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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 1-16371

 

 

 

IDT CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   22-3415036

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

     
520 Broad Street, Newark, New Jersey   07102
(Address of principal executive offices)   (Zip Code)

 

(973) 438-1000

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Class B common stock, par value $.01 per share   New York Stock Exchange

 

Trading symbol: IDT

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
Emerging growth company      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No

 

As of December 8, 2021, the registrant had the following shares outstanding:

 

Class A common stock, $.01 par value:   1,574,326 shares outstanding (excluding 1,698,000 treasury shares)
Class B common stock, $.01 par value:   24,187,548 shares outstanding (excluding 2,192,276 treasury shares)

 

 

 

 

 

 

IDT CORPORATION

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 3
       
  Item 1. Financial Statements (Unaudited) 3
       
    Consolidated Balance Sheets 3
       
    Consolidated Statements of Operations 4
       
    Consolidated Statements of Comprehensive (Loss) Income 5
       
    Consolidated Statements of Equity 6
       
    Consolidated Statements of Cash Flows 7
       
    Notes to Consolidated Financial Statements 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risks 31
       
  Item 4. Controls and Procedures 32
       
PART II. OTHER INFORMATION 33
       
  Item 1. Legal Proceedings 33
       
  Item 1A. Risk Factors 33
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
       
  Item 3. Defaults Upon Senior Securities 33
       
  Item 4. Mine Safety Disclosures 33
       
  Item 5. Other Information 33
       
  Item 6. Exhibits 33
       
SIGNATURES 34

 

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  $ 114,543   $107,147 
Restricted cash and cash equivalents    107,317    119,769 
Debt securities    13,633    14,012 
Equity investments    31,144    42,434 
Trade accounts receivable, net of allowance for doubtful accounts of $4,810 at October 31, 2021 and $4,438 at July 31, 2021    51,263    46,644 
Disbursement prefunding    23,969    27,656 
Prepaid expenses    17,130    13,694 
Other current assets    26,491    16,779 
Total current assets    385,490    388,135 
Property, plant, and equipment, net    30,870    30,829 
Goodwill    14,798    14,897 
Other intangibles, net    7,312    7,578 
Equity investments    9,487    11,654 
Operating lease right-of-use assets    7,768    7,671 
Deferred income tax assets, net    41,686    41,502 
Other assets    10,318    10,389 
Total assets  $ 507,729   $512,655 
Liabilities and equity           
Current liabilities:           
Trade accounts payable  $ 31,615   $24,502 
Accrued expenses    120,440    129,085 
Deferred revenue    41,299    42,293 
Customer deposits    100,342    115,524 
Other current liabilities    32,223    27,930 
Total current liabilities    325,919    339,334 
Operating lease liabilities    5,533    5,473 
Other liabilities    975    1,234 
Total liabilities    332,427    346,041 
Commitments and contingencies         - 
Redeemable noncontrolling interest    10,010     
Equity:           
IDT Corporation stockholders’ equity:           
Preferred stock, $.01 par value; authorized shares—10,000; no shares issued         
Class A common stock, $.01 par value; authorized shares—35,000; 3,272 shares issued and 1,574 shares outstanding at October 31, 2021 and July 31, 2021    33    33 
Class B common stock, $.01 par value; authorized shares—200,000; 26,380 and 26,379 shares issued and 24,188 and 24,187 shares outstanding at October 31, 2021 and July 31, 2021, respectively    264    264 
Additional paid-in capital    278,306    278,021 
Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 2,192 and 2,192 shares of Class B common stock at October 31, 2021 and July 31, 2021, respectively    (60,439)   (60,413)
Accumulated other comprehensive loss    (9,226)   (10,183)
Accumulated deficit    (45,336)   (42,858)
Total IDT Corporation stockholders’ equity    163,602    164,864 
Noncontrolling interests    1,690    1,750 
Total equity    165,292    166,614 
Total liabilities and equity  $ 507,729   $512,655 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

2021

  

2020

 
  

Three Months Ended

October 31,

 
  

2021

  

2020

 
   (in thousands, except per share data) 
Revenues  $370,083   $343,425 
Costs and expenses:          
Direct cost of revenues (exclusive of depreciation and amortization)   291,625    273,174 
Selling, general and administrative (i)   60,113    52,140 
Depreciation and amortization   4,446    4,493 
Severance   38    113 
Total costs and expenses   356,222    329,920 
Other operating expense, net (see Note 11)   (88)   (252)
Income from operations   13,773    13,253 
Interest income (expense), net   13   (41)
Other expense, net   (16,216)   (1,380)
(Loss) income before income taxes   (2,430)   11,832 
Benefit from (provision for) income taxes   85   (3,417)
Net (loss) income    (2,345)   8,415 
Net income attributable to noncontrolling interests   (133)   (127)
Net (loss) income attributable to IDT Corporation  $(2,478)  $8,288 
(Loss) earnings per share attributable to IDT Corporation common stockholders:          
Basic  $(0.10)  $0.32 
Diluted  $(0.10)  $0.32 
           
Weighted-average number of shares used in calculation of (loss) earnings per share:          
Basic   25,566    25,534 
Diluted   25,566    25,861 

           
(i) Stock-based compensation included in selling, general and administrative expenses  $285   $506 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

(Unaudited)

 

   2021  

2020

 
  

Three Months Ended

October 31,

 
   2021  

2020

 
   (in thousands) 
Net (loss) income   $(2,345)  $8,415 
Other comprehensive (loss) income:          
Change in unrealized gain on available-for-sale securities   (111)   (29)
Foreign currency translation adjustments   1,068    251 
Other comprehensive income    957    222 
Comprehensive (loss) income   (1,388)   8,637 
Comprehensive income attributable to noncontrolling interests   (133)   (127)
Comprehensive (loss) income attributable to IDT Corporation  $(1,521)  $8,510 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

 

   Class A    Class B    Capital   Treasury    Comprehensive    Deficit   Interests   Total  
  

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  $33   $264   $278,021   $(60,413)  $(10,183)  $(42,858)  $1,750   $166,614 
Restricted Class B common stock purchased from employee              (26)               (26)
Stock-based compensation           285                    285 
Distributions to noncontrolling interests                           (183)   (183)
Other comprehensive income                   957            957 
Net loss                       (2,478)   123    (2,355)
BALANCE AT OCTOBER 31, 2021  $33   $264   $278,306   $(60,439

  $(9,226)  $(45,336)  $1,690   $165,292 

 

  

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  $33   $260   $277,443   $(56,221)  $(7,410)  $(139,333)  $(3,633)  $71,139 
Exercise of stock options           185                    185 
Repurchases of Class B common stock through repurchase program               (2,849)               (2,849)
Restricted Class B common stock purchased from employees               (7)               (7)
Stock-based compensation           506                    506 
Distributions to noncontrolling interests                           (28)   (28)
Other comprehensive income                   222            222 
Net income                       8,288    127    8,415 
BALANCE AT OCTOBER 31, 2020  $33   $260   $278,134   $(59,077)  $(7,188)  $(131,045)  $(3,534)  $77,583 

 

See accompanying notes to consolidated financial statements.

 

6

 

 

IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

  

2021

  

2020

 
  

Three Months Ended

October 31,

 
  

2021

  

2020

 
   (in thousands) 
Operating activities          
Net (loss) income   $(2,345)  $8,415 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:          
Depreciation and amortization   4,446    4,493 
Deferred income taxes   (413)   3,104 
Provision for doubtful accounts receivable   716    579 
Net unrealized loss from marketable securities   

13,386

    17 
Stock-based compensation   285    506 
Other   1,718    1,077 
Changes in assets and liabilities:          
Trade accounts receivable   (5,638)   (4,020)
Disbursement prefunding, prepaid expenses, other current assets, and other assets   (7,563)   7,318 
Trade accounts payable, accrued expenses, other current liabilities, and other liabilities   3,265   (2,023)
Customer deposits at IDT Financial Services Limited (Gibraltar-based bank)   (13,069)   (549)
Deferred revenue   (641)   (150)
Net cash (used in) provided by operating activities   (5,853)   18,767 
Investing activities          
Capital expenditures   (4,353)   (4,564)
Purchase of convertible preferred stock in equity method investment   

(1,051

)   

 
Purchases of debt securities and equity investments   (6,260)   (29,295)
Proceeds from maturities and sales of debt securities and redemption of equity investments   3,867    6,596 
Net cash used in investing activities   (7,797)   (27,263)
Financing activities          
Distributions to noncontrolling interests   (183)   (28)
Proceeds from other liabilities   

2,302

    

 
Repayment of other liabilities   (1,242)   (40)
Proceeds from sale of redeemable equity in subsidiary   10,000     
Proceeds from exercise of stock options       185 
Repurchases of Class B common stock   (26)   (2,856)
Net cash provided by (used in) financing activities   10,851   (2,739)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents   (2,257)   (1,859)
Net decrease in cash, cash equivalents, and restricted cash and cash equivalents   (5,056)   (13,094)
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period   226,916    201,222 
Cash, cash equivalents, and restricted cash and cash equivalents at end of period  $221,860   $188,128 

 

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 three reportable business segments, Fintech, net2phone-Unified Communications as a Service (“UCaaS”), and Traditional Communications. The Company’s reportable segments are distinguished by types of service, customers, and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The accounting policies of the segments are the same as the accounting policies of the Company as a whole. There are no significant asymmetrical allocations to segments. The Company evaluates the performance of its business segments based primarily on income (loss) from operations.

 

  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  $22,568   $12,913   $334,602   $    $370,083 
(Loss) income from operations   (45)   (4,198)   20,125    (2,109)   13,773 
                                    
Three Months Ended October 31, 2020                         
Revenues  $20,087   $9,702   $313,636   $   $343,425 
Income (loss) from operations   3,136    (3,880)   15,861    (1,864)   13,253 

 

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  $12,496   $15,157 
National Retail Solutions   10,072    4,930 
Total Fintech   22,568    20,087 
net2phone-UCaaS   12,913    9,702 
Mobile Top-Up   128,485    95,835 
BOSS Revolution Calling   105,969    117,350 
Carrier Services   89,195    87,773 
Other   10,953    12,678 
Total Traditional Communications   334,602    313,636 
Total  $370,083   $343,425 

 

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  $22,568   $6,824   $238,692   $268,084 
Outside the United States:                    
United Kingdom           81,769    81,769 
Other       6,089    14,141    20,230 
Total outside the United States       6,089    95,910    101,999 
Total  $22,568   $12,913   $334,602   $370,083 

 

(in thousands)  Fintech   net2phone-UCaaS   Traditional Communications   Total 
Three Months Ended October 31, 2020                
United States  $20,087   $5,090   $270,623   $295,800 
Outside the United States:                    
United Kingdom           29,421    29,421 
Other       4,612    13,592    18,204 
Total outside the United States       4,612    43,013    47,625 
Total  $20,087   $9,702   $313,636   $343,425 

 

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:

 

   2021  

2020

 
  

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  $22,456   $23,460 

 

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”  $3,787   $3,460 
Deferred customer contract acquisition costs included in “Other assets”   3,241    3,151 
Total  $7,028   $6,611 

 

  The Company’s amortization of deferred customer contract acquisition costs during the periods were as follows:

 

  

2021

  

2020

 
  

Three Months Ended

October 31,

 
  

2021

  

2020

 
   (in thousands) 
Amortization of deferred customer contract acquisition costs  $1,012   $767 

 

Note 4—Leases

 

The Company’s leases primarily consist of operating leases for office space. These leases have remaining terms from one to six years. net2phone-UCaaS also has operating leases for office equipment. Certain of these leases contain renewal options that may be exercised and/or options to terminate the lease. The Company has concluded that it is not reasonably certain that it would exercise the options to extend or terminate the leases.

 

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. The Newark lease expires in April 2025 and the Israel lease expires in July 2025. In each of the three months ended October 31, 2021 and 2020, the Company incurred lease costs of $0.5 million in connection with the Rafael leases, which is included in operating lease cost in the table below.

 

Supplemental disclosures related to the Company’s operating leases were as follows:

   2021   2020 
  

Three Months Ended

October 31,

 
   2021   2020 
   (in thousands) 
Operating lease cost  $700   $729 
Short-term lease cost   347    65 
Total lease cost  $1,047   $794 

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

  $695   $710 

  

Schedule of Supplemental Disclosures Related Weighted Average Operating Leases

  

October 31, 2021

  

July 31, 2021

 
Weighted-average remaining lease term-operating leases   3.4 years    3.4 years 
Weighted-average discount rate-operating leases   2.9%   2.9%

 

On September 13, 2021, the Company entered into a new lease with an aggregate operating lease liability of $0.7 million. The Company’s aggregate operating lease liability was as follows:

 

  

October 31, 2021

  

July 31, 2021

 
    (in thousands) 
Operating lease liabilities included in “Other current liabilities”  $2,500   $2,456 
Operating lease liabilities included in noncurrent liabilities   5,533    5,473 
Total  $8,033   $7,929 

 

Future minimum maturities of operating lease liabilities were as follows (in thousands):

 

Twelve-month period ending October 31:   
2022  $2,698 
2023   2,406 
2024   1,967 
2025   1,095 
2026   139 
Thereafter   

154

 
Total lease payments   8,459 
Less imputed interest   (426)
Total operating lease liabilities  $8,033 

 

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  $114,543   $107,147 
Restricted cash and cash equivalents   107,317    119,769 
Total cash, cash equivalents, and restricted cash and cash equivalents  $221,860   $226,916 

 

At October 31, 2021 and July 31, 2021, restricted cash and cash equivalents included $101.8 million and $115.8 million, respectively, in restricted cash and cash equivalents for customer deposits held by IDT Financial Services Limited, the Company’s Gibraltar-based bank.

 

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 $16.7 million and $15.3 million, respectively, held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC, that was unavailable for other purposes.

 

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:                
Certificates of deposit*  $-   $-   $   $- 
U.S. Treasury bills and notes  $1,663   $   $(36)  $1,627 
Corporate bonds   6,276    33    (116)   6,193 
Municipal bonds   5,814        (1)   5,813 
Total  $13,753   $33   $(153)  $13,633 
                     
July 31, 2021:                    
Certificates of deposit*  $1,200   $3   $   $1,203 
U.S. Treasury bills and notes   1,669        (17)   1,652 
Corporate bonds   6,327    38    (33)   6,332 
Municipal bonds   4,825            4,825 
Total  $14,021   $41   $(50)  $14,012 

 

* Each of the Company’s certificates of deposit has a CUSIP, was purchased in the secondary market through a broker and may be sold in the secondary market.

   

  Proceeds from maturities and sales of debt securities and redemptions of equity investments were $3.9 million and $6.6 million in the three months ended October 31, 2021 and 2020, respectively. There were no realized gains or realized losses from sales of debt securities in the three months ended October 31, 2021 and 2020. The Company uses the specific identification method in computing the realized gains and realized losses on the sales of debt securities.

 

  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  $1,258 
After one year through five years   6,326 
After five years through ten years   5,249 
After ten years   800 
Total  $13,633 

 

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  $36   $1,627 
Corporate bonds   116    5,572 
Municipal bonds   1    4,569 
Total  $153   $11,768 
           
July 31, 2021:          
U.S. Treasury bills and notes  $17   $1,652 
Corporate bonds   33    3,293 
Total  $50   $4,945 

   

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  $36   $1,627 
Corporate bonds   44    1,219 
Total  $80   $2,846 

 

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, 42,282 shares at October 31, 2021 and July 31, 2021  $488   $649 
Rafael Holdings, Inc. Class B common stock, 290,214 and 246,565 shares at October 31, 2021 and July 31, 2021, respectively   2,194    12,479 
Rafael Holdings, Inc. restricted Class B common stock, nil and 43,649 shares at October 31, 2021 and July 31, 2021, respectively       2,209 
Other marketable equity securities   5,186    3,630 
Fixed income mutual funds   23,276    23,467 
Current equity investments  $31,144   $42,434 
           
Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”)  $2,119   $2,465 
Series B and Series C convertible preferred stock—equity method investment   3,329    2,901 
Hedge funds   2,814    3,563 
Other   1,225    2,725 
Noncurrent equity investments  $9,487   $11,654 

 

The Company received the shares of Zedge, Inc. (“Zedge”) Class B common stock and 28,320 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 261,894 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:

 

   2021   2020 
  

Three Months Ended

October 31,

 
   2021   2020 
   (in thousands) 
Balance, beginning of period  $2,743   $4,109 
Redemption for Visa mandatory release assessment       (1,870)
Adjustment for observable transactions involving a similar investment from the same issuer   (346)   (130)
Impairments        
Balance, end of the period  $2,397   $2,109 

 

13

 

 

The Company decreased the carrying value of the shares of Visa Series C Preferred it held by $0.3 million and $0.1 million in the three months ended October 31, 2021 and 2020, respectively, based on the fair value of Visa Class A common stock and a discount for lack of current marketability.

 

Unrealized gains and losses for all equity investments included the following:

   2021   2020 
  

Three Months Ended

October 31,

 
   2021   2020 
   (in thousands) 
Net losses recognized during the period on equity investments  $(14,494)  $(920)
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  $(14,494)  $(920)

 

The net 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.

 

Equity Method Investment

 

On February 2, 2021, the Company 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, the Company 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 the Company’s ownership to 26.57% on an as converted basis.

 

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 $3.4 million and $1.0 million between its investment in the EMI and its proportional interest in the equity of the EMI, which represented the Company’s 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. In the accompanying consolidated statements of operations, amortization of equity method basis difference is included in the equity in the net loss of investee, which is recorded in “Other expense, net” (see Note 18).

 

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  $2,901   $ 
Purchase of convertible preferred stock   1,051     
Equity in the net loss of investee   (441)    
Amortization of equity method basis difference   (182)    
Balance, end of period  $3,329   $ 

 

Summarized financial information of the EMI was as follows:

  

Three Months Ended

October 31,

 
   2021   2020 
   (in thousands) 
Revenues  $1,691   $ 
Costs and expenses:          
Direct cost of revenues   1,462     
Selling, general and administrative   1,889     
Depreciation and amortization   -    - 
Severance   -    - 
Total costs and expenses   3,351     
Loss from operations   (1,660)    
Other expense   (1)    
Net loss  $(1,661)  $ 

 

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  $1,627   $12,006   $   $13,633 
Equity investments included in current assets   31,144            31,144 
Equity investments included in noncurrent assets           2,119    2,119 
Total  $32,771   $12,006   $2,119   $46,896 
                     
Contingent consideration included in:                    
Other current liabilities  $   $   $(628)  $(628)
Other noncurrent liabilities           (387)   (387)
                     
Total  $   $   $(1,015)  $(1,015)
                     
July 31, 2021                    
Debt securities  $1,652   $12,360   $   $14,012 
Equity investments included in current assets   40,225    2,209        42,434 
Equity investments included in noncurrent assets           2,465    2,465 
                     
Total  $41,877   $14,569   $2,465   $58,911 
                     
Contingent consideration included in:                    
Other current liabilities  $   $   $(628)  $(628)
Other noncurrent liabilities           (397)   (397)
                     
Total  $   $   $(1,025)  $(1,025)

 

(1) quoted prices in active markets for identical assets or liabilities
(2) observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) no observable pricing inputs in the market

  

At October 31, 2021 and July 31, 2021, the Company had $2.8 million and $3.6 million, respectively, in investments in hedge funds, which were included in noncurrent “Equity investments” in the accompanying consolidated balance sheets. The Company’s investments in hedge funds were accounted for using the equity method, therefore they were not measured at fair value.

 

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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  $2,465   $3,825 
Redemption for Visa mandatory release assessment       (1,870)
Total losses included in “Other expense, net”   (346)   (130)
Balance, end of period  $2,119   $1,825 
           
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  $1,025   $396 
Total gains included in “Foreign currency translation adjustment”   (10)   (5)
Balance, end of period  $1,015   $391 
           
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 51% 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. The purchase price was $2.4 million, net of cash acquired. The Company also recorded $0.4 million for the estimated fair value of contingent consideration of $0.5 million. Pursuant to a Put/Call Option Agreement related to the 5% of the issued shares of the acquired company that the seller did not initially sell to IDTIT (“Option Shares”), the seller exercised its option and on March 22, 2021, IDTIT purchased the Option Shares for $0.3 million. On June 15, 2021, IDTIT purchased 19% of the issued shares of the acquired company from the remaining noncontrolling interest holder for $1.0 million. The Company also recorded $0.2 million for the estimated fair value of contingent consideration of up to $0.3 million. There was no change in the estimated fair value of the contingent consideration in the three months ended October 31, 2021.

 

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.

 

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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  $144   $ 
Aggregate funding repaid to the Company by the VIE, net  $(3)  $ 

 

The VIE’s summarized consolidated balance sheet amounts are as follows:

 

  

October 31, 2021

  

July 31, 2021

 
   (in thousands) 
Assets:          
Cash and equivalents  $1,419   $1,364 
Restricted cash   5,384    3,848 
Trade accounts receivable, net   31    91 
Prepaid expenses   210    344 
Other current assets   863    858 
Total current assets   -    - 
Goodwill   -    - 
Property, plant, and equipment, net   652    637 
Equity investments   -    - 
Operating lease right-of-use assets   -    - 
Deferred income tax assets, net   -    - 
Other assets   -    - 
Other intangibles, net   1,042    1,042 
           
Total assets  $9,601   $8,184 
           
Liabilities and noncontrolling interests:          
Trade accounts payable  $5   $312 
Accrued expenses   41    26 
Other current liabilities   6,058    4,491 
Due to the Company   5    8 
Accumulated other comprehensive loss   (6)   (7)
Noncontrolling interests   3,498    3,354 
           
Total liabilities and noncontrolling interests  $9,601   $8,184 

 

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  $(978)  $(321)
Corporate—Straight Path Communications Inc. class action insurance claims   915   623
Traditional Communications—net2phone indemnification claim   (25)    
Traditional Communications—Carrier Services settlement       (554)
           
Total other operating expense, net  $(88)  $(252)

 

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.

 

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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 $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.

 

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 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, the Company 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, the Company paid $26,000 and $7,000, respectively, to repurchase 627 and 1,053 shares, respectively, of the Company’s Class B common stock that were tendered by employees of the Company to satisfy the employees’ tax withholding obligations in connection with the vesting of deferred stock units (“DSUs”) and lapsing of restrictions on restricted stock. Such shares were repurchased by the Company based on their fair market value on the trading day immediately prior to the vesting date.

 

Deferred Stock Units Equity Incentive Program

 

The Company has an existing equity incentive program in the form of DSUs that, upon vesting, will entitle the grantees to receive shares of the Company’s Class B common stock. The number of shares issuable on the vesting date varies between 50% to 200% of the number of DSUs that vest on that vesting date, depending on the market price for the underlying Class B common stock on the vesting date relative to the market price at the time of the grant. At October 31, 2021, there were 154,169 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 $0.2 million for which the Company issued 21,894 shares of its Class B common stock. There were no stock option exercises in the three months ended October 31, 2021.

 

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 175,000 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 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 (“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.

 

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

 

 

Note 15—(Loss) Earnings Per Share

 

Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.

 

The weighted-average number of shares used in the calculation of basic and diluted (loss) earnings per share attributable to the Company’s common stockholders consists of the following:

 

  

Three Months Ended

October 31,

 
   2021   2020 
   (in thousands) 
Basic weighted-average number of shares   25,566    25,534 
Effect of dilutive securities:          
Stock options        
Non-vested restricted Class B common stock       327 
Diluted weighted-average number of shares   25,566    25,861 

 

The following shares were excluded from the calculation of diluted (loss) earnings per share:

 

  

Three Months Ended

October 31,

 
   2021   2020 
   (in thousands) 
Stock options   1,035    1,104 
Non-vested restricted Class B common stock   352     
Shares excluded from the calculation of diluted earnings per share   1,387    1,104 

 

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   $(9)  $(10,174)  $(10,183)
Other comprehensive (loss) income attributable to IDT Corporation   (111)   1,068   957
Balance, October 31, 2021   $(120)  $(9,106)  $(9,226)

 

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 $2.9 million and $1.8 million on behalf of the Federal Telecommunications Relay Services Fund and on behalf of the Universal Service Fund, respectively. The Company does not intend to remit payment for these fees unless and until a negative decision on its appeal has been issued. In response to the aforementioned preliminary audit findings, the Company made certain changes to its filing policies and procedures for years that remain potentially under audit. At October 31, 2021 and July 31, 2021, the Company’s accrued expenses included $38.2 million and $38.3 million, respectively, for FCC-related regulatory fees for the year covered by the audit, as well as prior and subsequent years.

 

20

 

 

Purchase Commitments

 

At October 31, 2021, the Company had purchase commitments of $4.0 million primarily for equipment and services.

 

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 $19.6 million outstanding.

 

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  $(250)  $(428)
Equity in net loss of investee   (623)    
Losses on investments (see Note 7)   (14,494)   (920)
Other   (849)   (32)
Total other expense, net  $(16,216)  $(1,380)
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