose regulatory penalties or civil liability on us related to activities during the period of ownership by us.
The Separation and Distribution Agreement related to the spin-off of Straight Path provides for us and Straight Path to indemnify each other for certain liabilities. We and Straight Path each communicated that it was entitled to indemnification from the other in connection with the inquiry described above and related matters. On October 24, 2017, we, Straight Path, Straight Path IP Group, Inc., or SPIP, and PR-SP IP Holdings LLC, or PR-SP, an entity owned by Howard 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 us and Straight Path. In exchange for the mutual release, in October 2017, we paid Straight Path an aggregate of $16 million in cash, Straight Path transferred to us its majority ownership interest in Straight Path IP Group Holding, Inc., or New SPIP, which holds the equity of SPIP, the entity that holds intellectual property primarily related to communications over computer networks, subject to the right to receive 22% of the net proceeds, if any, received by SPIP from licenses, settlements, awards or judgments involving any of the patent rights and certain transfers of the patents or related rights, that will be retained by Straight Path’s stockholders (such equity interest, subject to the retained interest right, the “IP Interest”), and we undertook certain funding and other obligations related to SPIP. The Settlement Agreement and Release allocates (i) $10 million of the payment and the retained interest right to the settlement of claims and the mutual release and (ii) $6 million to the transfer of the IP Interest. In fiscal 2018 in the accompanying consolidated statement of cash flows, $10 million of the aggregate payment to Straight Path was included in operating activities and $6 million of the aggregate payment was included in investing activities.
In August 2017, we entered into a Reciprocal Services Agreement with a telecom operator in Central America for a full range of services, including, but not limited to, termination of inbound and outbound international long-distance voice calls. We have committed to pay such telecom operator monthly committed amounts during the term of the agreement. In addition, under certain limited circumstances, the parties may renegotiate the amount of $4.7the monthly payments. In the event the parties do not agree on re-pricing terms after good faith negotiations, then either party has the right to terminate the agreement. Pursuant to the agreement, in fiscal 2018, we deposited $9.2 million made by IDT Financial Services Ltd. At July 31, 2015, thisinto an escrow account as security depositfor the benefit of the telecom operator, which was included in operating activities in the accompanying consolidated statement of cash flows. The $9.2 million escrow account balance is included in “Other current assets” in the accompanying consolidated balance sheet.
In fiscal 2015sheet based on the terms and fiscal 2014, Fabrix received $2.0 million and $13.4 million, respectively, in cash from sales of software licenses and support services.
Our Separation and Distribution Agreement with Straight Path includes, among other things, our obligation to reimburse Straight Path for the payment of liabilities of Straight Path arising or related to the period prior to the Straight Path Spin-Off. In fiscal 2016, fiscal 2015 and fiscal 2014, we paid nil, $2.8 million and $1.0 million, respectively, in connection with this obligation.
In August 2016, we and the New Jersey Economic Development Authority entered into an incentive agreement pursuant to which we may receive corporation business tax credits in exchange for investment in a qualified business facility and employmentconditions of the required number of full-time employees. The corporation business tax credits to be received are a maximum of $24.3 million. We are required to invest $5.3 million in our building located at 520 Broad Street, Newark, New Jersey, as well as retain 528 full-time jobs and create 40 new full-time jobs in New Jersey. We may claim a tax credit each tax year for ten years beginning when the Economic Development Authority accepts our project completion certification. We must submit the project completion certification on or before December 9, 2016. The tax credit can be applied to 100% of our New Jersey tax liability each year, and the unused amount of the annual credit can be carried forward. In addition, we may apply for a tax credit transfer certificate to sell unused tax credits to another business. The tax credits must be sold for no less than 75% of the value of the tax credits. The tax credits are subject to reduction, forfeiture and recapture if, among other things, the number of full-time employees declines below the program or statewide minimum.agreement.
Investing Activities
Our capital expenditures were $20.6 million in fiscal 2018 compared to $22.9 million in fiscal 2017 and $18.4 million in fiscal 2016 compared to $28.6 million in fiscal 2015 and $17.0 million in fiscal 2014. The increase in fiscal 2015 compared to fiscal 2014 was primarily due to expenditures for the renovations of the first four floors of our building located at 520 Broad Street, Newark, New Jersey.2016. We currently anticipate that total capital expenditures in fiscal 20162019 will be between $18$20 million to $20$23 million. We expect to fund our capital expenditures with our net cash provided by operating activities and cash, cash equivalents and marketable securities on hand.
On October 8,24, 2017, we sold our entire majority interests in New SPIP to PR-SP in exchange for $6 million and the assumption by PR-SP of our funding and other obligations. As described above, $6 million of the aggregate payment to Straight Path that was allocated to the transfer of the IP Interest was included in investing activities in fiscal 2018.
On December 23, 2016, we acquired all of the outstanding shares of Live Ninja, a business communications company that provides chat and messaging capabilities for small and medium-sized businesses with the ability to transfer a conversation from one channel of communications (for example, the web) to another (such as a mobile phone). The cash paid for the acquisition, net of cash acquired was $1.8 million. We have since paid a further $1.3 million in respect of certain milestones. We may be required to pay up to an additional $1.8 million by December 31, 2019 for certain contingent payment obligations.
In connection with the October 2014 we completed the sale of our interest in Fabrix to Ericsson. The final sale price for 100% of the sharesEricsson, in Fabrix was $95 million in cash, excluding transaction costs and working capital and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price was $69.2 million, after reflecting the impact of working capital and other adjustments. We and the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims, of which $6.5 million was released in October 2015 and $6.5 million was released in April 2016. In fiscal 2016, we received additional cash of $9.6 million and recorded gain on the sale of our interest in Fabrix of $1.1 million, which represented adjustments to our share of Fabrix’ working capital and estimated transaction costs. In fiscal 2015, we recorded a gain on the sale of our interest in Fabrix of $76.9 million.
In June 2016, Visa Inc. acquired Visa Europe Limited for cash, shares of Visa Inc. Series C preferred stock and a deferred cash payment. IDT Financial Services Ltd. was a member of Visa Europe and received cash of €5.0 million ($5.6 million on the acquisition date), 1,830 shares of Series C preferred stock and deferred payment receivable of €0.4 million ($0.5 million on the acquisition date). At July 31, 2016,2018 and 2017, the carrying value of the shares of Visa Inc. Series C preferred stock was $1.6 million. The 1,830 shares of Visa Inc. Series C preferred stock are convertible into 25,532 shares of Visa Inc. Class A common stock. The shares of preferred stock become fully convertible in 2028. Beginning in 2020, Visa Inc. will assess whether it is appropriate to effectaffect a partial conversion. The preferred stock shares may only be transferred to other former Visa Europe members, or to existing qualifying holders of Visa Inc.’s Class B common stock. In addition, the preferred stock will not be registered under the U.S. Securities Act of 1933 and therefore is not transferable unless such transfer is registered or an exemption from registration is available. The deferred payment receivable plus 4% compounded annual interest is due in June 2019. In fiscal 2016, we recorded a gain of $7.5 million from the sale of our member interest in Visa Europe.
In fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, we used cash of $2.0 million, $0.1nil, $9.4 million and $0.2$2.0 million, respectively, for additional investments.
We received $0.6 In September 2016, Rafael Pharma issued to our former 50%-owned subsidiary, CS Pharma Holdings, LLC, or CS Pharma, its convertible Series D Note with a principal amount of $10 million, representing the $8 million investment funded on such date plus the conversion of $2 million principal amount convertible promissory notes issued in connection with a prior funding. In addition, in fiscal 2017, we used cash of $1.4 million for additional investments in our former subsidiary, Lipomedix. In fiscal 2016, we used cash of $1.9 million for investment in Rafael Pharma and $0.1 million and $1.0 millionfor investment in fiscal 2016, fiscal 2015 and fiscal 2014, respectively, from the redemption of certain of our investments.
Proceeds from insurance of $0.6 million in fiscal 2014 related to water damage in our building located at 520 Broad Street, Newark, New Jersey, that occurred in a prior period. We recorded a gain of $0.6 million from this insurance claim in fiscal 2014.Lipomedix.
In fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, we used cash of $46.9$22.5 million, $52.4$53.4 million and $20.7$46.9 million, respectively, to purchase marketable securities.
Proceeds from maturities and sales of marketable securities were $35.0$41.5 million, $24.1$48.0 million and $17.3$35.0 million in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively.
Financing Activities
In fiscal 2018, we paid aggregate cash dividends of $0.56 per share on our Class A common stock and Class B common stock, or $13.9 million in total. In fiscal 2017, we paid aggregate cash dividends of $0.76 per share on our Class A common stock and Class B common stock, or $17.9 million in total. In fiscal 2016, we paid aggregate cash dividends of $0.75 per share on our Class A common stock and Class B common stock, or $17.4 million in total. In fiscal 2015, we paid aggregate cash dividendsOur Board of $2.03 per share onDirectors discontinued our Class A common stock andquarterly dividend, electing instead to repurchase shares of our Class B common stock or $47.6 millionwhen warranted by market conditions, available resources, and our business outlook and results, as well as invest in total. The aggregate cash dividends included special dividends of $0.68 per share and $0.64 per share paid in November 2014 and January 2015, respectively. In fiscal 2014, we paid aggregate cash dividends of $0.59 per share on our Class A common stock and Class B common stock, or $13.6 million in total. In September 2016, our Board of Directors declared a dividend of $0.19 per share for the fourth quarter of fiscal 2016 to holders of our Class A common stock and Class B common stock. The dividend will be paid on or about October 20, 2016 to stockholders of record as of the close ofearly stage business on October 11, 2016.initiatives.
We distributed cash of $1.8$1.0 million, $2.1$1.5 million and $1.9$1.8 million in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively, to the noncontrolling interests in certain of our subsidiaries.
On April 16, 2018, our Board of Directors and its Corporate Governance Committee approved an arrangement with Howard S. Jonas related to the purchase of shares of our Class B common stock by Mr. Jonas. Under the arrangement, Mr. Jonas has agreed to purchase 2,546,689 shares of our Class B common stock at a price per share of $5.89, which was the closing price for the Class B common stock on the New York Stock Exchange on April 16, 2018 (the last closing price before approval of the arrangement) for an aggregate purchase price of $15 million. The arrangement is subject to approval of our stockholders, and no shares will be issued unless such approval is obtained. Mr. Jonas has agreed to vote in favor of the arrangement when it is submitted to the stockholders. We have agreed to present the matter to our stockholders at the next meeting of stockholders to be held. On May 31, 2018, Mr. Jonas paid $1.5 million of the purchase price. The remainder of the purchase price will be payable following approval of our stockholders, and the shares will be issued upon payment in full. The purchase price per share will be reduced by the amount of any dividends whose record date is between the date hereof and the issuance of the shares.
On June 9, 2017, we sold 1.0 million shares of our Class B common stock to Howard S. Jonas for aggregate consideration of $14.9 million. The price per share of $14.93 was equal to the closing price of our Class B common stock on May 1, 2017, the day prior to the approval of the sale by our Board of Directors and Corporate Governance Committee. On April 11, 2017, we sold 728,332 treasury shares of our Class B common stock to Howard S. Jonas for aggregate consideration of $10.0 million. The price per share of $13.73 was equal to the closing price of our Class B common stock on April 10, 2017.
On March 2, 2017, we sold 10% of the equity in our former subsidiary, IDT-Rafael Holdings, LLC, to Howard S. Jonas for a purchase price of $1 million.
In connection with our investment in Rafael Pharma, our former subsidiary, CS Pharma Holdings, LLC, or CS Pharma, issued member interests to third parties in exchange for cash investments. In fiscal 2017 and fiscal 2016, we received cash of $1.2 million and $8.8 million, respectively, from third parties for member interests in CS Pharma. At July 31, 2016, the $8.8 million received was included in “Other current liabilities” in our consolidated balance sheet pending the issuance of the member interests.
On March 26, 2018, we completed the Rafael Spin-Off. The disposition of Rafael 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. 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 held by us. The commercial real estate holdings consisted of our headquarters building and its associated public garage in Newark, New Jersey, an office/data center building in Piscataway, New Jersey and a portion of a building in Israel that hosts offices for us and certain affiliates. The pharmaceutical holdings included debt interests and warrants in Rafael Pharma and a majority equity interest in Lipomedix. In addition, prior to the Rafael Spin-Off, we transferred to Rafael cash, cash equivalents, marketable securities, and hedge fund and other investments. As a result of the Rafael Spin-Off, we deconsolidated cash and cash equivalents of $9.3 million, and net assets excluding cash and cash equivalents of $105.6 million.
In June 2016, cash and cash equivalents held by Zedge of $6.4 million were deconsolidated as a result of the Zedge Spin-Off.
In connection with the Zedge Spin-Off, in May 2016, Zedge sold shares of its Class B common stock representing approximately 10.0% of its capital stock to certain of its equity holders, including us, for $3 million. The other purchasers paid $0.4 million of the total and we paid $2.6 million.
In fiscal 2016, we received cash of $8.8 million from third parties for an investment in a joint venture.
In August 2013, both Fabrix and a wholly-owned subsidiary of ours purchased shares of Fabrix for aggregate cash of $1.1 million. The shares were purchased from holders of noncontrolling interests in Fabrix representing 2.8% of the equity in Fabrix.
We received proceeds from the exercise of our stock options of nil in fiscal 2016, $3.4$0.8 million in fiscal 2015 and $0.6 million2017, for which we issued 73,471 shares of our Class B common stock. There were no stock option exercises in fiscal 2014.
We paid the outstanding principal of $6.4 million on the mortgage on our building in Piscataway, New Jersey on the maturity date of September 1, 2015.2018 or fiscal 2016.
Our subsidiary, IDT Telecom, Inc., entered into a credit agreement, dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. IDT Telecom may use the proceeds to finance working capital requirements, acquisitions and for other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets.agreement was terminated on July 20, 2018. The principal outstanding bearsincurred 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 150125 basis points. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date. In January 2016, the maturity date was extended to January 31, 2018. In fiscal 2016, fiscal 2015 and fiscal 2014,2018, we borrowed nil, nil and $56.0repaid an aggregate of $22.3 million respectively,under the facility. There were no amounts borrowed under the facility and we repaid nil, $13.0 million and $64.1 million, respectively. We intend to borrow under the facility from time to time.in fiscal 2017 or fiscal 2016. IDT Telecom payspaid a quarterly unused commitment fee of 0.375%0.325% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain financial targets and ratios during the term of the line of credit, including IDT Telecom may not pay any dividend on its capital stock and IDT Telecom’s aggregate loans and advances to affiliates or subsidiaries may not exceed $110.0 million. At July 31, 2016 and 2015, there were no amounts utilized for letters of credit under the line of credit, IDT Telecom was in compliance with all of the covenants, and IDT Telecom’s aggregate loans and advances to affiliates and subsidiaries was $91.1 and $90.1 million, respectively.
RepaymentsWe paid the outstanding principal of other borrowings were nil, $0.3$6.4 million and $0.3 millionon the mortgage on Rafael’s building in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
On June 25, 2015, we purchased 404,967 sharesPiscataway, New Jersey on the maturity date of our Class B common stock from Howard S. Jonas, our Chairman of the Board and former Chief Executive Officer. The purchase price was $18.52 per share, the share price at the close of business on June 23,September 1, 2015. The aggregate purchase price was $7.5 million.
In fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, we paid $0.1$0.4 million, $2.8$1.8 million and $1.0$0.1 million, respectively to repurchase 11,250; 152,85657,081; 94,338; and 34,20611,250 shares of Class B common stock, respectively, that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares are repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.
We hadhave a stock repurchase program for the repurchase of up to an aggregate of 8.38.0 million shares of our Class B common stock. On January 22, 2016, our Board of Directors approved a stock repurchase program to purchase up to 8.0 millionIn fiscal 2018, we repurchased 367,484 shares of our Class B common stock and cancelledfor an aggregate purchase price of $1.9 million. There were no repurchases under the previous stock repurchase program which had 4.6 million shares remaining available for repurchase.in fiscal 2017. In fiscal 2016, we repurchased 398,376 shares of our Class B common stock for an aggregate purchase price of $4.6 million. In fiscal 2015, weAt July 31, 2018, 7.6 million shares remained available for repurchase under the stock repurchase program. From August 1, 2018 through October 9, 2018, the Company repurchased 29,675729,110 shares of our Class B common stock for an aggregate purchase price of $0.4$3.9 million. There were no repurchases in fiscal 2014. At July 31, 2016, 8.0 million shares remained available
Other Sources and Uses of Resources
IDT Financial Services Holding Limited Held for repurchaseSale
On June 22, 2017, IDT Telecom, Inc. entered into a Share Purchase Agreement with JAR Fintech Limited and JAR Capital Limited to sell the capital stock of IDT Financial Services Holding Limited, or IDTFS Holding, a company incorporated under the stock repurchase program.
Changes in Trade Accounts Receivable, Allowance For Doubtful Accountslaws of Gibraltar and Deferred Revenue
Gross trade accounts receivable decreaseda wholly-owned subsidiary of IDT Telecom, to $54.1JAR Fintech Limited. IDTFS Holding is the sole shareholder of IDT Financial Services Limited, or IDTFS, our Gibraltar-based bank. The Share Purchase Agreement provides for an aggregate purchase price for the outstanding equity interests of IDTFS Holding of £2.9 million ($3.8 million at July 31, 2016 from $64.22018) plus an amount equal to the value of IDTFS Holding’s net assets, to be paid at closing, subject to adjustments relating to customer assets of IDTFS. The net asset value of IDTFS was $13.7 million at July 31, 2015 primarily due2018. The sale is subject to an $8.5 million decrease in IDT Telecom’s gross trade accounts receivable balanceregulatory approval and other conditions. The term for consummating the Zedge Spin-Off. The decrease in IDT Telecom’s gross trade accounts receivable balance was primarily due to collections in fiscal 2016 in excesstransaction under the Share Purchase Agreement has passed, and as certain remaining closing conditions are outside of amounts billed duringour control, there can be no assurance that the period, accounts receivable written-off and the effect of changes in foreign currency exchange rates. At July 31, 2015, Zedge’s gross trade accounts receivable balance was $1.6 million.
The allowance for doubtful accounts as a percentage of gross trade accounts receivable increased to 8.9% at July 31, 2016 from 8.8% at July 31, 2015 as a result of a 15.7% decrease in the gross accounts receivable balance and a 14.6% decline in the allowance balance.
Deferred revenue as a percentage of total revenues varies from period to period depending on the mix and the timing of revenues. Deferred revenue arises from IDT Telecom’s sales of prepaid products. Deferred revenue slightly decreased to $86.2 million at July 31, 2016 from $86.3 million at July 31, 2015 primarily due to a decrease in the IDT Telecom U.S. balance, partially offset by an increase in IDT Telecom’s deferred revenue balance in Europe.sale will be completed.
Other Uses of Resources
Our controlled 50%-owned subsidiary, CS Pharma, holds Cornerstone’s $10 million principal amount, 3.5% convertible promissory note dueOn September 16,14, 2018, we purchased Versature Corp., a software as a service, or SaaS, business communications solutions and we and CS Pharma were issued warrants to purchase Cornerstone shares. Cornerstone is a clinical stage, oncology-focused pharmaceutical company committed tohosted VoIP provider serving the development and commercializationCanadian market, for cash of therapies targeting cancer metabolism that exploit the metabolic differences between normal cells and cancer cells. We expect to fund additional cash investments in Cornerstone in fiscal 2017.$6.9 million.
We intend to, where appropriate, make other strategic investments and acquisitions to complement, expand, and/or enter into new businesses. In considering acquisitions and investments, we search for opportunities to profitably grow our existing businesses and/or to add qualitatively to the range and diversification of businesses in our portfolio. At this time, we cannot guarantee that we will be presented with other acquisition opportunities that meet our return on investment criteria, or that our efforts to make acquisitions that meet our criteria will be successful.
On September 20, 2016, we received a letter of inquiry from the Enforcement Bureau of the FCC requesting certain information and materials related to an investigation of potential violations by Straight Path Spectrum LLC (formerly a subsidiary of ours and currently a subsidiary of Straight Path) in connection with licenses to operate on the 28 GHz and 39 GHz bands of the Fixed Microwave Services. We intend to cooperate with the FCC in this matter and we are in the process of responding to the letter of inquiry. The FCC could seek to fine or impose regulatory penalties or civil liability on us related to activities during the period of ownership by us. Further, should the FCC impose liability on Straight Path, we could be the subject of a claim from Straight Path related to that liability.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables quantify our future contractual obligations and commercial commitments at July 31, 2016:
CONTRACTUAL OBLIGATIONS2018:
Payments Due by Period
| (in millions) | Total | Less than 1 year | 1—3 years | 4—5 years | After 5 years | |||||||||||||||
| Operating leases | $ | 6.2 | $ | 2.7 | $ | 2.2 | $ | 1.2 | $ | 0.1 | ||||||||||
| Revolving credit unused commitment fee | 0.1 | 0.1 | — | — | — | |||||||||||||||
| Purchase commitments | 1.6 | 1.6 | — | — | — | |||||||||||||||
| TOTAL CONTRACTUAL OBLIGATIONS | $ | 7.9 | $ | 4.4 | $ | 2.2 | $ | 1.2 | $ | 0.1 | ||||||||||
OTHER COMMERCIAL COMMITMENTS
Payments Due by Period
| (in millions) | Total | Less than 1 year | 1—3 years | 4—5 years | After 5 years | Total | Less than 1 year | 1—3 years | 4—5 years | After 5 years | ||||||||||||||||||||||||||||||
| Standby letters of credit (1) | $ | 0.1 | $ | 0.1 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Operating leases | $ | 16.1 | $ | 3.8 | $ | 4.8 | $ | 4.4 | $ | 3.1 | ||||||||||||||||||||||||||||||
| Purchase commitments (1) | 56.9 | 56.9 | — | — | — | |||||||||||||||||||||||||||||||||||
| TOTAL CONTRACTUAL OBLIGATIONS (2) | $ | 73.0 | $ | 60.7 | $ | 4.8 | $ | 4.4 | $ | 3.1 | ||||||||||||||||||||||||||||||
| (1) | Purchase commitments include the aggregate commitment under the Reciprocal Services Agreement with a telecom operator in Central America for a full range of services, including, but not limited to, termination of inbound and outbound international long-distance voice calls. |
| (2) | The above table does not include an aggregate of |
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources, other than the following.
In connection with the GenieRafael Spin-Off in October 2011,March 2018, we and GenieRafael entered into various agreements prior to the Genie Spin-Offspin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with GenieRafael after the Genie Spin-Off,spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and GenieRafael with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Genie Spin-Off,spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, among other things, we indemnify GenieRafael and GenieRafael indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, we indemnify GenieRafael from all liability for taxes of ours, with respect toother than Rafael and its subsidiaries, for any taxable period, and Genie indemnifies us from all liability for taxes of Genie and its subsidiaries with respectdue to any taxable period, including, without limitation, the ongoing tax audits related to Genie’s business.spin-off.
In connection with theour spin-off of Straight Path, Spin-Off in July 2013, we and Straight Path entered into various agreements prior to the Straight Path Spin-Offspin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Straight Path after the Straight Path Spin-Off,spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Straight Path with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Straight Path Spin-Off,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 indemnifieswe indemnify Straight Path and Straight Path indemnifies the Companyus 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 indemnifieswe indemnify Straight Path from all liability for taxes of Straight Path or any of its subsidiaries or relating to the Straight Path business with respect to taxable periods ending on or before the Straight Path Spin-Off,spin-off, from all liability for taxes of the Company,ours, other than Straight Path and its subsidiaries, for any taxable period, and from all liability for taxes due to the Straight Path Spin-Off.spin-off. (See Notes 10 and 19 to the Consolidated Financial Statements included in Item 8 to Part II of this Annual Report).
In connection with theour spin-off of Zedge, Spin-OffInc., or Zedge, in June 2016, we and Zedge entered into various agreements prior to the Zedge Spin-Offspin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Zedge after the Zedge Spin-Off,spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Zedge with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Zedge Spin-Off,spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to Separation and Distribution Agreement, among other things, we indemnify Zedge and Zedge indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, Zedge indemnifies us from all liability for taxes of Zedge and any of Zedge’s subsidiaries or relating to Zedge’s business accruing after the Zedge Spin-Off,spin-off, and we indemnify Zedge from all liability for taxes of Zedge and any of Zedge’s subsidiaries or relating to Zedge’s business with respect to taxable periods ending on or before the Zedge Spin-Off.spin-off.
IDT Payment Services and IDT Telecom have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively. At July 31, 2016,2018, we had aggregate performance bonds of $13.4$15.8 million outstanding.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
FOREIGN CURRENCY RISK
Revenues from our international operations representedwere 32%, 31% and 29%, 30% and 30% of our consolidated revenues in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively. A significant portion of these revenues is in currencies other than the U.S. Dollar. Our foreign currency exchange risk is somewhat mitigated by our ability to offset a portion of these non U.S.non-U.S. Dollar-denominated revenues with operating expenses that are paid in the same currencies. While the impact from fluctuations in foreign exchange rates affects our revenues and expenses denominated in foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period is generally not material.
INVESTMENT RISK
In addition to, but separate from our primary business, we hold a portion of our assets in marketable securities and hedge funds for strategic and speculative purposes. As of July 31, 2016,2018, the carrying value of our marketable securities and investments in hedge funds were $52.9$6.0 million and $8.1$4.8 million, respectively. Investments in marketable securities and hedge funds carry a degree of risk and depend to a great extent on correct assessments of the future course of price movements of securities and other instruments. There can be no assurance that our investment managers will be able to accurately predict these price movements. The securities markets have in recent years been characterized by great volatility and unpredictability. Accordingly, the value of our investments may go down as well as up and we may not receive the amounts originally invested upon redemption.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of the Company and the reportreports of the independent registered public accounting firmfirms thereon starting on page F-1 are included herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of July 31, 2016.2018.
Report of Management on Internal Control over Financial Reporting
We, the management of IDT Corporation and subsidiaries (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting of the Company.
The Company’s internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
| 1. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company; |
| 2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| 3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2018. In making this assessment, the Company’s management used the criteria established in theInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting, as prescribed above, for the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that the Company’s internal control over financial reporting as of July 31, 2018 was effective based on the criteria established in theInternal Control-Integrated Framework (2013) issued by COSO.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
BDO USA, LLP has provided an attestation report on the Company’s internal control over financial reporting as of July 31, 2018.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of fiscal 20162018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s report on internal control over financial reporting and the attestation report of our independent registered public accounting firm are included in this Annual Report on Form 10-K on pages 48 and 49.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
The following is a list of our directors and executive officers along with the specific information required by Rule 14a-3 of the Securities Exchange Act of 1934:
Executive Officers
Howard S. Jonas – Jonas—Chairman of the Board
Shmuel Jonas – Jonas—Chief Executive Officer
Marcelo Fischer – Fischer—Senior Vice President—Finance
Bill Pereira—President – Financeand Chief Operating Officer
Mitch Silberman – Silberman—Chief Accounting Officer and Controller
Joyce J. Mason – Mason—Executive Vice President, General Counsel and Corporate Secretary
Menachem Ash – Ash—Executive Vice President of Strategy and Legal Affairs
Anthony S. Davidson – Senior Vice President –David Wartell —Chief Technology
Bill Pereira – Chief Executive Officer and President of IDT Telecom
Directors
Howard S. Jonas – Jonas—Chairman of the Board
Bill Pereira –Pereira— President and Chief ExecutiveOperating Officer and President of IDT Telecom
Michael Chenkin – Chenkin—Certified Public Accountant; previously worked in the Audit Department of Coopers and Lybrand and as a consultant to the securities industry
Eric F. Cosentino – Cosentino—Former Rector of the Episcopal Church of the Divine Love, Montrose, New York
Judah Schorr – Schorr—Founder of Judah Schorr MD PC, an anesthesia provider to hospitals, ambulatory surgery centers and medical offices, and has been its President and owner since its inception
The remaining information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2016,2018, and which is incorporated by reference herein.
Corporate Governance
We have included as exhibits to this Annual Report on Form 10-K certificates of our Chief Executive Officer and Principal Financial Officer certifying the quality of our public disclosure.
We make available free of charge through the investor relations page of our web site (www.idt.net/ir) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. We have adopted codes of business conduct and ethics for all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. Copies of the codes of business conduct and ethics are available on our web site.
Our web site and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission.
Item 11. Executive Compensation.
The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2016,2018, and which is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2016,2018, and which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2016,2018, and which is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be contained in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after July 31, 2016,2018, and which is incorporated by reference herein.
Item 15. Exhibits, Financial Statement Schedules.
| (a) | The following documents are filed as part of this Report: |
| 1. | Report of Management on Internal Control Over Financial Reporting
|
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
Consolidated Financial Statements covered by Reports of Independent Registered Public Accounting Firms
| 2. | Financial Statement Schedule.
|
All schedules have been omitted since they are either included in the Notes to Consolidated Financial Statements or not required or not applicable.
| 3. | Exhibits. Exhibit Numbers 10.01, 10.02, 10.03, 10.04, 10.05, 10.06, and
|
The exhibits listed in paragraph (b) of this item are filed, furnished, or incorporated by reference as part of this Form 10-K.
Certain of the agreements filed as exhibits to this Form 10-K contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
| may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements; |
| may apply standards of materiality that differ from those of a reasonable investor; and |
| were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: October
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders IDT Corporation Newark, New Jersey Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of IDT Corporation We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of July 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the two years in the period ended July 31, 2018, and the related notes and our report dated October 15, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Report of Management on Internal Control We conducted our audit of internal control over financial reporting in accordance with the standards of the Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP Woodbridge, New Jersey October 15, 2018 49 IDT Corporation Index to Consolidated Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of IDT Corporation (a Delaware Corporation) and subsidiaries (the “Company”) as of July 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the two years in the period ended July 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
Woodbridge, New Jersey
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders IDT Corporation
We have audited the accompanying consolidated balance
We conducted our
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IDT Corporation and subsidiaries as of July 31, 2016, and
/s/ GRANT THORNTON LLP New York, New York October 14, 2016 IDT CORPORATION
See accompanying notes to consolidated financial statements. IDT CORPORATION
See accompanying notes to consolidated financial statements. IDT CORPORATION
See accompanying notes to consolidated financial statements. IDT CORPORATION
IDT CORPORATION
IDT CORPORATION
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements. F-10
IDT CORPORATION
Note 1—Description of Business and Summary of Significant Accounting Policies
Description of Business IDT Corporation (“IDT” or the “Company”) is a multinational The Company has two reportable business segments, Telecom & Payment Services (formerly known as Telecom Platform Services) and net2phone-Unified Communications as a Service (“net2phone-UCaaS”) (formerly known as UCaaS). Telecom & Payment Services and
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.
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,
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Revenue Recognition Telephone service, which includes domestic and international long distance, local service, and wholesale carrier telephony
IDT Telecom enters into reciprocal transactions pursuant to which IDT Telecom is committed to purchase a specific number of minutes to specific destinations at specified rates, and the counterparty is committed to purchase from IDT Telecom a specific number of minutes to specific destinations at specified rates. The number of minutes purchased and sold in a reciprocal transaction is not necessarily equal. The rates in these reciprocal transactions are generally
IDT CORPORATION Prior to
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”).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. The Company adopted ASC 606 as of August 1, 2018 using the modified retrospective method, which will be reflected in the Company’s financial statements beginning in the first quarter of fiscal 2019. The Company identified its main revenue streams, which include Boss Revolution international calling revenue, wholesale carrier services revenue, and domestic and international airtime top-up revenue. The Company substantially completed the review and analysis of contracts and other relevant documents related to its Boss Revolution calling service retailer and direct to consumer revenue streams, wholesale carrier services revenue, domestic and international airtime top-up revenue, and other significant revenue streams to determine how to apply ASC 606 to these revenue streams. At August 1, 2018, the cumulative effect of initially applying ASC 606 is expected to be a $8.6 million reduction to “Deferred revenue”, with an offsetting reduction to “Accumulated deficit”. This adjustment is primarily due to a change in accounting for breakage primarily from the Company’s Boss Revolution international calling service, traditional calling cards, and international and domestic 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 a good or service). However, customers may not exercise all of their contractual rights. Those unexercised rights are referred to as breakage. Prior to the The Company is currently reviewing future required disclosures and updating its accounting policy, which is expected to be
Direct Cost of Revenues Direct cost of revenues for IDT Telecom consists primarily of termination and origination costs, toll-free costs, and network costs—including customer/carrier interconnect charges and leased fiber circuit charges. These costs include an estimate of charges for which invoices have not yet been received, and estimated amounts for pending disputes with other carriers. Direct cost of revenues for IDT Telecom also includes the cost of airtime top-up minutes.
Direct cost of revenues for Zedge consisted
Direct cost of revenues excludes depreciation and amortization expense.
Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash and Cash Equivalents The Company classifies the change in its restricted cash and cash equivalents as an operating activity in the accompanying consolidated statements of cash flows because the restrictions are directly related to the operations of IDT Financial Services
In November 2016, the FASB issued an ASU that includes specific guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The Company adopted the amendments in this ASU on August 1, 2018 using the retrospective transition method. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash flows. Beginning in the first quarter of fiscal 2019, the adoption will impact the beginning of the period and end of the period cash and cash equivalents balance in the statement of cash flows, as well as the net cash provided by or used in operating activities. At July 31, 2018, the aggregate cash, cash equivalents and restricted cash and cash equivalents was $203.2 million, which included $134.8 million included in current “Assets held for sale” (see Note 3) and $0.3 million included in “Other current assets” in the accompanying consolidated balance sheet. IDT CORPORATION Substantially Restricted Cash and Cash Equivalents The Company treats unrestricted cash and cash equivalents held by IDT Payment Services, which provides the Company’s international money transfer services in the United States,
Marketable Securities The Company’s investments in marketable securities are classified as “available-for-sale.” Available-for-sale securities are required to be carried at their fair value, with unrealized gains and losses (net of income taxes) that are considered temporary in nature recorded in “Accumulated other comprehensive
In January 2016, the FASB issued an ASU to provide more information about recognition, measurement, presentation and disclosure of financial instruments. The Company adopted the amendments in this ASU on August 1, 2018. The amendments in the ASU include, among other changes, the following: (1) equity investments (except those accounted for under the equity method or that result in consolidation) will be measured at fair value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period to identify impairment of equity investments without readily determinable fair values, (3) financial assets and financial liabilities will be presented separately by measurement category and form of financial asset on the balance sheet or the notes to the financial statements, and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability exception will be available for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. These investments may be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will have to reassess at each reporting period whether an investment qualifies for this practicability exception. At August 1, 2018, the cumulative effect of adopting this ASU is expected to be a $1.2 million increase in “Investments”, a $0.1 million decrease in “Accumulated other comprehensive loss” and a $1.1 million reduction to “Accumulated deficit”, primarily from the measurement at fair value of the Company’s shares of Visa Inc. Series C preferred stock (see Note 9) and the derecognition of unrealized holding losses on equity securities classified as available-for-sale. Property, Plant and Equipment Equipment, buildings, computer software, and furniture and fixtures are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives, which range as follows: equipment—5, 7 or 20 years; buildings—40 years; computer software—2, 3 or 5 years; and furniture and fixtures—5, 7 or 10 years. Leasehold improvements are recorded at cost and are depreciated on a straight-line basis over the term of their lease or their estimated useful lives, whichever is shorter. The Company tests the recoverability of its property, plant and equipment 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 IDT CORPORATION 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 budget projections and growth rates. 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. The estimates that the Company uses in its discounted cash flow methodology involves many assumptions by management that are based upon future growth projections. 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 2018, fiscal 2017 and fiscal 2016, advertising expense was $16.3 million, $17.4 million and $16.5 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 2018, fiscal 2017 and fiscal 2016 was $16.1 million, $14.2 million and $12.6 million, respectively. Unamortized capitalized internal use software costs at July 31, 2018 and 2017 were $24.9 million and $22.8 million, respectively. Repairs and Maintenance The Company charges the cost of repairs and maintenance, including the cost of replacing minor items not constituting substantial betterment, to selling, general and administrative expenses as these costs are incurred. Foreign Currency Translation Assets and liabilities of foreign subsidiaries denominated in foreign currencies are translated to U.S. Dollars at end-of-period rates of exchange, and their monthly results of operations are translated to U.S. Dollars at the average rates of exchange for that month. Gains or losses resulting from such foreign currency translations are recorded in “Accumulated other comprehensive loss” in the accompanying consolidated balance sheets. Foreign currency transaction gains and losses are reported in “Other (expense) income, 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. IDT CORPORATION 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:
The following outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the stock option was greater than the average market price of the Company’s stock during the period:
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. IDT CORPORATION In May 2017, the FASB issued an ASU to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification); (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The Company adopted the amendments in this ASU prospectively to awards modified on or after on August 1, 2018. There was no impact on the Company’s consolidated financial statements upon adoption. Vulnerability Due to Certain Concentrations Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, restricted cash and cash equivalents, marketable securities, investments in hedge funds and trade accounts receivable. The Company holds cash and cash equivalents at several major financial institutions, which often exceed FDIC insurance limits. Historically, the Company has not experienced any losses due to such concentration of credit risk. The Company’s temporary cash investments policy is 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 2018, fiscal 2017 or fiscal 2016. However, the Company’s five largest customers collectively accounted for 12.5%, 12.4% and 11.2% of its consolidated revenues in fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The Company’s customers with the five largest receivables balances collectively accounted for 18.7% and 35.4% of the consolidated gross trade accounts receivable at July 31, 2018 and 2017, respectively. This concentration of customers increases the Company’s risk associated with nonpayment by those customers. In an effort to reduce such risk, the Company performs ongoing credit evaluations of its significant retail, wholesale and cable telephony customers. In addition, the Company attempts to mitigate the credit risk related to specific wholesale carrier services customers by also buying services from the customer, in order to create an opportunity to offset its payables and receivables and reduce its net trade receivable exposure risk. When it is practical to do so, the Company will increase its purchases from wholesale carrier services customers with receivable balances that exceed the Company’s applicable payables in order to maximize the offset and reduce its credit risk. IDT CORPORATION 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:
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:
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. Recently Adopted Accounting Standard – Definition of a Business In January 2017, the FASB issued an ASU IDT CORPORATION Recently Issued Accounting Standards Not Yet Adopted
In February 2016, the FASB issued
In June 2016, the FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. The Company will adopt the new standard on August 1, 2020. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.
In August 2017, the FASB issued an ASU intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge accounting guidance in U.S. GAAP. The amendments in this ASU are effective for the Company on August 1, 2019. Early application is permitted. Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. The Company is evaluating the impact that this ASU will have on its consolidated financial statements. In June 2018, the FASB issued an ASU to simplify several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718,Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 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 amendments in this ASU are effective for the Company on August 1, 2019. The Company is evaluating the impact that this ASU will have on its consolidated financial statements. In August 2018, the FASB issued an ASU that modifies the disclosure requirements for fair value measurements. The amendments in this ASU are effective for the Company on August 1, 2020. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. The Company expects to adopt this ASU for its financial statements beginning in the first quarter of fiscal 2019. The adoption of this ASU will only impact the fair value measurement disclosures in the Company’s consolidated financial statements. Note 2—
On 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 is a clinical stage, oncology-focused pharmaceutical company committed to the development and commercialization of therapies that exploit the metabolic differences between normal cells and cancer cells, and a majority equity interest in IDT CORPORATION In March 2018, in connection with the Rafael Spin-Off, each holder of options to The carrying amounts of Rafael’s assets and liabilities included as part of the disposal group in the Rafael Spin-Off were as follows:
Rafael’s (loss) income before income taxes and (loss) income before income taxes attributable to the Company, which was
Prior to the Rafael Spin-Off, the Company had made investments totaling $10 million in 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’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 The Company and CS Pharma held warrants to purchase shares of capital stock of Rafael Pharma representing in the IDT CORPORATION The Company’s investment in
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-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 3—IDT Financial Services Holding Limited Assets and Liabilities Held for Sale On June 22, 2017, the Company’s wholly-owned subsidiary IDT Telecom, Inc. (“IDT Telecom”) entered into a Share Purchase Agreement with JAR Fintech Limited (“JAR Fintech”) and JAR Capital Limited to sell the capital stock of IDT Financial Services Holding Limited, a company incorporated under the laws of Gibraltar and a wholly-owned subsidiary of IDT Telecom (“IDTFS Holding”), to JAR Fintech. IDTFS Holding is the sole shareholder of IDT Financial Services Limited (“IDTFS”), a Gibraltar-based bank and e-money issuer, providing prepaid card solutions across the European Economic Area. The Share Purchase Agreement provides for an aggregate purchase price for the IDT CORPORATION The pending disposition of IDTFS Holding did not meet the criteria to be reported as a discontinued operation and accordingly, its results of operations and cash flows have not been reclassified. The IDTFS Holding assets and liabilities held for sale included the following:
IDTFS Holding is included in the Telecom & Payment Services segment. IDTFS Holding’s (loss) income before income taxes and (loss) income before income taxes attributable to the Company, which
Note 4—Zedge Spin-Off On June 1, 2016, the Company
IDT CORPORATION
Note
The following is a summary of marketable securities:
As part of the Rafael Spin-Off, holders of the Company’s restricted Class B common stock received, in respect of those restricted shares, one restricted share of Rafael Class B common stock for every two restricted shares of the Company that they held as of the record date for the Rafael Spin-Off. In July 2018, the Company received 25,803 shares of Rafael Class B common stock in connection with the lapsing of restrictions on Rafael restricted stock held by certain of the Company’s employees and the payment of taxes related thereto. The Company received the Rafael shares in exchange for the payment of an aggregate of $0.2 million for the employees’ tax withholding obligations upon the vesting event. The number of shares was determined based on their fair market value on the trading day immediately prior to the vesting date. At July 31, 2018, the Company owned 25,803 shares of Rafael Class B common stock that had a fair value of $0.2 million.
Proceeds from maturities and sales of available-for-sale securities were
The contractual maturities of the Company’s available-for-sale debt securities at July 31,
IDT CORPORATION
The following available-for-sale securities were in an unrealized loss position for which other-than-temporary impairments have not been recognized:
At July 31,
Note
The following table presents the balance of assets
At July 31,
At July 31, IDT CORPORATION The following tables summarize the change in the balance of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3). There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) in the years ended July 31, 2018, 2017 or 2016.
At July 31, 2018 and 2017, the Company had
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,
Other assets and other liabilities. At July 31,
The Company’s investments at July 31,
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
Property, plant and equipment consist of the following:
The
Depreciation and amortization expense of property, plant and equipment was
Note
The table below reconciles the change in the carrying amount of goodwill by operating segment for the period from July 31,
Note
In June 2016, Visa Inc. acquired Visa Europe Limited for cash, shares of Visa Inc. Series C preferred stock and a deferred cash payment. IDT Financial Services
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
The following table summarizes the other operating (losses) gains, net by business segment:
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”). In fiscal 2018, we incurred legal fees of $1.7 million related to the Straight Path stockholders’ putative class action and derivative complaint (see Note 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 currently a subsidiary of Straight Path) in connection with licenses to operate on the 28 GHz and 39 GHz bands of the Fixed Microwave Services. The Company has cooperated with the FCC in this matter and has responded to the letter of inquiry. If the FCC were to pursue separate action against the Company, the FCC could seek to fine or impose regulatory penalties or civil liability on the Company related to activities during the period of ownership by the Company. The Separation and Distribution Agreement provides for the Company and Straight Path to indemnify each other for certain liabilities. The Company and Straight Path each communicated that it was entitled to indemnification from the other in connection with the inquiry described above and related matters. On October 24, 2017, the Company, Straight Path, Straight Path IP Group, Inc. (“SPIP”) and PR-SP IP Holdings LLC (“PR-SP”), an entity owned by Howard Jonas, entered into a Settlement Agreement and Release that provides for, among other things, the settlement and mutual release of potential liabilities and claims that may exist or arise under the Separation and Distribution Agreement between the Company and Straight Path. In exchange for the mutual release, 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. Sale of Interest in Fabrix Systems Ltd. On October 8, 2014, the Company completed the sale of its interest in Fabrix Systems Ltd. (“Fabrix”) to Telefonaktiebolget LM Ericsson (publ). In fiscal 2016, the Company recorded gain on the sale of its interest in Fabrix of $1.1 million, which represented adjustments to the Company’s share of Fabrix’ working capital and estimated transaction costs. IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 11—Revolving Credit
The Company’s subsidiary, IDT Telecom,
Note 12—Accrued Expenses
Accrued expenses consist of the following:
Note 13—Severance Expense In fiscal 2018, the Company implemented an internal restructuring that reduced the Company’s global employee base in its IDT Telecom division and at the corporate level. In fiscal 2018, the Company recorded severance expense of $3.9 million related to this workforce reduction. Severance expense in fiscal 2018 also included $0.7 million unrelated to the workforce reduction. At July 31, 2018, the accrued severance expense balance for the workforce reduction was $2.1 million, which is included in “Accrued expenses” in the accompanying consolidated balance sheet.
In July 2016, the Company completed a reduction of its workforce and incurred severance expense of $6.3 million in fiscal 2016. Severance expense in fiscal 2016 also included $0.2 million unrelated to the July 2016 workforce reduction. At July 31,
Note 14—Other (Expense) Income,
Other (expense) income,
IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 15—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 reduces the U.S. federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, requires companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and makes other changes to the U.S. income tax code. Due to the Company’s July 31 fiscal year-end, the lower corporate income tax rate is phased in, resulting in a blended U.S. federal statutory tax rate of approximately 26.9% for the Company’s fiscal 2018, and 21.0% for the Company’s fiscal years thereafter. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), expressing its views regarding Topic 740,Income Taxes, in the reporting period that includes the enactment date of the Tax Act. SAB 118 recognizes that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. Specifically, SAB 118 allows a company to report provisional estimates in the reporting period that includes the enactment date if the company does not have the necessary information available, prepared, or fully analyzed for certain income tax effects of the Tax Act. The provisional estimates would be adjusted during a measurement period not to exceed 12 months from the enactment date of the Tax Act, at which time the accounting for the income tax effects of the Tax Act is required to be completed. As of July 31, 2018, the Company had not completed its accounting for the income tax effects of the Tax Act; however, the Company had made a reasonable estimate of the effect on its existing AMT credit carry-over and transition tax. Because the AMT credit will be refundable if not utilized in the next four years, the Company reversed the valuation allowance that offset the AMT credit. As a result, in fiscal 2018, the Company recorded a noncurrent receivable and an income tax benefit of $3.3 million for the anticipated refund. The reduction in the corporate tax rate 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 has estimated that it will utilize $12 million of federal net operating loss carryforwards to offset the transition tax that it expects it will incur. The Company is currently working to complete various earnings and profits analyses to finalize its estimate. At July 31, 2018, the undistributed earnings of the Company’s foreign subsidiaries continued to be permanently reinvested. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated balance sheets and consisted of approximately $395 million at July 31, 2018. If these foreign earnings were to be distributed to the Company’s domestic entities, the Company may be subject to withholding of foreign taxes. It is impractical to determine the amount of withholding at this time, due to the numerous methods available to the Company to remit those earnings. The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”), which were not effective until August 1, 2018. The Company did not record any impact associated with either GILTI or BEAT in fiscal 2018. The Company is reviewing the proposed guidance that was issued by the Internal Revenue Service in September 2018. The Company anticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, the Company anticipates that the U.S. state jurisdictions will continue to determine and announce their conformity or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to the Company’s provisional estimates when the accounting for the income tax effects of the Tax Act is completed. The Company will continue to evaluate the impact of the Tax Act on its financial statements and will record the effect of any reasonable changes in its estimates and adjustments.
The components of income before income taxes are as follows:
During the fiscal 2018 financial statement close, the Company determined that a revision was required to correct the disclosure of certain gross deferred tax assets of $27.9 million that were fully offset by a valuation allowance. TheCompany’s disclosure of the related deferred tax assets and valuation allowance balances at July 31, 2017 and 2016, and in the two years in the period ended July 31, 2017 were revised, which had no impact on the Company’s consolidated balance sheets, statements of income or statements of cash flows as previously reported.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant components of the Company’s deferred income tax assets consist of the following:
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
The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At July 31,
The
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
At July 31,
In
On June 22, 2017, the Company’s wholly-owned subsidiary IDT Telecom entered into a Share Purchase Agreement to sell the capital stock of IDTFS Holding, a company incorporated under the laws of Gibraltar and a wholly-owned subsidiary of IDT Telecom. IDTFS Holding is the sole shareholder of IDTFS, a Gibraltar-based bank and e-money issuer (see Note 3). The Company does not expect a significant difference in the tax versus book gain on the sale. Gibraltar does not tax capital gains and the Company will offset the U.S. tax gain with existing net operating losses. Tax on the sale will not impact the Company’s results of operations or financial position because the income tax benefit from the use of the net operating loss will be offset by the valuation allowance. The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 16—Equity
Class A Common Stock and Class B Common Stock
The rights of holders of Class A common stock and Class B common stock are identical except for certain voting and conversion rights and restrictions on transferability. The holders of Class A common stock and Class B common stock receive identical dividends per share when and if declared by the Company’s Board of Directors. In addition, the holders of Class A common stock and Class B common stock have identical and equal priority rights per share in liquidation. The Class A common stock and Class B common stock do not have any other contractual participation rights. The holders of Class A common stock are entitled to three votes per share and the holders of Class B common stock are entitled to one-tenth of a vote per share. Each share of Class A common stock may be converted into one share of Class B common stock, at any time, at the option of the holder. Shares of Class A common stock are subject to certain limitations on transferability that do not apply to shares of Class B common stock.
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 2016, the Company paid aggregate cash dividends of $0.75 per share on its Class A common stock and Class B common stock, or $17.4 million in total. Sales of
On 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
Stock Repurchases The Company
In fiscal
Equity Sale Prior to the Zedge Spin-Off In connection with the Zedge Spin-Off, in May 2016, Zedge sold shares of its Class B common stock representing approximately 10.0% of its capital stock to certain of its equity holders, including the Company, for $3 million. The other purchasers paid $0.4 million of the total and the Company paid $2.6 million.
On April 16, 2018, the Company’s Board of Directors and its Corporate Governance Committee approved an arrangement with Howard S. Jonas related to the purchase of shares of the Company’s Class B common stock by Mr. Jonas. Under the arrangement, Mr. Jonas has agreed to purchase 2,546,689 shares of the Company’s Class B common stock at a price per share of $5.89, which was the closing price for the Class B common stock on the New York Stock Exchange on April 16, 2018 (the last closing price before approval of
IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The arrangement is subject to approval of the stockholders of the Company,
The
Note 17—Stock-Based Compensation
Stock-Based Compensation
The 2015 Stock Option and Incentive Plan is intended to provide incentives to officers, employees, directors and consultants of the Company, including stock options, stock appreciation rights, limited rights, deferred stock units, and restricted stock. On December 14,
In fiscal
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
A summary of stock option activity for the Company is as follows:
IDT CORPORATION
The total intrinsic value of options exercised during fiscal 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 333,333 shares underlying the options on May 2, 2019 and as to 333,334 shares underlying the option on May 2, 2020. Mr. Jonas will be prohibited from transferring any shares of the Class B common stock issued on exercise of the option that are subject to the Company’s repurchase right. The Company’s repurchase right is essentially a forfeiture provision. The options were not granted under the Company’s 2015 Stock Option and Incentive Plan, but, except to the extent otherwise provided in the related grant agreement, are subject to the terms of the 2015 Stock Option and Incentive Plan. The Company estimated that the fair value of the options on the date of grant was $3.3 million, which will be recognized on a straight-line basis over the requisite three-year service period ending in May 2020.
On June 7, 2016, in connection with the Zedge Spin-Off, the Compensation Committee of the Company’s Board of Directors approved a $2.25 reduction in the per share exercise price of all outstanding options to purchase the Company’s Class B common stock. The Company accounted for the reduction in the exercise price of the Company’s outstanding stock options as a modification. The Company determined that there was no incremental value from the modification, and therefore, the Company did not record a stock-based compensation charge.
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:
At July 31,
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 18—Accumulated Other Comprehensive
The accumulated balances for each classification of other comprehensive income (loss) were as follows:
Note 19—Commitments and Contingencies
Legal Proceedings 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. IDT Telecom and the Company intend to vigorously defend this matter. IDT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend this matter. 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 FCC, as well as the sale of Straight Path’s subsidiary SPIP to the Company in connection with that settlement. That action was consolidated with a similar action that was initiated by The Arbitrage Fund. The Plaintiffs are seeking, among other things, (i) a declaration that the action may be maintained as a class action or in the alternative, that demand on the Straight Path Board is excused; (ii) that the term sheet is invalid; (iii) awarding damages for the unfair price stockholders are receiving in the merger between Straight Path and Verizon Communications Inc. for their shares of Straight Path’s Class B common stock; and (iv) ordering Howard S. Jonas, Davidi Jonas, and the Company to disgorge any profits for the benefit of the class Plaintiffs. On August 28, 2017, the Plaintiffs filed an amended complaint. On September 24, 2017, the Company filed a motion to dismiss the amended complaint. The Company intends to vigorously defend the action. On November 20, 2017, the Delaware Chancery Court issued an order staying the case pending the closing of the transaction between Verizon and Straight Path on the grounds that the claims are not ripe. That transaction closed on February 28, 2018 and the Court was so notified. The motion to dismiss was denied. On July 13, 2018, the Company filed a motion for an interlocutory appeal with the Delaware Chancery Court. The Chancery Court granted the motion and the Delaware Supreme Court accepted the appeal. On September 5, 2018, the Company filed the appeal with the Delaware Supreme Court. On October 5, 2019, the Plaintiffs filed its Answering Brief to the appeal. In fiscal 2018, the Company incurred legal fees of $1.7 million related to this putative class action (see Note 10). At this stage, the Company is unable to estimate its potential liability, if any. On May 5, 2004, the Company filed a complaint in the Supreme Court of the State of New York, County of New York, seeking injunctive relief and damages against Tyco Group, S.A.R.L., Tyco Telecommunications (US) Inc. (f/k/a TyCom (US) Inc.), Tyco International, Ltd., Tyco International (US) Inc., and TyCom Ltd. (collectively “Tyco”). The Company alleged that Tyco breached a settlement agreement that it had entered into with the Company to resolve certain disputes and civil actions among the parties. The Company alleged that Tyco did not provide the Company, as required under the settlement agreement, free of charge and for the Company’s exclusive use, a 15-year indefeasible right to use four Wavelengths in Ring Configuration (as defined in the settlement agreement) on a global undersea fiber optic network that Tyco was deploying at that time. After extensive proceedings, including several decisions and appeals, the New York Court of Appeals affirmed a lower court decision to dismiss the Company’s claim and denied the Company’s motion for re-argument of that decision. On June 23, 2015, the Company filed a new summons and complaint against Tyco in the Supreme Court of the State of New York, County of New York alleging that Tyco breached the settlement agreement. In September 2015, Tyco filed a motion to dismiss the complaint, which the Company opposed. Oral
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.
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, 2018 and 2017, the Company’s accrued expenses included $43.9 million and $43.5 million, respectively, for these regulatory fees for the years covered by the audit and subsequent years. Purchase Commitments The Company had purchase commitments of $56.9 million at July 31, 2018, including the aggregate commitment of $55.4 million under the Reciprocal Services Agreement described below. Reciprocal Services Agreement In August 2017, the Company entered into a Reciprocal Services Agreement with a telecom operator in Central America for a full range of services, including, but not limited to, termination of inbound and outbound international long-distance voice calls. The Company has committed to pay such telecom operator monthly committed amounts during the term of the agreement. In addition, under certain limited circumstances, the parties may renegotiate the amount of the monthly payments. In the event the parties do not agree on re-pricing terms after good faith negotiations, then either party has the right to terminate the agreement. Pursuant to the agreement, 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,
Rental expense under operating leases was
Performance Bonds IDT Payment Services and IDT Telecom have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively. At July 31,
Two customers of the
The Company
Rafael Spin-Off. IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $0.2 million in fiscal 2018 for services provided subsequent to the Rafael Spin-Off. In addition, subsequent to the Rafael Spin-Off, the Company collected cash of $0.3 million on behalf of Rafael, primarily from Rafael’s third-party tenants, while Rafael was in the process of changing its billing and collection systems. At July 31, 2018, the Company owed Rafael $0.4 million for cash collected in excess of services rendered. At July 31, 2018, the Company held 25,803 shares of Rafael Class B common stock (see Note The Company provides 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 and 2017, other current assets reported in the Company’s consolidated balance sheet included receivable from Rafael Pharma of $1.0 million and $0.6 million, respectively.
The Company entered into various agreements with Zedge prior to the Zedge Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for
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 At July 31, 2018 and 2017, the Company held 42,282 and 23,227 shares, respectively, of Zedge Class B common stock (see Note 5).
The Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including (1) a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with Straight Path after the spin-off, and (2) a Tax Separation Agreement, which sets forth the responsibilities of the Company and Straight Path with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such The Separation and Distribution Agreement
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.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In July 2015, the Company received 64,624 shares of Straight Path Class B common stock in connection with the lapsing of restrictions on awards of Straight Path restricted stock to certain of the Company’s employees and the payment of taxes related 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 10). In addition, on July 5, 2017, plaintiff JDS1, LLC, on behalf of itself and all other similarly situated stockholders of Straight Path, and derivatively on behalf of Straight Path as nominal defendant, filed a putative class action and derivative complaint in the Delaware Chancery Court against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas 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 (see Note 20).
On October 28, 2011, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary, Genie Energy Ltd. (“Genie”), to the Company’s stockholders of record as of the close of business on October 21, 2011 (the “Genie Spin-Off”). The Company entered into various agreements with Genie prior to the Genie Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with Genie after the spin-off, and a Transition Services Agreement, which provides for certain services to be performed by the Company and Genie to facilitate Genie’s transition into a separate publicly-traded company. These agreements provide for, among other things, (1) the allocation between the Company and Genie of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the spin-off, (2) transitional services to be provided by the Company relating to human resources and employee benefits administration, (3) the allocation of responsibilities relating to employee compensation and benefit plans and programs and other related matters, (4)
Pursuant to the Separation and Distribution Agreement, the Company indemnifies Genie and Genie indemnifies the Company for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, the Company indemnifies Genie from all liability for the Company’s taxes with respect to any taxable period, and Genie indemnifies the Company from all liability for taxes of Genie and its subsidiaries with respect to any taxable period, including, without limitation, the ongoing tax audits related to Genie’s business.
The Company charged Genie
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 $17,000, $22,000
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 2018, $24,000 in fiscal 2017, and $22,000 in fiscal 2016,
Mason and Company Consulting, LLC (“Mason and Co.”), a company owned solely by Jonathan Mason, receives an annual fee for the insurance brokerage referral and placement of the Company’s health benefit plan with Brown & Brown Metro, Inc. Based on information the Company received from Jonathan Mason, the Company believes that Mason and Co. received from Brown & Brown Metro, Inc. commissions and fees from payments made by the Company in the amount of $22,000 in fiscal 2018, $22,000 in fiscal 2017, and $24,000 in fiscal
Since August 2009, IDT Domestic Telecom, Inc., a subsidiary of the Company, has leased space in a building in the Bronx, New York. Howard S. Jonas and Shmuel Jonas, the Company’s Chief Executive Officer, and the son of Howard S. Jonas, are members of the limited liability company that owns the building. The latest lease, which became effective November 1, 2012, had a one-year term with a one-year renewal
The Company had net loans receivable outstanding from employees aggregating $0.2 million and
Note 21—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
Note 22—Business Segment Information
The Company has two reportable business segments, Telecom
The Telecom Beginning in the first quarter of fiscal 2018, the Telecom & Payment Services segment includes Consumer Phone Services, IDT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Operating segments that are not reportable individually are included in All Corporate costs include
The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations. IDT Telecom depreciation and amortization are allocated to Telecom
Operating results for the business segments of the Company were as follows:
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.
The Company’s revenue from external customers for each service was as follows:
Geographic Information Revenue from customers located outside of the United States as a percentage of total revenues from continuing operations and revenue from customers located in the United Kingdom as a percentage of total revenues from continuing operations were as follows. Revenues by country are determined based on selling location.
Net long-lived assets and total assets held outside of the United States, which are located primarily in Western Europe, were as follows:
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 23—Subsequent Event On September 14, 2018, the Company purchased Versature Corp., a software as a service (“SaaS”) business communications solutions and hosted voice over Internet Protocol (“VoIP”) provider serving the Canadian market, for cash of $6.9 million. Note 24—Selected Quarterly Financial Data (Unaudited)
The table below presents selected quarterly financial data of the Company for its fiscal quarters in fiscal
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||