Idt Corp 10-Q for FY2020 Q3
Idt Corp (IDT)
About this 10-Q
Idt Corp filed this 10-Q on June 9, 2020, covering the quarter ended April 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended April 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $321.34M
- down 5.8% from $341.26M a year earlier
- Net income
- $518K
- down 76.1% from net income of $2.17M a year earlier
- Diluted EPS
- $0.02
- down 75.0% from $0.08 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-16371
IDT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 22-3415036 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| 520 Broad Street, Newark, New Jersey | 07102 | |
| (Address of principal executive offices) | (Zip Code) |
(973) 438-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
| Class B common stock, par value $.01 per share | New York Stock Exchange |
| Trading symbol: IDT |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):Yes ☐ No ☒
As of June 4, 2020, the registrant had the following shares outstanding:
Class A common stock, $.01 par value: 1,574,326 shares outstanding (excluding 1,698,000 treasury shares)
Class B common stock, $.01 par value: 24,974,837 shares outstanding (excluding 985,770 treasury shares)
IDT CORPORATION
TABLE OF CONTENTS
i
| Item 1. | Financial Statements (Unaudited) |
IDT
CORPORATION
CONSOLIDATED BALANCE SHEETS
April 30, | July 31, | |||||||
| (Unaudited) | (Note 1) | |||||||
| (in thousands) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 51,786 | $ | 80,168 | ||||
| Restricted cash and cash equivalents | 114,667 | 177,031 | ||||||
| Debt securities | 12,948 | 2,534 | ||||||
| Equity investments | 5,716 | 5,688 | ||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $6,286 at April 30, 2020 and $5,444 at July 31, 2019 | 47,400 | 58,060 | ||||||
| Prepaid expenses | 32,713 | 20,276 | ||||||
| Other current assets | 26,686 | 24,704 | ||||||
| Total current assets | 291,916 | 368,461 | ||||||
| Property, plant and equipment, net | 30,436 | 34,355 | ||||||
| Goodwill | 12,566 | 11,209 | ||||||
| Other intangibles, net | 3,913 | 4,196 | ||||||
| Equity investments | 8,569 | 9,319 | ||||||
| Operating lease right-of-use assets | 10,307 | — | ||||||
| Deferred income tax assets, net | 1,795 | 4,589 | ||||||
| Other assets | 12,108 | 11,574 | ||||||
| Total assets | $ | 371,610 | $ | 443,703 | ||||
| Liabilities and equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | 27,738 | $ | 37,077 | ||||
| Accrued expenses | 118,065 | 127,834 | ||||||
| Deferred revenue | 37,808 | 42,479 | ||||||
| Customer deposits | 114,061 | 175,028 | ||||||
| Other current liabilities | 10,860 | 6,652 | ||||||
| Total current liabilities | 308,532 | 389,070 | ||||||
| Operating lease liabilities | 8,109 | — | ||||||
| Other liabilities | 1,366 | 1,076 | ||||||
| Total liabilities | 318,007 | 390,146 | ||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| IDT Corporation stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value; authorized shares—10,000; no shares issued | — | — | ||||||
| Class A common stock, $.01 par value; authorized shares—35,000; 3,272 shares issued and 1,574 shares outstanding at April 30, 2020 and July 31, 2019 | 33 | 33 | ||||||
| Class B common stock, $.01 par value; authorized shares—200,000; 25,961 and 25,803 shares issued and 24,975 and 24,895 shares outstanding at April 30, 2020 and July 31, 2019, respectively | 260 | 258 | ||||||
| Additional paid-in capital | 276,928 | 273,313 | ||||||
| Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 986 and 908 shares of Class B common stock at April 30, 2020 and July 31, 2019, respectively | (52,217 | ) | (51,739 | ) | ||||
| Accumulated other comprehensive loss | (7,138 | ) | (4,858 | ) | ||||
| Accumulated deficit | (160,826 | ) | (160,763 | ) | ||||
| Total IDT Corporation stockholders’ equity | 57,040 | 56,244 | ||||||
| Noncontrolling interests | (3,437 | ) | (2,687 | ) | ||||
| Total equity | 53,603 | 53,557 | ||||||
| Total liabilities and equity | $ | 371,610 | $ | 443,703 | ||||
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Revenues | $ | 321,336 | $ | 341,255 | $ | 985,425 | $ | 1,053,044 | ||||||||
| Costs and expenses: | ||||||||||||||||
| Direct cost of revenues (exclusive of depreciation and amortization) | 258,839 | 282,791 | 801,016 | 878,661 | ||||||||||||
| Selling, general and administrative (i) | 52,630 | 49,518 | 159,853 | 150,970 | ||||||||||||
| Depreciation and amortization | 5,239 | 5,524 | 15,718 | 16,881 | ||||||||||||
| Severance | 602 | 553 | 1,714 | 553 | ||||||||||||
| Total costs and expenses | 317,310 | 338,386 | 978,301 | 1,047,065 | ||||||||||||
| Other operating expense, net (see Note 9) | (234 | ) | (2,420 | ) | (3,402 | ) | (5,805 | ) | ||||||||
| Income from operations | 3,792 | 449 | 3,722 | 174 | ||||||||||||
| Interest income, net | 56 | 177 | 525 | 472 | ||||||||||||
| Other (expense) income, net | (2,144 | ) | 360 | (1,360 | ) | (494 | ) | |||||||||
| Income before income taxes | 1,704 | 986 | 2,887 | 152 | ||||||||||||
| (Provision for) benefit from income taxes | (1,319 | ) | 1,471 | (3,020 | ) | (704 | ) | |||||||||
| Net income (loss) | 385 | 2,457 | (133 | ) | (552 | ) | ||||||||||
| Net loss (income) attributable to noncontrolling interests | 133 | (287 | ) | 70 | (888 | ) | ||||||||||
| Net income (loss) attributable to IDT Corporation | $ | 518 | $ | 2,170 | $ | (63 | ) | $ | (1,440 | ) | ||||||
| Earnings (loss) per share attributable to IDT Corporation common stockholders: | ||||||||||||||||
| Basic | $ | 0.02 | $ | 0.08 | $ | (0.00 | ) | $ | (0.06 | ) | ||||||
| Diluted | $ | 0.02 | $ | 0.08 | $ | (0.00 | ) | $ | (0.06 | ) | ||||||
| Weighted-average number of shares used in calculation of earnings (loss) per share: | ||||||||||||||||
| Basic | 26,371 | 26,263 | 26,323 | 24,970 | ||||||||||||
| Diluted | 26,506 | 26,263 | 26,323 | 24,970 | ||||||||||||
| (i) Stock-based compensation included in selling, general and administrative expenses | $ | 810 | $ | 332 | $ | 3,341 | $ | 1,212 | ||||||||
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net income (loss) | $ | 385 | $ | 2,457 | $ | (133 | ) | $ | (552 | ) | ||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Change in unrealized loss on available-for-sale securities | 84 | — | 84 | 1 | ||||||||||||
| Foreign currency translation adjustments | (647 | ) | (10 | ) | (2,364 | ) | 473 | |||||||||
| Other comprehensive (loss) income | (563 | ) | (10 | ) | (2,280 | ) | 474 | |||||||||
| Comprehensive (loss) income | (178 | ) | 2,447 | (2,413 | ) | (78 | ) | |||||||||
| Comprehensive loss (income) attributable to noncontrolling interests | 133 | (287 | ) | 70 | (888 | ) | ||||||||||
| Comprehensive (loss) income attributable to IDT Corporation | $ | (45 | ) | $ | 2,160 | $ | (2,343 | ) | $ | (966 | ) | |||||
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Three Months Ended April 30, 2020 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JANUARY 31, 2020 | $ | 33 | $ | 260 | $ | 276,118 | $ | (52,005 | ) | $ | (6,575 | ) | $ | (161,344 | ) | $ | (3,094 | ) | $ | 53,393 | ||||||||||||
| Repurchases of Class B common stock through repurchase program | — | — | — | (212 | ) | — | — | — | (212 | ) | ||||||||||||||||||||||
| Stock-based compensation | — | — | 810 | — | — | — | — | 810 | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (210 | ) | (210 | ) | ||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (563 | ) | — | — | (563 | ) | ||||||||||||||||||||||
| Net income | — | — | — | — | — | 518 | (133 | ) | 385 | |||||||||||||||||||||||
| BALANCE AT APRIL 30, 2020 | $ | 33 | $ | 260 | $ | 276,928 | $ | (52,217 | ) | $ | (7,138 | ) | $ | (160,826 | ) | $ | (3,437 | ) | $ | 53,603 | ||||||||||||
| Nine Months Ended April 30, 2020 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JULY 31, 2019 | $ | 33 | $ | 258 | $ | 273,313 | $ | (51,739 | ) | $ | (4,858 | ) | $ | (160,763 | ) | $ | (2.687 | ) | $ | 53,557 | ||||||||||||
| Exercise of stock options | — | — | 276 | — | — | — | — | 276 | ||||||||||||||||||||||||
| Repurchases of Class B common stock through repurchase program | — | — | — | (212 | ) | — | — | — | (212 | ) | ||||||||||||||||||||||
| Restricted Class B common stock purchased from employees | — | — | — | (266 | ) | — | — | — | (266 | ) | ||||||||||||||||||||||
| Stock-based compensation | — | 2 | 3,339 | — | — | — | — | 3,341 | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (680 | ) | (680 | ) | ||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (2,280 | ) | — | — | (2,280 | ) | ||||||||||||||||||||||
| Net loss | — | — | — | — | — | (63 | ) | (70 | ) | (133 | ) | |||||||||||||||||||||
| BALANCE AT APRIL 30, 2020 | $ | 33 | $ | 260 | $ | 276,928 | $ | (52,217 | ) | $ | (7,138 | ) | $ | (160,826 | ) | $ | (3,437 | ) | $ | 53,603 | ||||||||||||
4
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)—Continued
| Three Months Ended April 30, 2019 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JANUARY 31, 2019 | $ | 33 | $ | 256 | $ | 271,959 | $ | (51,727 | ) | $ | (4,455 | ) | $ | (166,509 | ) | $ | 503 | $ | 50,060 | |||||||||||||
| Restricted Class B common stock purchased from employees | — | — | — | (12 | ) | — | — | — | (12 | ) | ||||||||||||||||||||||
| Stock-based compensation | — | — | 332 | — | — | — | — | 332 | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (450 | ) | (450 | ) | ||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (10 | ) | — | — | (10 | ) | ||||||||||||||||||||||
| Net income | — | — | — | — | — | 2,170 | 287 | 2,457 | ||||||||||||||||||||||||
| BALANCE AT APRIL 30, 2019 | $ | 33 | $ | 256 | $ | 272,291 | $ | (51,739 | ) | $ | (4,465 | ) | $ | (164,339 | ) | $ | 340 | $ | 52,377 | |||||||||||||
| Nine Months Ended April 30, 2019 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JULY 31, 2018 | $ | 33 | $ | 256 | $ | 294,047 | $ | (85,597 | ) | $ | (4,972 | ) | $ | (173,103 | ) | $ | 639 | $ | 31,303 | |||||||||||||
| Adjustment from the adoption of change in revenue recognition | — | — | — | — | — | 9,064 | — | 9,064 | ||||||||||||||||||||||||
| Adjustment from the adoption of change in accounting for equity investments | — | — | — | — | 33 | 1,140 | — | 1,173 | ||||||||||||||||||||||||
| BALANCE AT AUGUST 1, 2018 | 33 | 256 | 294,047 | (85,597 | ) | (4,939 | ) | (162,899 | ) | 639 | 41,540 | |||||||||||||||||||||
| Repurchases of Class B common stock through repurchase program | — | — | — | (3,854 | ) | — | — | — | (3,854 | ) | ||||||||||||||||||||||
| Sale of Class B common stock to Howard S. Jonas | — | — | (22,968 | ) | 37,740 | — | — | — | 14,772 | |||||||||||||||||||||||
| Restricted Class B common stock purchased from employees | — | — | — | (28 | ) | — | — | — | (28 | ) | ||||||||||||||||||||||
| Stock-based compensation | — | — | 1,212 | — | — | — | — | 1,212 | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (1,187 | ) | (1,187 | ) | ||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 474 | — | — | 474 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (1,440 | ) | 888 | (552 | ) | ||||||||||||||||||||||
| BALANCE AT APRIL 30, 2019 | $ | 33 | $ | 256 | $ | 272,291 | $ | (51,739 | ) | $ | (4,465 | ) | $ | (164,339 | ) | $ | 340 | $ | 52,377 | |||||||||||||
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months Ended April 30, | ||||||||
| 2020 | 2019 | |||||||
| (in thousands) | ||||||||
| Operating activities | ||||||||
| Net loss | $ | (133 | ) | $ | (552 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 15,718 | 16,881 | ||||||
| Deferred income taxes | 2,912 | 699 | ||||||
| Provision for doubtful accounts receivable | 2,282 | 1,218 | ||||||
| Stock-based compensation | 3,341 | 1,212 | ||||||
| Other | 814 | (700 | ) | |||||
| Change in assets and liabilities: | ||||||||
| Trade accounts receivable | 8,374 | 14,045 | ||||||
| Prepaid expenses, other current assets and other assets | (13,080 | ) | 213 | |||||
| Trade accounts payable, accrued expenses, other current liabilities and other liabilities | (18,894 | ) | (13,032 | ) | ||||
| Customer deposits at IDT Financial Services Limited (Gibraltar-based bank) | (67,273 | ) | 33,086 | |||||
| Deferred revenue | (4,704 | ) | (5,716 | ) | ||||
| Net cash (used in) provided by operating activities | (70,643 | ) | 47,354 | |||||
| Investing activities | ||||||||
| Capital expenditures | (11,861 | ) | (13,724 | ) | ||||
| Payments for acquisitions, net of cash acquired | (450 | ) | (5,526 | ) | ||||
| Purchases of debt securities and equity investments | (14,790 | ) | (1,007 | ) | ||||
| Proceeds from maturities and sales of debt securities and redemptions of equity investments | 4,317 | 6,312 | ||||||
| Net cash used in investing activities | (22,784 | ) | (13,945 | ) | ||||
| Financing activities | ||||||||
| Distributions to noncontrolling interests | (680 | ) | (1,187 | ) | ||||
| Proceeds from sale of Class B common stock to Howard S. Jonas | — | 13,272 | ||||||
| Repayment of other liabilities. | (449 | ) | (635 | ) | ||||
| Proceeds from note payable | 10,000 | — | ||||||
| Repayment of note payable | (10,000 | ) | — | |||||
| Repayments of borrowings under revolving credit facility | (1,429 | ) | (3,000 | ) | ||||
| Proceeds from borrowings under revolving credit facility | 1,429 | 3,000 | ||||||
| Proceeds from exercise of stock options | 276 | — | ||||||
| Repurchases of Class B common stock | (478 | ) | (3,882 | ) | ||||
| Net cash (used in) provided by financing activities | (1,331 | ) | 7,568 | |||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents | 4,012 | (2,000 | ) | |||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents | (90,746 | ) | 38,977 | |||||
| Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period | 257,199 | 203,197 | ||||||
| Cash, cash equivalents, and restricted cash and cash equivalents at end of period | $ | 166,453 | $ | 242,174 | ||||
| Supplemental schedule of non-cash investing and financing activities | ||||||||
| Liabilities incurred for acquisition | $ | 375 | $ | — | ||||
| Howard S. Jonas’ advance payment used for sale of Class B common stock | $ | — | $ | 1,500 | ||||
See accompanying notes to consolidated financial statements.
6
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
The accompanying unaudited consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended April 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2020. The balance sheet at July 31, 2019 has been derived from the Company’s audited financial statements at that date but does not include all of the information and notes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2019, as filed with the U.S. Securities and Exchange Commission (“SEC”).
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2020 refers to the fiscal year ending July 31, 2020).
Note 2—Revenue Recognition
The Company earns revenue from contracts with customers, primarily through the provision of retail telecommunications and payment offerings as well as wholesale international long-distance traffic termination. The Company has two reportable business segments, Telecom & Payment Services and net2phone. The Telecom & Payment Services segment is comprised of Core and Growth verticals. Core includes BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States, Carrier Services, which provides international long-distance termination and outsourced traffic management solutions to telecoms worldwide, and Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging and data credits to mobile accounts internationally and domestically. Core also includes smaller communications and payment offerings, many in harvest mode. Growth includes National Retail Solutions, which operates a point-of-sale terminal-based network for independent retailers, BOSS Revolution Money Transfer, an international money remittance service for customers in the United States, and BOSS Revolution Mobile, a mobile virtual network operator in the United States. The net2phone segment is comprised of net2phone-Unified Communications as a Service (“UCaaS”), a unified cloud-based communications service for businesses in North and South America and certain other international markets, and net2phone-Platform Services, which provides telephony services to cable operators and other businesses by leveraging a common technology platform.
The Company’s core operations are mostly minute-based, paid-voice communications services, and revenue is primarily recognized at a point in time. Telecom & Payment Services’ growth initiatives and net2phone-UCaaS are technology-driven, synergistic businesses that leverage the Company’s core assets, and revenue, in some cases, is recognized over time. The Company’s most significant revenue streams are from BOSS Revolution Calling, Carrier Services, and Mobile Top-Up. BOSS Revolution Calling and Mobile Top-Up are sold direct-to-consumers and through distributors and retailers.
Disaggregated Revenues
The following table shows the Company’s revenues disaggregated by business segment and service offered to customers:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Core Operations: | ||||||||||||||||
| BOSS Revolution Calling | $ | 111,541 | $ | 120,455 | $ | 340,557 | $ | 366,114 | ||||||||
| Carrier Services | 87,306 | 120,955 | 302,482 | 391,073 | ||||||||||||
| Mobile Top-Up | 85,109 | 67,567 | 237,741 | 197,189 | ||||||||||||
| Other | 10,127 | 12,202 | 32,484 | 43,730 | ||||||||||||
| Growth | 14,707 | 7,659 | 34,078 | 20,531 | ||||||||||||
| Total Telecom & Payment Services | 308,790 | 328,838 | 947,342 | 1,018,637 | ||||||||||||
| net2phone-UCaaS | 8,137 | 6,651 | 23,298 | 17,483 | ||||||||||||
| net2phone-Platform Services | 4,409 | 5,766 | 14,785 | 16,924 | ||||||||||||
| Total net2phone | 12,546 | 12,417 | 38,083 | 34,407 | ||||||||||||
| Total | $ | 321,336 | $ | 341,255 | $ | 985,425 | $ | 1,053,044 | ||||||||
7
The following table shows the Company’s revenues disaggregated by geographic region, which is determined based on selling location:
| (in thousands) | Telecom & Payment Services | net2phone | Total | |||||||||
| Three Months Ended April 30, 2020 | ||||||||||||
| United States | $ | 216,310 | $ | 8,344 | $ | 224,654 | ||||||
| Outside the United States: | ||||||||||||
| United Kingdom | 26,360 | 3 | 26,363 | |||||||||
| Netherlands | 52,237 | — | 52,237 | |||||||||
| Other | 13,883 | 4,199 | 18,082 | |||||||||
| Total outside the United States | 92,480 | 4,202 | 96,682 | |||||||||
| Total | $ | 308,790 | $ | 12,546 | $ | 321,336 | ||||||
| (in thousands) | Telecom & Payment Services | net2phone | Total | |||||||||
| Three Months Ended April 30, 2019 | ||||||||||||
| United States | $ | 216,271 | $ | 8,833 | $ | 225,104 | ||||||
| Outside the United States: | ||||||||||||
| United Kingdom | 44,476 | 3 | 44,479 | |||||||||
| Netherlands | 48,817 | — | 48,817 | |||||||||
| Other | 19,274 | 3,581 | 22,855 | |||||||||
| Total outside the United States | 112,567 | 3,584 | 116,151 | |||||||||
| Total | $ | 328,838 | $ | 12,417 | $ | 341,255 | ||||||
| (in thousands) | Telecom & Payment Services | net2phone | Total | |||||||||
| Nine Months Ended April 30, 2020 | ||||||||||||
| United States | $ | 645,909 | $ | 25,452 | $ | 671,361 | ||||||
| Outside the United States: | ||||||||||||
| United Kingdom | 98,304 | 10 | 98,314 | |||||||||
| Netherlands | 156,870 | — | 156,870 | |||||||||
| Other | 46,259 | 12,621 | 58,880 | |||||||||
| Total outside the United States | 301,433 | 12,631 | 314,064 | |||||||||
| Total | $ | 947,342 | $ | 38,083 | $ | 985,425 | ||||||
| (in thousands) | Telecom & Payment Services | net2phone | Total | |||||||||
| Nine Months Ended April 30, 2019 | ||||||||||||
| United States | $ | 673,141 | $ | 24,857 | $ | 697,998 | ||||||
| Outside the United States: | ||||||||||||
| United Kingdom | 143,887 | 19 | 143,906 | |||||||||
| Netherlands | 147,796 | — | 147,796 | |||||||||
| Other | 53,813 | 9,531 | 63,344 | |||||||||
| Total outside the United States | 345,496 | 9,550 | 355,046 | |||||||||
| Total | $ | 1,018,637 | $ | 34,407 | $ | 1,053,044 | ||||||
8
Remaining Performance Obligations
The Company does not have any significant revenue from performance obligations satisfied or partially satisfied in previous reporting periods. The Company’s remaining performance obligations at April 30, 2020 had an original expected duration of one year or less.
Accounts Receivable and Contract Balances
The timing of revenue recognition may differ from the time of billing to the Company’s customers. Trade accounts receivable in the Company’s consolidated balance sheets represent unconditional rights to consideration. An entity records a contract asset when revenue is recognized in advance of the entity’s right to bill and receive consideration. The Company has not identified any contract assets.
Contract liabilities arise when the Company receives consideration or bills its customers prior to providing the goods or services promised in the contract. The primary component of the Company’s contract liability balance is the payments received for its prepaid BOSS Revolution Calling, traditional calling cards, and Mobile Top-Up services. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in the Company’s consolidated balance sheet as “Deferred revenue”.
The following table presents information about the Company’s contract liability balance:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue recognized in the period from amounts included in the contract liability balance at the beginning of the period | $ | 23,600 | $ | 25,282 | $ | 31,306 | $ | 30,363 | ||||||||
Deferred Customer Contract Acquisition and Fulfillment Costs
The Company recognizes as an asset its incremental costs of obtaining a contract with a customer that it expects to recover. The Company charges its direct costs to fulfill contracts to expense as incurred. The Company’s incremental costs of obtaining a contract with a customer are sales commissions paid to acquire customers. For Telecom & Payment Services, the Company applies the practical expedient whereby the Company primarily charges these costs to expense when incurred because the amortization period would be one year or less for the asset that would have been recognized from deferring these costs. For net2phone-UCaaS sales, employees and third parties receive commissions on sales to end users. The Company amortizes the deferred costs over the expected customer relationship period when it is expected to exceed one year.
The Company’s deferred customer contract acquisition costs were as follows:
| April 30, 2020 | July 31, 2019 | |||||||
| (in thousands) | ||||||||
| Deferred customer contract acquisition costs included in “Other current assets” | $ | 2,156 | $ | 1,474 | ||||
| Deferred customer contract acquisition costs included in “Other assets” | 2,162 | 1,716 | ||||||
| Total | $ | 4,318 | $ | 3,190 | ||||
The Company’s amortization of deferred customer contract acquisition costs during the periods were as follows:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Amortization of deferred customer contract acquisition costs | $ | 616 | $ | 466 | $ | 1,781 | $ | 1,218 | ||||||||
9
Note 3—Leases
On August 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), and the amendments thereto, related to the accounting for leases (collectively referred to as “ASC 842”). ASC 842 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on its balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Entities have the option to continue to apply historical accounting under Topic 840, the previously applicable standard, including its disclosure requirements, in comparative periods presented in the year of adoption. An entity that elects this option will recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption instead of the earliest period presented.
The Company elected to apply the optional ASC 842 transition provisions beginning on August 1, 2019. Accordingly, the Company will continue to apply Topic 840 prior to August 1, 2019, including Topic 840 disclosure requirements, in the comparative periods presented. The Company elected the package of practical expedients for all its leases that commenced before August 1, 2019. In addition, the Company elected not to apply the recognition requirements of ASC 842 for its short-term leases.
The Company’s leases primarily consist of operating leases for office space. These leases have remaining terms from one to six years. net2phone-UCaaS also has operating leases for office equipment. Certain of these leases include renewal options that may be exercised and/or options to terminate the lease. The Company has concluded that it is not reasonably certain that it would exercise the options to extend the lease or terminate the lease.
The adoption of ASC 842 resulted in the recognition of operating lease liabilities of $12.4 million and operating ROU assets of the same amount as of August 1, 2019 based on the present value of the remaining minimum rental payments associated with the Company’s leases. As the Company’s leases do not provide an implicit rate, nor is one readily available, the Company used its incremental borrowing rate based on information available at August 1, 2019 to determine the present value of its future minimum rental payments.
net2phone has equipment leases that were classified as capital leases under Topic 840 and are finance leases under ASC 842. net2phone is also the lessor in various equipment leases that were classified as sales-type capital leases under Topic 840, that are classified as sales-type finance leases under ASC 842. The assets and liabilities related to these finance leases are not material to the Company’s consolidated balance sheets.
On March 26, 2018, the Company completed a pro rata distribution of the common stock that the Company held in the Company’s former subsidiary, Rafael Holdings, Inc. (“Rafael”) to the Company’s stockholders of record as of the close of business on March 13, 2018. The Company leases office space and parking in Rafael’s building and parking garage located at 520 Broad St, Newark, New Jersey. The Company also leases office space in Israel from Rafael. The Newark lease expires in April 2025 and the Israel lease expires in July 2025. In the three months ended April 30, 2020 and 2019, the Company incurred lease costs of $0.5 million and $0.5 million, respectively, and in the nine months ended April 30, 2020 and 2019, the Company incurred lease costs of $1.4 million and $1.3 million, respectively, in connection with the Rafael leases, which is included in operating lease cost in the table below.
Supplemental disclosures related to the Company’s operating leases were as follows:
| Three Months Ended April 30, 2020 | Nine Months Ended April 30, 2020 | |||||||
| (in thousands) | ||||||||
| Operating lease cost | $ | 707 | $ | 2,130 | ||||
| Short-term lease cost | 66 | 198 | ||||||
| Total lease cost | $ | 773 | $ | 2,328 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 687 | $ | 2,056 | ||||
| April 30, 2020 | ||||
| Weighted-average remaining lease term-operating leases | 4.4 years | |||
| Weighted-average discount rate-operating leases | 3.12 | % | ||
The Company’s aggregate operating lease liability was as follows:
| April 30, 2020 | ||||
| (in thousands) | ||||
| Operating lease liabilities included in “Other current liabilities” | $ | 2,400 | ||
| Operating lease liabilities included in noncurrent liabilities | 8,109 | |||
| Total | $ | 10,509 | ||
10
Future minimum maturities of operating lease liabilities were as follows:
| Twelve-month period ending April 30, | ||||
| (in thousands) | ||||
| 2021 | $ | 2,691 | ||
| 2022 | 2,566 | |||
| 2023 | 2,237 | |||
| 2024 | 1,861 | |||
| 2025 | 1,896 | |||
| Thereafter | 41 | |||
| Total lease payments | 11,292 | |||
| Less imputed interest | (783 | ) | ||
| Total operating lease liabilities | $ | 10,509 | ||
Note 4—Cash, Cash Equivalents, and Restricted Cash and Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported in the consolidated balance sheet that equals the total of the same amounts reported in the consolidated statement of cash flows:
| April 30, 2020 | July 31, 2019 | |||||||
| (in thousands) | ||||||||
| Cash and cash equivalents | $ | 51,786 | $ | 80,168 | ||||
| Restricted cash and cash equivalents | 114,667 | 177,031 | ||||||
| Total cash, cash equivalents, and restricted cash and cash equivalents | $ | 166,453 | $ | 257,199 | ||||
At April 30, 2020 and July 31, 2019, restricted cash and cash equivalents included $114.6 million and $176.8 million, respectively, in restricted cash and cash equivalents held by IDT Financial Services Limited, the Company’s Gibraltar-based bank.
Note 5—Debt Securities
The following is a summary of available-for-sale debt securities:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| April 30, 2020: | ||||||||||||||||
| Certificates of deposit* | $ | 12,864 | $ | 85 | $ | (1 | ) | $ | 12,948 | |||||||
| July 31, 2019: | ||||||||||||||||
| Certificates of deposit* | $ | 2,234 | $ | — | $ | — | $ | 2,234 | ||||||||
| Municipal bonds | 300 | — | — | 300 | ||||||||||||
| Total | $ | 2,534 | $ | — | $ | — | $ | 2,534 | ||||||||
| * | Each of the Company’s certificates of deposit has a CUSIP, was purchased in the secondary market through a broker, and may be sold in the secondary market. |
Proceeds from maturities and sales of debt securities and redemptions of equity investments were $1.6 million and $0.8 million in the three months ended April 30, 2020 and 2019, respectively, and $4.3 million and $6.3 million in the nine months ended April 30, 2020 and 2019, respectively. There were no realized gains or realized losses from sales of debt securities in the three and nine months ended April 30, 2020 and 2019. The Company uses the specific identification method in computing the realized gains and realized losses on the sales of debt securities.
11
The contractual maturities of the Company’s available-for-sale debt securities at April 30, 2020 were as follows:
| Fair Value | ||||
| (in thousands) | ||||
| Within one year | $ | 11,728 | ||
| After one year through five years | 1,220 | |||
| After five years through ten years | — | |||
| After ten years | — | |||
| Total | $ | 12,948 | ||
The following available-for-sale debt securities were in an unrealized loss position for which other-than-temporary impairments have not been recognized:
| Unrealized Losses | Fair Value | |||||||
| (in thousands) | ||||||||
| April 30, 2020: | ||||||||
| Certificates of deposit | $ | 1 | $ | 384 | ||||
| July 31, 2019: | ||||||||
| Total | $ | — | $ | — | ||||
At April 30, 2020 and July 31, 2019, there were no securities in a continuous unrealized loss position for 12 months or longer.
Note 6—Equity Investments
Equity investments consist of the following:
| April 30, 2020 | July 31, 2019 | |||||||
| (in thousands) | ||||||||
| Zedge, Inc. Class B common stock, 42,282 shares at April 30, 2020 and July 31, 2019 | $ | 47 | $ | 68 | ||||
| Rafael Holdings, Inc. Class B common stock, 27,419 shares at April 30, 2020 and July 31, 2019 | 387 | 567 | ||||||
| Mutual funds | 5,282 | 5,053 | ||||||
| Current equity investments | $ | 5,716 | $ | 5,688 | ||||
| Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”) | $ | 3,633 | $ | 3,619 | ||||
| Hedge funds | 4,711 | 5,475 | ||||||
| Other | 225 | 225 | ||||||
| Noncurrent equity investments | $ | 8,569 | $ | 9,319 | ||||
On June 1, 2016, the Company completed a pro rata distribution of the common stock that the Company held in the Company’s subsidiary Zedge, Inc. to the Company’s stockholders of record as of the close of business on May 26, 2016. The Company received Zedge and Rafael shares in connection with the lapsing of restrictions on Zedge and Rafael restricted stock held by certain of the Company’s employees and the Company’s payment of taxes related thereto.
In June 2016, upon the acquisition of Visa Europe Limited by Visa, Inc., IDT Financial Services Limited received 1,830 shares of Visa Series C Preferred among other consideration. Each share of Visa Series C Preferred is convertible into 13.884 shares of Visa Class A common stock, subject to certain conditions, starting in June 2020 and will be convertible at the holder’s option beginning in June 2028.
12
The changes in the carrying value of the Company’s equity investments without readily determinable fair values for which the Company elected the measurement alternative was as follows:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance, beginning of period | $ | 4,345 | $ | 3,045 | $ | 3,919 | $ | 1,883 | ||||||||
| Adoption of change in accounting for equity investments | — | — | — | 1,213 | ||||||||||||
| Adjusted balance | 4,345 | 3,045 | 3,919 | 3,096 | ||||||||||||
| Adjustment for observable transactions involving a similar investment from the same issuer | (412 | ) | 599 | 14 | 550 | |||||||||||
| Redemptions | — | — | — | (2 | ) | |||||||||||
| Impairments | — | — | — | — | ||||||||||||
| Balance, end of the period | $ | 3,933 | $ | 3,644 | $ | 3,933 | $ | 3,644 | ||||||||
The Company decreased the carrying value of the 1,830 shares of Visa Series C Preferred it held by $0.4 million in the three months ended April 30, 2020, and increased the carrying value by $0.6 million in the three months ended April 30, 2019, and by $14,000 and $0.6 million in the nine months ended April 30, 2020 and 2019, respectively, based on the fair value of Visa Class A common stock and a discount for lack of current marketability.
Unrealized gains and losses for all equity investments included the following:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net (losses) gains recognized during the period on equity investments | $ | (1,226 | ) | $ | 623 | $ | (817 | ) | $ | 704 | ||||||
| Less: net gains and losses recognized during the period on equity investments redeemed during the period | — | — | — | — | ||||||||||||
| Unrealized (losses) gains recognized during the period on equity investments still held at the reporting date | $ | (1,226 | ) | $ | 623 | $ | (817 | ) | $ | 704 | ||||||
Note 7—Fair Value Measurements
The following tables present the balance of assets and liabilities measured at fair value on a recurring basis:
| Level 1 (1) | Level 2 (2) | Level 3 (3) | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| April 30, 2020 | ||||||||||||||||
| Debt securities | $ | — | $ | 12,948 | $ | — | $ | 12,948 | ||||||||
| Equity investments included in current assets | 5,716 | — | — | 5,716 | ||||||||||||
| Equity investments included in noncurrent assets | — | — | 3,633 | 3,633 | ||||||||||||
| Total | $ | 5,716 | $ | 12,948 | $ | 3,633 | $ | 22,297 | ||||||||
| Contingent consideration included in other noncurrent liabilities (see Note 8) | $ | — | $ | — | $ | 365 | $ | 365 | ||||||||
| July 31, 2019 | ||||||||||||||||
| Debt securities | $ | — | $ | 2,534 | $ | — | $ | 2,534 | ||||||||
| Equity investments included in current assets | 5,688 | — | — | 5,688 | ||||||||||||
| Equity investments included in noncurrent assets | — | — | 3,619 | 3,619 | ||||||||||||
| Total | $ | 5,688 | $ | 2,534 | $ | 3,619 | $ | 11,841 | ||||||||
(1) – quoted prices in active markets for identical assets or liabilities
(2) – observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) – no observable pricing inputs in the market
At July 31, 2019, the Company did not have any liabilities measured at fair value on a recurring basis.
At April 30, 2020 and July 31, 2019, the Company had $4.7 million and $5.5 million, respectively, in investments in hedge funds, which were included in noncurrent “Equity investments” in the accompanying consolidated balance sheets. The Company’s investments in hedge funds were accounted for using the equity method, therefore they were not measured at fair value.
13
The following table summarizes the change in the balance of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance, beginning of period | $ | 4,045 | $ | 2,745 | $ | 3,619 | $ | — | ||||||||
| Transfer into Level 3 from adoption of change in accounting for equity investments | — | — | — | 2,794 | ||||||||||||
| Total (losses) gains recognized in “Other (expense) income, net” | (412 | ) | 599 | 14 | 550 | |||||||||||
| Balance, end of period | $ | 3,633 | $ | 3,344 | $ | 3,633 | $ | 3,344 | ||||||||
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period | $ | (412 | ) | $ | 599 | $ | 14 | $ | 550 | |||||||
The following table summarizes the change in the balance of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) in the three and nine months ended April 30, 2019.
Three Months Ended | Nine Months Ended April 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance, beginning of period | $ | 370 | $ | — | $ | — | $ | — | ||||||||
| Transfer into Level 3 from acquisition (see Note 8) | — | — | 375 | — | ||||||||||||
| Total losses recognized in “Foreign currency translation adjustments” | (5 | ) | — | (10 | ) | — | ||||||||||
| Balance, end of period | $ | 365 | $ | — | $ | 365 | $ | — | ||||||||
| Change in unrealized gains or losses for the period included in earnings for liabilities held at the end of the period | $ | — | $ | — | $ | — | $ | — | ||||||||
Fair Value of Other Financial Instruments
The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
Cash and cash equivalents, restricted cash and cash equivalents, other current assets, customer deposits, and other current liabilities. At April 30, 2020 and July 31, 2019, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash, cash equivalents and restricted cash and cash equivalents were classified as Level 1 and other current assets, customer deposits, and other current liabilities were classified as Level 2 of the fair value hierarchy.
Other assets and other liabilities. At April 30, 2020 and July 31, 2019, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.
Note 8—Acquisitions
Ringsouth Europa, S.L.
On December 11, 2019, the Company’s subsidiary, net2phone, Inc. acquired 100% of the outstanding shares of Ringsouth Europa, S.L. (“Ringsouth”), a business communications provider headquartered in Murcia, Spain. The acquisition expands net2phone’s business into Spain. Ringsouth’s operating results from the date of acquisition, which were not significant, are included in the Company’s consolidated financial statements.
The acquisition date fair value of the consideration consisted of the following (in thousands):
| Cash paid | $ | 450 | ||
| Contingent consideration | 375 | |||
| Total fair value of consideration | $ | 825 |
The contingent consideration includes two potential payments to the seller of $0.4 million each, based on monthly recurring revenue targets to be achieved over a 36-month period and 48-month period. The second potential payment is not contingent upon meeting the target for the first payment. The fair value of the contingent consideration was estimated using discounted cash flow models and Monte Carlo simulations. This fair value measurement was based on significant inputs not observable in the market and therefore represents a Level 3 measurement. There was no change in the estimated fair value of the contingent consideration in the period from the acquisition date to April 30, 2020, although the balance changed due to foreign currency translation adjustments.
14
The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet was as follows (in thousands):
| Trade accounts receivable | $ | 142 | ||
| Other current assets | 21 | |||
| Property, plant and equipment | 84 | |||
| Goodwill | 1,437 | |||
| Non-compete agreement (4-year useful life) | 50 | |||
| Customer relationships (7-year useful life) | 130 | |||
| Tradename (2-year useful life) | 30 | |||
| Deferred income tax assets | 118 | |||
| Other assets | 10 | |||
| Trade accounts payable | (302 | ) | ||
| Accrued expenses | (136 | ) | ||
| Other current liabilities | (408 | ) | ||
| Other liabilities | (351 | ) | ||
| Net assets acquired | $ | 825 |
The goodwill was assigned to the net2phone segment and was attributable primarily to Ringsouth’s assembled workforce and expected synergies from the business combination. The goodwill is expected to be deductible for income tax purposes.
The Company’s pro forma results of operations as if the Ringsouth acquisition occurred on August 1, 2018 were not materially different from the actual results of operations.
Versature Corp.
On September 14, 2018, the Company acquired 100% of the outstanding shares of Versature Corp., a UCaaS provider serving the Canadian market, for cash of $5.9 million. Versature’s operating results from the date of acquisition, which were not significant, are included in the Company’s consolidated financial statements.
The Company’s pro forma results of operations as if the Versature acquisition occurred on August 1, 2018 were not materially different from the actual results of operations.
Note 9—Other Operating Expense, Net
The following table summarizes the other operating expense, net by business segment:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Corporate—Straight Path Communications Inc. class action legal fees net of insurance proceeds | $ | 152 | $ | (120 | ) | $ | (269 | ) | $ | (645 | ) | |||||
| net2phone—indemnification claim | (386 | ) | — | (920 | ) | — | ||||||||||
| net2phone—other, net | — | — | (63 | ) | 25 | |||||||||||
| Telecom & Payment Services—accrual for non-income related taxes related to a foreign subsidiary | — | (2,300 | ) | (2,150 | ) | (5,400 | ) | |||||||||
| Telecom & Payment Services—gain on sale of calling card business in Asia | — | — | — | 215 | ||||||||||||
| Total other operating expense, net | $ | (234 | ) | $ | (2,420 | ) | $ | (3,402 | ) | $ | (5,805 | ) | ||||
15
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. As discussed in Note 15, a putative class action on behalf of Straight Path’s stockholders and derivative complaint was filed naming the Company, among others. The Company incurred legal fees of $1.2 million and $0.1 million in the three months ended April 30, 2020 and 2019, respectively, and $2.5 million and $0.6 million in the nine months ended April 30, 2020 and 2019, respectively, related to this action. Also, in the three and nine months ended April 30, 2020, the Company recorded a gain from insurance proceeds for this matter of $1.4 million and $2.2 million, respectively.
Indemnification Claim
In June 2019, as part of a commercial resolution, the Company indemnified a net2phone cable telephony customer related to patent infringement claims brought against the customer.
Accrual for Non-Income Related Taxes
In the fourth quarter of fiscal 2019, the Company recorded an $8.0 million accrual for non-income related taxes related to one of its foreign subsidiaries. A portion of the accrual related to each of the fiscal quarters in fiscal 2019. Accordingly, the Company corrected its consolidated financial statements for the three months ended October 31, 2018, January 31, 2019, and April 30, 2019 to include the accrued expense and the related income tax benefit. The Company has determined that the adjustments were not material to its previously issued quarterly financial statements. The impact of the correction on the Company’s previously issued consolidated financial statements for the three and nine months ended April 30, 2019 was as follows:
| Three Months Ended April 30, 2019 | ||||||||||||
| Previously Reported | Error Correction | As Adjusted | ||||||||||
| (in thousands, except per share data) | ||||||||||||
| Consolidated Statement of Operations: | ||||||||||||
| Other operating expense, net | $ | (120 | ) | $ | (2,300 | ) | $ | (2,420 | ) | |||
| Benefit from income taxes | $ | 871 | $ | 600 | $ | 1,471 | ||||||
| Net income | $ | 4,157 | $ | (1,700 | ) | $ | 2,457 | |||||
| Net income attributable to IDT Corporation | $ | 3,870 | $ | (1,700 | ) | $ | 2,170 | |||||
| Earnings per share attributable to IDT Corporation common stockholders: | ||||||||||||
| Basic | $ | 0.15 | $ | (0.07 | ) | $ | 0.08 | |||||
| Diluted | $ | 0.15 | $ | (0.07 | ) | $ | 0.08 | |||||
| Nine Months Ended April 30, 2019 | ||||||||||||
Previously Reported | Error Correction | As Adjusted | ||||||||||
| (in thousands, except per share data) | ||||||||||||
| Consolidated Statement of Operations: | ||||||||||||
| Other operating expense, net | $ | (405 | ) | $ | (5,400 | ) | $ | (5,805 | ) | |||
| Provision for income taxes | $ | (2,054 | ) | $ | 1,350 | $ | (704 | ) | ||||
| Net income (loss) | $ | 3,498 | $ | (4,050 | ) | $ | (552 | ) | ||||
| Net income (loss) attributable to IDT Corporation | $ | 2,610 | $ | (4,050 | ) | $ | (1,440 | ) | ||||
| Earnings (loss) per share attributable to IDT Corporation common stockholders: | ||||||||||||
| Basic | $ | 0.10 | $ | (0.16 | ) | $ | (0.06 | ) | ||||
| Diluted | $ | 0.10 | $ | (0.16 | ) | $ | (0.06 | ) | ||||
16
Note 10—Equity
Stock Repurchases
The Company has an existing stock repurchase program authorized by its Board of Directors for the repurchase of shares of the Company’s Class B common stock. The Board of Directors authorized the repurchase of up to 8.0 million shares in the aggregate. In the nine months ended April 30, 2020, the Company repurchased 40,763 shares of Class B common stock for an aggregate purchase price of $0.2 million. In the nine months ended April 30, 2019, the Company repurchased 729,110 shares of Class B common stock for an aggregate purchase price of $3.9 million. At April 30, 2020, 6.9 million shares remained available for repurchase under the stock repurchase program.
In the nine months ended April 30, 2020 and 2019, the Company paid $0.3 million and $28,000, respectively, to repurchase 37,348 and 3,748 shares, respectively, of the Company’s Class B common stock that were tendered by employees of the Company to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of deferred stock units (“DSUs”) and restricted stock. Such shares were repurchased by the Company based on their fair market value on the trading day immediately prior to the vesting date.
Deferred Stock Units Equity Incentive Program
The Company has an existing equity incentive program in the form of DSUs that, upon vesting, will entitle the grantees to receive shares of the Company’s Class B common stock. On January 6, 2020, the first vesting date under the program, in accordance with the program and based on certain elections made by grantees, the Company issued 100,284 shares of its Class B common stock for vested DSUs. Based on those elections, vesting for 38,024 DSUs was delayed until January 5, 2021. At April 30, 2020, there were 314,516 unvested DSUs outstanding.
2015 Stock Option and Incentive Plan
In the nine months ended April 30, 2020, the Company received proceeds from the exercise of stock options of $0.3 million for which the Company issued 32,551 shares of its Class B common stock. There were no stock option exercises in the nine months ended April 30, 2019.
On December 12, 2019, the Company’s stockholders approved an amendment to the Company’s 2015 Stock Option and Incentive Plan to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 0.4 million shares. At April 30, 2020, the Company had 0.6 million shares available for future grants under its 2015 Stock Option and Incentive Plan.
Fiscal 2019 Sale of Class B Common Stock to Howard S. Jonas
On December 21, 2018, the Company sold 2,546,689 shares of its Class B common stock that were held in treasury to Howard S. Jonas, the Chairman of the Board of the Company, for aggregate consideration of $14.8 million. The price per share of $5.89 was equal to the closing price of the Company’s Class B common stock on April 16, 2018, the last closing price before approval of the sale by the Company’s Board of Directors and its Corporate Governance Committee. On May 31, 2018, Mr. Jonas paid $1.5 million of the purchase price, and he paid the balance of the purchase price on December 21, 2018 after approval of the sale by the Company’s stockholders at the 2018 annual meeting of stockholders. The purchase price was reduced by approximately $0.2 million, which was the amount of dividends paid on 2,546,689 shares of the Company’s Class B common stock whose record date was between April 16, 2018 and the issuance of the shares.
Note 11—Earnings (Loss) Per Share
Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.
The weighted-average number of shares used in the calculation of basic and diluted earnings (loss) per share attributable to the Company’s common stockholders consists of the following:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Basic weighted-average number of shares | 26,371 | 26,263 | 26,323 | 24,970 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options | — | — | — | — | ||||||||||||
| Non-vested restricted Class B common stock | 135 | — | — | — | ||||||||||||
| Diluted weighted-average number of shares | 26,506 | 26,263 | 26,323 | 24,970 | ||||||||||||
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The following shares were excluded from the diluted loss per share computations:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Stock options | 1,126 | 1,223 | 1,126 | 1,223 | ||||||||||||
| Non-vested restricted Class B common stock | — | — | 520 | 16 | ||||||||||||
| Shares excluded from the calculation of diluted earnings per share | 1,126 | 1,223 | 1,646 | 1,239 | ||||||||||||
In the three months ended April 30, 2020 and 2019, stock options with an exercise price that was greater than the average market price of the Company’s stock during the period were excluded from the diluted earnings per share computation. The diluted loss per share equals basic loss per share in the nine months ended April 30, 2020 and 2019 because the Company had a net loss and the impact of the assumed exercise of stock options and the vesting of restricted stock would have been anti-dilutive.
Note 12—Note Payable and Revolving Credit Loan Payable
Note Payable
On April 20, 2020, IDT Domestic Telecom, Inc. (“IDT DT”), a subsidiary of the Company, received loan proceeds of $10.0 million (the “PPP Loan”) from TD Bank, N.A, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. On April 29, 2020, IDT DT returned all $10.0 million in proceeds from the PPP Loan. In light of the oversubscription of applications for loans under the PPP, and despite IDT DT’s need for the funds to support its operations, IDT DT returned the loan proceeds in order to make those funds available to other borrowers that may be in greater need than IDT DT.
Revolving Credit Loan Payable
As of October 31, 2019, the Company’s subsidiary, IDT Telecom, Inc., entered into a credit agreement 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 other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum at the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 125 basis points. Interest is payable monthly, and all outstanding principal and any accrued and unpaid interest is due on the maturity date of July 15, 2020. At April 30, 2020, there was no amount outstanding under the facility. IDT Telecom pays a quarterly unused commitment fee of 0.3% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT 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 facility, including IDT Telecom may not pay any dividend on its capital stock.
Note 13—Accumulated Other Comprehensive Loss
The accumulated balances for each classification of other comprehensive loss were as follows:
| Unrealized Gain (Loss) on Available-for- Sale Securities | Foreign Currency Translation | Accumulated Other Comprehensive Loss | ||||||||||
| (in thousands) | ||||||||||||
| Balance, July 31, 2019 | $ | — | $ | (4,858 | ) | $ | (4,858 | ) | ||||
| Other comprehensive income (loss) attributable to IDT Corporation | 84 | (2,364 | ) | (2,280 | ) | |||||||
| Balance, April 30, 2020 | $ | 84 | $ | (7,222 | ) | $ | (7,138 | ) | ||||
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Note 14—Business Segment Information
The Company has two reportable business segments, Telecom & Payment Services and net2phone. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations.
The Telecom & Payment Services segment provides retail telecommunications and payment offerings as well as wholesale international long-distance traffic termination. The net2phone segment provides unified cloud communications and telephony services to business customers. Depreciation and amortization are allocated to Telecom & Payment Services and net2phone because the related assets are not tracked separately by segment. There are no other significant asymmetrical allocations to segments.
Corporate costs include compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, charitable contributions, travel, and other corporate-related general and administrative expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
Operating results for the business segments of the Company are as follows:
| (in thousands) | Telecom & Payment Services | net2phone | Corporate | Total | ||||||||||||
| Three Months Ended April 30, 2020 | ||||||||||||||||
| Revenues | $ | 308,790 | $ | 12,546 | $ | — | $ | 321,336 | ||||||||
| Income (loss) from operations | 9,934 | (3,932 | ) | (2,210 | ) | 3,792 | ||||||||||
| Other operating expense, net | — | (386 | ) | 152 | (234 | ) | ||||||||||
| Three Months Ended April 30, 2019 | ||||||||||||||||
| Revenues | $ | 328,838 | $ | 12,417 | $ | — | $ | 341,255 | ||||||||
| Income (loss) from operations | 4,245 | (1,266 | ) | (2,530 | ) | 449 | ||||||||||
| Other operating expense, net | (2,300 | ) | — | (120 | ) | (2,420 | ) | |||||||||
| Nine Months Ended April 30, 2020 | ||||||||||||||||
| Revenues | $ | 947,342 | $ | 38,083 | $ | — | $ | 985,425 | ||||||||
| Income (loss) from operations | 21,441 | (10,512 | ) | (7,207 | ) | 3,722 | ||||||||||
| Other operating expense, net | (2,150 | ) | (983 | ) | (269 | ) | (3,402 | ) | ||||||||
| Nine Months Ended April 30, 2019 | ||||||||||||||||
| Revenues | $ | 1,018,637 | $ | 34,407 | $ | — | $ | 1,053,044 | ||||||||
| Income (loss) from operations | 12,605 | (4,663 | ) | (7,768 | ) | 174 | ||||||||||
| Other operating expense, net | (5,185 | ) | 25 | (645 | ) | (5,805 | ) | |||||||||
Note 15—Commitments and Contingencies
Coronavirus Disease (COVID-19)
During the first and second quarters of calendar 2020, the world experienced the unprecedented impacts of the coronavirus disease 2019 (COVID-19) pandemic. There are many uncertainties regarding the impacts of the COVID-19 pandemic, and the Company is monitoring those impacts on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners.
Operationally, the Company’s employees transitioned to work-from-home during the fiscal quarter. In particular, the Company’s salespeople and delivery employees continued to serve the Company’s independent retailers and channel partners with minimal interruption.
COVID-19 had a mixed financial impact on the Company during the three months ended April 30, 2020. The COVID-19 pandemic drove significant increases in demand for the Company’s consumer offerings through digital channels. Conversely, sales originating through retailers and channel partners slowed in March and April before beginning to rebound in May. COVID-19 related demand helped to boost Mobile Top-Up and BOSS Revolution Money Transfer revenues and slowed the rate of decline in BOSS Revolution Calling revenues. net2phone-UCaaS’ customer base growth slowed in the second half of the Company’s third fiscal quarter as sales became increasingly difficult as the pandemic spread in key markets. Carrier Services’ revenue was impacted by the closure of corporate offices and the decline of commerce globally.
As of the date of this filing, management believes that the Company continues to have sufficient liquidity and capital resources for the foreseeable future. Looking ahead, current economic conditions, if enduring, will create additional hardship for many of the Company’s customers. Over the longer term, sustained levels of high unemployment along with declining economic activity and less favorable foreign exchange market conditions could materially and adversely impact the Company by dampening demand for both its consumer and business-to-business offerings. The situation remains fluid and the Company cannot predict with certainty the potential impact of COVID-19 on its business, results of operations, financial condition and cash flows.
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Legal Proceedings
On April 12, 2019, Scarleth Samara filed a putative class action against IDT Telecom in the U.S. District Court for the Eastern District of Louisiana alleging certain violations of the Telephone Consumer Protection Act of 1991. Plaintiff alleges that in October of 2017, IDT Telecom sent unauthorized marketing messages to her cellphone. IDT Telecom filed a motion to compel arbitration. On or about August 19, 2019, the plaintiff agreed to dismiss the pending court action and the parties intend to proceed with arbitration. At this stage, the Company is unable to estimate its potential liability, if any. The Company intends to vigorously defend the claim.
On January 22, 2019, Jose Rosales filed a putative class action against IDT America, IDT Domestic Telecom and IDT International in California state court alleging certain violations of employment law. Plaintiff alleges that these companies failed to compensate members of the putative class in accordance with California law. The Company is evaluating the claims, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend the claims. In August 2019, the Company filed a cross complaint against Rosales alleging trade secret and other violations.
On May 2, 2018, Jean Carlos Sanchez filed a putative class action against IDT Telecom in the U.S. District Court for the Northern District of Illinois alleging that the Company sent unauthorized marketing messages to cellphones in violation of the Telephone Consumer Protection Act of 1991. On July 26, 2018, the parties filed a stipulation of dismissal. The Company is evaluating the claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend this matter.
On April 24, 2018, Sprint Communications Company L.P. filed a patent infringement claim against the Company and certain of its affiliates in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,298,064; 6,330,224; 6,343,084; 6,452,932; 6,463,052; 6,473,429; 6,563,918; 6,633,561; 6,697,340; 6,999,463; 7,286,561; 7,324,534; 7,327,728; 7,505,454; and 7,693,131. Plaintiff was seeking damages and injunctive relief. On June 28, 2018, Sprint dismissed the complaint without prejudice. The Company is evaluating the underlying claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend any claim of infringement of the listed patents.
On July 5, 2017, plaintiff JDS1, LLC, on behalf of itself and all other similarly situated stockholders of Straight Path, and derivatively on behalf of Straight Path as nominal defendant, filed a putative class action and derivative complaint in the Court of Chancery of the State of Delaware against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas that held record and beneficial ownership of certain shares of Straight Path he formerly held), Howard S. Jonas, and each of Straight Path’s directors. The complaint alleges that the Company aided and abetted Straight Path Chairman of the Board and Chief Executive Officer Davidi Jonas, and Howard S. Jonas in his capacity as controlling stockholder of Straight Path, in breaching their fiduciary duties to Straight Path in connection with the settlement of claims between Straight Path and the Company related to potential indemnification claims concerning Straight Path’s obligations under the Consent Decree it entered into with the Federal Communications Commission (“FCC”), as well as the sale of Straight Path’s subsidiary Straight Path IP Group, Inc. to the Company in connection with that settlement. That action was consolidated with a similar action that was initiated by The Arbitrage Fund. The Plaintiffs are seeking, among other things, (i) a declaration that the action may be maintained as a class action or in the alternative, that demand on the Straight Path Board is excused; (ii) that the term sheet is invalid; (iii) awarding damages for the unfair price stockholders received in the merger between Straight Path and Verizon Communications Inc. for their shares of Straight Path’s Class B common stock; and (iv) ordering Howard S. Jonas, Davidi Jonas, and the Company to disgorge any profits for the benefit of the class Plaintiffs. On August 28, 2017, the Plaintiffs filed an amended complaint. On September 24, 2017, the Company filed a motion to dismiss the amended complaint. Following closing of the transaction, the Delaware Chancery Court denied the motion to dismiss. On February 22, 2019, the Delaware Supreme Court affirmed the denial of the motion to dismiss. The parties are engaged in discovery. The Company intends to vigorously defend this matter (see Note 9). At this stage, the Company is unable to estimate its potential liability, if any.
In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, the Company believes that none of the other legal proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.
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Sales Tax Contingency
On June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. The Company is evaluating its state tax filings with respect to the Wayfair decision and is in the process of reviewing its collection practices. It is possible that one or more jurisdictions may assert that the Company has liability for periods for which it has not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could materially and adversely affect the Company’s business, financial position and operating results. One or more jurisdictions may change their laws or policies to apply their sales, use or other similar taxes to the Company’s operations, and if such changes were made it could materially and adversely affect the Company’s business, financial position and operating results.
Regulatory Fee 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 April 30, 2020 and July 31, 2019, the Company’s accrued expenses included $40.0 million and $44.7 million, respectively, for these regulatory fees for the years covered by the audit, as well as prior and subsequent years.
Purchase Commitments
At April 30, 2020, the Company had purchase commitments of $8.7 million, including the aggregate commitment of $5.7 million under the Memorandum of Understanding (“MOU”) described below.
Telecom Services Commitments
In May 2019, the Company entered into a MOU with a telecom operator in Central America for among other things, termination of inbound and outbound international long-distance voice calls. The MOU is effective until June 30, 2020 unless superseded by the execution of a definitive agreement. The Company has committed to pay such telecom operator monthly committed amounts during the term of the MOU. The parties intend to draft and execute a definitive agreement as soon as practicable.
In August 2017, the Company entered into a Reciprocal Services Agreement, as amended, 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. This agreement was terminated on April 30, 2020. Pursuant to the agreement, the Company deposited $9.2 million into an escrow account as security for the benefit of the telecom operator, which was included in “Other current assets” in the accompanying consolidated balance sheet based on the terms and conditions of the agreement. On May 11, 2020, the $9.2 million security deposit was released from escrow and returned to the Company.
Performance Bonds
The Company has performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers. At April 30, 2020, the Company had aggregate performance bonds of $18.0 million outstanding.
Company Restricted Cash and Cash Equivalents
The Company treats unrestricted cash and cash equivalents held by IDT Payment Services, which provides the Company’s international money transfer services in the United States, as substantially restricted and unavailable for other purposes. At April 30, 2020 and July 31, 2019, “Cash and cash equivalents” in the Company’s consolidated balance sheets included an aggregate of $6.6 million and $13.2 million, respectively, held by IDT Payment Services that was unavailable for other purposes.
FCC Investigation of Straight Path Spectrum LLC
On September 20, 2016, the Company 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 the Company and Straight Path) in connection with licenses to operate on the 28 GHz and 39 GHz bands of the Fixed Microwave Services. The Company has cooperated with the FCC in this matter and has responded to the letter of inquiry. If the FCC were to pursue separate action against the Company, the FCC could seek to fine or impose regulatory penalties or civil liability on the Company related to activities during the period of ownership by the Company.
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Note 16—Other (Expense) Income, Net
Other (expense) income, net consists of the following:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Foreign currency transaction (losses) gains | $ | (774 | ) | $ | (3 | ) | $ | 175 | $ | (838 | ) | |||||
| (Loss) gain on investments | (1,226 | ) | 623 | (817 | ) | 704 | ||||||||||
| Other | (144 | ) | (260 | ) | (718 | ) | (360 | ) | ||||||||
| Total other (expense) income, net | $ | (2,144 | ) | $ | 360 | $ | (1,360 | ) | $ | (494 | ) | |||||
Note 17—Defined Contribution Plan
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. On April 23, 2020, the Company paid cash of $1.0 million for calendar year 2019 matching contributions.
Note 18—Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking current expected credit loss model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. The Company will adopt the new standard on August 1, 2023. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, that removes certain exceptions to the general principles in Topic 740, and clarifies and amends existing guidance in Topic 740. The Company will adopt the new standard on August 1, 2021. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), that clarifies the interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU affect the application of the measurement alternative for certain equity securities and the equity method of accounting, and guidance for certain forward contracts and purchased options to purchase securities, that, upon settlement or exercise, would be accounted for under the equity method of accounting. The Company will adopt the new standard on August 1, 2021. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the accompanying consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, as filed with the U.S. Securities and Exchange Commission (or SEC).
As used below, unless the context otherwise requires, the terms “the Company,” “IDT,” “we,” “us,” and “our” refer to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation, and their subsidiaries, collectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, and under Item 1A to Part II “Risk Factors” in this Quarterly Report on Form 10-Q. The forward-looking statements are made as of the date of this 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 SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues 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 assets, income taxes and regulatory agency fees, and 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. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.
Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking current expected credit loss model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. We will adopt the new standard on August 1, 2023. We are evaluating the impact that the new standard will have on our consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, that removes certain exceptions to the general principles in Topic 740, and clarifies and amends existing guidance in Topic 740. We will adopt the new standard on August 1, 2021. We are evaluating the impact that the new standard will have on our consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), that clarifies the interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU affect the application of the measurement alternative for certain equity securities and the equity method of accounting, and guidance for certain forward contracts and purchased options to purchase securities, that, upon settlement or exercise, would be accounted for under the equity method of accounting. We will adopt the new standard on August 1, 2021. We are evaluating the impact that the new standard will have on our consolidated financial statements.
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Results of Operations
Coronavirus Disease (COVID-19)
During the first and second quarters of calendar 2020, the world experienced the unprecedented impacts of the coronavirus disease 2019 (COVID-19) pandemic. There are many uncertainties regarding the impacts of the COVID-19 pandemic, and we are monitoring those impacts on all aspects of our business, including how it will impact our customers, employees, suppliers, vendors, and business partners.
Operationally, our employees transitioned to work-from-home during the fiscal quarter. In particular, our salespeople and delivery employees continued to serve our independent retailers and channel partners with minimal interruption.
COVID-19 had a mixed financial impact on us during the three months ended April 30, 2020. The COVID-19 pandemic drove significant increases in demand for our consumer offerings through digital channels. Conversely, sales originating through retailers and channel partners slowed in March and April before beginning to rebound in May. COVID-19 related demand helped to boost Mobile Top-Up and BOSS Revolution Money Transfer revenues and slowed the rate of decline in BOSS Revolution Calling revenues. net2phone-UCaaS’ customer base growth slowed in the second half of our third fiscal quarter as sales became increasingly difficult as the pandemic spread in key markets. Carrier Services’ revenue was impacted by the closure of corporate offices and the decline of commerce globally.
As of the date of this filing, management believes that we continue to have sufficient liquidity and capital resources for the foreseeable future. Looking ahead, current economic conditions, if enduring, will create additional hardship for many of our customers. Over the longer term, sustained levels of high unemployment along with declining economic activity and less favorable foreign exchange market conditions could materially and adversely impact us by dampening demand for both our consumer and business-to-business offerings. The situation remains fluid and we cannot predict with certainty the potential impact of COVID-19 on our business, results of operations, financial condition and cash flows.
Three and Nine Months Ended April 30, 2020 Compared to Three and Nine Months Ended April 30, 2019
We are a multinational company with operations primarily in the telecommunications and payment industries. We have two reportable business segments, Telecom & Payment Services and net2phone. Our Telecom & Payment Services segment provides retail telecommunications and payment offerings as well as wholesale international long-distance traffic termination. Our net2phone segment provides unified cloud communications and telephony services to business customers. 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.
Our results of operations discussion include two key performance metrics: minutes of use and direct cost of revenues as a percentage of revenues. Minutes of use is a nonfinancial metric that measures aggregate customer usage during a reporting period for our BOSS Revolution Calling and Carrier Services businesses, as well as other, smaller telephony offerings. Minutes of use represent the volume of certain of our core offerings and that volume, together with revenues and the relationship between revenues and direct cost of revenues, is an indicator of the performance of those business units. Minutes of use is an important factor in BOSS Revolution Calling and Carrier Services’ revenue recognition since satisfaction of our performance obligation occurs when the customer uses our service. Minutes of use trends and comparisons between periods are used in the analysis of revenues and direct cost of revenues. Direct cost of revenues as a percentage of revenues is a financial metric that measures changes in our direct cost of revenues relative to changes in revenues during the same period. Direct cost of revenues as a percentage of revenues is a ratio in which direct cost of revenues is the numerator and revenues are the denominator. It is useful for monitoring trends in the direct cost of revenues generation as well as for evaluating the net contribution of our revenues.
Telecom & Payment Services Segment
Telecom & Payment Services, which represented 96.1% and 96.7% of our total revenues in the nine months ended April 30, 2020 and 2019, respectively, markets and distributes the following communications and payment services:
| ● | Core includes our three largest communications and payments offerings by revenue: BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States, Carrier Services, which provides international long-distance termination and outsourced traffic management solutions to telecoms worldwide, and Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging and data credits to mobile accounts internationally and domestically. Core also includes smaller communications and payments offerings, many in harvest mode. |
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| ● | Growth comprises National Retail Solutions, which operates a point-of-sale, or POS, terminal-based network for independent retailers, BOSS Revolution Money Transfer, an international money remittance service for customers in the United States, and BOSS Revolution Mobile, a mobile virtual network operator which provides mobile phone service over a third-party network for customers in the United States. |
Our Telecom & Payment Services segment’s most significant revenue streams are from BOSS Revolution Calling, Carrier Services, and Mobile Top-Up. BOSS Revolution Calling and Mobile Top-Up are sold direct-to-consumers and through distributors and retailers. We receive payments for BOSS Revolution Calling, traditional calling cards, and Mobile Top-Up prior to providing the services. We recognize the revenue when services are provided to the customer. 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.
| Three months ended April 30, | Change | Nine
months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Revenues | $ | 308.8 | $ | 328.8 | $ | (20.0 | ) | (6.1 | )% | $ | 947.3 | $ | 1,018.6 | $ | (71.3 | ) | (7.0 | )% | ||||||||||||||
| Direct cost of revenues | 256.0 | 279.4 | (23.4 | ) | (8.4 | ) | 792.2 | 869.0 | (76.8 | ) | (8.8 | ) | ||||||||||||||||||||
| Selling, general and administrative | 39.2 | 38.1 | 1.1 | 2.7 | 120.5 | 119.4 | 1.1 | 1.0 | ||||||||||||||||||||||||
| Depreciation and amortization | 3.1 | 4.2 | (1.1 | ) | (24.4 | ) | 9.3 | 11.8 | (2.5 | ) | (21.9 | ) | ||||||||||||||||||||
| Severance | 0.6 | 0.6 | — | 8.8 | 1.7 | 0.6 | 1.1 | 209.8 | ||||||||||||||||||||||||
| Other operating expense, net | — | 2.3 | (2.3 | ) | (100.0 | ) | 2.2 | 5.2 | (3.0 | ) | (58.5 | ) | ||||||||||||||||||||
| Income from operations | $ | 9.9 | $ | 4.2 | $ | 5.7 | 134.0 | % | $ | 21.4 | $ | 12.6 | $ | 8.8 | 70.1 | % | ||||||||||||||||
Revenues. Telecom & Payment Services’ revenues and minutes of use for the three and nine months ended April 30, 2020 and 2019 consisted of the following:
| Three months ended April 30, | Change | Nine
months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2020 | 2019 | $/# | % | 2020 | 2019 | $/# | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Core Operations: | ||||||||||||||||||||||||||||||||
| BOSS Revolution Calling | $ | 111.6 | $ | 120.4 | $ | (8.8 | ) | (7.4 | )% | $ | 340.5 | $ | 366.1 | $ | (25.6 | ) | (7.0 | )% | ||||||||||||||
| Carrier Services | 87.3 | 121.0 | (33.7 | ) | (27.8 | ) | 302.5 | 391.1 | (88.6 | ) | (22.7 | ) | ||||||||||||||||||||
| Mobile Top-Up | 85.1 | 67.6 | 17.5 | 26.0 | 237.7 | 197.2 | 40.5 | 20.6 | ||||||||||||||||||||||||
| Other | 10.1 | 12.2 | (2.1 | ) | (17.0 | ) | 32.5 | 43.7 | (11.2 | ) | (25.7 | ) | ||||||||||||||||||||
| Growth | 14.7 | 7.6 | 7.1 | 92.0 | 34.1 | 20.5 | 13.6 | 66.0 | ||||||||||||||||||||||||
| Total revenues | $ | 308.8 | $ | 328.8 | $ | (20.0 | ) | (6.1 | )% | $ | 947.3 | $ | 1,018.6 | $ | (71.3 | ) | (7.0 | )% | ||||||||||||||
| Minutes of use | ||||||||||||||||||||||||||||||||
| BOSS Revolution Calling | 953 | 1,048 | (95 | ) | (9.0 | )% | 2,913 | 3,245 | (332 | ) | (10.2 | )% | ||||||||||||||||||||
| Carrier Services | 3,347 | 4,031 | (684 | ) | (17.0 | ) | 11,589 | 13,379 | (1,790 | ) | (13.4 | ) | ||||||||||||||||||||
Revenues and minutes of use from BOSS Revolution Calling decreased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019, although COVID-19 related demand helped to slow the rate of decline in BOSS Revolution Calling revenue compared to prior periods. BOSS Revolution Calling continues to be impacted by persistent, market-wide trends, including the proliferation of unlimited calling plans offered by wireless carriers and mobile virtual network operators, and the increasing penetration of free and paid over-the-top voice and messaging services.
Revenues and minutes of use from Carrier Services decreased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 due to the closure of corporate offices and the decline of commerce globally. Over the long-term, we expect that Carrier Services will continue to be adversely impacted as communications globally transition away from traditional international long-distance voice operators. Carrier Services’ minutes of use and revenues will likely continue to decline from quarter-to-quarter, as we seek to maximize economics rather than necessarily sustain minutes of use or revenues.
Revenues from Mobile Top-Up increased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 due to COVID-19 related demand, as well as expanded bundled offerings of minutes, text and data, and growth from the addition of new mobile partners.
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Revenues from our Growth initiatives increased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019. BOSS Revolution Money Transfer revenues increased 95% to $11.8 million in the three months ended April 30, 2020 compared to the similar period in fiscal 2019 and increased 66% to $26.7 million in the nine months ended April 30, 2020 compared to the similar period in fiscal 2019 driven by increased transaction volumes partially related to COVID-19 and increased foreign exchange revenue derived, in part, from strategies leveraging the strengthened U.S. dollar and other transient foreign exchange market conditions. National Retail Solutions’ revenues increased 88% to $2.9 million in the three months ended April 30, 2020 compared to the similar period in fiscal 2019 and increased 70% to $7.3 million in the nine months ended April 30, 2020 compared to the similar period in fiscal 2019 driven by growth in monthly subscription fees, advertising sales, and credit card processing customers.
Direct Cost of Revenues. Direct cost of revenues in Telecom & Payment Services decreased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 primarily due to decreases in Carrier Services’ and BOSS Revolution Calling’s direct cost of revenues in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019, partially offset by an increase in Mobile Top-Up’s direct cost of revenues in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019.
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Direct cost of revenues as a percentage of revenues | 82.9 | % | 85.0 | % | (2.1 | )% | 83.6 | % | 85.3 | % | (1.7 | )% | ||||||||||||
Direct cost of revenues as a percentage of revenues in Telecom & Payment Services decreased 210 and 170 basis points in the three and nine months ended April 30, 2020, respectively, compared to the similar periods in fiscal 2019 primarily due to decreases in direct cost of revenues as a percentage of revenues in BOSS Revolution Money Transfer, Mobile Top-Up, BOSS Revolution Calling, and National Retail Solutions. BOSS Revolution Money Transfer’s direct cost of revenues as a percentage of revenues decreased largely from increased foreign exchange revenue derived, in part, from strategies leveraging the strengthened U.S. dollar and other transient foreign exchange market conditions. BOSS Revolution Calling’s direct cost of revenues as a percentage of revenues decreased primarily due to the continued migration of customers to the direct-to-consumer channel.
Selling, General and Administrative. Selling, general and administrative expense in our Telecom & Payment Services segment increased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 primarily due to increases in credit card charges and stock-based compensation, partially offset by decreases in marketing expense. In addition, selling, general and administrative expense in our Telecom & Payment Services segment increased in the nine months ended April 30, 2020 compared to the similar period in fiscal 2019 due to an increase in employee compensation. As a percentage of Telecom & Payment Services’ revenue, Telecom & Payment Services’ selling, general and administrative expense increased to 12.7% from 11.6% in the three months ended April 30, 2020 and 2019, respectively, and increased to 12.7% from 11.7% in the nine months ended April 30, 2020 and 2019, respectively.
Depreciation and Amortization. Depreciation and amortization expense in our Telecom & Payment Services segment decreased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 as more of our property, plant and equipment became fully depreciated, partially offset by depreciation of equipment added to our telecommunications network and capitalized costs of consultants and employees developing internal use software.
Severance. In the three months ended April 30, 2020 and 2019, Telecom & Payment Services incurred severance expense of $0.6 million and $0.6 million, respectively, and in the nine months ended April 30, 2020 and 2019, Telecom & Payment Services incurred severance expense of $1.7 million and $0.6 million, respectively. Severance expense in the three and nine months ended April 30, 2020 was incurred mostly for technology and software development employees in the United States, Carrier Services employees in Europe, and retail-related employees in Asia.
Other Operating Expense, net. Telecom & Payment Services recorded accruals for non-income related taxes related to one of its foreign subsidiaries of nil and $2.3 million in the three months ended April 30, 2020 and 2019, respectively, and $2.2 million and $5.4 million in the nine months ended April 30, 2020 and 2019, respectively. In addition, in the nine months ended April 30, 2019, other operating expense, net was partially offset by a gain of $0.2 million from the sale of a calling card business in Asia.
net2phone Segment
Our net2phone segment, which represented 3.9% and 3.3% of our total revenues in the nine months ended April 30, 2020 and 2019, respectively, is comprised of two verticals:
| ● | net2phone-Unified Communications as a Service, or UCaaS, a unified cloud communications service for businesses in North and South America and certain other international markets; and |
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| ● | net2phone-Platform Services, which provides telephony services to cable operators and other businesses by leveraging a common technology platform. |
| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Revenues | $ | 12.5 | $ | 12.4 | $ | 0.1 | 1.0 | % | $ | 38.1 | $ | 34.4 | $ | 3.7 | 10.7 | % | ||||||||||||||||
| Direct cost of revenues | 2.9 | 3.3 | (0.4 | ) | (13.8 | ) | 8.8 | 9.6 | (0.8 | ) | (8.7 | ) | ||||||||||||||||||||
| Selling, general and administrative | 11.1 | 9.0 | 2.1 | 24.0 | 32.4 | 24.5 | 7.9 | 32.5 | ||||||||||||||||||||||||
| Depreciation and amortization | 2.0 | 1.4 | 0.6 | 52.1 | 6.4 | 5.0 | 1.4 | 28.0 | ||||||||||||||||||||||||
| Other operating expense, net | 0.4 | — | 0.4 | nm | 1.0 | — | 1.0 | nm | ||||||||||||||||||||||||
| Loss from operations | $ | (3.9 | ) | $ | (1.3 | ) | $ | (2.6 | ) | (210.5 | )% | $ | (10.5 | ) | $ | (4.7 | ) | $ | (5.8 | ) | (125.4 | )% | ||||||||||
nm—not meaningful
Revenues. net2phone’s revenues in the three and nine months ended April 30, 2020 and 2019 consisted of the following:
| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| net2phone-UCaaS | $ | 8.1 | $ | 6.6 | $ | 1.5 | 22.3 | % | $ | 23.3 | $ | 17.5 | $ | 5.8 | 33.3 | % | ||||||||||||||||
| net2phone-Platform Services | 4.4 | 5.8 | (1.4 | ) | (23.5 | ) | 14.8 | 16.9 | (2.1 | ) | (12.6 | ) | ||||||||||||||||||||
| Total revenues | $ | 12.5 | $ | 12.4 | $ | 0.1 | 1.0 | % | $ | 38.1 | $ | 34.4 | $ | 3.7 | 10.7 | % | ||||||||||||||||
net2phone-UCaaS’ revenues increased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 driven by growth in its international and U.S. markets, partially offset by strengthening of the U.S. dollar compared to local currencies in key overseas markets. On September 14, 2018, net2phone-UCaaS entered the Canadian market through the acquisition of Versature Corp. Versature’s revenues increased $0.2 million and $1.5 million in the three and nine months ended April 30, 2020, respectively, compared to the similar periods in fiscal 2019. On December 11, 2019, we acquired Ringsouth Europa, S.L., which expanded net2phone-UCaaS’ business into Spain. Ringsouth’s revenues were $0.2 million and $0.4 million in the three and nine months ended April 30, 2020, respectively. net2phone-UCaaS’ customer base growth slowed in the second half of our third fiscal quarter as sales became increasingly difficult as the pandemic spread in key markets. During the third quarter of fiscal 2020, net2phone-UCaaS introduced an integration of its cloud communications offering with Microsoft Teams and its secure video conferencing solution, Huddle (in beta).
net2phone-Platform Services’ revenues decreased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 due to changes in contractual terms for telephony services that were effective beginning in January 2020.
Direct Cost of Revenues. Direct cost of revenues decreased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 because of decreases in the direct cost of revenues in both net2phone-UCaaS and net2phone-Platform Services.
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| Direct cost of revenues as a percentage of revenues | 23.0 | % | 27.0 | % | (4.0 | )% | 23.1 | % | 28.0 | % | (4.9 | )% | ||||||||||||
Direct cost of revenues as a percentage of revenues decreased 400 and 490 basis points in the three and nine months ended April 30, 2020, respectively, compared to the similar periods in fiscal 2019 primarily because of decreases in direct cost of revenues as a percentage of revenues in net2phone-UCaaS. Direct cost of revenues as a percentage of revenues in net2phone-Platform Services increased in the three months ended April 30, 2020 compared to the similar period in fiscal 2019 and decreased in the nine months ended April 30, 2020 compared to the similar period in fiscal 2019.
Selling, General and Administrative. Selling, general and administrative expense increased in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 due to increases in employee compensation, stock-based compensation, and sales commissions. As a percentage of net2phone’s revenues, net2phone’s selling, general and administrative expenses were 88.7% and 72.2% in the three months ended April 30, 2020 and 2019, respectively, and 85.1% and 71.1% in the nine months ended April 30, 2020 and 2019, respectively.
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Depreciation and Amortization. The increase in depreciation and amortization expense in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 was due to increases in depreciation of net2phone-UCaaS’ customer premises equipment, additional depreciation and amortization in Versature, and increases in depreciation of capitalized costs of consultants and employees developing internal use software.
Other Operating Expense, net. Other operating expense, net of $0.4 million and $1.0 million in the three and nine months ended April 30, 2020, respectively, was primarily due to our indemnification of a net2phone cable telephony customer related to patent infringement claims brought against the customer.
Corporate
| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| General and administrative | $ | (2.4 | ) | $ | (2.4 | ) | $ | — | 2.6 | % | $ | (6.9 | ) | $ | (7.2 | ) | $ | 0.3 | 3.0 | % | ||||||||||||
| Other operating gain (expense), net | 0.2 | (0.1 | ) | 0.3 | 226.6 | (0.3 | ) | (0.6 | ) | 0.3 | 58.3 | |||||||||||||||||||||
| Loss from operations | $ | (2.2 | ) | $ | (2.5 | ) | $ | 0.3 | 12.6 | % | $ | (7.2 | ) | $ | (7.8 | ) | $ | 0.6 | 7.2 | % | ||||||||||||
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, charitable contributions, travel, and other corporate-related general and administrative expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
General and Administrative. Corporate general and administrative expense was basically unchanged in the three months ended April 30, 2020 compared to the similar period in fiscal 2019 primarily because of a decrease in employee compensation, partially offset by an increase in stock-based compensation. Corporate general and administrative expense decreased in the nine months ended April 30, 2020 compared to the similar period in fiscal 2019 primarily because of decreases in employee compensation, legal fees, and consulting expense, partially offset by an increase in stock-based compensation. As a percentage of our total consolidated revenues, Corporate general and administrative expense was 0.7% in the three and nine months ended April 30, 2020 and 2019.
Other Operating Gain (Expense), net. 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. As discussed in Note 15 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q, a putative class action on behalf of Straight Path’s stockholders and derivative complaint was filed naming us, among others. We incurred legal fees of $1.2 million and $0.1 million in the three months ended April 30, 2020 and 2019, respectively, and $2.5 million and $0.6 million in the nine months ended April 30, 2020 and 2019, respectively, related to this action. Also, in the three and nine months ended April 30, 2020, we recorded a gain from insurance proceeds for this matter of $1.4 million and $2.2 million, respectively.
Consolidated
The following is a discussion of certain of our consolidated expenses, and our consolidated income and expense line items below income from operations.
Related Party Lease Costs. On March 26, 2018, we completed a pro rata distribution of the common stock of our former subsidiary, Rafael Holdings, Inc., or Rafael, to our stockholders of record as of the close of business on March 13, 2018, which we refer to as the Rafael Spin-Off. We lease office space and parking in Rafael’s building and parking garage located at 520 Broad St, Newark, New Jersey. We also lease office space in Israel from Rafael. The Newark lease expires in April 2025 and the Israel lease expires in July 2025. In the three months ended April 30, 2020 and 2019, we incurred lease costs of $0.5 million and $0.5 million, respectively, and in the nine months ended April 30, 2020 and 2019, we incurred lease costs of $1.4 million and $1.3 million, respectively, in connection with the Rafael leases, which is included in consolidated selling, general and administrative expenses.
Stock-Based Compensation Expense. Stock-based compensation expense included in consolidated selling, general and administrative expenses was $0.8 million and $0.3 million in the three months ended April 30, 2020 and 2019, respectively, and $3.3 million and $1.2 million in the nine months ended April 30, 2020 and 2019, respectively. The increase in stock-based compensation expense in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 was primarily due to expense of deferred stock units granted in June 2019. At April 30, 2020, unrecognized compensation cost related to non-vested stock-based compensation was an aggregate of $2.3 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting period that ends in 2022.
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| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2020 | 2019 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Income from operations | $ | 3.8 | $ | 0.4 | $ | 3.4 | 744.5 | % | $ | 3.7 | $ | 0.2 | $ | 3.5 | nm | |||||||||||||||||
| Interest income, net | 0.1 | 0.2 | (0.1 | ) | (68.4 | ) | 0.5 | 0.5 | — | 11.2 | % | |||||||||||||||||||||
| Other (expense) income, net | (2.1 | ) | 0.4 | (2.5 | ) | (695.6 | ) | (1.4 | ) | (0.5 | ) | (0.9 | ) | (175.3 | ) | |||||||||||||||||
| (Provision for) benefit from income taxes | (1.4 | ) | 1.5 | (2.9 | ) | (189.7 | ) | (3.0 | ) | (0.7 | ) | (2.3 | ) | (329.0 | ) | |||||||||||||||||
| Net income (loss) | 0.4 | 2.5 | (2.1 | ) | (84.3 | ) | (0.2 | ) | (0.5 | ) | 0.3 | 75.9 | ||||||||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 0.1 | (0.3 | ) | 0.4 | 146.3 | 0.1 | (0.9 | ) | 1.0 | 107.9 | ||||||||||||||||||||||
| Net income (loss) attributable to IDT Corporation | $ | 0.5 | $ | 2.2 | $ | (1.7 | ) | (76.1 | )% | $ | (0.1 | ) | $ | (1.4 | ) | $ | 1.3 | 95.6 | % | |||||||||||||
nm—not meaningful
Other (Expense) Income, net. Other (expense) income, net consists of the following:
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (in millions) | ||||||||||||||||
| Foreign currency transaction (losses) gains | $ | (0.8 | ) | $ | — | $ | 0.2 | $ | (0.8 | ) | ||||||
| (Loss) gain on investments | (1.2 | ) | 0.6 | (0.8 | ) | 0.7 | ||||||||||
| Other | (0.1 | ) | (0.2 | ) | (0.8 | ) | (0.4 | ) | ||||||||
| Total other (expense) income, net | $ | (2.1 | ) | $ | 0.4 | $ | (1.4 | ) | $ | (0.5 | ) | |||||
(Provision for) Benefit from Income Taxes. The increase in income tax expense in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 was primarily due to differences in the amount of taxable income earned in the various taxing jurisdictions.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into U.S. federal law, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. For the three months ended April 30, 2020, the CARES Act did not have a significant impact on our consolidated financial statements. We will continue to assess the impact of the CARES Act on our consolidated financial statements.
Net Loss (Income) Attributable to Noncontrolling Interests. The change in the net loss (income) attributable to noncontrolling interests in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 was primarily due to the net loss attributable to noncontrolling interests of one of our subsidiaries of $0.4 million and $0.7 million in the three and nine months ended April 30, 2020, respectively. We did not record the net loss attributable to noncontrolling interests of this subsidiary in the similar periods in fiscal 2019. In addition, the reduction in the net income attributable to noncontrolling interests of other subsidiaries in the three and nine months ended April 30, 2020 compared to the similar periods in fiscal 2019 was the result of a decrease in the net income of these subsidiaries.
Liquidity and Capital Resources
General
We currently expect our cash from operations in the next twelve months and the balance of cash, cash equivalents, debt securities, and current equity investments that we held on April 30, 2020 to be sufficient to meet our currently anticipated working capital and capital expenditure requirements during the twelve-month period ending April 30, 2021. As of the date of this filing, including the impact of COVID-19 on us, management believes that we continue to have sufficient liquidity and capital resources for the foreseeable future.
At April 30, 2020, we had cash, cash equivalents, debt securities, and current equity investments of $70.5 million and a working capital deficit (current liabilities in excess of current assets) of $16.6 million.
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We treat unrestricted cash and cash equivalents held by IDT Payment Services as substantially restricted and unavailable for other purposes. At April 30, 2020, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of $6.6 million held by IDT Payment Services that was unavailable for other purposes.
| Nine
months ended April 30, | ||||||||
| 2020 | 2019 | |||||||
| (in millions) | ||||||||
| Cash flows (used in) provided by: | ||||||||
| Operating activities | $ | (70.6 | ) | $ | 47.3 | |||
| Investing activities | (22.8 | ) | (13.9 | ) | ||||
| Financing activities | (1.3 | ) | 7.6 | |||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents | 4.0 | (2.0 | ) | |||||
| (Decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents | $ | (90.7 | ) | $ | 39.0 | |||
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 decreased to $53.7 million at April 30, 2020 from $63.5 million at July 31, 2019 primarily due to collections in the nine months ended April 30, 2020 in excess of amounts billed during the period.
Deferred revenue arises from sales of prepaid products and varies from period to period depending on the mix and the timing of revenues. Deferred revenue decreased to $37.8 million at April 30, 2020 from $42.5 million at July 31, 2019 primarily due to decreases in the BOSS Revolution Calling and net2phone-Platform Services deferred revenue balances.
Customer deposits at IDT Financial Services Limited, our Gibraltar-based bank, decreased to $114.1 million at April 30, 2020 from $175.0 million at July 31, 2019 mainly because of the decline of the bank’s travel related programs due to the effect of COVID-19.
In August 2017, we entered into a Reciprocal Services Agreement, as amended, 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. This agreement was terminated on April 30, 2020. Pursuant to the agreement, we deposited $9.2 million into an escrow account as security for the benefit of the telecom operator. On May 11, 2020, the $9.2 million security deposit was released from escrow and returned to us.
On June 21, 2018, in South Dakota v Wayfair Inc., the United States Supreme Court held that states may charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. We are evaluating our state tax filings with respect to the Wayfair decision and are in the process of reviewing our collection practices. It is possible that one or more jurisdictions may assert that we have liability for periods for which we have not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could adversely affect our business, financial position and operating results. One or more jurisdictions may change their laws or policies to apply their sales, use or other similar taxes to our operations, and if such changes were made it could materially and adversely affect our business, financial position and operating results.
Investing Activities
Our capital expenditures were $11.9 million and $13.7 million in the nine months ended April 30, 2020 and 2019, respectively. We currently anticipate that total capital expenditures for the twelve-month period ending April 30, 2021 will be $14 million to $16 million. We expect to fund our capital expenditures with our net cash provided by operating activities and cash, cash equivalents, debt securities, and current equity investments on hand.
On December 11, 2019, our subsidiary, net2phone, Inc. acquired 100% of the outstanding shares of Ringsouth Europa, S.L., a business communications provider headquartered in Murcia, Spain. The acquisition expands net2phone’s business into Spain. The cash paid for the acquisition was $0.5 million. We also recorded $0.4 million for the estimated fair value of contingent consideration. The contingent consideration includes two potential payments to the seller of $0.4 million each, based on monthly recurring revenue targets to be achieved over a 36-month period and 48-month period. The second potential payment is not contingent upon meeting the target for the first payment.
On September 14, 2018, we acquired 100% of the outstanding shares of Versature, a UCaaS provider serving the Canadian market. In the nine months ended April 30, 2019, the cash paid for the acquisition net of cash acquired was $5.5 million.
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Purchases of debt securities and equity investments were $14.8 million and $1.0 million in the nine months ended April 30, 2020 and 2019, respectively. Proceeds from maturities and sales of debt securities and redemptions of equity investments were $4.3 million and $6.3 million in the nine months ended April 30, 2020 and 2019, respectively.
Financing Activities
We distributed cash of $0.7 million and $1.2 million in the nine months ended April 30, 2020 and 2019, respectively, to the noncontrolling interests in certain of our subsidiaries.
On December 21, 2018, we sold 2,546,689 shares of our Class B common stock that were held in treasury to Howard S. Jonas for aggregate consideration of $14.8 million. The price per share of $5.89 was equal to the closing price of our Class B common stock on April 16, 2018, the last closing price before approval of the sale by our Board of Directors and its Corporate Governance Committee. On May 31, 2018, Mr. Jonas paid $1.5 million of the purchase price, and he paid the balance of the purchase price on December 21, 2018 after approval of the sale by the Company’s stockholders at the 2018 annual meeting of stockholders. The purchase price was reduced by approximately $0.2 million, which was the amount of dividends paid on 2,546,689 shares of our Class B common stock whose record date was between April 16, 2018 and the issuance of the shares.
In the nine months ended April 30, 2020 and 2019, we repaid financing-related other liabilities of $0.4 million and $0.6 million, respectively.
On April 20, 2020, our subsidiary, IDT Domestic Telecom, Inc., or IDT DT, received loan proceeds of $10.0 million from TD Bank, N.A, pursuant to the Paycheck Protection Program, or the PPP Loan, under the CARES Act, administered by the U.S. Small Business Administration. On April 29, 2020, IDT DT returned all $10.0 million in proceeds from the PPP Loan. In light of the oversubscription of applications for loans under the PPP, and despite IDT DT’s need for the funds to support its operations, IDT DT returned the loan proceeds in order to make those funds available to other borrowers that may be in greater need than IDT DT.
As of April 30, 2020, our subsidiary, IDT Telecom, Inc., entered into a credit agreement 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 other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum at the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 125 basis points. Interest is payable monthly, and all outstanding principal and any accrued and unpaid interest is due on the maturity date of July 15, 2020. IDT Telecom pays a quarterly unused commitment fee of 0.3% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT 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 facility, including IDT Telecom may not pay any dividend on its capital stock. At April 30, 2020, there was no amount outstanding under the facility. In the nine months ended April 30, 2020, IDT Telecom borrowed and repaid an aggregate of $1.4 million under the facility.
IDT Telecom had a credit agreement, dated as of October 31, 2018, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. The credit agreement terminated on July 15, 2019. In the nine months ended April 30, 2019, IDT Telecom borrowed and repaid an aggregate of $3.0 million under the facility.
In the nine months ended April 30, 2020, we received proceeds from the exercise of stock options of $0.3 million for which we issued 32,551 shares of our Class B common stock. There were no stock option exercises in the nine months ended April 30, 2019.
We have an existing stock repurchase program authorized by our Board of Directors for the repurchase of shares of our Class B common stock. The Board of Directors authorized the repurchase of up to 8.0 million shares in the aggregate. In the nine months ended April 30, 2020, we repurchased 40,763 shares of Class B common stock for an aggregate purchase price of $0.2 million. In the nine months ended April 30, 2019, we repurchased 729,110 shares of Class B common stock for an aggregate purchase price of $3.9 million. At April 30, 2020, 6.9 million shares remained available for repurchase under the stock repurchase program.
In the nine months ended April 30, 2020 and 2019, we paid $0.3 million and $28,000, respectively, to repurchase 37,348 and 3,748 shares, respectively, 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 deferred stock units and restricted stock. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.
Other Sources and Uses of Resources
We intend to, where appropriate, make strategic investments and acquisitions to complement, expand, and/or enter into new businesses. In considering acquisitions and investments, we search for opportunities to profitably grow our existing businesses and/or to add qualitatively to the range and diversification of businesses in our portfolio. At this time, we cannot guarantee that we will be presented with acquisition opportunities that meet our return on investment criteria, or that our efforts to make acquisitions that meet our criteria will be successful.
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Contractual Obligations and Other Commercial Commitments
The following table quantifies our future contractual obligations and other commercial commitments at April 30, 2020:
Payments Due by Period (in millions) | Total | Less than 1 year | 1–3 years | 4–5 years | After 5 years | |||||||||||||||
| Purchase commitments (1) | $ | 8.7 | $ | 8.7 | $ | — | $ | — | $ | — | ||||||||||
| Connectivity obligations under service agreements | 1.7 | 1.0 | 0.7 | — | — | |||||||||||||||
| Operating leases including short-term leases | 12.0 | 3.1 | 5.1 | 3.8 | — | |||||||||||||||
| Total contractual obligations (2) | $ | 22.4 | $ | 12.8 | $ | 5.8 | $ | 3.8 | $ | — | ||||||||||
| (1) | Purchase commitments include the commitment under a Memorandum of Understanding with a telecom operator in Central America, 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 $18.0 million in performance bonds or $0.8 million in potential contingent consideration related to the Ringsouth acquisition due to the uncertainty of the amount and/or timing of any such payments. |
Off-Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources, other than the following.
In connection with the Rafael Spin-Off in March 2018, we and Rafael entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Rafael after the spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Rafael with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, we indemnify Rafael and Rafael 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, we indemnify Rafael from all liability for taxes of ours, other than Rafael and its subsidiaries, for any taxable period, and from all liability for taxes due to the spin-off.
In connection with our spin-off of Straight Path, in July 2013, we and Straight Path entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Straight Path after the 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 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, we indemnify Straight Path and Straight Path 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, we 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 spin-off, from all liability for taxes of ours, other than Straight Path and its subsidiaries, for any taxable period, and from all liability for taxes due to the spin-off. (See Note 15 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q).
We 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. At April 30, 2020, we had aggregate performance bonds of $18.0 million outstanding.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risks |
Smaller reporting companies are not required to provide the information required by this item.
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| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief 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 Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of April 30, 2020 because of a material weakness in our internal control over financial reporting relating to management review controls associated with non-income related taxes related to one of our foreign entities. This material weakness was initially identified as of July 31, 2019 (see Item 9A to Part II of our Annual Report on Form 10-K for fiscal year ended July 31, 2019).
Remediation. As set forth below, following our Audit Committee’s independent review, management plans to take the following steps to remediate the material weakness identified above and improve our internal control over financial reporting:
| ● | Explore engaging an independent third party to assist in our evaluation of all non-income related taxes, relating to material foreign subsidiaries; |
| ● | Provide additional outside training to employees responsible for tax compliance; and |
| ● | Enhance internal documentation support related to our tax position. |
At April 30, 2020, we had explored the engagement of a third party as described above and determined that at the present time it would not materially improve our evaluation of all non-income related taxes, relating to material foreign subsidiaries. As a matter of policy, we will continue to assess engaging specialists as deemed appropriate. In addition, employees responsible for tax compliance had completed relevant training, and the enhanced internal documentation support related to our tax position was in process. Management and our Audit Committee continue to monitor these remedial measures and expect to test the effectiveness of these internal controls and procedures during the quarter ending July 31, 2020.
Notwithstanding the material weakness described above, we have performed additional analyses and other procedures to enable management to conclude that our financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition and results of operations as of and for the three and nine months ended April 30, 2020.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended April 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
| Item 1. | Legal Proceedings |
Legal proceedings in which we are involved are more fully described in Note 15 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.
| Item 1A. | Risk Factors |
There are no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, except for the following:
Our business, results of operation and financial condition could be adversely affected by the coronavirus COVID-19 pandemic and the restrictions put in place in connection therewith.
We are responding to the global outbreak of COVID-19 by taking steps to mitigate the potential risks to us posed by its spread and the impact of the restrictions put in place by governments to protect the population. We continue to execute our business continuity plan and have implemented a comprehensive set of actions for the health and safety of our employees, customers, and business partners. Our employees transitioned to work-from-home during the fiscal quarter where appropriate.
We continue to implement strong physical and cyber-security measures to ensure our systems remain functional to both serve our operational needs with a remote workforce and to provide uninterrupted service to our customers. We face challenges due to the need to operate with the remote workforce and are addressing those challenges to minimize the impact on our ability to operate.
In the three months ended April 30, 2020, the impacts of COVID-19 and related public health restrictions had a mixed financial impact on our business, operations and financial condition. Negative impacts of COVID-19 on us included the following:
| ● | net2phone-UCaaS’ customer base growth slowed as sales became increasingly difficult as the pandemic spread in key markets; | |
| ● | Reduction in the operations or the closure of independent retailers that offer our BOSS Revolution services or utilize our National Retail Solutions services; | |
| ● | Decreased retail consumer traffic resulting from concerns about the spread of COVID-19; | |
| ● | Carrier Services revenue was impacted by the closure of corporate offices and the decline of commerce globally; and | |
| ● | Reduced staffing levels at our call centers and field operations. |
If the COVID-19 pandemic continues for a prolonged period or has a more significant impact than currently, our business, operations and financial condition could be impacted in more significant ways. The continued spread of COVID-19 and efforts to contain the virus could have the following impacts, in addition to exacerbating the impacts described above:
| ● | Adversely impact our strategic business plans and growth strategy; | |
| ● | Result in increases in bad debt expense and accounts receivable write-offs as a result of delayed or non-payment from our customers; | |
| ● | Reduce demand for our offerings as widespread unemployment reduces consumer buying power; | |
| ● | Reduce the availability and productivity of our employees and third-party resources; | |
| ● | Cause us to experience an increase in costs as a result of our emergency measures; | |
| ● | Cause impairments of goodwill or long-lived assets; and | |
| ● | Cause a deterioration in our financial metrics or the business environment that adversely impacts our credit ratings. |
As of April 30, 2020, we have not experienced significant adverse impacts to our results of operations, financial condition, or cash flows. However, the situation remains fluid and we cannot predict with certainty the potential impact of COVID-19 on our business, results of operations, financial condition and cash flows.
Our U.K.-based businesses and business between the U.K. and other countries face risks related to the United Kingdom leaving the European Union (“Brexit”).
We operate our business worldwide, including meaningful operations in the United Kingdom. Accordingly, we are subjected to risks from changes in the regulatory environment in various countries. On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, or EU, (commonly referred to as “Brexit”). The United Kingdom formally left the EU on April 30, 2020 and has entered a transition period until December 31, 2020. During the transition period, the United Kingdom and the EU have stated that they will seek to negotiate a trade deal, and the United Kingdom will remain in both the EU customs union and single market.
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The effects of Brexit will depend on agreements, if any, the United Kingdom makes to retain access to EU markets. Brexit creates an uncertain political and economic environment in the United Kingdom and potentially across other EU member states for the foreseeable future, including while the terms of Brexit are being negotiated, and such uncertainties could impair or limit our ability to transact business in the member EU states.
Further, Brexit could adversely affect European and worldwide economic or market conditions and could contribute to instability in global financial markets, and the value of the Pound Sterling currency or other currencies, including the Euro. We are exposed to the economic, market and fiscal conditions in the United Kingdom and the EU and to changes in any of these conditions. Depending on the terms reached regarding Brexit, it is possible that there may be adverse practical and/or operational implications on our business.
A significant amount of the regulatory regime that applies to us in the United Kingdom is derived from EU directives and regulations. Brexit could change the legal and regulatory framework within the United Kingdom where we operate and is likely to lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which EU laws to replace or replicate. Consequently, no assurance can be given as to the impact of Brexit and, in particular, no assurance can be given that our operating results, financial condition and prospects would not be adversely impacted by the result.
IDT Financial Services Limited, or IDTFS, our Gibraltar-based bank, currently operates under a license from the Gibraltar Financial Services Commission. As an overseas British Territory, following the Brexit transition period, the passporting rights enjoyed by IDTFS under EU law will cease to be in effect. Absent other arrangements or accommodations provided by the EU or individual member states, IDTFS will not be permitted to provide services to customers in EU countries. We are currently seeking an e-money license issued by an EU country, but we cannot assure that any such license will be issued in a timely manner, if at all, or if the conditions of any such license that is issued will impact the operations of IDTFS. If IDTFS does not obtain a license in a timely manner, its operations and ability to service its customers would be materially and adversely affected.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides information with respect to purchases by us of our shares during the third quarter of fiscal 2020:
| 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) | |||||||||||||
| February 1-29, 2020 | — | $ | — | — | 6,903,406 | |||||||||||
| March 1–31, 2020 | 8,560 | $ | 4.99 | 8,560 | 6,894,846 | |||||||||||
| April 1–30, 2020 | 32,203 | $ | 5.21 | 32,203 | 6,862,643 | |||||||||||
| Total | 40,763 | $ | 5.17 | 40,763 | ||||||||||||
| (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. |
| Item 3. | Defaults Upon Senior Securities |
None
| Item 4. | Mine Safety Disclosures |
Not applicable
| Item 5. | Other Information |
None
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| Item 6. | Exhibits |
Exhibit |
Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Filed or furnished herewith. |
36
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IDT CORPORATION | |||
| June 9, 2020 | By: | /s/ Shmuel Jonas | |
Shmuel Jonas Chief Executive Officer | |||
| June 9, 2020 | By: | /s/ Marcelo Fischer | |
Marcelo Fischer Chief Financial Officer | |||
37
EXHIBIT 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Shmuel Jonas, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of IDT Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: June 9, 2020
| /s/ Shmuel Jonas | |
|
Shmuel Jonas Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Marcelo Fischer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of IDT Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: June 9, 2020
| /s/ Marcelo Fischer | |
|
Marcelo Fischer Chief Financial Officer |
EXHIBIT 32.1
Certification Pursuant
to
18 U.S.C. Section 1350
(as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act Of 2002)
In connection with the Quarterly Report of IDT Corporation (the “Company”) on Form 10-Q for the quarter ended April 30, 2020 as filed with the Securities and Exchange Commission (the “Report”), I, Shmuel Jonas, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 9, 2020
| /s/ Shmuel Jonas | |
|
Shmuel Jonas Chief Executive Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to IDT Corporation and will be retained by IDT Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
Certification Pursuant
to
18 U.S.C. Section 1350
(as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act Of 2002)
In connection with the Quarterly Report of IDT Corporation (the “Company”) on Form 10-Q for the quarter ended April 30, 2020 as filed with the Securities and Exchange Commission (the “Report”), I, Marcelo Fischer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 9, 2020
| /s/ Marcelo Fischer | |
|
Marcelo Fischer Chief Financial Officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to IDT Corporation and will be retained by IDT Corporation and furnished to the Securities and Exchange Commission or its staff upon request.