UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR
THE QUARTERLY PERIOD ENDED
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| (Address of principal executive offices) | (Zip Code) |
(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 | |
Trading symbol:
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.
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).
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 | ☐ | ☒ | ||
| 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 ☐
As of December 8, 2021, the registrant had the following shares outstanding:
| Class A common stock, $.01 par value: | shares outstanding (excluding 1,698,000 treasury shares) | |
| Class B common stock, $.01 par value: | shares outstanding (excluding 2,192,276 treasury shares) |
IDT CORPORATION
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements (Unaudited) |
IDT CORPORATION
CONSOLIDATED BALANCE SHEETS
October 31, 2021 | July 31, 2021 | |||||||
| (Unaudited) | (Note 1) | |||||||
| (in thousands) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Debt securities | ||||||||
| Equity investments | ||||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Disbursement prefunding | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangibles, net | ||||||||
| Equity investments | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deferred income tax assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Customer deposits | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Redeemable noncontrolling interest | ||||||||
| Equity: | ||||||||
| IDT Corporation stockholders’ equity: | ||||||||
| Preferred stock, $ par value; authorized shares—; shares issued | ||||||||
| Class A common stock, $ par value; authorized shares—; shares issued and shares outstanding at October 31, 2021 and July 31, 2021 | ||||||||
| Class B common stock, $par value; authorized shares—; and shares issued and and shares outstanding at October 31, 2021 and July 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost, consisting of and shares of Class A common stock and and shares of Class B common stock at October 31, 2021 and July 31, 2021, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total IDT Corporation stockholders’ equity | ||||||||
| Noncontrolling interests | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
3
IDT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended October 31, | ||||||||
2021 | 2020 | |||||||
| (in thousands, except per share data) | ||||||||
| Revenues | $ | $ | ||||||
| Costs and expenses: | ||||||||
| Direct cost of revenues (exclusive of depreciation and amortization) | ||||||||
| Selling, general and administrative (i) | ||||||||
| Depreciation and amortization | ||||||||
| Severance | ||||||||
| Total costs and expenses | ||||||||
| Other operating expense, net (see Note 11) | ( | ) | ( | ) | ||||
| Income from operations | ||||||||
| Interest income (expense), net | ( | ) | ||||||
| Other expense, net | ( | ) | ( | ) | ||||
| (Loss) income before income taxes | ( | ) | ||||||
| Benefit from (provision for) income taxes | ( | ) | ||||||
| Net (loss) income | ( | ) | ||||||
| Net income attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Net (loss) income attributable to IDT Corporation | $ | ( | ) | $ | ||||
| (Loss) earnings per share attributable to IDT Corporation common stockholders: | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | ( | ) | $ | ||||
| Weighted-average number of shares used in calculation of (loss) earnings per share: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| (i) | $ | $ | |||||||
See accompanying notes to consolidated financial statements.
4
IDT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Other comprehensive (loss) income: | ||||||||
| Change in unrealized gain on available-for-sale securities | ( | ) | ( | ) | ||||
| Foreign currency translation adjustments | ||||||||
| Other comprehensive income | ||||||||
| Comprehensive (loss) income | ( | ) | ||||||
| Comprehensive income attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Comprehensive (loss) income attributable to IDT Corporation | $ | ( | ) | $ | ||||
See accompanying notes to consolidated financial statements.
5
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
Three Months Ended October 31, 2021 (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, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Restricted Class B common stock purchased from employee | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| BALANCE AT OCTOBER 31, 2021 | $ | $ | $ | $ | ( |
) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
Three Months Ended October 31, 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, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Repurchases of Class B common stock through repurchase program | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Restricted Class B common stock purchased from employees | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| BALANCE AT OCTOBER 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
See accompanying notes to consolidated financial statements.
6
IDT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended October 31, | ||||||||
2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Operating activities | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Provision for doubtful accounts receivable | ||||||||
| Net unrealized loss from marketable securities | ||||||||
| Stock-based compensation | ||||||||
| Other | ||||||||
| Changes in assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Disbursement prefunding, prepaid expenses, other current assets, and other assets | ( | ) | ||||||
| Trade accounts payable, accrued expenses, other current liabilities, and other liabilities | ( | ) | ||||||
| Customer deposits at IDT Financial Services Limited (Gibraltar-based bank) | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Purchase of convertible preferred stock in equity method investment | ( | ) | ||||||
| Purchases of debt securities and equity investments | ( | ) | ( | ) | ||||
| Proceeds from maturities and sales of debt securities and redemption of equity investments | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||
| Proceeds from other liabilities | ||||||||
| Repayment of other liabilities | ( | ) | ( | ) | ||||
| Proceeds from sale of redeemable equity in subsidiary | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Repurchases of Class B common stock | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents | ( | ) | ( | ) | ||||
| Net decrease in cash, cash equivalents, and restricted cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash and cash equivalents at end of period | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
7
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 months ended October 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2022. The balance sheet at July 31, 2021 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, 2021, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2022 refers to the fiscal year ending July 31, 2022).
Note 2—Business Segment Information
The
Company has
The Fintech segment is comprised of National Retail Solutions (“NRS”), an operator of a nationwide point of sale (“POS”) network providing payment processing, digital advertising, transaction data, and ancillary services, and BOSS Revolution Money Transfer, a provider of international money remittance and related value/payment transfer services.
The net2phone-UCaaS segment is comprised of net2phone’s cloud communications offerings.
The Traditional Communications segment includes Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging, and data to international and domestic mobile accounts, BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States and Canada, and Carrier Services, a wholesale provider of international voice and SMS termination and outsourced traffic management solutions to telecoms worldwide. Traditional Communications also includes other smaller businesses, many in harvest mode.
Corporate costs include compensation, consulting fees, treasury, tax and accounting services, human resources, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, charitable contributions, travel, and other corporate-related general and administrative expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
Operating results for the business segments of the Company were as follows:
| (in thousands) | Fintech | net2phone- UCaaS | Traditional Communications | Corporate | Total | |||||||||||||||
| Three Months Ended October 31, 2021 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Three Months Ended October 31, 2020 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||||||
8
Note 3—Revenue Recognition
The Company earns revenue from contracts with customers, primarily through the provision of retail telecommunications and payment offerings as well as wholesale international voice and SMS termination. BOSS Revolution Money Transfer, NRS, and net2phone-UCaaS are technology-driven, synergistic businesses that leverage the Company’s core assets, and revenue is primarily recognized at a point in time, and in some cases (mainly net2phone-UCaaS) is recognized over time. Traditional Communications are mostly minute-based, paid-voice communications services, and revenue is primarily recognized at a point in time. The Company’s most significant revenue streams are from Mobile Top-Up, BOSS Revolution Calling, and Carrier Services. Mobile Top-Up and BOSS Revolution Calling are sold direct-to-consumers and through distributors and retailers.
Disaggregated Revenues
The following table shows the Company’s revenues disaggregated by business segment and service offered to customers:
Three Months Ended October 31, | ||||||||
2021 | 2020 | |||||||
| (in thousands) | ||||||||
| BOSS Revolution Money Transfer | $ | $ | ||||||
| National Retail Solutions | ||||||||
| Total Fintech | ||||||||
| net2phone-UCaaS | ||||||||
| Mobile Top-Up | ||||||||
| BOSS Revolution Calling | ||||||||
| Carrier Services | ||||||||
| Other | ||||||||
| Total Traditional Communications | ||||||||
| Total | $ | $ | ||||||
The following table shows the Company’s revenues disaggregated by geographic region, which is determined based on selling location. On February 1, 2021, the Company changed the geographic sourcing of certain revenues from the United States to the United Kingdom.
| (in thousands) | Fintech | net2phone-UCaaS | Traditional Communications | Total | ||||||||||||
| Three Months Ended October 31, 2021 | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Outside the United States: | ||||||||||||||||
| United Kingdom | — | |||||||||||||||
| Other | ||||||||||||||||
| Total outside the United States | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| (in thousands) | Fintech | net2phone-UCaaS | Traditional Communications | Total | ||||||||||||
| Three Months Ended October 31, 2020 | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Outside the United States: | ||||||||||||||||
| United Kingdom | ||||||||||||||||
| Other | ||||||||||||||||
| Total outside the United States | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 October 31, 2021 and July 31, 2021 had an original expected duration of one year or less.
9
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 Company’s contract liability balance is primarily payments received for prepaid BOSS Revolution Calling. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in the Company’s consolidated balance sheets as “Deferred revenue”.
The following table presents information about the Company’s contract liability balance:
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Revenue recognized in the period from amounts included in the contract liability balance at the beginning of the period | $ | $ | ||||||
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. 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:
October 31,2021 | July 31, 2021 | |||||||
| (in thousands) | ||||||||
| Deferred customer contract acquisition costs included in “Other current assets” | $ | $ | ||||||
| Deferred customer contract acquisition costs included in “Other assets” | ||||||||
| Total | $ | $ | ||||||
The Company’s amortization of deferred customer contract acquisition costs during the periods were as follows:
Three Months Ended October 31, | ||||||||
2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Amortization of deferred customer contract acquisition costs | $ | $ | ||||||
Note 4—Leases
The
Company’s leases primarily consist of operating leases for office space. These leases have remaining terms from to
net2phone-UCaaS is the lessee in equipment leases that are classified as finance leases. The assets and liabilities related to these finance leases are not material to the Company’s consolidated balance sheets.
10
The Company leases office and parking space from Rafael Holdings, Inc. (“Rafael”)
in a building and parking garage located at 520 Broad Street, Newark, New Jersey. The Company also leases office space in Israel from
Rafael. Howard S. Jonas, the Chairman of the Company’s Board of Directors, is also the Chairman of the Board of Directors of Rafael.
Supplemental disclosures related to the Company’s operating leases were as follows:
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases | $ | $ | ||||||
October 31, 2021 | July 31, 2021 | |||||||
| Weighted-average remaining lease term-operating leases | ||||||||
| Weighted-average discount rate-operating leases | % | % | ||||||
On
September 13, 2021, the Company entered into a new lease with an aggregate operating lease liability of $
October 31, 2021 | July 31, 2021 | |||||||
| (in thousands) | ||||||||
| Operating lease liabilities included in “Other current liabilities” | $ | $ | ||||||
| Operating lease liabilities included in noncurrent liabilities | ||||||||
| Total | $ | $ | ||||||
Future minimum maturities of operating lease liabilities were as follows (in thousands):
| Twelve-month period ending October 31: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total operating lease liabilities | $ | |||
11
Note 5—Cash, Cash Equivalents, and Restricted Cash and Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported in the consolidated balance sheets that equals the total of the same amounts reported in the consolidated statements of cash flows:
October 31, 2021 | July 31, 2021 | |||||||
| (in thousands) | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Total cash, cash equivalents, and restricted cash and cash equivalents | $ | $ | ||||||
At
October 31, 2021 and July 31, 2021, restricted cash and cash equivalents included $
Company Restricted Cash and Cash Equivalents
The
Company treats unrestricted cash and cash equivalents held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC, which
provide the Company’s international money transfer services in the United States, as substantially restricted and unavailable for
other purposes. At October 31, 2021 and July 31, 2021, “Cash and cash equivalents” in the Company’s consolidated balance
sheets included an aggregate of $
Note 6—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) | ||||||||||||||||
| October 31, 2021: | ||||||||||||||||
| U.S. Treasury bills and notes | $ | $ | $ | ( | ) | $ | ||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Municipal bonds | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| July 31, 2021: | ||||||||||||||||
| Certificates of deposit* | $ | $ | $ | $ | ||||||||||||
| U.S. Treasury bills and notes | ( | ) | ||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Municipal bonds | ||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| * |
Proceeds from maturities and sales of debt securities and redemptions of equity investments were $
The contractual maturities of the Company’s available-for-sale debt securities at October 31, 2021 were as follows:
| Fair Value | ||||
| (in thousands) | ||||
| Within one year | $ | |||
| After one year through five years | ||||
| After five years through ten years | ||||
| After ten years | ||||
| Total | $ | |||
12
The following available-for-sale debt securities were in an unrealized loss position for which other-than-temporary impairments were not recognized:
| Unrealized Losses | Fair Value | |||||||
| (in thousands) | ||||||||
| October 31, 2021: | ||||||||
| U.S. Treasury bills and notes | $ | $ | ||||||
| Corporate bonds | ||||||||
| Municipal bonds | ||||||||
| Total | $ | $ | ||||||
| July 31, 2021: | ||||||||
| U.S. Treasury bills and notes | $ | $ | ||||||
| Corporate bonds | ||||||||
| Total | $ | $ | ||||||
At July 31, 2021, there were no securities in a continuous unrealized loss position for 12 months or longer. At October 31, 2021, the following available-for-sale debt securities included in the table above were in a continuous unrealized loss position for 12 months or longer:
| Unrealized Losses | Fair Value | |||||||
| (in thousands) | ||||||||
| U.S. Treasury bills and notes | $ | $ | ||||||
| Corporate bonds | ||||||||
| Total | $ | $ | ||||||
At October 31, 2021, the Company did not intend to sell any of the debt securities included in the table above, and it is not more likely than not that the Company will be required to sell any of these securities before recovery of the unrealized losses, which may be at maturity.
Note 7—Equity Investments
Equity investments consist of the following:
October 31, 2021 | July 31, 2021 | |||||||
| (in thousands) | ||||||||
| Zedge, Inc. Class B common stock, shares at October 31, 2021 and July 31, 2021 | $ | $ | ||||||
| Rafael Holdings, Inc. Class B common stock, and shares at October 31, 2021 and July 31, 2021, respectively | ||||||||
| Rafael Holdings, Inc. restricted Class B common stock, and shares at October 31, 2021 and July 31, 2021, respectively | ||||||||
| Other marketable equity securities | ||||||||
| Fixed income mutual funds | ||||||||
| Current equity investments | $ | $ | ||||||
| Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”) | $ | $ | ||||||
| Series B and Series C convertible preferred stock—equity method investment | ||||||||
| Hedge funds | ||||||||
| Other | ||||||||
| Noncurrent equity investments | $ | $ | ||||||
The Company received the shares of Zedge, Inc. (“Zedge”) Class B common stock and of the shares of Rafael Class B common stock set forth in the table above in connection with the lapsing of restrictions on Zedge and Rafael restricted stock held by certain of the Company’s employees and the Company’s payment of taxes related thereto. The Company purchased shares of Rafael Class B common stock in fiscal 2021. Howard S. Jonas is the Vice-Chairman of the Board of Directors of Zedge.
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 October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period | $ | $ | ||||||
| Redemption for Visa mandatory release assessment | ( | ) | ||||||
| Adjustment for observable transactions involving a similar investment from the same issuer | ( | ) | ( | ) | ||||
| Impairments | ||||||||
| Balance, end of the period | $ | $ | ||||||
13
The
Company decreased the carrying value of the shares of Visa Series C Preferred it held by $
Unrealized gains and losses for all equity investments included the following:
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net losses recognized during the period on equity investments | $ | ( | ) | $ | ( | ) | ||
| Less: net gains and losses recognized during the period on equity investments sold during the period | ||||||||
| Unrealized losses recognized during the period on equity investments still held at the reporting date | $ | ( | ) | $ | ( | ) | ||
The net losses on investments in the three months
ended October 31, 2021 was primarily from unrealized losses of $
Equity Method Investment
On
February 2, 2021, the Company paid $
The Company accounts for this investment using the equity method since the series B and series C convertible preferred stock are in-substance common stock, and the Company can exercise significant influence over the operating and financial policies of the EMI.
The
Company determined that on the dates of the acquisitions, there were differences of $
The following table summarizes the change in the balance of the Company’s equity method investment:
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period | $ | $ | ||||||
| Purchase of convertible preferred stock | ||||||||
| Equity in the net loss of investee | ( | ) | ||||||
| Amortization of equity method basis difference | ( | ) | ||||||
| Balance, end of period | $ | $ | ||||||
Summarized financial information of the EMI was as follows:
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Revenues | $ | $ | ||||||
| Costs and expenses: | ||||||||
| Direct cost of revenues | ||||||||
| Selling, general and administrative | ||||||||
| Total costs and expenses | ||||||||
| Loss from operations | ( | ) | ||||||
| Other expense | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ||||
14
Note 8—Fair Value Measurements
The following table presents 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) | ||||||||||||||||
| October 31, 2021 | ||||||||||||||||
| Debt securities | $ | $ | $ | $ | ||||||||||||
| Equity investments included in current assets | ||||||||||||||||
| Equity investments included in noncurrent assets | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Contingent consideration included in: | ||||||||||||||||
| Other current liabilities | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Other noncurrent liabilities | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| July 31, 2021 | ||||||||||||||||
| Debt securities | $ | $ | $ | $ | ||||||||||||
| Equity investments included in current assets | ||||||||||||||||
| Equity investments included in noncurrent assets | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Contingent consideration included in: | ||||||||||||||||
| Other current liabilities | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Other noncurrent liabilities | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| (1) | |
| (2) | |
| (3) |
At
October 31, 2021 and July 31, 2021, the Company had $
15
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 October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period | $ | $ | ||||||
| Redemption for Visa mandatory release assessment | ( | ) | ||||||
| Total losses included in “Other expense, net” | ( | ) | ( | ) | ||||
| Balance, end of period | $ | $ | ||||||
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period | $ | $ | ||||||
The following table summarizes the change in the balance of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period | $ | $ | ||||||
| Total gains included in “Foreign currency translation adjustment” | ( | ) | ( | ) | ||||
| Balance, end of period | $ | $ | ||||||
| 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 October 31, 2021 and July 31, 2021, 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 October 31, 2021 and July 31, 2021, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.
Note 9—Acquisition
On
December 3, 2020, the Company’s subsidiary IDT International Telecom, Inc. (“IDTIT”) acquired
The Company’s pro forma results of operations as if the acquisitions occurred on August 1, 2020 were not materially different from the actual results of operations.
16
Note 10—Variable Interest Entity
As of May 31, 2021, the Company entered into a Warrant Purchase Agreement with the shareholders of an entity (the variable interest entity, or “VIE”) that operates money transfer businesses. The Company determined that, effective May 31, 2021, it had the power to direct the activities of the VIE that most significantly impact its economic performance, and the Company has the obligation to absorb losses of and the right to receive benefits from the VIE that could potentially be significant to it. The Company therefore determined that it is the primary beneficiary of the VIE, and as a result, the Company consolidates the VIE. The Company does not currently own any interest in the VIE and thus the net income incurred by the VIE was attributed to noncontrolling interests in the accompanying consolidated statements of operations.
The VIE’s net income and aggregate funding repaid to the Company by the VIE were as follows:
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net income of the VIE | $ | $ | ||||||
| Aggregate funding repaid to the Company by the VIE, net | $ | ( | ) | $ | ||||
The VIE’s summarized consolidated balance sheet amounts are as follows:
October 31, 2021 | July 31, 2021 | |||||||
| (in thousands) | ||||||||
| Assets: | ||||||||
| Cash and equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Other intangibles, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and noncontrolling interests: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Due to the Company | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Noncontrolling interests | ||||||||
| Total liabilities and noncontrolling interests | $ | $ | ||||||
The VIE’s assets may only be used to settle the VIE’s obligations and may not be used for other consolidated entities. The VIE’s liabilities are non-recourse to the general credit of the Company’s other consolidated entities.
Note 11—Other Operating Expense, Net
The following table summarizes the other operating expense, net by business segment:
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Corporate—Straight Path Communications Inc. class action legal fees | $ | ( | ) | $ | ( | ) | ||
| Corporate—Straight Path Communications Inc. class action insurance claims | ||||||||
| Traditional Communications—net2phone indemnification claim | ( | ) | ||||||
| Traditional Communications—Carrier Services settlement | ( | ) | ||||||
| Total other operating expense, net | $ | ( | ) | $ | ( | ) | ||
Straight Path Communications Inc. Class Action
As discussed in Note 17, the Company (as well as other defendants) has been named in a pending putative class action on behalf of the stockholders of the Company’s former subsidiary, Straight Path Communications Inc. (“Straight Path”), and a derivative complaint. The Company incurred legal fees and recorded offsetting gains from insurance claims related to this action in the three months ended October 31, 2021 and 2020.
17
Indemnification Claim
Beginning 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.
Note 12—Revolving Credit Facility
The
Company’s subsidiary, IDT Telecom, Inc. (“IDT Telecom”), entered into a credit agreement, dated as of May 17, 2021,
with TD Bank, N.A. for a revolving credit facility for up to a maximum principal amount of $
Note 13—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 million shares in the aggregate. There were repurchases
under the program in the three months ended October 31, 2021. In the three months ended October 31, 2020, the Company repurchased
shares of Class B common stock for an aggregate purchase price of $
In
the three months ended October 31, 2021 and 2020, the Company paid $
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. . At October 31, 2021, there were unvested DSUs outstanding that are eligible to vest (if the conditions therefor are satisfied) on January 5, 2022.
2015 Stock Option and Incentive Plan
In
the three months ended October 31, 2020, the Company received proceeds from the exercise of stock options of $
On September 14, 2021, the Company’s Board of Directors amended the Company’s 2015 Stock Option and Incentive Plan to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional shares. The amendment is subject to approval by the Company’s stockholders at its annual meeting of stockholders on December 15, 2021.
Note 14—Redeemable Noncontrolling Interest
On
September 29, 2021, NRS sold shares of its Class B common stock, which represents
The shares of NRS’ Class B common stock sold to Alta Fox have been classified as mezzanine equity in the accompanying consolidated balance sheet because they may be redeemed at the option of Alta Fox, although the shares are not mandatorily redeemable. The carrying amount of the shares includes the noncontrolling interest in the net income of NRS.
18
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.
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Basic weighted-average number of shares | ||||||||
| Effect of dilutive securities: | ||||||||
| Stock options | ||||||||
| Non-vested restricted Class B common stock | ||||||||
| Diluted weighted-average number of shares | ||||||||
Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Stock options | ||||||||
| Non-vested restricted Class B common stock | ||||||||
| Shares excluded from the calculation of diluted earnings per share | ||||||||
The diluted loss per share equals basic loss per share in the three months ended October 31, 2021 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. Stock options with an exercise price that was greater than the average market price of the Company’s common stock in the three months ended October 31, 2020 were excluded from the calculation of diluted earnings per share.
Note 16—Accumulated Other Comprehensive Loss
The accumulated balances for each classification of other comprehensive (loss) income were as follows:
| Unrealized Loss on Available-for-Sale Securities | Foreign Currency Translation | Accumulated Other Comprehensive Loss | ||||||||||
| (in thousands) | ||||||||||||
| Balance, July 31, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive (loss) income attributable to IDT Corporation | ( | ) | ||||||||||
| Balance, October 31, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Note 17—Commitments and Contingencies
Coronavirus Disease (COVID-19)
The Company continues to monitor and respond to the impacts of the COVID-19 pandemic on all aspects of its business, including its customers, employees, suppliers, vendors, and business partners.
Operationally, the Company’s employees transitioned to work-from-home during the third quarter of fiscal 2020 and, to a large degree, continue to work-from-home. Beginning in the fourth quarter of fiscal 2021, certain of the Company’s employees returned to work in the Company’s offices on a part-time basis. The Company’s salespeople, customer service employees, technicians, and delivery employees continue to serve its independent retailers, channel partners, and customers with minimal interruption.
19
COVID-19 had mixed financial impacts on the Company beginning in the third quarter of fiscal 2020 and continuing through the first quarter of fiscal 2022.
Legal Proceedings
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. In August 2019, the Company filed a cross complaint against Rosales alleging trade secret and other violations. The parties are now seeking court approval of a settlement agreement.
On April 24, 2018, Sprint Communications Company L.P. filed a patent infringement claim against the Company and certain of its affiliates in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,298,064; 6,330,224; 6,343,084; 6,452,932; 6,463,052; 6,473,429; 6,563,918; 6,633,561; 6,697,340; 6,999,463; 7,286,561; 7,324,534; 7,327,728; 7,505,454; and 7,693,131. Plaintiff was seeking damages and injunctive relief. On June 28, 2018, Sprint dismissed the complaint without prejudice. The Company is evaluating the underlying claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend any claim of infringement of the listed patents.
On July 5, 2017, plaintiff JDS1, LLC, on behalf of itself and all other similarly situated stockholders of Straight Path, and derivatively on behalf of Straight Path as nominal defendant, filed a putative class action and derivative complaint in the Court of Chancery of the State of Delaware against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas that held record and beneficial ownership of certain shares of Straight Path he formerly held), Howard S. Jonas, and each of Straight Path’s directors. The complaint alleges that the Company aided and abetted Straight Path Chairman of the Board and Chief Executive Officer Davidi Jonas, and Howard S. Jonas in his capacity as controlling stockholder of Straight Path, in breaching their fiduciary duties to Straight Path in connection with the settlement of claims between Straight Path and the Company related to potential indemnification claims concerning Straight Path’s obligations under the Consent Decree it entered into with the Federal Communications Commission (“FCC”), as well as the sale of Straight Path’s subsidiary Straight Path IP Group, Inc. to the Company in connection with that settlement. That action was consolidated with a similar action that was initiated by The Arbitrage Fund. The Plaintiffs are seeking, among other things, (i) a declaration that the action may be maintained as a class action or in the alternative, that demand on the Straight Path Board is excused; (ii) that the term sheet is invalid; (iii) awarding damages for the unfair price stockholders received in the merger between Straight Path and Verizon Communications Inc. for their shares of Straight Path’s Class B common stock; and (iv) ordering Howard S. Jonas, Davidi Jonas, and the Company to disgorge any profits for the benefit of the class Plaintiffs. On August 28, 2017, the Plaintiffs filed an amended complaint. On September 24, 2017, the Company filed a motion to dismiss the amended complaint, which was ultimately denied, and which denial was affirmed by the Delaware Supreme Court. The parties are engaged in discovery and motion practice. The trial is currently scheduled for May 2022. The Company intends to vigorously defend this matter (see Note 11). At this stage, the Company is unable to estimate its potential liability, if any.
In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, the Company believes that none of the other legal proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.
Sales Tax Contingency
On June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. The Company has evaluated its state tax filings with respect to the Wayfair decision and is in the process of reviewing its remittance 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 Fees Audit
The
Company’s 2017 FCC Form 499-A, which reports its calendar year 2016 revenue, is currently under audit by the Universal Service
Administrative Company (“USAC”). The Internal Audit Division of USAC issued preliminary audit findings and the Company has,
in accordance with audit procedures, appealed certain of the findings. The Company awaits a final decision by USAC on the preliminary
audit findings. Depending on the findings contained in the final decision, the Company may further appeal to the FCC. Although a final
decision remains pending, the Company has been invoiced $
20
Purchase Commitments
At
October 31, 2021, the Company had purchase commitments of $
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 October 31, 2021, the Company had aggregate
performance bonds of $
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.
Note 18—Other Expense, Net
Other expense, net consists of the following:
| Three Months Ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Foreign currency transaction losses | $ | ( | ) | $ | ( | ) | ||
| Equity in net loss of investee | ( | ) | ||||||
| Losses on investments (see Note 7) | ( | ) | ( | ) | ||||
| Other | ( | ) | ( | ) | ||||
| Total other expense, net | $ | ( | ) | $ | ( | ) | ||
Note 19—Recently Issued Accounting Standard Not Yet Adopted
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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.
21
| 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, 2021, 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, 2021. 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, 2021.
Recently Issued Accounting Standard Not Yet Adopted
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 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.
Results of Operations
We evaluate the performance of our 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.
Coronavirus Disease (COVID-19)
We continue to monitor and respond to the impacts of the COVID-19 pandemic on all aspects of our business, including our customers, employees, suppliers, vendors, and business partners.
Operationally, our employees transitioned to work-from-home during the third quarter of fiscal 2020 and, to a large degree, continue to work-from-home. Beginning in the fourth quarter of fiscal 2021, certain of our employees returned to work in our offices on a part-time basis. Our salespeople, customer service employees, technicians, and delivery employees continue to serve our independent retailers, channel partners, and customers with minimal interruption.
COVID-19 has had mixed financial impacts on our businesses beginning in the third quarter of fiscal 2020 and continuing through the first quarter of fiscal 2022. It drove increases in demand for our consumer offerings, principally BOSS Revolution Money Transfer, BOSS Revolution Calling and Mobile Top-Up, through our digital channels beginning in the latter half of March 2020. Subsequently, digital transaction levels have continued to increase relative to retailer originated transactions. Correspondingly, sales of consumer offerings originating through retailers and channel partners slowed modestly in late March and April 2020 before stabilizing in the fourth quarter of fiscal 2020. National Retail Solutions, or NRS, was immaterially impacted by the closure of some of its retailers in the third quarter of fiscal 2020, but most re-opened quickly and many attracted increased foot traffic following the onset of COVID-19 as local retailers are typically more accessible to pedestrian traffic than big box retailers. The resilience of local retailers has enabled NRS to continue to expand sales of terminals, payment processing, and advertising services. Carrier Services’ revenue, which had been declining as communications globally transition away from traditional international long-distance voice, declined more rapidly following the onset of COVID-19 as business communications shifted from calling to video conferencing and other collaboration platforms.
22
At the onset of the COVID-19 pandemic, the transition from offices to a more flexible workforce increased the demand for net2phone-UCaaS’ offerings. Customers transitioned from their on-premises phone system to net2phone-UCaaS’ cloud solution, ported their phone numbers, and quickly set-up their employees to work remotely. In April 2020, the release of Huddle, net2phone-UCaaS’ integrated video conferencing solution, significantly improved net2phone-UCaaS’ functionality for remote work, which also increased the demand for its services. COVID-19 had mixed financial impacts on net2phone-UCaaS’ business beginning in the third quarter of fiscal 2020. Its customer base growth slowed somewhat in the second half of fiscal 2020 in certain Latin American markets. However, Latin American sales rebounded in the first quarter of fiscal 2021 and sales have remained strong in its United States and Canadian markets. In the second half of fiscal 2021, COVID-19 cases increased in Latin America, in particular Brazil, and in Spain. This caused businesses to downsize or shutdown, which reduced its customer base and revenues. In the fourth quarter of fiscal 2021, the demand for flexible communications solutions for a hybrid workforce has resulted in an increase in new net2phone-UCaaS customers.
As of the date of this Quarterly Report, including the impact of COVID-19, we expect that our cash from operations and the balance of cash, cash equivalents, debt securities, and current equity investments that we held on October 31, 2021 will be sufficient to meet our anticipated working capital and capital expenditure requirements during the twelve month period ending October 31, 2022. 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.
Explanation of Performance Metrics
Our results of operations discussion include the following performance metrics: active point of sale, or POS, terminals, payment processing accounts, direct cost of revenues as a percentage of revenues, seats, subscription revenue, and minutes of use.
NRS uses two metrics, among others, to measure the size of its customer base: active POS terminals and payment processing accounts. Active POS terminals are the number of POS terminals that have completed at least one transaction in the calendar month. It excludes POS terminals that are being installed. Payment processing accounts are NRS PAY accounts that can generate revenue. It excludes accounts that have been approved but not activated. NRS uses these two metrics in its analysis of revenue trends and comparisons between periods.
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 is the numerator and revenues are the denominator in this ratio. Direct cost of revenues as a percentage of revenues is a useful metric for monitoring and evaluating trends in the net contribution of our revenues.
net2phone-UCaaS’ cloud communications offering is priced on a per-seat basis, with each customer employee identity constituting a seat, and its subscription revenue is a monthly base fee per seat. The number of seats served and subscription revenue trends and comparisons between periods are used in the analysis of net2phone-UCaaS’ revenues and direct cost of revenues.
Minutes of use is a nonfinancial metric that measures aggregate customer usage during a reporting period. Minutes of use is an important factor in BOSS Revolution Calling’s 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.
Three Months Ended October 31, 2021 Compared to Three Months Ended October 31, 2020
Fintech Segment
Fintech, which represented 6.1% and 5.9% of our total revenues in the three months ended October 31, 2021 and 2020, respectively, is comprised of BOSS Revolution Money Transfer, a provider of international money remittance and related value/payment transfer services, and NRS, an operator of a nationwide POS network providing payment processing, digital advertising, transaction data, and ancillary services.
23
Three
months ended | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
| Revenues: | ||||||||||||||||
| BOSS Revolution Money Transfer | $ | 12.5 | $ | 15.2 | $ | (2.7 | ) | (17.6 | )% | |||||||
| National Retail Solutions | 10.1 | 4.9 | 5.2 | 104.3 | ||||||||||||
| Total revenues | 22.6 | 20.1 | 2.5 | 12.4 | ||||||||||||
| Direct cost of revenues | 7.2 | 6.2 | 1.0 | 16.9 | ||||||||||||
| Selling, general and administrative | 14.8 | 10.4 | 4.4 | 42.9 | ||||||||||||
| Depreciation and amortization | 0.6 | 0.4 | 0.2 | 43.9 | ||||||||||||
| (Loss) income from operations | $ | — | $ | 3.1 | $ | (3.1 | ) | (101.4 | )% | |||||||
Revenues. Revenues from BOSS Revolution Money Transfer decreased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily because the significant benefit from transient foreign exchange market conditions that materially improved BOSS Revolution Money Transfer’s revenues in the three months ended October 31, 2020 ceased by January 31, 2021. The revenue decline was partially offset by revenue from increased transaction volume in BOSS Revolution Money Transfer’s digital channel in the three months ended October 31, 2021 compared to the similar period in fiscal 2021.
Revenues from NRS increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 driven primarily by the expansion of its POS network, and revenue growth from its digital out-of-home advertising and payment processing services. Advertising and data revenue increased 130% to $4.3 million in the three months ended October 31, 2021 from $1.9 million in the three months ended October 31, 2020. Merchant services and other revenue, which includes payment processing services, increased 146% to $3.1 million in the three months ended October 31, 2021 from $1.3 million in the three months ended October 31, 2020. Active POS terminals increased 37% to 15,100 at October 31, 2021 from 11,100 at October 31, 2020. Payment processing accounts increased 118% to 6,800 at October 31, 2021 from 3,100 at October 31, 2020.
Direct Cost of Revenues. BOSS Revolution Money Transfer’s direct cost of revenues increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 due to increased direct cost of revenues in both its retailer and digital channels. NRS’ direct cost of revenues increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily due to the increase in its revenues.
Three months ended October 31, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Direct cost of revenues as a percentage of revenues | 32.1 | % | 30.9 | % | 1.2 | % | ||||||
Direct cost of revenues as a percentage of revenues increased 120 basis points in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 due to the increase in BOSS Revolution Money Transfer’s direct cost of revenues as a percentage of revenues, although NRS’ direct cost of revenues as a percentage of revenues decreased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021.
Selling, General and Administrative. Selling, general and administrative expense increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily due to increases in sales commissions, employee compensation, and debit and credit card processing charges. The increase in card processing charges was the result of increased credit and debit card transactions through our BOSS Revolution Money app and other digital channels. As a percentage of Fintech’s revenue, Fintech’s selling, general and administrative expense increased to 65.6% from 51.6% in the three months ended October 31, 2021 and 2020, respectively.
Depreciation and Amortization. Depreciation and amortization expense increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2020 primarily due to increased depreciation of capitalized costs of consultants and employees developing internal use software and increased depreciation of NRS’ POS equipment.
net2phone-UCaaS Segment
The net2phone-UCaaS segment, which represented 3.5% and 2.8% of our total revenues in the three months ended October 31, 2021 and 2020, respectively, is comprised of net2phone’s cloud communications offerings.
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Three months ended | Change | |||||||||||||||
2021 | 2020 | $ | % | |||||||||||||
| Revenues | $ | 12.9 | $ | 9.7 | $ | 3.2 | 33.1 | % | ||||||||
| Direct cost of revenues | 2.5 | 2.1 | 0.4 | 18.9 | ||||||||||||
| Selling, general and administrative | 13.3 | 10.4 | 2.9 | 27.8 | ||||||||||||
| Depreciation and amortization | 1.3 | 1.1 | 0.2 | 22.2 | ||||||||||||
| Loss from operations | $ | (4.2 | ) | $ | (3.9 | ) | $ | (0.3 | ) | (8.2 | )% | |||||
Revenues. net2phone-UCaaS’s revenues increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 driven primarily by growth in the United States, although revenue increased in all net2phone-UCaaS regions. Seats served increased 38% to 244,000 at October 31, 2021 from 176,000 at October 31, 2020. Subscription revenue increased 38% to $12.5 million in the three months ended October 31, 2021 from $9.1 million in the three months ended October 31, 2020 led by growth in both the South American and North American regions. In the three months ended October 31, 2021, net2phone-UCaaS launched a HIPAA compliant program for certain of its communications and collaboration solutions and introduced net2phone Phone App for Teams. The app enables Microsoft Teams users to add voice capabilities into Teams environments without additional licenses.
Direct Cost of Revenues. Direct cost of revenues increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily due to the increase in revenues, with the largest increase in Latin America.
Three months ended October 31, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Direct cost of revenues as a percentage of revenues | 19.1 | % | 21.4 | % | (2.3 | )% | ||||||
Direct cost of revenues as a percentage of revenues decreased 230 basis points in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily because of a decrease in direct cost of revenues as a percentage of revenues in the United States. net2phone-UCaaS’ focus on mid-sized businesses, multi-channel strategies, and localized offerings generated revenue growth that exceeded the increase in direct cost of revenues.
Selling, General and Administrative. Selling, general and administrative expense increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily due to increases in employee compensation and sales commissions. As a percentage of net2phone-UCaaS’ revenues, net2phone-UCaaS’ selling, general and administrative expenses decreased to 103.1% from 107.4% in the three months ended October 31, 2021 and 2020, respectively.
Depreciation and Amortization. The increase in depreciation and amortization expense in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 was due to increased depreciation of net2phone-UCaaS’ telephone equipment leased to customers and increased depreciation of capitalized costs of consultants and employees developing internal use software.
Traditional Communications Segment
The Traditional Communications segment, which represented 90.4% and 91.3% of our total revenues in the three months ended October 31, 2021 and 2020, respectively, includes Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging, and data to international and domestic mobile accounts, BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States and Canada, and Carrier Services, a wholesale provider of international voice and SMS termination and outsourced traffic management solutions to telecoms worldwide. Traditional Communications also includes other smaller businesses, many in harvest mode.
Traditional Communications’ most significant revenue streams are from Mobile Top-Up, BOSS Revolution Calling, and Carrier Services. Mobile Top-Up and BOSS Revolution Calling 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. Traditional Communications’ 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.
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| Three months ended October 31, | Change | |||||||||||||||
| 2021 | 2020 | $/# | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Mobile Top-Up | $ | 128.5 | $ | 95.8 | $ | 32.7 | 34.1 | % | ||||||||
| BOSS Revolution Calling | 106.0 | 117.3 | (11.3 | ) | (9.7 | ) | ||||||||||
| Carrier Services | 89.2 | 87.8 | 1.4 | 1.6 | ||||||||||||
| Other | 10.9 | 12.7 | (1.8 | ) | (13.3 | ) | ||||||||||
| Total revenues | 334.6 | 313.6 | 21.0 | 6.7 | ||||||||||||
| Direct cost of revenues | 281.9 | 264.9 | 17.0 | 6.4 | ||||||||||||
| Selling, general and administrative | 30.0 | 29.2 | 0.8 | 2.6 | ||||||||||||
| Depreciation and amortization | 2.6 | 3.0 | (0.4 | ) | (15.3 | ) | ||||||||||
| Severance | — | 0.1 | (0.1 | ) | (66.4 | ) | ||||||||||
| Other operating expense | — | 0.5 | (0.5 | ) | (95.3 | ) | ||||||||||
| Income from operations | $ | 20.1 | $ | 15.9 | $ | 4.2 | 26.9 | % | ||||||||
| Minutes of use: | ||||||||||||||||
| BOSS Revolution Calling | 804 | 927 | (123 | ) | (13.3 | )% | ||||||||||
| Carrier Services | 2,060 | 2,917 | (857 | ) | (29.4 | ) | ||||||||||
Revenues. Revenues from Mobile Top-Up increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily from continued product expansion and growth in the business-to-business wholesale channel. In addition, our acquisition of a mobile top-up company in December 2020 contributed to our increased penetration into the market in Africa.
Revenues and minutes of use from BOSS Revolution Calling decreased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021. In fiscal 2021, COVID-19-related demand slowed the rate of decline in BOSS Revolution Calling revenue that we experienced but it was less significant in the three months ended October 31, 2021. 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, video conferencing, and messaging services.
Revenues from Carrier Services increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 due to an increase in the average rate per minute. Minutes of use from Carrier Services decreased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 as communications globally continued to transition away from international voice calling. This trend was accelerated by the impact of COVID-19 as business communications shifted from calling to video conferencing and other collaboration platforms. We expect that Carrier Services will continue to be adversely impacted by these trends, and 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.
Direct Cost of Revenues. Direct cost of revenues increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily due to increases in Mobile Top-Up’s and Carrier Services’ direct cost of revenues in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 as a result of the increases in revenues from those lines of business, partially offset by a decrease in and BOSS Revolution Calling’s direct cost of revenues in the three months ended October 31, 2021 compared to the similar period in fiscal 2021.
Three months ended October 31, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Direct cost of revenues as a percentage of revenues | 84.3 | % | 84.5 | % | (0.2 | )% | ||||||
Direct cost of revenues as a percentage of revenues decreased 20 basis points in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 because of decreases in direct cost of revenues as a percentage of revenues in Mobile Top-Up, BOSS Revolution Calling, and Carrier Services in the three months ended October 31, 2021 compared to the similar period in fiscal 2021. The decreases in direct cost of revenues as a percentage of revenues at Mobile Top-Up and BOSS Revolution Calling were primarily due to the continued migration of customers to our digital platforms. The increased adoption of our digital, direct-to-consumer channels is expected to continue, which is expected to contribute to future reductions in direct cost of revenues as a percentage of revenues.
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Selling, General and Administrative. Selling, general and administrative expense increased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily due to increases in consulting expense and marketing expense, partially offset by decreases in employee compensation and stock-based compensation. As a percentage of Traditional Communications’ revenue, Traditional Communications’ selling, general and administrative expense decreased to 9.0% from 9.3% in the three months ended October 31, 2021 and 2020, respectively.
Depreciation and Amortization. Depreciation and amortization expense decreased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 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 Expense. In the three months ended October 31, 2021 and 2020, we incurred severance expense of $38,000 and $0.1 million, respectively.
Other Operating Expense. Other operating expense of $25,000 in the three months ended October 31, 2021 was for the indemnification of a net2phone cable telephony customer related to patent infringement claims brought against the customer. Other operating expense in the three months ended October 31, 2020 was for a settlement of a Carrier Services’ claim.
Corporate
| Three months ended October 31, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| (in millions) | ||||||||||||||||
| General and administrative | $ | (2.0 | ) | $ | (2.2 | ) | $ | 0.2 | 5.6 | % | ||||||
| Other operating (expense) gain, net | (0.1 | ) | 0.3 | (0.4 | ) | (120.7 | ) | |||||||||
| Loss from operations | $ | (2.1 | ) | $ | (1.9 | ) | $ | (0.2 | ) | (13.2 | )% | |||||
Corporate costs include compensation, consulting fees, treasury, tax and accounting services, human resources, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, 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 decreased in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 primarily because of a decrease in stock-based compensation due to reductions in expense of deferred stock units granted in June 2019, as well as a decrease in employee compensation. As a percentage of our consolidated revenues, Corporate general and administrative expense was 0.5% and 0.6% in the three months ended October 31, 2021 and 2020, respectively.
Other Operating (Expense) Gain, net. As discussed in Note 17 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report, we (as well as other defendants) have been named in a pending putative class action on behalf of the stockholders of our former subsidiary, Straight Path Communications Inc., or Straight Path, and a derivative complaint. We incurred legal fees of $1.0 million and $0.3 million in the three months ended October 31, 2021 and 2020, respectively, related to this action. Also, we recorded offsetting gains from insurance claims for this matter of $0.9 million and $0.6 million in the three months ended October 31, 2021 and 2020, 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. We lease office and parking space in a building and parking garage located at 520 Broad Street, Newark, New Jersey that is owned by our former subsidiary, Rafael Holdings, Inc., or Rafael. We also lease office space in Israel from Rafael. The Newark lease expires in April 2025 and the Israel lease expires in July 2025. We incurred lease costs of $0.5 million in each of the three months ended October 31, 2021 and 2020 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 $0.3 million and $0.5 million in the three months ended October 31, 2021 and 2020, respectively. The decrease in stock-based compensation expense in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 was primarily due to reductions in expense of deferred stock units granted in June 2019. At October 31, 2021, unrecognized compensation cost related to non-vested stock-based compensation was an aggregate of $0.4 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting period that ends in fiscal 2024.
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| Three months ended October 31, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Income from operations | $ | 13.8 | $ | 13.3 | $ | 0.5 | 3.9 | % | ||||||||
| Interest income (expense), net | — | (0.1 | ) | 0.1 | 131.7 | |||||||||||
| Other expense, net | (16.2 | ) | (1.4 | ) | (14.8 | ) | nm | |||||||||
| Benefit from (provision for) income taxes | 0.1 | (3.4 | ) | 3.5 | 102.5 | |||||||||||
| Net (loss) income | (2.3 | ) | 8.4 | (10.7 | ) | (127.9 | ) | |||||||||
| Net income attributable to noncontrolling interests | (0.2 | ) | (0.1 | ) | (0.1 | ) | (4.7 | ) | ||||||||
| Net (loss) income attributable to IDT Corporation | $ | (2.5 | ) | $ | 8.3 | $ | (10.8 | ) | (129.9 | )% | ||||||
nm—not meaningful
Other Expense, net. Other expense, net consists of the following:
Three months ended October 31, | ||||||||
2021 | 2020 | |||||||
| (in millions) | ||||||||
| Foreign currency transaction losses | $ | (0.3 | ) | $ | (0.4 | ) | ||
| Equity in the net loss of investee | (0.6 | ) | — | |||||
| Losses on investments | (14.5 | ) | (0.9 | ) | ||||
| Other | (0.8 | ) | (0.1 | ) | ||||
| Total other expense, net | $ | (16.2 | ) | $ | (1.4 | ) | ||
On February 2, 2021, we paid $4.0 million to purchase shares of series B convertible preferred stock of a communications company (the equity method investee, or EMI), and on August 10, 2021, we paid $1.1 million to purchase shares of the EMI’s series C convertible preferred stock and additional shares of the EMI’s series B convertible preferred stock. The initial shares purchased represented 23.95% of the outstanding shares of the EMI on an as converted basis. The subsequent purchases increased our ownership to 26.57% on an as converted basis. We account for this investment using the equity method since the series B and series C convertible preferred stock are in-substance common stock, and we can exercise significant influence over the operating and financial policies of the EMI. We determined that on the dates of the acquisitions, there were differences of $3.4 million and $1.0 million between our investment in the EMI and our proportional interest in the equity of the EMI, which represented our share of the EMI’s customer list on the dates of the acquisitions. These basis differences are being amortized over the 6-year estimated life of the customer list.
The losses on investments in the three months ended October 31, 2021 was primarily from unrealized losses of $12.5 million on shares of Rafael Class B common stock.
Benefit from (Provision for) Income Taxes. The change in income tax expense in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 was primarily due to differences in the amount of taxable (loss) income in the various taxing jurisdictions.
Net Income Attributable to Noncontrolling Interests. The change in the net income attributable to noncontrolling interests in the three months ended October 31, 2021 compared to the similar period in fiscal 2021 was mostly due to new noncontrolling interests subsequent to October 31, 2020. On September 29, 2021, NRS sold shares of its Class B common stock to a third party that represents 2.5% of its outstanding capital stock on a fully diluted basis. As of May 31, 2021, we began consolidating a variable interest entity, or VIE, because we determined that we are the primary beneficiary of the VIE since we have the power to direct the activities of the VIE that most significantly impact its economic performance, and we have the obligation to absorb losses of and the right to receive benefits from the VIE that could potentially be significant to it. We do not currently own any interest in the VIE and thus the net income incurred by the VIE was attributed to noncontrolling interests. On December 31, 2020, Howard S. Jonas, the Chairman of our Board of Directors, and Shmuel Jonas, our Chief Executive Officer, each received fifty restricted shares of net2phone 2.0, Inc., or net2phone 2.0, Class B common stock, which represents 5% of the outstanding common stock of net2phone 2.0. net2phone 2.0 owns and operates our net2phone-UCaaS segment. Finally, beginning on December 3, 2020, we acquired an aggregate of 75% of the issued shares of a company that provides a digital platform facilitating supply and distribution of mobile airtime and data top-ups and other services across borders.
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Liquidity and Capital Resources
General
As of the date of this Quarterly Report, including the impact of COVID-19, we expect our cash from operations and the balance of cash, cash equivalents, debt securities, and current equity investments that we held on October 31, 2021 will be sufficient to meet our currently anticipated working capital and capital expenditure requirements during the twelve-month period ending October 31, 2022.
At October 31, 2021, we had cash, cash equivalents, debt securities, and current equity investments of $159.3 million and working capital (current assets in excess of current liabilities) of $59.6 million.
We treat unrestricted cash and cash equivalents held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC as substantially restricted and unavailable for other purposes. At October 31, 2021, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of $16.7 million held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC that was unavailable for other purposes.
Three months ended October 31, | ||||||||
2021 | 2020 | |||||||
| (in millions) | ||||||||
| Cash flows (used in) provided by: | ||||||||
| Operating activities | $ | (5.9 | ) | $ | 18.8 | |||
| Investing activities | (7.8 | ) | (27.3 | ) | ||||
| Financing activities | 10.9 | (2.7 | ) | |||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents | (2.3 | ) | (1.9 | ) | ||||
| Decrease in cash, cash equivalents, and restricted cash and cash equivalents | $ | (5.1 | ) | $ | (13.1 | ) | ||
Operating Activities
Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable.
Gross trade accounts receivable increased to $56.1 million at October 31, 2021 from $51.1 million at July 31, 2021 primarily due to amounts billed in the three months ended October 31, 2021 that were greater than collections 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 $41.3 million at October 31, 2021 from $42.3 million at July 31, 2021 primarily due to decreases in the BOSS Revolution Calling and Mobile Top-Up deferred revenue balances.
Customer deposit liabilities at IDT Financial Services Limited, our Gibraltar-based bank, decreased to $100.3 million at October 31, 2021 from $115.5 million at July 31, 2021. Our restricted cash and cash equivalents included $101.8 million and $115.8 million at October 31, 2021 and July 31, 2021, respectively, held by the bank.
On June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. We have evaluated our state tax filings with respect to the Wayfair decision and are in the process of reviewing our remittance practices. It is possible that one or more jurisdictions may assert that we have liability for periods for which we have not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could materially and adversely affect our business, financial 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.
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Investing Activities
Our capital expenditures were $4.4 million and $4.6 million in the three months ended October 31, 2021 and 2020, respectively. We currently anticipate that total capital expenditures in the twelve-month period ending October 31, 2022 will be $18 million to $20 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 August 10, 2021, we paid $1.1 million to purchase shares of the EMI’s series C convertible preferred stock and additional shares of the EMI’s series B convertible preferred stock. The purchases increased our ownership of the EMI’s outstanding shares to 26.57% from 23.95% on an as converted basis.
Purchases of debt securities and equity investments were $6.3 million and $29.3 million in the three months ended October 31, 2021 and 2020, respectively. Proceeds from maturities and sales of debt securities and redemptions of equity investments were $3.9 million and $6.6 million in the three months ended October 31, 2021 and 2020, respectively.
Financing Activities
We distributed cash of $0.2 million and $28,000 in the three months ended October 31, 2021 and 2020, respectively, to the noncontrolling interests in certain of our subsidiaries.
In the three months ended October 31, 2021 and 2020, we received proceeds from financing-related other liabilities of $2.3 million and nil, respectively.
In the three months ended October 31, 2021 and 2020, we repaid financing-related other liabilities of $1.2 million and $40,000, respectively.
On September 29, 2021, NRS sold 862,442 shares of its Class B common stock, which represents 2.5% of its outstanding capital stock on a fully diluted basis, to Alta Fox Opportunities Fund LP, or Alta Fox, for cash of $10 million. Alta Fox has the right to request that NRS redeem all or any portion of the NRS common shares that it purchased at the per share purchase price during a period of 182 days following the fifth anniversary of this transaction. The redemption right shall terminate upon the consummation of (i) a sale of NRS or its assets for cash or securities that are listed on a national securities exchange, (ii) a public offering of NRS’ securities, or (iii) a distribution of NRS’ capital stock following which NRS’ common shares are listed on a national securities exchange.
In the three months ended October 31, 2020, we received proceeds from the exercise of stock options of $0.2 million for which we issued 21,894 shares of our Class B common stock. There were no stock option exercises in the three months ended October 31, 2021.
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. There were no repurchases under the program in the three months ended October 31, 2021. In the three months ended October 31, 2020, we repurchased 463,792 shares of Class B common stock for an aggregate purchase price of $2.8 million. At October 31, 2021, 5.8 million shares remained available for repurchase under the stock repurchase program.
In the three months ended October 31, 2021 and 2020, we paid $26,000 and $7,000, respectively, to repurchase 627 and 1,053 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 vesting of deferred stock units and lapsing of restrictions on restricted stock. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.
Our subsidiary, IDT Telecom, Inc., or IDT Telecom, entered into a credit agreement, dated as of May 17, 2021, with TD Bank, N.A. for a revolving credit facility for up to a maximum principal amount of $25.0 million. IDT Telecom may use the proceeds to finance working capital requirements and for certain closing costs of the facility. At October 31, 2021 and July 31, 2021, IDT Telecom had not borrowed any amounts under this facility. The revolving credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum at the Intercontinental Exchange Benchmark Administration Ltd. LIBOR multiplied by the Regulation D maximum reserve requirement plus 125 to 175 basis points, depending upon IDT Telecom’s leverage ratio as computed for the most recent fiscal quarter. Interest is payable monthly, and all outstanding principal and any accrued and unpaid interest is due in May 2024. IDT Telecom pays a quarterly unused commitment fee on the average daily balance of the unused portion of the $25.0 million commitment of 30 to 85 basis points, depending upon IDT Telecom’s leverage ratio as computed for the most recent fiscal quarter. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain targets based on financial ratios during the term of the revolving credit facility. As of October 31, 2021, IDT Telecom was in compliance with all of the covenants.
Other Sources and Uses of Resources
We are considering spin-offs, sales of equity, and other potential dispositions of certain of our subsidiaries. Some of the transactions under consideration are in early stages and others are more advanced. A spin-off may include the contribution of a significant amount of cash, cash equivalents, debt securities, and/or equity securities to the subsidiary prior to the spin-off, which would reduce our capital resources. The sale of a subsidiary’s equity in a private or public offering or other transaction would instead be a source of cash to us or that subsidiary. In fiscal 2021, we announced that our Board of Directors had directed us to prepare for the potential spin-off of our net2phone cloud communications business. Management subsequently has stated that the preparations for the potential spin-off are progressing, with timing dependent on market conditions and other factors should our Board of Directors authorize it. There is no assurance at this time that any of these transactions will be completed.
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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.
Contractual Obligations and Other Commercial Commitments
The following table quantifies our future contractual obligations and other commercial commitments at October 31, 2021:
Payments Due by Period (in millions) | Total | Less
than | 1–3 years | 4–5 years | After 5 years | |||||||||||||||
| Purchase commitments | $ | 4.0 | $ | 4.0 | $ | — | $ | — | $ | — | ||||||||||
| Connectivity obligations under service agreements | 0.6 | 0.6 | — | — | — | |||||||||||||||
| Operating leases including short-term leases | 8.9 | 3.1 | 4.4 | 1.2 | 0.2 | |||||||||||||||
| Total contractual obligations (1) | $ | 13.5 | $ | 7.7 | $ | 4.4 | $ | 1.2 | $ | 0.2 | ||||||||||
| (1) | The above table does not include up to $10 million for the potential redemption of shares of NRS’ Class B common stock, an aggregate of $19.6 million in performance bonds, and $1.7 million in potential contingent consideration related to business acquisitions, 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 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 17 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report).
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 October 31, 2021, we had aggregate performance bonds of $19.6 million outstanding.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risks |
Foreign Currency Risk
Revenues from our international operations were 28% and 14% of our consolidated revenues in the three months ended October 31, 2021 and 2020, respectively. On February 1, 2021, we changed the geographic sourcing of certain revenues from the United States to the United Kingdom. A significant portion of these revenues is in currencies other than the U.S. Dollar. Our foreign currency exchange risk is somewhat mitigated by our ability to offset a portion of these non-U.S. Dollar-denominated revenues with operating expenses that are paid in the same currencies. While the impact from fluctuations in foreign exchange rates affects our revenues and expenses denominated in foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period is generally not material.
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Investment Risk
We hold a portion of our assets in debt and equity securities, including hedge funds, for strategic and speculative purposes. At October 31, 2021, the value of our debt and equity securities was an aggregate of $54.3 million, which represented 10.7% of our total assets. Investments in debt and equity securities carry a degree of risk and depend to a great extent on correct assessments of the future course of price movements of securities and other instruments. There can be no assurance that our investment managers will be able to accurately predict these price movements. The securities markets have in recent years been characterized by great volatility and unpredictability. Accordingly, the value of our investments may go down as well as up and we may not receive the amounts originally invested upon redemption.
| Item 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 effective as of October 31, 2021.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended October 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
Legal proceedings in which we are involved are described in Note 17 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report.
| 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, 2021.
| 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 first quarter of fiscal 2022:
Total Number of Purchased | Average Price per Share | Total Number Purchased as Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||||||||||
| August 1-31, 2021 | — | $ | — | — | 5,768,497 | |||||||||||
| September 1–30, 2021 | 627 | $ | 40.68 | — | 5,768,497 | |||||||||||
| October 1–31, 2021 | — | $ | — | — | 5,768,497 | |||||||||||
| Total | 627 | $ | 40.68 | — | ||||||||||||
| (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
| Item 6. | Exhibits |
Exhibit Number |
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.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 | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed or furnished herewith.
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SIGNATURES
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 | ||
| December 10, 2021 | By: | /s/ SHMUEL JONAS |
Shmuel Jonas Chief Executive Officer | ||
| December 10, 2021 | By: | /s/ MARCELO FISCHER |
Marcelo Fischer Chief Financial Officer | ||
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