10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended June 30, 2017

OR

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

For transition period from __________ to __________

Commission file number: 000-27648

MAGICJACK VOCALTEC LTD.

(Exact name or Registrant as specified in its charter)

STATE OF ISRAEL (State or Other Jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)

12 HAOMANUT STREET, 2ND FLOOR

POLEG INDUSTRIAL ZONE, NETANYA, ISRAEL 42504

 (Address of principal executive offices, including zip code)

(561) 749-2255

(Registrant’s telephone number, including area code)

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 ⌧

There were 16,113,050 ordinary shares with no par value outstanding at July 31, 2017.

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	3
		Condensed Consolidated Balance Sheets (Unaudited)	3
		Condensed Consolidated Statements of Operations (Unaudited)	4
		Condensed Consolidated Statement of Capital Equity (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	43
	ITEM 4.	Controls and Procedures	43
PART II		OTHER INFORMATION
	ITEM 1.	Legal Proceedings	44
	ITEM 1A.	Risk Factors	44
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
	ITEM 3.	Defaults Upon Senior Securities	44
	ITEM 4.	Mine Safety Disclosures	44
	ITEM 5.	Other Information	44
	ITEM 6.	Exhibits	45

DEFINITIONS

In this quarterly report on Form 10-Q, unless the context otherwise requires:

· references to “magicJack VocalTec,” the “Company,” “we,” “us” or “our” are to magicJack VocalTec Ltd., a company organized under the laws of the State of Israel (the “Registrant”), and its subsidiaries;

· references to “common shares”, “ordinary shares”, “our shares” and similar expressions refer to the Registrant’s Ordinary Shares, no par value;

· references to “$” or “dollars” are to U.S. dollars. All references to “NIS” are to New Israeli Shekels and “PLN” are to Polish Zloty. Except as otherwise indicated, financial statements of, and information regarding, magicJack VocalTec are presented in U.S. dollars; and

· references to the “magicJack devices” are to the original magicJack^®, the magicJack PLUS^TM, the New magicJack PLUS^TM , the magicJackGO and the magicJackEXPRESS^TM.

2

PART I – FINANCIAL INFORMATION

ITEM 1.     Financial Statements

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 (in thousands)

	June 30,			December 31,
	2017			2016
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	47,041		$	52,394
Investments, at fair value		369			447
Accounts receivable, net of allowance for doubtful accounts and billing adjustments
of $433 and $402, respectively		2,095			3,171
Inventories		2,646			4,441
Deferred costs		1,918			2,319
Prepaid income taxes		2,713			527
Receivable from earnout escrow		2,000			2,000
Deposits and other current assets		4,465			1,970
Total current assets		63,247			67,269
Property and equipment, net		3,173			3,805
Intangible assets, net		11,533			28,854
Goodwill		32,304			47,185
Deferred tax assets		35,659			26,568
Deposits and other non-current assets		793			836
Total assets	$	146,709		$	174,517
LIABILITIES AND CAPITAL EQUITY
Current liabilities:
Accounts payable	$	1,846		$	2,790
Income tax payable		-			1,527
Accrued expenses and other current liabilities		10,549			8,426
Deferred revenue, current portion		44,886			48,507
Total current liabilities		57,281			61,250
Deferred revenue, net of current portion		41,510			44,201
Other non-current liabilities		12,577			10,866
Total liabilities		111,368			116,317
Commitments and contingencies (Note 10)
Capital equity
Ordinary shares, No par value; 100,000 shares authorized; 25,055 and 25,039 shares
issued at June 30, 2017 and December 31, 2016, respectively		111,783			111,783
Additional paid-in capital		13,845			13,567
Treasury stock (8,942 and 8,988 shares at June 30, 2017
and December 31, 2016, respectively)		(119,410	)		(120,300	)
Retained earnings		29,123			53,785
Total magicJack VocalTec, LTD. shareholders's equity		35,341			58,835
Noncontrolling interest		-			(635	)
Total capital equity		35,341			58,200
Total liabilities and capital equity	$	146,709		$	174,517

See accompanying notes to condensed consolidated financial statements.

3

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except per share information)

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2017			2016		2017			2016
Net revenues	$	22,381		$	25,301	$	45,578		$	49,000
Cost of revenues		8,166			9,838		17,617			18,047
Gross profit		14,215			15,463		27,961			30,953
Operating expenses:
Marketing		2,120			1,758		4,527			2,979
General and administrative		9,544			8,252		22,369			17,187
Impairment of intangible assets and goodwill		-			-		31,527			-
Research and development		1,462			1,247		2,961			2,347
Total operating expenses		13,126			11,257		61,384			22,513
Operating income (loss)		1,089			4,206		(33,423	)		8,440
Other income (expense):
Interest and dividend income		17			9		23			16
Other income (expense), net		(13	)		2		(30	)		(5	)
Total other income (expence)		4			11		(7	)		11
Income (loss) before income taxes		1,093			4,217		(33,430	)		8,451
Income tax expense (benefit)		2,587			1,702		(8,768	)		5,202
Net (loss) income		(1,494	)		2,515		(24,662	)		3,249
Net (loss) income attributable to noncontrolling interest		(67	)		304		-			304
Net (loss) income attributable to magicJack VocalTec Ltd. common shareholders	$	(1,561	)	$	2,819	$	(24,662	)	$	3,553
(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:
Basic	$	(0.10	)	$	0.18	$	(1.54	)	$	0.23
Diluted	$	(0.10	)	$	0.18	$	(1.54	)	$	0.22
Weighted average common shares outstanding:
Basic		16,078			15,853		16,056			15,750
Diluted		16,078			15,872		16,056			15,914

See accompanying notes to condensed consolidated financial statements.

4

 MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CAPITAL EQUITY

(in thousands)

					Additional															Total
	Common Stock				Paid-in			Treasury Stock						Retained			Noncontrolling			Capital
	Number		Amount		Capital			Number			Amount			Earnings			Interest			Equity
Balance, January 1, 2017		25,039	$	111,783	$	13,567			(8,988	)	$	(120,300	)	$	53,785		$	(635	)	$	58,200
Share-based compensation		-		-		1,303			-			-			-			-			1,303
Issuance of ordinary shares		-		-		(1,025	)		83			1,025			-			-			-
Reclassification of shares *		16		-		-			(16	)		-			-			-			-
Purchase of treasury stock		-		-		-			(21	)		(135	)		-			-			(135	)
Deconsolidation of subsidiary		-		-		-			-			-			-			635			635
Net loss		-		-		-			-			-			(24,662	)		-			(24,662	)
Balance, June 30, 2017 (unaudited)		25,055	$	111,783	$	13,845			(8,942	)	$	(119,410	)	$	29,123		$	-		$	35,341

* represents shares previously recorded as treasury stock that were reclassified as they were issued as new ordinary shares.

See accompanying notes to condensed consolidated financial statements.

5

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Six Months Ended
	June 30,
	2017			2016
Cash flows from operating activities:
Net (loss) income	$	(24,662	)	$	3,249
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts and billing adjustments		126			152
Share-based compensation		1,303			2,250
Depreciation and amortization		2,419			2,182
Impairment of goodwill and intangible assets		31,527			-
Loss on sale of assets		18			-
Increase of uncertain tax positions		1,809			1,187
Deferred income tax (benefit) provision		(9,091	)		935
Change in operating assets and liabilities
Accounts receivable		943			713
Inventories		1,690			1,595
Deferred costs		318			275
Prepaid Income taxes		(2,846	)		1,912
Deposits and other current assets		(2,415	)		(431	)
Other non-current assets		322			(40	)
Accounts payable		(707	)		455
Income taxes payable		38			-
Accrued expenses and other current liabilities		2,123			(1,016	)
Deferred revenue		(6,038	)		(4,999	)
Other non-current liabilities		(1,003	)		(70	)
Net cash (used in) provided by operating activities		(4,126	)		8,349
Cash flows from investing activities:
Purchase of investments		-			(80	)
Purchases of property and equipment		(248	)		(159	)
Proceeds from sale of investment		245			-
Acquisition of Broadsmart		-			(40,019	)
Acquisition of intangible assets		(1,089	)		-
Net cash used in investing activities		(1,092	)		(40,258	)
Cash flows from financing activities:
Purchase of treasury stock		(135	)		-
Proceeds from exercise of ordinary share options		-			1
Net cash (used by) provided by financing activities		(135	)		1
Net (decrease) increase in cash and cash equivalents		(5,353	)		(31,908	)
Cash and cash equivalents, beginning of period		52,394			78,589
Cash and cash equivalents, end of period	$	47,041		$	46,681

See accompanying notes to condensed consolidated financial statements.

6

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(in thousands)

	For the Six Months Ended June 30,
	2017		2016
Supplemental disclosures:
Income taxes paid	$	3,293	$	1,240
Non-cash investing and financing activities:
Ordinary shares issued for acquisition of Broadsmart	$	-	$	1,676

See accompanying notes to condensed consolidated financial statements.

7

NOTE 1 –DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

magicJack VocalTec Ltd. and its subsidiaries (the “Company”) is the cloud communications leader that invented the magicJack device as well as other telecommunication products and services. The Company is a vertically integrated group of companies, with capabilities including Voice-over-Internet-Protocol (“VoIP”) services and related equipment sales, micro-processor chip design and development of the magicJack device. In addition to residential consumers, the Company provides VoIP services and related equipment to small to medium sized businesses at competitive prices and wholesales telephone service to VoIP providers and telecommunication carriers.  In 2016, the Company acquired a provider of hosted Unified Communication as a Service (“UCaaS”) and seller of hardware and network equipment focusing on medium-to-large, multi-location enterprise customers.

magicJack devices weigh about one ounce and plug into the USB port on a computer or into a power adapter and high speed Internet source, providing users with complete phone service for home, business and travel. magicJack devices come with the right to access the Company’s servers ("access right"), which provides customers the ability to obtain free telephone services. Access rights are renewable. The Company currently offers the magicJack GO version of the device, which has its own CPU and can connect a regular phone directly to the user’s broadband modem/router and function as a standalone phone without using a computer.  The sale of devices is done through distribution channels that include retailers, wholesalers and direct to customer sales via the Company’s web-site.

The Company also offers magicJack mobile apps, which are applications that allow users to make and receive telephone calls through their smart phones or devices. The Company currently offers the magicApp, magicJack Connect and magicJack Spark. The magicApp and magicJack Connect are mobile apps available for both iOS and Android. In July 2017, the Company launched magicJack Spark on iOS devices.  The mobile apps allow customers to place and receive telephone calls in the U.S. or Canada on their mobile devices through either an existing or new magicJack account. The mobile apps also give users the ability to add a second phone number to their smart phone for a monthly or annual fee. Customers may purchase international minutes to place telephone calls through the magicJack device or mobile apps to locations outside of the U.S. and Canada.

The Company was incorporated in the State of Israel in 1989 and is domiciled in Netanya, Israel, with executive and administrative offices, a warehouse and a customer care call center in West Palm Beach, Florida. In addition the Company has offices for technology management in Franklin, Tennessee, research and development in Plano, Texas, and Sunnyvale, California and the UCaaS provider in Fort Lauderdale, Florida.

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements are prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the Company’s unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. The balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The Company’s unaudited condensed consolidated financial statements are the basis for the discussion and analysis of the Company’s results of operations, liquidity and capital resources. References to authoritative accounting literature in this report, where applicable, are based on the Accounting Standards Codification (“ASC”). The Company’s functional and reporting currency is the United States Dollar (“U.S. Dollar”), which is the currency of the primary economic environment in which its consolidated operations are conducted. Transactions and balances originally denominated in U.S. Dollars are presented at their original amounts. Transactions and balances in currencies other than U.S. Dollars, including New Israeli Shekels (“NIS”) and Polish Zloty (“PLN”), are re-measured in dollars and any gains or losses are recognized in the Company's unaudited condensed consolidated statement of operations in the period they occur.

Prior to 2016, the Company prepared its consolidated financial statements on the basis of being a single reporting entity. In 2016, with the acquisition of North American Telecommunications Corporation (“NATC”) d/b/a Broadsmart (“Broadsmart”) and the internal development of magicJack SMB, Inc. (“SMB”), the Company began reporting the results of its operations as separate reportable segments – “Core Consumer,” “Enterprise” and “SMB”. During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB Segment within the Core Consumer segment. Accordingly, this segment will not show activity for periods after March 31, 2017. Refer to Note 16, “Segment Reporting” for further details.

8

Approximately 86% of the Company’s consolidated revenues in the three and six months ended June 30, 2017, were from sales to customers located in the United States. Approximately 90% of the Company’s consolidated revenues in the three and six months ended June 30, 2016 were from sales to customers located in the United States.

The majority of Core Consumer segment revenues were generated from sales of the magicJack product line and accompanying software access rights, which were $17.1 million and $19.5 million for the three months ended June 30, 2017 and 2016, respectively, and $35.2 million and $39.6 million for the six months ended June 30, 2017 and 2016, respectively. The Core Consumer segment also provides its customers with the ability to make prepaid international calls by purchasing prepaid minutes for use with the magicJack devices and mobile apps. Revenues generated from the usage of prepaid minutes were $1.2 million and $1.5 million for the three months ended June 30, 2017 and 2016, respectively, and $2.4 million and $3.2 million for the six months ended June 30, 2017 and 2016, respectively.

The Enterprise segment was launched with the acquisition of Broadsmart on March 16, 2016.  The majority of Enterprise segment revenues were generated from Broadsmart hosted UCaaS services and sales of hardware and equipment which were $3.0 million and $2.9 million for the three months ended June 30, 2017 and 2016, respectively, and $5.7 million and $3.4 million for the six months ended June 30, 2017 and 2016, respectively.

The SMB segment did not generate significant revenue for the three and six months ended June 30, 2016, or the three months ended March 31, 2017.

Basis of Consolidation

The Company’s unaudited condensed consolidated financial statements include the accounts of magicJack VocalTec and its wholly owned subsidiaries. The results of Broadsmart Global, Inc. have been included since March 17, 2016.  The results of SMB have been included since the first quarter of 2016.  All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications may have been made to prior period financial statement amounts to conform to the current presentation. The results for the three and six months ended June 30, 2017 may not be indicative of the results for the entire year ending December 31, 2017. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 16, 2017.

Noncontrolling Interest

During the year ended December 31, 2016, the Company formed a new subsidiary and entered into a joint venture with an unrelated third party which resulted in the Company having a 60% controlling interest in the joint venture which began selling a line of high-technology residential consumer products in the fourth quarter of fiscal year 2016. On March 31, 2017, this interest was reduced to 36% and on May 31, 2017 the Company sold its remaining interest to the unrelated third party.  Based on the difference between the sales price from the agreement and the carrying value of the asset, the Company recognized an impairment loss of $0.4 million in general and administrative expense in the Core Consumer segment of the unaudited condensed consolidated statement of operations for the six months ended June 30, 2017.

The operations of the joint venture for the three and six months ended June 30, 2017 and 2016 were not significant to the Company’s financial statements. The Company’s consolidated financial statements for the three and six months ended June 30, 2016, include adjustments to income attributable to magicJack VocalTec Ltd. common shareholders of $0.3 million, to recognize the impact of the noncontrolling interest.  The Company’s consolidated financial statements included a loss of $0.1 million for the three months ended June 30, 2017, but did not include any adjustments to income attributable to magicJack VocalTec Ltd. common shareholders for the six months ended June 30, 2017. The Company has determined that the joint venture did not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a separate reportable segment. As such, it was included in the “Other” category of the Company’s segment reconciliation. Refer to Note 16, “Segment Reporting,” for further details.

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

A summary of significant accounting policies used in preparing the Company’s financial statements, including a summary of recent accounting pronouncements that may affect its financial statements in the future, follows:

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and judgments are revised periodically as required. Actual results could differ from those estimates. Significant estimates include allowances for billing adjustments and doubtful accounts, the recoverability of long-lived assets and goodwill, income taxes, income tax valuation allowance, uncertain tax liabilities, the value of ordinary shares issued in asset acquisitions, business combinations or underlying the Company’s ordinary share options, and estimates of likely outcomes related to certain contingent liabilities.

9

The Company evaluates its estimates on an ongoing basis. The Company's estimates and assumptions are based on factors such as historical experience, trends within the Company and the telecommunications industry, general economic conditions and on various other assumptions that it believes to be reasonable under the circumstances. The results of such assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily available. Actual results may differ from the Company's estimates and assumptions as a result of varying market and economic conditions, and may result in lower revenues and net income.

Fair Value

The Company accounts for financial instruments in accordance with ASC 820, "Fair Value Measurements and Disclosures", which provides a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s judgements about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Valuation based on inputs that are unobservable and significant to the overall fair value measurement.

When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. Fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or the Company) will not be fulfilled. For the Company's financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. The Company’s assets and liabilities measured on a recurring basis at fair value may include marketable securities and time deposits. As of June 30, 2017 and December 31, 2016, all of them were Level 1 instruments. The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses are expected to approximate fair value because of their immediate availability, near term maturities or potential interest payments at settlement.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity at acquisition of three months or less to be cash equivalents.

Investments

Investments consist of interest bearing time deposits with maturity dates of greater than 90 days totaling $369 thousand and $447 thousand at June 30, 2017 and December 31, 2016, respectively.  The value of time deposits at June 30, 2017 and December 31, 2016 was determined based on face value, which approximates fair value and is a Level 1 input. There was no realized gain or loss on investments for the three and six months ended June 30, 2017 and 2016.

Allowance for Doubtful Accounts and Billing Adjustments

The Company maintains an allowance for doubtful accounts and billing adjustments based on the expected collectability of its accounts receivables. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance includes estimates of billing adjustments, which are negotiated with other telecommunications carriers and are common in the telecommunications industry.

10

Certain Risks and Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and accounts receivable. Cash equivalents generally consist of money market instruments.

The Company places its cash and cash equivalents in high quality financial institutions and management believes that the Company is not exposed to any significant risk on its cash accounts. The Company maintains accounts with various banks and brokerage organizations and constantly monitors the creditworthiness of these institutions. Cash accounts at each U.S. bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 thousand in the aggregate and may exceed federally insured limits. Cash accounts at Israeli or Polish banks are not insured. The Company has never experienced any losses related to these balances. At June 30, 2017, the Company had cash and cash equivalents totaling $47.0 million, which included (i) $46.4 million in U.S. financial institutions, and (ii) $0.6 million in foreign financial institutions.

The Company’s non-interest bearing cash balances in U.S. banks included $1.6 million in one individual financial institution which was fully insured. A total of $0.2 million, primarily held in another financial institution, exceeded insurance limits at June 30, 2017. The Company had money market accounts with financial institutions with balances totaling approximately $44.4 million at June 30, 2017.

For the Core Consumer segment, no telecommunication carrier accounted for more than 10% of the segment’s gross accounts receivable at June 30, 2017 and December 31, 2016. One U.S. retail customer accounted for approximately 11% of the segment’s gross accounts receivable at June 30, 2017 and three retail customers accounted for approximately 34% of the segment’s gross accounts receivable at December 31, 2016. For the three and six months ended June 30, 2017 and 2016, no telecommunications carrier or retailer accounted for more than 10% of the segment’s total operating revenues.

For the Enterprise segment, two U.S. retail customers accounted for approximately 37% of gross accounts receivable at June 30, 2017. No customer accounted for more than 10% of gross accounts receivable at December 31, 2016.  For the three months ended June 30, 2017 and 2016, two customers accounted for approximately 34% and 28% of the segment’s total operating revenues, respectively. For the six months ended June 30, 2017 and 2016, two customers accounted for approximately 32% and 28% of the segment’s total operating revenues, respectively.

For the SMB segment, accounts receivable were not significant at December 31, 2016. The segment’s operating revenues were not significant for the three and six months ended June 30, 2016 or the three months ended March 31, 2017.

Inventories

Inventories are stated at the lower of cost or market, with cost primarily determined using the first-in first-out cost method. Inventory is written off at the point it is determined to be obsolete.

Receivable from Earnout Escrow

The 2016 acquisition of Broadsmart, described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, included a contingent earnout payment of $2.0 million in cash, if the acquired assets generated 2016 revenues of at least $15.6 million. The $2.0 million was paid into escrow at the time of closing. Revenues for the year ended December 31, 2016 did not reach the target and the Company has requested return of the funds, which are recorded on the accompanying unaudited condensed consolidated balance sheets as a receivable from earnout escrow.

Property, Equipment and Depreciation Expense

Property and equipment are accounted for under ASC 360, “Property, Plant and Equipment” and consist primarily of servers, computer hardware, furniture, and leasehold improvements. Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to fifteen years. Leasehold improvements are depreciated over the shorter of the term of the lease or useful life of the assets. The cost of substantial improvements is capitalized while the cost of maintenance and repairs are charged to operating expenses as incurred.  Refer to Note 6, “Property and Equipment” for further details.

The Company reviews property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Property and equipment to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management believes there was no impairment of the Company’s property or equipment at June 30, 2017.

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The Company’s hardware consists of routers, gateways and servers that enable the Company’s telephony services. Some of these assets may be subject to technological risks and rapid market changes due to the introduction of new technology, products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives and the carrying value of these assets. Changes in estimated useful lives are accounted for on a prospective basis starting with the period in which the change in estimate is made in accordance with ASC 250-10, “Accounting Changes and Error.”

Intangible Assets

Identifiable intangible assets are stated at cost and accounted based on whether the useful life of the asset is definite or indefinite. Identified intangible assets with definite useful lives are amortized using the accelerated and straight-line methods over their estimated useful lives, which range from one to seventeen years. Intangible assets with indefinite lives are not amortized to operations, but instead are reviewed for impairment at least annually, or more frequently if there is an indicator of impairment.

The Company reviews definite lived intangible assets subject to amortization for possible impairment using a three-step approach.  Under the first step, management determines whether an indicator of impairment is present (a “Triggering Event”). If a Triggering Event has occurred, the second step is to test for recoverability based on a comparison of the asset’s carrying amount with the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, the third step is to recognize an impairment loss for the excess of the asset’s carrying amount over its fair value. Intangible assets subject to amortization to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

The Company recognized impairment charges of $16.6 million on intangible assets during the six months ended June 30, 2017. There were no impairment charges recognized on intangible assets during the six months ended June 30, 2016. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 6, “Intangible Assets” for further details.

The costs of developing the Company’s intellectual property rights, intellectual property right applications and technology are charged to research and development expense as incurred.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination. Goodwill is not amortized to operations, but instead is reviewed for impairment at least annually, or more frequently if there is an indicator of impairment. Indicators include, but are not limited to: sustained operating losses or a trend of poor operating performance and a decrease in the Company’s market capitalization below its book value.

The Company’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairment charges in the future.

With the acquisition of Broadsmart and the founding of SMB in 2016, management began evaluating each of these new business lines separately and has allocated goodwill between the three reporting units that correspond to the reportable segments – “Core Consumer,” “Enterprise” and “SMB”. Refer to Note 7, “Goodwill” and Note 16, “Segment Reporting” for further details.

The Company may utilize a qualitative assessment to determine if it is "more-likely-than-not" that the fair value of the reporting unit is less than its carrying value. If so, an impairment test must be performed. If not, no further testing is required and the Company documents the relevant qualitative factors that support its fair value. Qualitative factors may include, but are not limited to: macroeconomic conditions, industry and market considerations, cost factors that may have a negative effect on earnings, overall financial performance, and other relevant entity-specific events.

In prior years, the Company used the two-step goodwill impairment test.  In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other” which eliminated step two of the goodwill impairment test. The Company adopted ASU 2017-04 on a prospective basis in the first quarter of 2017.

The Company recognized impairment charges of $14.9 million on goodwill for the Enterprise reporting unit, the full balance for that unit, during the six months ended June 30, 2017. There was no impairment of goodwill during the six months ended June 30, 2016. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 7, “Goodwill” for further details.

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Deferred Revenues

Deferred revenues for the Core Consumer segment consist primarily of billings and payments for magicJack devices and access rights renewals received in advance of revenue recognition. The Company bills and collects in advance for magicJack devices, which include an initial access right period, and access right renewals.  The Company recognizes revenue from device sales and access right renewals ratably over the access right period, as described above.

For the Enterprise segment, deferred revenues consist of UCaaS hardware or equipment purchased but not yet delivered. The Company recognizes revenue from UCaaS hardware or equipment sales in the period they are delivered and put into service.

Deferred revenues to be recognized over the next twelve months are classified as current on the consolidated balance sheets, with the remainder classified as non-current.

Net Revenues

Net revenues consists of revenue from sales of magicJack devices to retailers, wholesalers or directly to customers, access right renewal fees, fees charged for shipping magicJack devices, usage of domestic and international prepaid minutes, access charges to other carriers, recurring sales of the Company’s hosted UCaaS voice services, non-recurring sales of equipment related to its UCaaS services and other miscellaneous charges. The Company typically enters into multi-year agreements, typically with durations of three to five years, to provide the hosted voice and other services. The Company earns revenue from the sale of the hardware and network equipment necessary to operate its UCaaS services directly to its customers. All revenue is recorded net of sales returns and allowances.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 605, "Revenue Recognition", which provides authoritative guidance on revenue recognition. For arrangements that include more than one product or service (deliverables), the Company applies Section 25 of ASC 605, “Multiple-Element Arrangements”. ASC 605-25 establishes criteria for separating deliverables into different units of accounting and allocating consideration to those units of accounting.  The Company is transitioning to ASC 606, “Revenue from Contracts with Customers”, which will be implemented in 2018.

Core Consumer Segment

magicJack Devices

 magicJack devices include an initial access right, which qualify as multiple deliverables per ASC 605-25.  Since the device and initial access right are interdependent and not sold separately, they are accounted for as a combined unit of accounting. Direct sales of devices include shipping charges and 30 days to return the device and cancel the service.  For retail sales of devices, there is a delay between shipment to the retailer and the ultimate sale to a customer (end-user). Based on sales and inventory data provided by retail partners, the Company’s estimate of the delay was 30 days and 90 days for the three and six months ended June 30, 2017 and 2016, respectively. The Company defers revenue recognition on direct sales for the 30 day return period and on retail sales for the delay period, after which the Company recognizes the revenue from device sales ratably over the remaining initial access right period.

Access Right Renewals and Mobile Apps

Customers may renew access rights for periods ranging from one month to five years. The revenue associated with access right renewals is deferred and recognized ratably over the extended access right period. Revenue from the sale of mobile apps is recognized ratably over the access right period.

Other magicJack-Related Products

The Company offers customers other optional products related to their magicJack devices and services, such as insurance, custom or vanity phone numbers, Canadian phone numbers, the ability to either change their existing phone numbers or port them to a magicJack device, and battery powerbanks for mobile devices. These revenues are recognized at the time of sale, with the exception of sales of the battery powerbank which are recognized when shipped.

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Prepaid Minutes and Access and Wholesale Charges

The Company generates revenues from the sales of prepaid international minutes to customers, fees for origination of calls to 800-numbers, and access fees charged to other telecommunication carriers on a per-minute basis for Interexchange Carriers (“IXC”) calls terminated on the Company’s servers. Revenues from access fee charges to other telecommunication carriers are recorded based on rates set forth in the respective state and federal tariffs or negotiated contract rates, less a provision for billing adjustments. Revenues from prepaid minutes and access and wholesale charges are recognized as minutes are used.

Sales Return Policy

The Company offers some of its direct sales customers a 30-day free trial before they have to pay for their magicJack device. The Company does not recognize revenue until the 30-day trial period has expired and a customer’s credit card has been charged.

Returns from retailers are accepted on an authorized basis for devices deemed defective. The Company may offer certain retailers the limited right to return any unsold merchandise from their initial stocking orders. The Company also accepts returns of battery powerbanks for mobile devices within 30 days of sale. The Company estimates potential returns under these arrangements at point of sale and re-estimates potential returns on a quarterly basis. For the three and six months ended June 30, 2017 and 2016, the Company’s estimates of returns and actual returns from initial stocking orders have not been materially different.

Enterprise Segment

UCaaS services and equipment sales related to the Broadsmart subsidiary qualify as multiple deliverables per ASC 605-25.  Since the equipment and services are sold separately and can be used with other products and services, they are accounted for as separate units of accounting. The Company recognizes revenues from sales of its hosted services in the period the services are provided over the term of the respective customer agreements. Customers are billed monthly in advance for these recurring services and in arrears for one time service charges and other certain usage charges.  Revenues from sales of hardware and network equipment are recognized in the period that the equipment is delivered. Revenues from the sale of equipment purchased but not yet delivered are deferred and recognized in the period that the hardware or equipment is delivered and put into service.

SMB Segment

The SMB segment provided phone equipment and services that were interdependent and not sold separately. As such they were accounted for as a combined unit of accounting under ASC 605-25.  Some agreements included a refund period or a promotion for free introductory service.  Revenue recognition was deferred for either period, after which the Company recognized the revenue for the combined unit ratably over the remaining service period.  Revenues from this segment were not significant for the three and six months ended June 30, 2016.  The SMB segment did not generate significant revenue for the three months ended March 31, 2017.  During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment. Accordingly, this segment will not show activity for periods after March 31, 2017.

Cost of Revenues

Core Consumer Segment

Cost of revenues for the Core Consumer segment includes direct costs of operation of the Company’s servers, which are expensed as incurred. These costs include the Company’s internal operating costs, depreciation and amortization expense, access and interconnection charges to terminate domestic and international telephone calls on the public switched telephone network and related taxes. Direct costs also include regulatory costs, server maintenance, and costs to co-locate the Company’s equipment in other telephone companies’ facilities. Direct costs of producing magicJack devices are deferred on shipment and charged to cost of sales ratably over the initial access right period. Deferred costs are included in current assets in the Company’s consolidated balance sheets.

Costs incurred for shipping and handling and credit card charges are included in cost of revenues and are expensed as incurred. Costs for shipping and handling and credit card charges were $0.8 million for the three months ended June 30, 2017 and 2016, $1.7 million and $1.8 million for the six months ended June 30, 2017 and 2016, respectively. Starting in the second quarter of 2017, these amounts include SMB.

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Enterprise Segment

Cost of revenues related to the Company’s UCaaS services include direct costs of providing the services, which are expensed as incurred. These costs include charges for access to the public switched telephone network, internet service for its customers, maintenance costs for its software, commissions, credit card charges, contract labor for installation and depreciation and amortization. The Company also incurs costs for hardware and equipment sold to customers, along with related delivery costs, which are recognized in the period they are delivered and put into service.

SMB Segment

Costs of revenue for the SMB segment included direct costs of providing the services, which were expensed as incurred, and costs for phone equipment, which were recognized ratably over the service period.  Costs of revenue from this segment were not significant for the three and six months ended June 30, 2016. The SMB segment did not incur significant costs of revenue for the three months ended March 31, 2017.

Marketing Expenses

Marketing expenses consist primarily of advertising media buys for television commercials, internet and print advertising, marketing related personnel costs and other marketing projects including sponsorships. Marketing costs are expensed when incurred. A break-down of marketing expense by category is as follows (in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Advertising media buys	$	664	$	751	$	1,919	$	1,416
Marketing personnel related		412		199		1,221		387
Other marketing projects		1,044		808		1,387		1,176
Total marketing expenses	$	2,120	$	1,758	$	4,527	$	2,979

Research and Development Expenses

The Company’s research and development activities consist primarily of the design and development of its proprietary software used in the magicJack devices, mobile apps and servers, as well as the development of new products and applications for use in its VoIP service offerings. The Company accounts for research and development costs in accordance with applicable accounting pronouncements. These pronouncements specify that costs incurred internally in researching and developing a product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all costs should be capitalized until the product is available for general release to customers. The Company has determined that technological feasibility for its products is reached after all high-risk development issues have been resolved through internal and customer base testing. Generally, new products offered to customers and improvements to the Company’s servers are placed in service on attainment of technological feasibility. The Company has not capitalized any of its research and development activities and related costs.

Share-based Compensation

Share-based compensation generally consists of option grants or ordinary share and restricted stock units awards to directors, officers, employees or consultants. We account for share-based compensation in accordance with ASC 718, "Compensation - Stock Compensation", which requires companies to estimate the fair value of equity-based payment awards on the date of grant based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period. Refer to Note 12, “Share-Based Compensation” for further details.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates. Any changes in enacted tax rates or tax laws are included in the provision for income taxes in the period of enactment. The Company’s net deferred tax assets consist primarily of foreign net operating loss carry-forwards, timing differences between recognition of income for book and tax purposes, and the tax benefit related to the impairment of intangible assets, including goodwill, in the Enterprise segment. The Company records a valuation allowance to reduce the net deferred tax assets to the amount that it estimates is more-likely-than-not to be realized. The Company periodically reviews the composition of its deferred tax assets and related valuation allowances and will make adjustments if available evidence indicates that it is more likely than not a change in the carrying amounts is required. The Company increased the valuation allowance by $15 thousand and $30 thousand during the three and six months ended June 30, 2017, respectively. The Company decreased the valuation allowance by $0.3 million and $0.6 million during the three and six months ended June 30, 2016, respectively.

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The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions that are not more likely than not, no tax benefit has been recognized in the financial statements. The Company revised its liability for uncertain tax positions by an increase of $0.4 million and $1.8 million in the three and six months ended June 30, 2017, respectively, due primarily to an increase in uncertain tax positions related to various state issues and the revaluation impact of certain Israeli uncertain tax positions.  The Company revised its liability for uncertain tax positions by an increase of $1.2 million in the three and six months ended June 30, 2016, due primarily to an increase in uncertain tax positions related to state taxes and the revaluation impact of certain Israeli uncertain tax positions.

The Company records its income tax expense for interim financial statements by using an estimated annual effective income tax rate based on its expected annual results after consideration of permanent nontaxable items. The tax benefits of net operating loss carry-forwards expected to be realized through 2017 and changes in other deferred tax assets and liabilities are recognized during interim periods based on an annual forecast as of the interim reporting date. At June 30, 2017, the estimated annual effective income tax rate is expected to approximate 22.4%, excluding discrete tax items, which includes federal, foreign, state and local taxes. This rate may fluctuate due to changes in jurisdictional income and to the timing of other discrete period transactions during the remainder of the year.

Comprehensive Income

Comprehensive income attributable to common shareholders, as defined, includes all changes in equity (net assets) during a period from non-owner sources. There were no items of comprehensive income in the six months ended June 30, 2017 and 2016.

Earnings (Loss) per Share Attributable to Common Shareholders

Net income or loss per share attributable to the Company’s common shareholders – basic, is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during each period. Net income or loss per share attributable to the Company’s common shareholders – diluted, is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Potential common shares consist of shares issuable upon the exercise or settlement of options to purchase common shares or restricted stock units.

Business Combinations

The Company accounts for business combinations under ASC 805, “Business Combinations” using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period and final determination of the values of assets acquired or liabilities assumed, any subsequent adjustments are recorded to the consolidated statements of operations. The Company includes the results of all acquisitions in its Consolidated Financial Statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expense.

Acquisition-related integration costs also include expenses directly related to integrating and reorganizing acquired businesses, employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in general and administrative expense.

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Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which is the new ASC 606. The standard requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. On July 9, 2015, the FASB deferred the effective dates of the standard by one year. As a result, the standard will be effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted, but cannot precede the original effective date (annual and interim reporting periods beginning after December 15, 2016). The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period presented. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” to provide clarification regarding the application of the principal-versus-agent guidance. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” to clarify the guidance for identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB also issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides narrow scope improvements and technical expedients on assessing collectibility, presentation of sales taxes, evaluating contract modifications and completed contracts at transition and the disclosure requirement for the effect of the accounting change for the period of adoption. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606” which made minor corrections and improvements to certain narrow aspects of the guidance. The Company has internally performed a preliminary review of the new guidance and has engaged consultants to document the appropriate revenue recognition for its various products and services and assist in the implementation of any required changes.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO"). The Company adopted ASU 2015-11 on a prospective basis in the first quarter of 2017.  Prior periods were not retrospectively adjusted.

In February 2016, the FASB issued ASU 2016-02, “Leases”. ASU 2016-02 requires that long-term lease arrangements be recognized on the balance sheet. The standard is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 changed the accounting for certain aspects of stock options and other share-based compensation. This accounting standard requires companies to recognize excess tax benefits or expenses related to the vesting or settlement of employee share-based awards (i.e., the difference between the actual tax benefit realized and the tax benefit initially recognized for financial reporting purposes) as income tax benefits or expenses in the quarterly Financial Statements. The standard also requires companies to record a windfall tax benefit when it arises, subject to normal valuation allowance considerations, instead of delaying recognition until the benefit reduces current taxes payable. The Company adopted ASU 2016-09 on a prospective basis in the first quarter of 2017. For the six months ended June 30, 2017, this adoption had no tax impact to the Company.  The Company will continue to monitor this for each reporting period going forward.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 reduces the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The ASU should be applied retrospectively to all periods presented. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other than Inventory”. ASU 2016-16 requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The ASU should be applied retrospectively as an adjustment to retained earnings. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other”.  ASU 2017-04 eliminates step two of the goodwill impairment test. The standard is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted.  The Company early adopted ASU 2017-04 on a prospective basis in the first quarter of 2017. Prior periods were not retrospectively adjusted.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification Accounting”. ASU 2017-09 provides guidance on determining which changes to share-based awards require modification accounting under ASC 718. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

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NOTE 3 – IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL

As part of the Company’s quarterly impairment reviews for intangible assets with indefinite lives, including goodwill, management determined that there were no impairment indicators as of June 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.

As was previously disclosed in the Company’s Form 10-K filed on March 16, 2017, the Broadsmart business which comprises the Enterprise segment was underperforming and steps were being taken to improve operating results including the February 2017 hiring of a new Chief Operating Officer for the segment and the hiring of additional sales and marketing personnel dedicated to obtaining new business.  The new Chief Operating Officer for the Enterprise segment and the new Executive Management team recently completed a comprehensive review of the Enterprise segment’s business prospects and through this process revised the projections for its operating results downward.  Additionally, Broadsmart received notification in early April 2017 that a major customer would not be renewing its contract and management anticipates the loss of another one of the Enterprise segment’s significant customers.  Combined, these customers accounted for approximately 29% of the Enterprise segment’s revenue in 2016.  Management considered the revised projections and customer losses to be indicators of potential impairment, and accordingly performed impairment testing of its long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017 utilizing its revised projections for Broadsmart.

Based on the impairment indicators as of March 31, 2017 discussed above, the Company engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill as of March 31, 2017. The valuation estimated the fair value of Broadsmart’s identified intangible assets not subject to amortization based on the relief from royalty method, which requires an estimate of a reasonable royalty rate, identification of relevant projected revenues and expenses, and selection of an appropriate discount rate. The Company recorded an impairment charge of $0.9 million for the carrying value in excess of the fair value.

For long-lived assets, including definite-lived intangible assets subject to amortization, management totaled the undiscounted cash flows expected to result from the use of these assets and their eventual disposition and noted that the sum did not exceed the carrying amount of the assets, indicating further impairment testing was necessary for these assets as of March 31, 2017. The estimated fair value of definite-lived intangible assets subject to amortization as of March 31, 2017, was based on discounted future cash flows.  The Company recorded impairment losses of $15.7 million for the carrying value in excess of the fair value.

Based on a discounted future cash-flows approach, the third party valuation estimated the fair value of the Enterprise reporting unit to be $17.9 million.  Recognition of the goodwill impairment resulted in a tax benefit which was recorded as a deferred tax asset.  Since the deferred tax asset increases the carrying value of the reporting unit, it would result in an additional impairment. The accounting guidance requires an entity to calculate the impairment charge and the deferred tax effect using a simultaneous equation method, which effectively grosses up the goodwill impairment charge to account for the related deferred tax benefit so that the resulting carrying value does not exceed the calculated fair value. The simultaneous equation calculation resulted in an impairment charge that exceeded the carrying value of the goodwill. Since the guidance limits goodwill impairments to the carrying value of goodwill, the Company recognized an impairment loss of $14.9 million, the full carrying value of goodwill.

In total, impairment losses of $31.5 million were recognized in operating expenses of the Enterprise segment for the first quarter ended March 31, 2017.  The impaired assets were (in thousands):

	March 31, 2017
	Carrying Amount		Fair Value		Impairment
Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
Goodwill		14,881		-		14,881
		37,127		5,600		31,527

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NOTE 4 – INVENTORIES

Raw materials represent components used in the manufacturing of the magicJack devices, held by the Company or by a Chinese manufacturer on consignment. Finished goods are comprised primarily of magicJack devices on hand or in transit to the Company’s distribution center in the United States and customer equipment, as well as hardware and equipment pending delivery or sale to Enterprise segment customers. Inventories were comprised of the following (in thousands):

	June 30, 2017		December 31, 2016
Raw materials	$	669	$	1,455
Finished goods		1,977		2,986
Total	$	2,646	$	4,441

The Company wrote-off obsolete inventory of approximately $2 thousand and $3 thousand during the three months ended June 30, 2017 and June 30, 2016, respectively, and $403 thousand and $80 thousand during the six months ended June 30, 2017 and June 30, 2016, respectively. Inventory write-offs are reflected in cost of revenues in the unaudited condensed consolidated statements of operations.

NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

	Estimated
	Useful Lives		June 30,			December 31,
	(in years)		2017			2016
Switches		3 - 15	$	9,721		$	9,699
Computers		3		2,629			2,866
Furniture		5 - 7		281			269
Leasehold-improvements		*		848			893
Accumulated depreciation				(10,306	)		(9,922	)
Total			$	3,173		$	3,805

* The estimated useful life for leasehold improvements is the shorter of the term of the lease or life of the asset.

Depreciation expense for the three months ended June 30, 2017 and 2016 was $0.3 million. Depreciation expense for the six months ended June 30, 2017 and 2016 was $0.7 million and $0.5 million, respectively.

NOTE 6 – INTANGIBLE ASSETS

Identified intangible assets consisted of the following (in thousands):

		June 30, 2017								December 31, 2016
	Estimated	Gross								Gross
	Useful Lives	Carrying		Accumulated					Weighted-	Carrying		Accumulated					Weighted-
	(in years)	Amount		Amortization			Net		Average Life	Amount		Amortization			Net		Average Life
Technology	3 - 17	$	3,110	$	(2,914	)	$	196	4.76	$	3,110	$	(2,854	)	$	256	4.71
Intellectual property rights	3 - 17		14,162		(11,377	)	$	2,785	4.71		14,162		(10,794	)		3,368	4.87
Covenants not-to-compete and not-to-sue	2 - 5		2,185		(2,120	)	$	65	1.92		2,185		(2,107	)		78	3.17
Tradename	3 - 6		131		(131	)	$	-	0.00		131		(131	)		-	0.00
Customer relationships	5 - 10		4,900		(633	)	$	4,267	8.71		22,600		(2,249	)		20,351	9.21
Backlog	1		800		(800	)	$	-	0.00		800		(800	)		-	0.00
Software license	10		2,296		(211	)	$	2,085	1.95		1,207		(80	)		1,127	8.00
Process know how	5		400		(16	)	$	384	5.50		1,100		(87	)		1,013	6.08
Other			1		(1	)	$	-	0.00		-		-			-	0.00
Intangible assets subject to amortization			27,985		(18,203	)		9,782			45,295		(19,102	)		26,193
Tradename			1,700		-		$	1,700	N/A		2,600		-			2,600	N/A
Domain names			51		-		$	51	N/A		61		-			61	N/A
Total intangible assets		$	29,736	$	(18,203	)	$	11,533		$	47,956	$	(19,102	)	$	28,854

19

Amortization expense for the three months ended June 30, 2017 and 2016 was $0.6 million and $1.1 million, respectively. Amortization expense for the six months ended June 30, 2017 and 2016 was $1.8 million and $1.7 million, respectively.

As part of the Company’s quarterly impairment reviews for intangible assets with indefinite lives, including goodwill, management determined that there were no impairment indicators as of June 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.  Due tothe knowable impairment indicators discussed in Note 3, “Impairment of Intangible Assets, Including Goodwill”, the Company engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017. Based on the results of the valuation, impairment losses of $16.6 million were recognized on the following intangible assets in operating expenses under the Enterprise segment in the unaudited condensed consolidated statements of operations for the quarter ended March 31, 2017:

	March 31, 2017
	Carrying Amount		Fair Value		Impairment
Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
	$	22,246	$	5,600	$	16,646

No impairment losses were recognized on intangible assets for the six months ended June 30, 2016.

Based on the carrying value of identified intangible assets recorded at June 30, 2017, the amortization expense for the future fiscal years is expected to be as follows (in thousands):

Fiscal Year	Amortization Expense
Six months ending December 31, 2017	$	1,343
2018		2,231
2019		1,619
2020		1,079
2021		766
Thereafter		2,744
	$	9,782

NOTE 7 – GOODWILL

The changes in the carrying amount of goodwill for the six months ended June 30, 2017, were as follows (in thousands):

	Six Months Ended June 30, 2017
	Core Consumer		Enterprise			SMB		Other		Consolidated
Balance, beginning of period	$	32,304	$	14,881		$	-	$	-	$	47,185
2017 impairment		-		(14,881	)		-		-		(14,881	)
Balance, end of period	$	32,304	$	-		$	-	$	-	$	32,304

As part of the Company’s quarterly impairment reviews for intangible assets with indefinite lives, including goodwill, management determined that there were no impairment indicators as of June 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.  Due tothe knowable impairment indicators discussed in Note 3, “Impairment of Intangible Assets, Including Goodwill”, the Company engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017.

Based on a discounted future cash-flows approach, the third party valuation estimated the fair value of the Enterprise reporting unit to be $17.9 million.  Recognition of the goodwill impairment resulted in a tax benefit which was recorded as a deferred tax asset.  Since the deferred tax asset increases the carrying value of the reporting unit, it would result in an additional impairment. The accounting guidance requires an entity to calculate the impairment charge and the deferred tax effect using a simultaneous equations method, which effectively grosses up the goodwill impairment charge to account for the related deferred tax benefit so that the resulting carrying value does not exceed the calculated fair value.  The resulting impairment is limited to the carrying value of goodwill.  In the valuation performed for the Company the impairment calculated using the simultaneous equation method resulted in an impairment charge that exceeded the carrying value of the goodwill.  Accordingly, an impairment loss of $14.9 million on goodwill was recognized in operating expenses under the Enterprise segment in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2017.

20

The application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgment, and the use of significant estimates and assumptions, is required to estimate the fair value of reporting units, including estimating future cash flows, future market conditions, and determining the appropriate discount rates, growth rates, and operating margins, among others.

The discounted cash flow analyses factor in assumptions on revenue and expense growth rates. These estimates are based upon the Company’s historical experience, best estimates of future activity, and a cost structure necessary to achieve the related revenues.

Additionally, these discounted cash flow analyses factor in expected amounts of working capital and weighted average cost of capital. The Company believes the assumptions are reasonable. However, there can be no assurance that its estimates and assumptions made for purposes of the goodwill impairment testing, at the annual Measurement Date, will prove to be accurate predictions of the future. Changes in these estimates and assumptions as previously noted, could result in the need to conduct additional goodwill impairment tests in the future and could ultimately result in an impairment charge. In addition, a change in the Company’s reporting units could materially affect the determination of the fair value for each reporting unit, which could trigger impairment in the future. The Company will continue to review its results against forecasts and assess its assumptions to ensure they continue to be appropriate.

NOTE 8 – DEFERRED COSTS AND REVENUES

All deferred costs and deferred revenues to be recognized over the next twelve months are classified as current on the Company’s unaudited condensed consolidated balance sheets. The remaining deferred revenue amounts are classified as non-current on the unaudited condensed consolidated balance sheets.

Deferred revenues were comprised of the following at June 30, 2017 and December 31, 2016 (in thousands):

	June 30, 2017		December 31, 2016
magicJack devices	$	6,313	$	7,962
Access right renewals		35,187		36,515
Mobile apps		772		808
Prepaid minutes		2,426		2,851
Other		188		371
Deferred revenue, current		44,886		48,507
Deferred revenue, non-current*		41,510		44,201
Total deferred revenue	$	86,396	$	92,708

* Deferred revenue, non-current, is comprised entirely of deferred revenues originating from the sale of access right renewals.

Costs necessary to fulfill the Company’s obligations to provide VoIP telephone service to new and existing customers who have purchased magicJack devices, mobile apps or renewed access rights are expensed as incurred. For the Core Consumer segment, such costs were approximately $2.4 million and $3.2 million for the three months ended June 30, 2017 and 2016, respectively, and $5.1 million and $6.7 million for the six months ended June 30, 2017 and 2016, respectively. For the Enterprise segment, such costs were approximately $0.8 million for the three months ended June 30, 2017 and 2016, and $1.3 million and $1.0 million for the six months ended June 30, 2017 and 2016, respectively. Costs related to providing broadband telephone service to SMB segment customers were not significant for the three and six months ended June 30, 2016 and the three months ended March 31, 2017.

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Deferred revenues as of June 30, 2017 are expected to be recognized in future years as follows (in thousands):

Recognition Period	Estimated Recognition of Deferred Revenues
Next 12 months	$	44,886
13-24 Months		17,489
25-36 Months		11,075
37-48 months		6,940
49-60 Months		3,318
61+ Months		2,688
	$	86,396

NOTE 9 – OTHER LIABILITIES

As of June 30, 2017 and December 31, 2016, other non-current liabilities primarily consisted of provisions for uncertain tax positions of $12.1 million and $10.4 million, respectively.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is subject to various legal proceedings and claims, including intellectual property claims, contractual and commercial disputes, employment claims, state and local tax matters and other matters which arise in the ordinary course of business. The Company vigorously defends claims made against it, and management regularly evaluates the status of legal proceedings in which the Company is involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred and to determine if accruals are appropriate. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s business, operating results, financial condition or cash flows. However, an unexpected adverse resolution of one or more of these matters could have a material adverse effect on the Company’s results of operations in a particular fiscal year or quarter.

On March 11, 2016, a purported class action lawsuit was filed against the Company, its then Chief Executive Officer, Gerald Vento, and its then Chief Financial Officer, Jose Gordo (together, "the Defendants"), in the United States District Court for the Southern District of New York. Thereafter, on August 18, 2016, the Plaintiff filed an Amended Complaint.  The Amended Complaint alleges that the Company and Mr. Gordo made false and misleading statements regarding the financial performance and guidance during the alleged class period of November 12, 2013 to March 12, 2014. The Plaintiff asserted claims that (i) the Company and Mr. Gordo violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and SEC Rule 10b-5; and (ii) that Mr. Vento and Mr. Gordo violated Section 20(a) of the Exchange Act by virtue of their control over the Company.  For himself and for the class, the Plaintiff seeks damages, attorneys' fees and costs, and equitable/injunctive relief or such other relief as the court deems proper. The Defendants answered the Amended Complaint on December 23, 2016.  On June 23, 2017, the parties agreed in principle to a mediated settlement in which the Defendants would pay $3,650,000 to settle all claims, while denying all claims and allegations against them by the Plaintiff.  The agreement is subject to certain conditions, including approval of the Company's Board of Directors and the negotiation of a definitive Stipulation of Settlement, which would then have to be approved by the Court. The Company has insurance coverage applicable to this settlement with a retention amount of $1.0 million. As of June 30, 2017, the Company has accrued $3.1 million of expense and a $2.7 million receivable related to this item, reflecting anticipated future expenditures and reimbursement from insurance coverage.

Tax Contingencies

The Company believes that it files all required tax returns and pays all required federal, state and municipal taxes (such as sales, excise, utility, and ad valorem taxes), fees and surcharges. The Company is the subject of inquiries and examinations by various states and municipalities in the normal course of business. In accordance with generally accepted accounting principles, the Company makes a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company vigorously defends its rights and tax positions. However, if a government entity were to prevail in any matter, it could have a material adverse effect on the Company’s financial condition, results of operation and cash flows. In addition, it is at least reasonably possible that a potential loss may exist for tax contingencies in addition to the provisions taken by the Company. For those potential additional tax contingencies which can be reasonably estimated, that additional potential liability ranges from $0 to $2.5 million dollars.

The Company is currently under examination for potential state tax liabilities. On June 8, 2017, the Company offered to settle the examinations for payment of $0.6 million and the agreement to remit certain taxes on a prospective basis.

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NOTE 11 –TREASURY STOCK

In January 2017, the Company reclassified 16,666 shares previously issued out of treasury stock as they had been issued as new ordinary shares. In April 2017, the Company issued 6,996 of its ordinary shares held as treasury shares with a cost of $86 thousand, or $12.32 per share, to Board members as a result of restricted stock units vesting. In May 2017, the Company issued 76,211 of its ordinary shares held as treasury shares with a cost of $939 thousand, or $12.32 per share, to an executive officer as a result of restricted stock units vesting. In May 2017, the Company purchased 20,844 of its ordinary shares at $6.50 per share, for an aggregate purchase price of approximately $135 thousand, in settlement of the withholding tax liability on the vesting of those restricted stock units.

NOTE 12 – SHARE-BASED COMPENSATION

The Company has granted ordinary share options, issued restricted stock units and ordinary shares as an alternative or supplement to the compensation of its executives, employees, directors and outside consultants. The Company’s share-based compensation program is a long-term retention program intended to attract and reward talented executives, employees and outside consultants, and align their interests with stockholders. The Company is currently granting share-based awards under the magicJack VocalTec Ltd. 2013 Stock Incentive Plan and the magicJack VocalTec Ltd. 2013 Israeli Stock Incentive Plan (together, the “2013 Plans”). In July 2013, the shareholders approved the 2013 Plans at the annual general meeting of shareholders to allow grants of ordinary share options, restricted stock units and ordinary shares. In April 2014, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of June 30, 2017, the aggregate number of shares subject to awards under the 2013 Plans, as amended, was 3,600,000. In July 2017, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant to 5,600,000. Refer to Note 17, “Subsequent Events” for further details.  The Company had previously granted shares under the VocalTec amended Master Stock Plan (the “2003 Plan”) which expired in April 2013. Share-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation expense for awards with only service conditions and a graded vesting on a straight-line basis over the requisite vesting period for the entire award.

The Company’s share-based compensation expense for ordinary share options and issued restricted stock units for the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Ordinary share options	$	230	$	822	$	613	$	1,458
Restricted stock units		337		425		690		792
	$	567	$	1,247	$	1,303	$	2,250

The detail of total share-based compensation recognized by classification on the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017			2016
Cost of revenues	$	96	$	23	$	102		$	29
Marketing		10		33		14			76
General and administrative		461		1,123		1,197			2,019
Research and development		-		68		(10	)		126
	$	567	$	1,247	$	1,303		$	2,250

The decrease in share-based compensation is due primarily to the forfeitures related to reduced headcount and awards that were fully expensed in prior periods.

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Ordinary Share Options

Ordinary share options granted under the 2013 Plans have a five-year life and typically vest over a period of 36 months beginning at the date of grant. The 2013 Plans, as amended, currently allow for a maximum term of five years for awards granted. The following table provides additional information regarding ordinary share options issued, outstanding and exercisable for the year ended December 31, 2016, and six months ended June 30, 2017 (aggregate intrinsic value in thousands):

Date of Grant	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining  Contractual Term (in years)		Aggregate Intrinsic Value(1)
January 1, 2016		2,527,427		$	12.98		3.61	$	-
Granted		1,107,040		$	7.09
Exercised		(2,500	)	$	3.96
Forfeited		(34,740	)	$	8.83
Expired or cancelled		(109,168	)	$	13.57
December 31, 2016		3,488,059		$	11.13		3.11	$	-
Granted		100,000		$	6.85
Exercised		-
Forfeited(2)		(2,501,614	)	$	11.12
Expired or cancelled		-
Outstanding at June 30, 2017 (unaudited)		1,086,445		$	10.78		0.86	$	-
Vested at June 30, 2017 (unaudited)		986,445		$	11.18		0.62	$	-

(1) The aggregate intrinsic value is the amount by which the market value for the Company's common stock exceeds the weighted average exercise price of the outstanding stock options on the measurement date.

(2) In 2017, two former executive officers surrendered a total of 1,244,777 ordinary share options with a weighted average exercise price of $14.57. Additionally, 1,256,837 options with a weighted average strike price of $7.70 were forfeited by terminated executives in the SMB and Enterprise segments. The surrender of options resulted in a $2.4 million increase in tax expense during the second quarter.

Share-based compensation expense recognized for ordinary share options was approximately $0.2 million and $0.8 million for the three months ended June 30, 2017 and 2016, respectively, and $0.6 million and $1.5 million for the six months ended June 30, 2017 and 2016, respectively. No ordinary share options were exercised during the six months ended June 30, 2017. The total intrinsic value of ordinary share options exercised during the six months ended June 30, 2016 was $4 thousand. As of June 30, 2017, there was approximately $162 thousand of unrecognized share-based compensation expense related to unvested ordinary share options, which is expected to be recognized over a weighted average remaining period of 1.71 years.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company's stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company's expected stock price volatility over the term of the awards, assumed employee exercise behaviors, risk-free interest rate and expected dividends. For purposes of valuing ordinary share options, the Company used historical volatility at the date of grant. The approximate risk-free interest rate was based on the U.S. Treasury yield for comparable periods. The Company has experienced forfeitures in the past and estimates a forfeiture rate for awards issued when deemed applicable. The expected term of the ordinary share options was calculated using the simplified method in accordance with section 10-S99 of ASC 718, "Compensation - Stock Compensation".  The Company does not expect to pay dividends on its ordinary shares in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. The Company granted 100,000 ordinary share options during the six months ended June 30, 2017 with a weighted average fair value of $2.62. The Company granted 1,107,040 ordinary share options during the six months ended June 30, 2016 with a weighted average fair value of $2.75.  The grants were measured using the following assumptions:

	Six Months Ended June 30,
	2017			2016
Expected term (in years)		3.22 to 3.23			3.50
Dividend yield		0.00	%		0.00	%
Expected volatility		48.77 to 49.56	%	52.15% to 52.47		%
Risk free interest rate		1.53	%	0.95% to 1.13		%
Forfeiture rate		0.00	%		0.00	%

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Restricted Stock Units

The Company may also award non-vested restricted stock units to its executives, employees, directors and outside consultants under the 2013 Plans, which may vest based on service or a combination of service and other conditions, such as market share price. The compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. Each non-vested stock unit, upon vesting, represents the right to receive one ordinary share of the Company. During the six months ended June 30, 2017 and 2016 the Company granted 80,282 and 295,305 restricted stock units, respectively, under the 2013 Plans, as amended.

The following table summarizes the Company’s restricted stock unit activity for the six months ended June 30, 2017:

				Average
	Number of			Fair Value
	Shares			at Grant Date
December 31, 2016		482,085		$	7.70
Granted		80,282		$	7.99
Vested		(83,210	)	$	12.31
Forfeited		(248,876	)	$	7.45
Non-vested at June 30, 2017		230,281		$	6.74

Share-based compensation expense recognized for restricted stock units was approximately $0.3 million and $0.4 million for the three months ended June 30, 2017 and 2016, respectively, and $0.7 million and $0.8 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was approximately $1.3 million in unrecognized share-based compensation costs related to restricted stock units. The unrecognized share-based compensation expense is expected to be recognized over a weighted average remaining period of 1.21 years.

NOTE 13 – INCOME TAXES

Total income tax expense (benefit) was $2.6 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively, and ($8.8) million and $5.2 million for the six months ended June 30, 2017 and 2016, respectively. The calculation of the Company’s effective income tax rate for the three and six months ended June 30, 2017 and 2016 was (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Income before income taxes	$	1,093		$	4,217		$	(33,430	)	$	8,451
Income tax expense (benefit)		2,587			1,702			(8,768	)		5,202
Effective income tax rate		236.69	%		40.36	%		26.23	%		61.55	%

The Company primarily operates in the U.S. and Israel, and the Company’s Israeli operations are subject to a statutory income tax rate of 24% in 2017 and 23% in 2018 which is lower than the Company’s U.S. federal income tax rate of 34% as of June 30, 2017.

For the three months ended June 30, 2017, the Company recorded income tax expense of $2.6 million, which is higher than the expected tax expense of $0.4 million, using the statutory income tax rate of 34% due primarily to reductions in the Company’s deferred tax assets related to the surrender of stock options by certain former executive officers and forfeiture of options totalling $2.4 million. Additionally, the effective tax rate was impacted by increases to uncertain tax positions of $0.4 million, the revaluation of our Israeli NOLs of ($0.2) million and other smaller discrete items. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations

For the six months ended June 30, 2017, the Company recorded an income tax benefit of ($8.8) million, which is lower than the expected tax benefit of ($11.4) million, using the statutory rate of 34%, due, in part, to revaluations of the Israel net operating loss carryforwards of ($1.0) million, increases to uncertain tax positions of $1.8 million, and a reduction to deferred tax assets related to surrender of stock options and option forfeitures of $2.4 million. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

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NOTE 14 – NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE

Net income (loss) attributable to common shareholders per share – basic, is calculated by dividing net (loss) income attributable to the Company’s common shareholders (the “Numerator”), by the weighted average number of common shares outstanding during the period, (the “Denominator”). Net (loss) income attributable to common shareholders per share – diluted, is computed by increasing the basic denominator to include the number of common shares that would have been issued if the Company’s dilutive potential common shares had been exercised.  The Company’s potential common shares are the share-based awards (ordinary share options and restricted stock units)discussed in Note 12, “Share-Based Compensation”.

The Company calculates the diluted denominator using the treasury stock method, which assumes that all exercise proceeds are used to repurchase common shares, reducing the net number of shares to be added. Share-based awards only have a dilutive effect when the average stock price for the period exceeds their exercise price (“they are in the money”) and the entity has net income.

The following table presents the computation of basic and diluted net (loss) income per common share attributable to shareholders (in thousands, except for per share information):

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Numerator:
Net income (loss) attributable to common shareholders	$	(1,561	)	$	2,819	$	(24,662	)	$	3,553
Denominator:
Denominator for basic net income per share -
weighted average ordinary shares outstanding		16,078			15,853		16,056			15,750
Effect of dilutive share-based awards outstanding		-			17		-			157
Effect of dilutive share-based awards vested,
exercised or expired during the period		-			2		-			7
Denominator for diluted net income per share -
weighted average ordinary shares outstanding		16,078			15,872		16,056			15,914
Net income (loss) per common share attributable to
common shareholders:
Basic	$	(0.10	)	$	0.18	$	(1.54	)	$	0.23
Diluted	$	(0.10	)	$	0.18	$	(1.54	)	$	0.22
Anti-dilutive share-based awards not included above		1,317			3,812		1,317			2,812

NOTE 15 – BROADSMART ACQUISITION

In March 2016, the Company acquired the assets of Broadsmart for approximately (i) $38.0 million in cash, (ii) 233,402 shares of the Company's ordinary shares issued from treasury stock with a fair value of $1.7 million based on closing market price per share as of the date of the acquisition, and (iii) additional contingent cash payments of (a) up to $0.2 million, if two certain individuals ($0.1 million for each) previously employed by Broadsmart do not accept the Company's employment offer, and (b) $2.0 million, if the acquired assets generated 2016 revenues of at least $15.6 million.

At the time of closing, $3.0 million of the cash consideration was paid into escrow to cover indemnification claims by the Company against the sellers. No asset or liability is included in the accompanying unaudited condensed consolidated balance sheets for this item.

Neither of the contingent payments had been made as of June 30, 2017. The $0.2 million is included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets. The $2.0 million was paid into escrow at the time of closing. Revenues for the year ended December 31, 2016 did not reach the target and the Company has requested return of the funds, which were recorded as a $2.0 million receivable from earnout escrow in the accompanying unaudited condensed consolidated balance sheets.

The acquired assets and liabilities were recorded at their estimated fair values on the balance sheet for the Enterprise segment on March 17, 2016. The results of operations of the Broadsmart business have been included in the Company’s consolidated financial statements, under the Enterprise segment, since that date. During the year ended December 31, 2016, the Company recognized an impairment loss of $0.5 million on one of the Broadsmart intangible assets.  During the first quarter ended March 31, 2017, the Company recognized impairment charges of $31.5 million on Broadsmart intangible assets, including goodwill.  The carrying value of the Broadsmart business after the impairment was $18.5 million at March 31, 2017. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets” and Note 7, “Goodwill” for further details.

26

On June 23, 2017 the founders of Broadsmart left the Company.  On August 4, 2017, the Company reached a  mutual agreement with the founders, and certain affiliated companies, that included release to the Company of $1.0 million of the $3.0 million held in escrow to cover indemnification claims and the $2.0 million earn-out amount.  The remaining $2.0 million will remain in escrow, pursuant to the provisions of the purchase agreement, to cover specific potential claims by the Company.  The  agreement also provides that the Company will execute an agreement to acquire certain assets of NATC for $10 thousand, subject to any required regulatory approvals. The agreement is subject to a seven day revocation period in which the founders have the right to rescind the agreement. Refer to Note 17, "Subsequent Events" for further details.

Pro Forma Financial Information

The following table presents the unaudited pro forma combined results of operations of the Company and Broadsmart for the six months ended June 30, 2016, as if the acquisition of Broadsmart had occurred on January 1, 2016. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2016.

	Six Months Ended
	June 30, 2016
Net revenues	$	51,540
Net income	$	3,658

The pro forma results are based on estimates and assumptions, which the Company believes are reasonable. The pro forma results include adjustments primarily related to amortization of acquired intangible assets, depreciation, interest expense, and transaction costs expensed during the period.

NOTE 16 – SEGMENT REPORTING

Reportable segments are defined under U.S. GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by a company's chief operating decision makers in deciding how to allocate resources and assess performance.

Historically, the Company has not had separate reportable segments. However, with the acquisition of Broadsmart and the founding of the SMB business during 2016, management evaluated each of these new business lines separately and determined that the Company had separate reportable segments – "Core Consumer," "Enterprise" and "SMB". These segments were organized by the products and services that are sold and the customers that are served.  During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment. Accordingly, the SMB segment will not show activity for periods after March 31, 2017.  The below table includes an "Other" segment to capture the Company's interest in a joint venture that does not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a reportable segment.  The Company measures and evaluates its reportable segments based on revenues and gross profit margins. The Company's segments and their principal activities consist of the following:

Core Consumer

This segment represents a vertically integrated group of companies, a micro-processor chip design company, an appserver and session border controller company, a wholesale provider of VoIP services, a softphone company, the developer and provider of the magicJack device, and a wholesaler of telephone service to VoIP providers and telecommunication carriers. This segment represents the historical magicJack Core Consumer business.

magicJack is the cloud communications leader that invented the magicJack device and other magicJack products and services. magicJack devices and mobile apps provide customers the ability to make and receive telephone calls in the U.S. or Canada with no additional cost.   Customers may also purchase international minutes to place telephone calls outside of the U.S. and Canada.

Enterprise

This segment includes Broadsmart, which is a provider of UCaaS hardware and connectivity for enterprise customers.

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SMB

Through this segment, started during 2016, the Company provided VoIP services to small to medium sized businesses. The expenses of this restructuring included severance for the majority of the employees in the segment and future rent payments for the Alpharetta, GA office.

Other

This segment included the Company’s 60% controlling interest in a joint venture which began selling a line of high-technology residential consumer products in the fourth quarter of fiscal year 2016. On March 31, 2017, this interest was reduced to 36% and on May 31, 2017 the Company sold its remaining interest to the unrelated third party. The Company has determined that the joint venture did not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a reportable segment. As such, it was included in the “Other” segment.

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Selected information for the three and six month periods ended June 30, 2017 and 2016 and as of June 30, 2017 and December 31, 2016 is presented by reportable segment below (in thousands):

	For the Three Months Ended June 30, 2017
	Previous Core Consumer			SMB		Revised Core Consumer			Enterprise		Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	19,334			-	$	19,334			3,088		(1	)		(40	)	$	22,381
Cost of revenues		6,185			-		6,185			2,000		(19	)		-			8,166
Gross profit (loss)		13,149			-		13,149			1,088		18			(40	)		14,215
Marketing		1,884			-		1,884			247		(11	)		-			2,120
General and administrative		8,966			-		8,966			755		(137	)		(40	)		9,544
Impairment of goodwill and
intangible assets		-			-		-			-		-			-			-
Research and development		1,462			-		1,462			-		-			-			1,462
Operating expenses		12,312			-		12,312			1,002		(148	)		(40	)		13,126
Operating income (loss)		837			-		837			86		166			-			1,089
Interest and dividend income		17			-		17			-		-			-			17
Other expenses, net		(13	)		-		(13	)		-		-			-			(13	)
Income (loss) before income taxes	$	841		$	-	$	841		$	86	$	166		$	-		$	1,093
Other Data:
Capital expenditures	$	1,064			-	$	1,064			10		-			-		$	1,074
Depreciation expense	$	272			-	$	272			61		(2	)		-		$	331
Amortization expense	$	380			-	$	380			183		-			-		$	563

	For the Six Months Ended June 30, 2017
	Previous Core Consumer			SMB			Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	39,764			116		$	39,880			5,771			-		(73	)	$	45,578
Cost of revenues		13,342			131			13,473			4,144			-		-			17,617
Gross profit (loss)		26,422			(15	)		26,407			1,627			-		(73	)		27,961
Marketing		2,962			1,089			4,051			476			-		-			4,527
General and administrative		19,274			1,056			20,330			2,112			-		(73	)		22,369
Impairment of goodwill and
intangible assets		-			-			-			31,527			-		-			31,527
Research and development		2,364			596			2,960			1			-		-			2,961
Operating expenses		24,600			2,741			27,341			34,116			-		(73	)		61,384
Operating income (loss)		1,822			(2,756	)		(934	)		(32,489	)		-		-			(33,423	)
Interest and dividend income		23			-			23			-			-		-			23
Other expenses, net		(30	)		-			(30	)		-			-		-			(30	)
Income (loss) before income taxes	$	1,815		$	(2,756	)	$	(941	)	$	(32,489	)	$	-	$	-		$	(33,430	)
Other Data:
Capital expenditures	$	1,094			-		$	1,094			72			-		-		$	1,166
Depreciation expense	$	537			21		$	558			107			-		-		$	665
Amortization expense	$	723			-		$	723			1,031			-		-		$	1,754

	June 30, 2017
	Previous Core Consumer		SMB		Revised Core Consumer		Enterprise		Other		Intercompany		Consolidated
Balance Sheet Data:
Goodwill	$	32,304		-	$	32,304		-		-		-	$	32,304
Total assets	$	126,986		-	$	126,986		19,723		-		-	$	146,709

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	For the Three Months Ended June 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	22,361			-		$	22,361			2,967			7			(34	)	$	25,301
Cost of revenues		7,353			14			7,367			2,462			9			-			9,838
Gross profit (loss)		15,008			(14	)		14,994			505			(2	)		(34	)		15,463
Marketing		1,162			369			1,531			80			147			-			1,758
General and administrative		5,184			1,548			6,732			1,131			423			(34	)		8,252
Research and development		947			295			1,242			-			5			-			1,247
Operating expenses		7,293			2,212			9,505			1,211			575			(34	)		11,257
Operating income (loss)		7,715			(2,226	)		5,489			(706	)		(577	)		-			4,206
Interest and dividend income		(9	)		-			(9	)		-			-			-			(9	)
Other expenses, net		(2	)		-			(2	)		-			-			-			(2	)
Income (loss) before income taxes	$	7,726		$	(2,226	)	$	5,500		$	(706	)	$	(577	)	$	-		$	4,217
Other Data:
Capital expenditures	$	5			154		$	159			-			-			-		$	159
Depreciation expense	$	223			3		$	226			55			-			-		$	281
Amortization expense	$	434			-		$	434			676			-			-		$	1,110

	For the Six Months Ended June 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	45,580			-		$	45,580			3,447			7			(34	)	$	49,000
Cost of revenues		15,295			14			15,309			2,729			9			-			18,047
Gross profit (loss)		30,285			(14	)		30,271			718			(2	)		(34	)		30,953
Marketing		2,321			374			2,695			77			207			-			2,979
General and administrative		12,259			3,046			15,305			1,373			543			(34	)		17,187
Research and development		1,977			365			2,342						5			-			2,347
Operating expenses		16,557			3,785			20,342			1,450			755			(34	)		22,513
Operating income (loss)		13,728			(3,799	)		9,929			(732	)		(757	)		-			8,440
Interest and dividend income		(16	)		-			(16	)		-			-			-			(16	)
Other expenses, net		5			-			5			-			-			-			5
Income (loss) before income taxes	$	13,739		$	(3,799	)	$	9,940		$	(732	)	$	(757	)	$	-		$	8,451
Other Data:
Capital expenditures	$	5			154		$	159			-			-			-		$	159
Depreciation expense	$	462			3		$	465			64			-			-		$	529
Amortization expense	$	903			-		$	903			751			-			-		$	1,654

	December 31, 2016
	Previous Core Consumer		SMB			Restated Core Consumer		Enterprise		Other		Intercompany		Consolidated
Balance Sheet Data:
Goodwill	$	32,304		-		$	32,304		14,881		-		-	$	47,185
Total assets	$	142,870		(9,447	)	$	133,423		40,839		255		-	$	174,517

Prior year allocations have been reclassified to conform to current year presentation.

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NOTE 17 – SUBSEQUENT EVENTS

Under Israeli law, CEO compensation must be approved by shareholders.  The Company held a special shareholder meeting on July 31, 2017, to approve the compensation packages for Don Carlos Bell, III, the Company’s Chief Executive Officer (“CEO”),  a change in compensation payable to non-employe Directors, and amendments to the Company’s compensation policy and amendments to the 2013 Stock Incentive Plans including an  increase in the number of share based awards available for grants under the plans to 5,600,000. Shareholders approved all proposals.

On August 4, 2017, the Company reached a mutual agreement with the founders of Broadsmart, and certain affiliated companies, that will release to the Company of $1.0 million of the $3.0 million held in escrow to cover indemnification claims and the $2.0 million earn-out amount.  The remaining $2.0 million will remain in escrow, pursuant to the provisions of the purchase agreement, to cover specific potential claims by the Company.  The agreement also provided that the Company will execute an agreement to acquire certain assets of NATC for $10 thousand, subject to any required regulatory approvals. The agreement is subject to a seven day revocation period in which the founders have the right to rescind the agreement.

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ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements as of June 30, 2017 and for the three and six month periods ended June 30, 2017 and 2016, as well as our Annual Report on Form 10-K for the year ended December 31, 2016. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, the accuracy of which involves risk and uncertainties. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “estimates,” “projects,” and similar expressions to identify forward-looking statements. Readers should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section titled “Risk Factors” of our Form 10-K for the year ended December 31, 2016 filed on March 16, 2017.

Overview

magicJack VocalTec Ltd. and its Subsidiaries (the “Company”) is the cloud communications leader that invented the magicJack device and other magicJack products and services. magicJack devices weigh about one ounce and plug into the USB port on a computer or into a power adapter and high speed Internet source, providing users with complete phone service for home, business and travel. magicJack devices come with the right to access our servers (“access right”), which provides our customers the ability to obtain free telephone services. Customers may renew access rights. We currently offer the magicJack GO, which has its own CPU and can connect a regular phone directly to the user’s broadband modem/router and function as a standalone phone without using a computer.

We also offer magicJack mobile apps, which are applications that allow users to make and receive telephone calls through their smart phones or devices. We currently offer the magicApp, magicJack Connect and magicJack Spark. The magicApp and magicJack Connect are mobile apps available for both iOS and Android. In July 2017, we launched magicJack Spark on iOS devices.  The mobile apps allow customers to place and receive telephone calls in the U.S. or Canada on their mobile devices through either an existing or new magicJack account. The mobile apps also give users the ability to add a second phone number to their smart phone for a monthly or annual fee. Customers may purchase international minutes to place telephone calls through the magicJack device or mobile apps to locations outside of the U.S. and Canada.

magicJack VocalTec is a vertically integrated group of companies, with capabilities including Voice-over-Internet-Protocol (“VoIP”) services and related equipment sales, micro-processor chip design, development of the magicJack device. In addition to residential consumers, the Company provides VoIP services and related equipment to small to medium sized businesses at competitive prices and wholesales telephone service to VoIP providers and telecommunication carriers.  In 2016, we acquired a provider of hosted Unified Communication as a Service (“UCaaS”) and seller of hardware and network equipment focusing on medium-to-large, multi-location enterprise customers.

Effective March 9, 2017, the Board of Directors appointed Don C. Bell III, as our new Chief Executive Officer, replacing the retiring Gerald Vento.  In conjunction with this change, the Board also approved the appointment of Thomas Fuller as Senior Vice President Finance and subsequently approved him assuming the role of Chief Financial Officer effective May 11, 2017, replacing Jose Gordo. Additionally, the Board approved the appointment of Kristin Beischel as Chief Marketing Officer and Dvir Salomon as Chief Technology Officer. Furthermore, on May 22, 2017, Don Burns, the Chairman of our Board, resigned, and the Board approved Izhak Gross as his successor.

Basis of Presentation

Our unaudited condensed consolidated financial statements are prepared in conformity with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2016. The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included.

Our unaudited condensed consolidated financial statements are the basis for the discussion and analysis of our results of operations, liquidity and capital resources. References to authoritative accounting literature in this report, where applicable, are based on the Accounting Standards Codification (“ASC”). Our functional and reporting currency is the United States Dollar (“U.S. Dollar”), which is the currency of the primary economic environment in which our consolidated operations are conducted. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in currencies other than U.S. dollars, including New Israeli Shekels (“NIS”) and Polish Zloty (“PLN”), are re-measured in U.S. dollars and any gains or losses are recognized in our consolidated financial statements in the period they occur.

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Prior to 2016, we prepared our consolidated financial statements on the basis of being a single reporting entity. Beginning in the first quarter of 2016, with the acquisition of Broadsmart and the internal development of SMB, we have reported the results of operations in separate reportable segments – “Core Consumer,” “Enterprise” and “SMB”.  During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment, so this segment will not show activity for periods after March 31, 2017.  Refer to Note 16, “Segment Reporting,” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

Approximately 86% of our consolidated revenues in the three and six months ended June 30, 2017 were from sales to customers located in the United States. Approximately 90% of our consolidated revenues in the three and six months ended June 30, 2016, were from sales to customers located in the United States.

Basis of Consolidation

Our consolidated financial statements include the accounts of magicJack VocalTec and its wholly owned subsidiaries. The results of Broadsmart Global, Inc. have been included since March 17, 2016.  The results of SMB have been included since the first quarter of 2016.  All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications may have been made to prior period financial statement amounts to conform to the current presentation.

The results for the six months ended June 30, 2017 may not be indicative of the results for the entire year ending December 31, 2017. The interim unaudited condensed consolidated financial statements should be read in conjunction with our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 16, 2017.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and judgments are revised periodically as required. Actual results could differ from those estimates. Significant estimates include allowances for billing adjustments and doubtful accounts, the recoverability of long-lived assets and goodwill, income taxes, income tax valuation allowance, uncertain tax liabilities, the value of ordinary shares issued in business combinations or underlying our ordinary share options, the expected forfeitures of ordinary share options and estimates of likely outcomes related to certain contingent liabilities.

We evaluate our estimates on an ongoing basis. Our estimates and assumptions are based on factors such as historical experience, trends within the Company and the telecommunications industry, general economic conditions and on various other assumptions that we believe to be reasonable under the circumstances. The results of such assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily available. Actual results may differ from our estimates and assumptions as a result of varying market and economic conditions, and may result in lower revenues and lower operating income.

CRITICAL ACCOUNTING POLICIES

We have identified below any critical accounting policies that have changed since our Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 16, 2017.

INTANGIBLE ASSETS, INCLUDING GOODWILL

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Intangible assets with indefinite lives, including goodwill, are not amortized to operations, but are instead reviewed for impairment at least annually, or more frequently if there is an indicator of impairment. Indicators include, but are not limited to: sustained operating losses or a trend of poor operating performance and a decrease in our market capitalization below its book value.

The valuation methodology we use for assessing potential impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. If these assumptions differ materially from actual future results, we may record impairment charges in the future.

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In prior years, we used the two-step goodwill impairment test.  In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other” which eliminated step two of the goodwill impairment test. The Company adopted ASU 2017-04 on a prospective basis in the first quarter of 2017.

As part of our quarterly impairment review for intangible assets with indefinite lives, including goodwill, we determined there were no impairment indicators as of June 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.

As was previously disclosed in our Form 10-K filed on March 16, 2017, the Broadsmart business which comprises the Enterprise segment was underperforming and steps were being taken to improve operating results including the hiring of a new Chief Operating Officer for the segment and additional sales and marketing personnel dedicated to obtaining new business.  The new Chief Operating Officer for the Enterprise segment and our new Executive Management team recently completed a comprehensive review of the Enterprise segment’s business prospects and, through this process, revised the projections.  Additionally, Broadsmart received notification in early April 2017 that a major customer would not be renewing its contract and management anticipates the loss of another one of the Enterprise segment’s significant customers.  Combined, these customers accounted for approximately 29% of the Enterprise segment’s revenue in 2016.  We considered the revised projections and customer losses to be indicators of potential impairment, and accordingly performed impairment testing of the segment’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017 utilizing the revised projections.

Based on the impairment indicators as of March 31, 2017 discussed above, we engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill as of March 31, 2017. The valuation estimated the fair value of Broadsmart’s identified intangible assets not subject to amortization based on the relief from royalty method, which requires an estimate of a reasonable royalty rate, identification of relevant projected revenues and expenses, and selection of an appropriate discount rate. We recognized an impairment charge of $0.9 million for the carrying value in excess of the fair value.

For long-lived assets including definite-lived intangible assets subject to amortization, we totaled the undiscounted cash flows expected to result from the use of these assets and their eventual disposition and noted that the sum did not exceed the carrying amount of the assets, indicating further impairment testing was necessary for these assets as of March 31, 2017. The estimated fair value of definite-lived intangible assets subject to amortization as of March 31, 2017, was based on discounted future cash flows.  We recorded impairment losses of $15.7 million for the carrying value of these assets in excess of the fair value.

Based on a discounted future cash-flows approach, the valuation estimated the fair value of the Enterprise reporting unit to be $17.9 million.  Recognition of the goodwill impairment resulted in a tax benefit which was recorded as a deferred tax asset.  Since the deferred tax asset increases the carrying value of the reporting unit, it would result in an additional impairment. The accounting guidance requires an entity to calculate the impairment charge and the deferred tax effect using a simultaneous equation method, which effectively grosses up the goodwill impairment charge to account for the related deferred tax benefit so that the resulting carrying value does not exceed the calculated fair value. The simultaneous equation calculation resulted in an impairment charge that exceeded the carrying value of the goodwill. Since the guidance limits goodwill impairments to the carrying value of goodwill, we recognized an impairment loss of $14.9 million, the full carrying value of goodwill.

In total, impairment losses of $31.5 million were recognized in operating expenses and a related deferred income tax benefit of $11.7 million was recognized in the Enterprise segment for the quarter ended March 31, 2017.  The impaired assets were (in thousands):

	March 31, 2017
	Carrying Amount		Fair Value		Impairment
Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
Goodwill		14,881		-		14,881
		37,127		5,600		31,527

Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

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SIGNIFICANT CHANGES IN FINANCIAL POSITION

The following table presents significant changes in our unaudited condensed consolidated balance sheets for the six months ended June 30, 2017 (in thousands).

	June 30,		December 31,
	2017		2016		Change
	(Unaudited)
Cash and cash equivalents	$	47,041	$	52,394	$	(5,353	)
Accounts receivable, net	$	2,095	$	3,171	$	(1,076	)
Inventories	$	2,646	$	4,441	$	(1,795	)
Prepaid income taxes	$	2,713	$	527	$	2,186
Deposits and other current assets	$	4,465	$	1,970	$	2,495
Intangible assets, net	$	11,533	$	28,854	$	(17,321	)
Goodwill	$	32,304	$	47,185	$	(14,881	)
Deferred tax asset	$	35,659	$	26,568	$	9,091
Income tax payable	$	-	$	1,527	$	(1,527	)
Accrued expenses and other current liabilities	$	10,549	$	8,426	$	2,123
Total deferred revenue	$	86,396	$	92,708	$	(6,312	)
Other non-current liabilities	$	12,577	$	10,866	$	1,711

During the six months ended June 30, 2017, cash and cash equivalents decreased $5.4 million, primarily reflecting estimated tax payments for fiscal 2016, personnel related disbursements including payment of  2016 accrued bonus, and severance payments related to the restructuring of the SMB business, costs associated with changes to our customer service team and the change in executive management team, investment in the SMB segment, and legal fees and other costs associated with our response to activist shareholder initiatives, strategic process and other ongoing litigation matters. A detailed discussion of this change is provided in “Liquidity and Capital Resources”.

During the six months ended June 30, 2017, net accounts receivable decreased $1.1 million reflecting timing of collections and lower retail sales of the magicJack device.

During the six months ended June 30, 2017, inventories decreased $1.8 million reflecting a $0.4 million write-down of obsolete inventory components and reduced purchases of magicJack devices reflecting lower year-over-year sales volumes.

During the six months ended June 30, 2017, prepaid income taxes increased $2.2 million primarily due to a $3.0 million estimated federal tax payment made during the first quarter which was partially offset by the receipt of a $0.9 million state tax refund.

During the six months ended June 30, 2017, deposits and other current assets increased $2.5 million and accrued expenses and other current liabilities increased $2.1 million primarily due to accruals for litigation settlement and applicable insurance recovery.  Refer to Note 10, “Commitments and Contingencies” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

During the six months ended June 30, 2017, intangible assets decreased $17.3 million. The decrease in intangible assets is primarily attributable to the $16.6 million impairment of intangible assets for the Enterprise reporting unit, and $1.8 million in amortization expense, partially offset by $1.1 million in acquisitions. Refer to Note 3, "Impairment of Intangible Assets, Including Goodwill" and Note 6, "Intangible Assets," in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

During the six months ended June 30, 2017, goodwill decreased $14.9 million due to the impairment of goodwill for the Enterprise reporting unit. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

During the six months ended June 30, 2017, deferred tax asset increased $9.1 million due primarily to the $31.5 million impairment of intangible assets, including goodwill, for the Enterprise reporting unit.   Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets,” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details. This increase was partially offset by the surrender of stock options from two former executive officers and forfeitures of options by other executives. Refer to Note 12, “Share-based Compensation” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

During the six months ended June 30, 2017, income tax payable decreased $1.5 million reflecting the $3.0 million estimated tax payment for the prior year noted above and the current year to date income tax benefit not generating any new tax liability.

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During the six months ended June 30, 2017, total deferred revenue decreased $6.3 million due primarily to the recognition of 2016 deferred revenue exceeding the deferral associated with 2017 sales.

During the six months ended June 30, 2017, other non-current liabilities increased $1.7 million due primarily to a $1.8 million increase in the uncertain tax provision.

RESULTS OF OPERATIONS

The following table presents our unaudited condensed consolidated results of operations for the periods indicated (in thousands). The unaudited condensed consolidated statements of operations below have been expanded to show the composition of our net revenues and cost of revenues to enable a more meaningful discussion of our operations.

	Three Months Ended June 30,					2017 Compared to					Six Months Ended June 30,						2017 Compared to
	2017			2016		2016					2017			2016			2016
Net Revenues
Sale of magicJack devices	$	2,503		$	3,227	$	(724	)	(22.4	)%	$	5,346		$	6,792		$	(1,446	)	(21.3	)%
Access right renewals		12,630			14,485		(1,855	)	(12.8	)		25,691			29,483			(3,792	)	(12.9	)
Mobile apps		408			306		102		33.3			859			525			334		63.6
Shipping and handling		395			172		223		129.7			715			381			334		87.7
magicJack-related products		1,152			1,324		(172	)	(13.0	)		2,597			2,444			153		6.3
Prepaid minutes		1,158			1,526		(368	)	(24.1	)		2,379			3,216			(837	)	(26.0	)
Access and wholesale charges		957			1,322		(365	)	(27.6	)		2,047			2,740			(693	)	(25.3	)
UCaaS		3,049			2,933		116		4.0			5,698			3,413			2,285		66.9
Other		129			6		123		*			246			6			240		*
Total Net Revenue		22,381			25,301		(2,920	)	(11.5	)		45,578			49,000			(3,422	)	(7.0	)
Cost of Revenues
Cost of devices and related products		2,043			2,119		(76	)	(3.6	)		4,584			4,125			459		11.1
Shipping and handling		360			393		(33	)	(8.4	)		821			829			(8	)	(1.0	)
Credit card processing fees		401			449		(48	)	(10.7	)		877			964			(87	)	(9.0	)
Network and carrier charges		2,389			3,209		(820	)	(25.6	)		5,074			6,735			(1,661	)	(24.7	)
UCaaS		2,000			2,461		(461	)	(18.7	)		4,144			2,729			1,415		51.9
Other		973			1,207		(234	)	(19.4	)		2,117			2,665			(548	)	(20.6	)
Total Cost of Revenues		8,166			9,838		(1,672	)	(17.0	)		17,617			18,047			(430	)	(2.4	)
Gross Profit		14,215			15,463		(1,248	)	(8.1	)		27,961			30,953			(2,992	)	(9.7	)
Operating expenses:
Marketing		2,120			1,758		362		20.6			4,527			2,979			1,548		52.0
General and administrative		9,544			8,252		1,292		15.7			22,369			17,187			5,182		30.2
Impairment of goodwill and intangible assets		-			-		-		-			31,527			-			31,527		100.0
Research and development		1,462			1,247		215		17.2			2,961			2,347			614		26.2
Total operating expenses		13,126			11,257		1,869		16.6			61,384			22,513			38,871		172.7
Operating income		1,089			4,206		(3,117	)	(74.1	)		(33,423	)		8,440			(41,863	)	(496.0	)
Other income (expense):
Interest and dividend income		17			9		8		*			23			16			7		*
Other income (expense), net		(13	)		2		(15	)	*			(30	)		(5	)		(25	)	*
Total other income (expense)		4			11		(7	)	*			(7	)		11			(18	)	*
(Loss) income before income taxes		1,093			4,217		(3,124	)	(74.1	)		(33,430	)		8,451			(41,881	)	(495.6	)
Income tax (benefit) expense		2,587			1,702		885		52.0			(8,768	)		5,202			(13,970	)	(268.6	)
Net (loss) income	$	(1,494	)	$	2,515	$	(4,009	)	(159.4	)	$	(24,662	)	$	3,249		$	(27,911	)	(859.1	)

* - Not meaningful.

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Components of Net Revenues

Our net revenues are comprised of the following sources:

· Sale of magicJack devices and access rights – represent revenues recognized from sales of the magicJack devices to retailers, wholesalers, or direct to customers, net of returns, over the period associated with the access right period. These revenues are recorded net of sales allowance, chargebacks, retailer discounts and advertising allowances;

· Access right renewals – represent revenues from customers purchasing rights to access our servers beyond the access right period included with a magicJack device or magicJack service. The extended access right ranges from one to five years. These fees charged to customers are initially deferred and recognized as revenue ratably over the extended access right period;

· Mobile apps – represent revenues from access rights granted to users of the magicApp and magicJack Connect App which are recognized ratably over the access right period;

· Shipping and handling – represent charges for shipping and handling fees for magicJack devices shipped directly to customers. The fees are initially deferred and recognized as revenues over the access right period associated with the magicJack device;

· magicJack-related products – represent revenues recognized from sale of other items related to the magicJack devices and access right renewals we offer our customers, including: (i) porting fees charged to customers to port their existing phone number to a magicJack device or service, (ii) fees charged for customers to select a custom, vanity or Canadian phone number, (iii) fees charged to customers to change their existing number, (iv) insurance covering the replacement of a damaged or lost device, and (v) sale of battery powerbanks. These revenues are recognized at the time of sale, with the exception of sales of the battery powerbank which are recognized when shipped;

· Prepaid minutes – represents revenues recognized primarily from the usage and expiration of international prepaid minutes, net of chargebacks. Revenues from prepaid minutes are recognized as minutes are used;

· Access and wholesale charges – represent revenues generated from: (i) access fees charged to other telecommunication carriers or providers for Inter-exchange Carriers (“IXC”) calls terminated to our end-users, and (ii) fees charged to telecommunication carriers or providers for origination of calls to their 800-numbers. These revenues are recorded based on rates set forth in the respective state and federal tariffs or negotiated contract rates, less provisions for billing adjustments. Revenues from access and wholesale charges are recognized as minutes are used;

· UCaaS – represents revenues recognized from: (i) recurring monthly service revenue from the sales of hosted services - customers are billed monthly in advance for these recurring services and in arrears for one time service charges and other certain usage charges, and (ii) non-recurring revenue from the sale of hardware and network equipment. Revenues for recurring monthly service are recorded in the period the services are provided over the term of the respective customer agreements and  revenues from the sale of hardware and network equipment are recognized in the period that the equipment is delivered and put into service; and

· Other revenues – represent VoIP services provided to small to medium sized businesses and revenues generated by ancillary revenue sources.

Components of Cost of Revenues

Our cost of revenues is comprised of the following components:

· Cost of devices and related products – represent the costs of components and manufacturing of the magicJack devices, as well as production, packaging and other inventory-related costs and broker commissions on devices and mobile apps. The costs of the magicJack devices and mobile apps are recognized over the initial three, six or twelve month access right period. The cost of battery powerbanks is expensed as incurred;

· Shipping and handling – represent freight, postage and other transportation costs related to: (i) transportation of the magicJack devices from the manufacturer to our warehouse and distribution center, and (ii) freight, shipping and handling fees incurred to ship the magicJack devices to retailers and direct customers. These costs are expensed as incurred;

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· Credit card processing fees – represent transaction and other fees incurred as a result of accepting credit card payments for sales of magicJack devices, access right renewals, shipping and handling charges, magicJack related products and prepaid minutes sold direct to customers through our website. These fees are expensed as incurred;

· Network and carrier charges – represent facilities charges to establish and maintain our network as well as network usage fee charges from other telecommunication carriers. These rates or charges are based upon commercial agreements or applicable state and/or federal tariffs. These charges are expensed as incurred;

· UCaaS – represents the cost of providing the recurring monthly hosted services including, network usage charges, customer internet access, amortization expense and commissions as well as the cost of hardware and network equipment related to non-recurring sales, provided by our Broadsmart subsidiary. These costs are expensed as incurred; and

· Other cost of revenues – represents allocation of personnel-related costs, amortization and depreciation expense related to assets employed in generating our revenues, as well as costs from discontinued revenue sources.

THREE MONTHS ENDED JUNE 30, 2017 COMPARED TO THREE MONTHS ENDED JUNE 30, 2016

Net Revenues

Total net revenue was $22.4 million and $25.3 million for the three months ended June 30, 2017 and 2016, respectively, representing a decrease of $2.9 million, or 11.5%. The decrease in the components of net revenues was primarily attributable to the following:

· $0.7 million decrease in revenues from the sale of magicJack devices primarily reflecting lower retail sales volume, lower average sales prices due to the increased use of promotion offers and a proposed consumer telecommunications tax settlement;

· $1.9 million decrease in access right renewal revenues due to customer churn, promotional offers and the number of long-term renewals in the customer base that are at lower average annual revenues;

· $0.4 million decrease in revenues from prepaid minutes resulting reflecting declining usage levels; and

· $0.4 million decrease in revenues from access and wholesale charges resulting from lower network traffic.

For the three months ended June 30, 2017 and 2016, sales of the magicJack devices through retail outlets represented approximately 53% and 46%, respectively, of sales of all magicJack devices sold. For the same periods, direct sales represented approximately 47% and 54%, respectively, of magicJack devices sold. For the three months ended June 30, 2017 and 2016, no retailer accounted for more than 10% of our consolidated net revenue.

Cost of Revenues

Total cost of revenues was $8.2 million and $9.8 million for the three months ended June 30, 2017 and 2016, respectively, representing a decrease of approximately $1.7 million, or 17.0%.

· This decrease in cost of revenues was primarily attributable to: (i) a $0.8 million decrease in network and carrier charges primarily as a result of lower traffic substantially resulting from the elimination of free app users at the end of the second quarter of 2016, and (ii) $0.5 million decrease in UCaaS related cost of goods sold, reflecting lower amortization expense due to the write-off of intangible assets in the first quarter of 2017 and cost savings associated with the ongoing integration of the UCaaS business with the Company’s network infrastructure.

Operating Expenses

Total operating expenses were $13.1 million and $11.2 million for three months ended June 30, 2017 and 2016, respectively, representing an increase of $1.9 million, or 16.6%. This change in operating expenses is primarily attributable to:

· a $0.4 million increase in marketing expense, primarily related to increased advertising research in the Core Consumer segment to test market sensitivity,

· a $1.3 million increase in General and Administrative (“G&A”) expense due to several factors including:

i. a $3.1 million increase in costs related to the Core Consumer segment, primarily composed of a $2.2 million increase in legal fees related to the response to activist shareholders, strategic process and other litigation matters and a $0.6 million increase in personnel related expenses primarily reflecting severance and new executive officer compensation including accruals for anticipated CEO compensation.

ii. These increases were partially offset by a $0.4 million decrease in costs related to the Enterprise segment, primarily reflecting lower personnel related costs associated with stock based compensation and bonus accruals and a $1.5 million decrease in costs related to SMB activity due to the scaling back of the Alpharetta location.

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Income Taxes

Total income tax expense was $2.6 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively. The calculation of our effective income tax rate for the three months ended June, 2017 and 2016 was (in thousands):

	Three Months Ended
	June 30,
	2017			2016
Income before income taxes	$	1,093		$	4,217
Income tax expense		2,587			1,702
Effective income tax rate		236.69	%		40.36	%

We primarily operate in the U.S. and Israel, and our Israeli operations are subject to a statutory income tax rate of 24% in 2017, which is set to decline to 23% in 2018, that is lower than our U.S. federal income tax rate anticipated to be 34% as of June 30, 2017.

For the three months ended June 30, 2017, we recorded income tax expense of $2.6 million, which is higher than the expected tax expense of $0.4 million, using the statutory income tax rate of 34% due primarily to reductions in our deferred tax assets related to the surrender of stock options by certain former executive officers and forfeiture of options totalling $2.4 million. Additionally, the effective tax rate was impacted by increases to uncertain tax positions of $0.4 million, the revaluation of our Israeli NOLs of ($0.2) million and other smaller discrete items. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

The 2017 estimated annual effective tax rate is expected to approximate 22.4%, excluding discrete tax items, but may fluctuate during the year due to changes in our jurisdictional income and due to the timing of other discrete period transactions.

Net (Loss) Income Attributable to Common Shareholders

As a result of the foregoing items, net (loss) income attributable to common shareholders decreased to a net loss of ($1.6) million in the three months ended June 30, 2017, as compared to net income attributable to common shareholders of $2.5 million in the three months ended June 30, 2016. Net loss attributable to common shareholders per diluted ordinary share was ($0.10) for the three months ended June 30, 2017, as compared to net income attributable to common shareholders of $0.18 per diluted ordinary share in the prior year. The change was primarily due to declining revenue and increased operating expenses.

SIX MONTHS ENDED JUNE 30, 2017 COMPARED TO SIX MONTHS ENDED JUNE 30, 2016

Net Revenues

Total net revenue was $45.6 million and $49.0 million for the six months ended June 30, 2017 and 2016, respectively, representing a decrease of $3.4 million, or 7.0%. The decrease in the components of net revenues was primarily attributable to the following:

· $1.4 million decrease in revenues from the sale of magicJack devices primarily reflecting lower retail sales volume, lower average revenue per unit sold due to promotional offers and a proposed consumer telecommunications tax settlement;

· $3.8 million decrease in access right renewal revenues due to customer churn, promotional offers and the number of long-term renewals in the customer base that are at lower average annual revenues;

· $0.8 million decrease in revenues from prepaid minutes resulting from declining usage levels; and

· $0.7 million decrease in revenues from access and wholesale charges resulting from lower network traffic.

These decreases in components of net revenue were partially offset by an increase of $2.3 million in revenues from UCaaS reflecting a full six months of revenue in the current year.

For the six months ended June 30, 2017 and 2016, sales of the magicJack devices through retail outlets represented approximately 52% and 53%, respectively, of sales of all magicJack devices sold. For the same periods, direct sales represented approximately 48% and 47%, respectively, of magicJack devices sold. For the six months ended June 30, 2017 and 2016, no retailer accounted for more than 10% of our consolidated net revenue.

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Cost of Revenues

Total cost of revenues was $17.6 million and $18.0 million for the six months ended June 30, 2017 and 2016, respectively, representing a decrease of approximately $0.4 million, or 2.4%.  The primary changes in cost of revenues were: (i) a $1.4 million increase in UCaaS related cost of goods sold, reflecting a full six months of operations, and (ii) a $0.5 million increase in the cost of devices and related products reflecting a write-down of obsolete components inventory and increased cost associated with powerbanks, offset by: (i) a $1.7 million decrease in network and carrier charges primarily as a result of lower traffic substantially resulting from the elimination of free app users at the end of the second quarter of 2016, and (ii) $0.5 million decrease in other cost of revenues primarily attributable to a decrease in personnel related costs.

Operating Expenses

Total operating expenses were $61.4 million and $22.5 million for six months ended June 30, 2017 and 2016, respectively, representing an increase of $38.9 million, or 172.7%. This change in operating expenses is primarily attributable to:

· a $31.5 million impairment of intangible assets, including goodwill, related to the Enterprise segment. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

· a $1.5 million increase in marketing expense, primarily related to increased advertising research in the Core Consumer segment to test market sensitivity,

· a $5.2 million increase in G&A expense due to several factors including:

i. a $6.5 million increase in costs related to the Core Consumer segment, primarily composed of: a $2.3 million increase in personnel related expenses primarily reflecting severance and new executive officer compensation including sign-on bonuses and accruals for CEO compensation, a $2.9 million increase in legal fees related to the response to activist shareholders, strategic process and other litigation matters, and a $0.4 million asset impairment related to our exit from our joint venture in the home consumer product market; and

ii. a $0.7 million increase in costs related to the Enterprise segment, primarily reflecting a full six months of operations in the current year.

iii. These increases were partially offset by a $2.0 million decrease in costs related to SMB activity reflecting the scaling back of the Alpharetta location.

· a $0.6 million increase in R&D expense, primarily related to increases in personnel for product development of the new Spark mobile app and a new chip for future device upgrades.

Income Taxes

Total income tax (benefit) expense was ($8.8) million and $5.2 million for the six months ended June 30, 2017 and 2016, respectively. The calculation of our effective income tax rate for the six months ended June 30, 2017 and 2016 was (in thousands):

	Six Months Ended
	June 30,
	2017			2016
(Loss) income before income taxes	$	(33,430	)	$	8,451
Income tax (benefit) expense		(8,768	)		5,202
Effective income tax rate		26.23	%		61.55	%

We primarily operate in the U.S. and Israel, and our Israeli operations are subject to a statutory income tax rate of 24% in 2017, which is set to decline to 23% in 2018, that is lower than our U.S. federal income tax rate anticipated to be 34% as of June 30, 2017.

For the six months ended June 30, 2017, we recorded an income tax benefit of ($8.8) million, which is lower than the expected tax benefit of ($11.4) million, using the statutory income tax rate of 34% due, in part, to revaluations of our Israel net operating loss carryforwards of ($1.0) million, increases to uncertain tax positions of $1.8 million, and a reduction to our deferred tax assets related to the surrender of options by certain former executive officers and the forfeiture of options totalling $2.4 million. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

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The 2017 estimated annual effective tax rate is expected to approximate 22.4%, excluding discrete tax items, but may fluctuate during the year due to changes in our jurisdictional income and due to the timing of other discrete period transactions.

Net (Loss) Income Attributable to Common Shareholders

As a result of the foregoing items, net (loss) income attributable to common shareholders decreased to a net loss of ($24.7) million in the six months ended June 30, 2017, as compared to net income (loss) attributable to common shareholders of $3.6 million in the six months ended June 30, 2016. Net loss attributable to common shareholders per diluted ordinary share was ($1.54) for the six months ended June 30, 2017, as compared to net income attributable to common shareholders of $0.22 per diluted ordinary share in the prior year. The change was primarily due to the impairment of the Enterprise segment intangible assets, declining revenue and an increase in operating expenses related to response to activist shareholders and management change.

BUSINESS TRENDS

Revenues in our Core Consumer segment continued to decline during the six months ended June 30, 2017. We remain encouraged by the loyalty of our existing customer base and we continue to undertake efforts to improve customer renewal rates, invest in new product development and innovation, improve our retail sales channels and optimize the marketing of our magicJack products.  During the three months ended June 30, 2017, we continued customer care engagement with our customer base to improve customer experience.  In the three months ended June 30, 2017, we completed initial beta testing on the new mobile product, Spark, which gives users the ability to add a second line to their own smartphone starting at $4.99/month. Spark was launched on iOS in July 2017.  The remainder of 2017 will include further beta testing, product development, and market testing.  We believe that because of our brand awareness, our existing investment in mobile apps, and our vertically integrated operations and Competitive Local Exchange Carrier (“CLEC”) network with significant excess capacity, we can effectively compete in the fast-growing SOHO market and build new revenue streams for the future.  We believe that there will continue to be solid demand for our low priced, unlimited phone service, whether through our magicJack devices, our mobile Apps, or a combination of both.

During the six months ended June 30, 2017, we implemented steps to improve the operating results and bolster integration efforts for the Enterprise segment.   On June 26, 2017 Kerrin Parker was promoted from Chief Operating Officer to CEO of Broadsmart. We continue to focus on improving customer churn and expanding Broadsmart sales channels, and we are adding sales and marketing personnel dedicated to obtaining new business.  In the first quarter of 2017, following a thorough review of the operations, sales pipeline, business practices and the current customer base, management re-evaluated the segment’s projections and made significant adjustments to future revenue growth assumptions. Because of the continued underperformance compared to projections and the anticipated customer churn, during the quarter ended March 31, 2017, we recognized a $31.5 million impairment on the intangible assets, including goodwill, of the Enterprise reporting unit. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details. 

While we are excited by the new direction that we are planning for 2017 and beyond, there can be no assurance that these initiatives will be successful and we cannot predict what impact, if any, these initiatives will ultimately have on our business, results of operations, financial condition or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations, cash on hand and investments. As of June 30, 2017, we had cash and cash equivalents of $47.0 million, investments of $0.4 million, net accounts receivable of $2.1 million and receivable from earnout escrow of $2.0 million. Our accounts payable at June 30, 2017 were $1.8 million.

During the six months ended June 30, 2017, we generated negative operating cash flows of $4.1 million, as compared to positive operating cash flows of $8.3 million for the six months ended June 30, 2016. The $12.4 million decrease was primarily due to payment of $3.3 million in income taxes, declining sales in the core magicJack business during the six months ended June 30, 2017, and higher general and administrative expenses, primarily reflecting costs associated with executive management turn-over, management’s response to activist shareholder initiatives and the strategic process. The net loss was ($24.7) million for the six months ended June 30, 2017 as compared to net income of $3.2 million for the six months ended June 30, 2016.

We currently believe that available funds and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. If we decide to make future acquisitions, we may require new sources of funding, including debt, equity financing or some combination thereof. There can be no assurances that we will be able to secure additional sources of funding or that such additional sources of funding will be available to us on acceptable terms.

41

Cash Flow – Operating Activities

Net cash used by operating activities was $4.1 million for the six months ended June 30, 2017. Net cash provided by operating activities was $8.3 million for the six months ended June 30, 2016.

During the six months ended June 30, 2017, net cash used by operating activities was primarily attributable to:

· ($24.7) million of net loss, which included $28.1 million in non-cash items, consisting primarily of (i) $31.5 million impairment loss on intangible assets, including goodwill, of the Enterprise reporting unit, (ii) $2.4 million of depreciation and amortization expense, (iii) $1.3 million of stock-based compensation expense, and (iv) a $1.8 million increase in uncertain tax positions, partially offset by a $9.1 million deferred income tax benefit;  and

· Changes in operating assets and liabilities of (i) a $2.8 million increase in prepaid income taxes, (ii) a $2.4 million increase in deposits and other current assets, (iii) a $6.0 million decrease in deferred revenue and (iv) a $1.0 million decrease in other non-current liabilities.  These items were partially offset by (i) a $1.0 million decrease in accounts receivable, ii) a $1.7 million decrease in inventory levels, and (iii) a $2.9 million increase in accrued expenses and other current liabilities.

During the six months ended June 30, 2016, net cash provided by operating activities was primarily attributable to:

· $3.2 million of net income, which included $6.7 million in non-cash items consisting primarily of (i) $2.3 million of stock-based compensation expense, (ii) $2.2 million of depreciation and amortization expense, (iii) a $0.9 million increase in the deferred income tax provision, and (iv) a $1.2 million increase in uncertain tax positions, and

· Changes in operating assets and liabilities of (i) a $0.7 million decrease in accounts receivable, (ii) a $1.6 million decrease in inventory levels, (iii) a $0.3 million decrease in deferred costs, (iv) a $1.9 million decrease in prepaid income taxes, and (v) a $0.4 million increase in accounts payable. These items were partially offset by: (i) a $5.0 million decrease in deferred revenue, (ii) a $1.0 million decrease in accrued expenses and other current liabilities, (iii) a $0.4 million increase in deposits and other current assets and (iv) a $0.1 million decrease in other non-current liabilities.

Cash Flow – Investing Activities

Net cash used in investing activities was $1.1 million and $40.3 million for the six months ended June 30, 2017, and 2016, respectively. Net cash used in investing activities during the six months ended June 30, 2017 was primarily attributable to the acquisition of software licenses. Net cash used in investing activities during the six months ended June 30, 2016 was primarily attributable to the acquisition of Broadsmart.

Cash Flow –Financing Activities

No significant cash was (used in) or provided by financing activities for the six months ended June 30, 2017 and 2016.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2017.

42

ITEM 3.          Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks that are inherent in our financial statements, including changes in interest rates, equity and derivative prices and foreign currency exchange rates that could adversely affect our results of operations or financial condition.

Exposure to Interest Rates

The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to the general level of United States interest rates. In this regard, changes in the United States interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact the total fair value of our portfolio as of June 30, 2017.

Exposure to Exchange Rates

Our overseas expenses are incurred primarily in connection with the manufacturing of the magicJack devices and expenses related to our operations in Israel and Poland. The majority of our overseas expenses are influenced by exchange rate fluctuations in local currencies, including NIS, PLN, Hong Kong dollars, Taiwan dollars and Chinese yuan. Due to the small percentage of our expenses that are influenced by exchange rate fluctuations, a 10% movement in currency exchange rates would not materially impact our results of operations.

Exposure to Equity and Derivative Prices

Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions.

ITEM 4.          Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2017, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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

We are subject to various legal proceedings and claims, including intellectual property claims, contractual and commercial disputes, employment claims, state and local tax matters and other matters which arise in the ordinary course of business. Our policy is to vigorously defend any legal proceedings. Management regularly evaluates the status of legal proceedings in which we are involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred and to determine if accruals are appropriate. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our business, operating results, financial condition or cash flows. However, an unexpected adverse resolution of one or more of these matters could have a material adverse effect on our results of operations in a particular fiscal year or quarter. For additional information, refer to Note 10, “Commitments and Contingencies,” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

ITEM 1A.          Risk Factors

There have been no material changes from the risk factors disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 2.          Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

ITEM 3.          Defaults Upon Senior Securities

Not applicable.

ITEM 4.          Mine Safety Disclosures

Not applicable.

ITEM 5.          Other Information

Not applicable.

44

ITEM 6.          Exhibits

Exhibit No.	Description
3.1	Amended and Restated Articles of Association (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on April 2, 2013)
10.1*	Second Amendment to Executive Employment Agreement, effective as of December 31, 2016, by and between magicJack VocalTec Ltd. and Gerald Vento (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 5, 2017)
10.2	Settlement Agreement, dated January 31, 2017, entered into between the Company, David L. Kanen and Kanen Wealth Management LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 2, 2017)

10.3*	Employment Agreement between the Company and Don Carlos Bell III, dated May 8, 2017(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2017, Commission File No. 000-27648)**
10.4*	Stock Option Agreement between the Company and Don Carlos Bell III, dated May 8, 2017(incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2017, Commission File No. 000-27648)
10.5*	Restricted Stock Agreement between the Company and Don Carlos Bell III, dated May 8, 2017(incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2017, Commission File No. 000-27648)
10.6*	Employment Agreement between the Company and Thomas Fuller, dated May 8, 2017***
10.7*	Stock Option Agreement between the Company and Thomas Fuller, dated May 8, 2017
10.8*	Restricted Stock Agreement between the Company and Thomas Fuller, dated May 8, 2017
10.9*	Amended and Restated magicJack VocalTec Ltd. 2013 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2017, Commission File No. 000-27648)
10.10*	Amended and Restated magicJack VocalTec Ltd. 2013 Israeli Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2017, Commission File No. 000-27648)
10.11*	Amendments to Independent Contractor and Stock Option Agreements and Releases of Claims between the Company and Gerald Vento, dated June 17, 2017
31.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
32.2	Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.

______________________

* Denotes management contract or compensatory plan or arrangement.

**  Confidential treatment requested and granted for portions of this agreement.

*** Confidential treatment requested for portions of this agreement.

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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.

	magicJack VocalTec Ltd. (Registrant)
Dated: August 9, 2017	By: /s/ Don C. Bell, III Don C. Bell. III President and Chief Executive Officer
Dated: August 9, 2017	By: /s/ Thomas Fuller Thomas Fuller Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
10.6*	Employment Agreement between the Company and Thomas Fuller, dated May 8, 2017***
10.7*	Stock Option Agreement between the Company and Thomas Fuller, dated May 8, 2017
10.8*	Restricted Stock Agreement between the Company and Thomas Fuller, dated May 8, 2017
10.11*	Amendments to Independent Contractor and Stock Option Agreements and Releases of Claims between the Company and Gerald Vento, dated June 17, 2017
31.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
32.2	Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.

______________________

* Denotes management contract or compensatory plan or arrangement.

*** Confidential treatment requested for portions of this agreement.

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EX-10.6

Exhibit 10.6

CONFIDENTIAL TREATMENT REQUESTED FORINFORMATION ON ATTACHMENT C OMITTED HERE AND

FILED SEPARATELY WITH THE COMMISSION

EXECUTIVE EMPLOYMENT AGREEMENT

THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into on May 8, 2017 ("Execution Date") by and between MagicJack VocalTec Ltd. (the "Company") and Thomas E. D. Fuller (the "Executive" and, together with the Company, the "Parties").

WHEREAS, the Company desires for the Executive to be employed as Executive Vice President Finance, transitioning to the role of Executive Vice President and Chief Financial Officer ("CFO") of the Company immediately following the filing of the Company's form 10-Q for the first calendar quarter of 2017, which is expected to occur in mid-May, 2017, and Executive desires to accept employment, subject to and on the terms and conditions set forth in this Agreement;

WHEREAS, both the Company and the Executive have read and understood the terms and provisions set forth in this Agreement and have been afforded a reasonable opportunity to review this Agreement with their respective legal counsel; and

WHEREAS, the terms of this Agreement have been reviewed and approved by the members of the Compensation Committee of the Board of Directors of the Company (the "Board") and recommended by the Board for approval by the Company's shareholders in compliance with Amendment 20 to the Israeli Companies Law (the "Companies Law").

NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other valuable consideration the receipt and adequacy of which is hereby acknowledged, the Parties hereby agree as follows:

1. POSITION AND DUTIES.  The Company hereby agrees to employ the Executive in the positions and titles of Executive Vice President of Finance, transitioning to the role of Executive Vice President and CFO of the Company as set forth in the recitals above, and the Executive hereby agrees to be employed in such capacities. The Executive will perform all duties and responsibilities inherent in the positions of Executive Vice President Finance and, upon transition, Executive Vice President & CFO. The Executive shall report directly to the Chief Executive Officer of the Company. He shall have all authority and responsibility commensurate with the Executive Vice President Finance and, upon transition, Executive Vice President & CFO titles.

2. TERM OF AGREEMENT AND EMPLOYMENT.  The term of the Executive's employment under this Agreement will be three (3) years, beginning on March 13, 2017 (the "Start Date") and terminating three years thereafter "Employment Term."

3. DEFINITIONS.

A. CAUSE.  For purposes of this Agreement, "Cause" for the termination of the Executive's employment hereunder shall be deemed to exist if, in the reasonable judgment of the Company's Board: (i) the Executive commits fraud, theft or embezzlement against the Company or any subsidiary or affiliate thereof; (ii) the Executive commits a felony or a crime involving moral turpitude; (iii) the Executive breaches any non-competition, confidentiality or non-solicitation agreement with the Company or any subsidiary or affiliate thereof; (iv) the Executive's material breach of the Company's Insider Trading Policy, FD/Media Policy or Investment Policy, (v) the Executive breaches any of the terms of this Agreement and fails to cure such breach within thirty (30) days after the receipt of written notice of such breach from the Company; or (vi) the Executive engages in gross negligence or willful misconduct that causes harm to the business and operations of the Company or a subsidiary or affiliate thereof.

B. GOOD REASON.  Termination by the Executive of his employment for "Good Reason" shall mean a termination by the Executive of his employment upon the occurrence of one of the following events or conditions without the consent of the Executive:

(i)A material reduction in the authority, duties or responsibilities of the Executive;

(ii)Any material reduction in the Executive's Annual Base Salary; or

(iii)Any material breach of this Agreement by the Company.

Notwithstanding the foregoing, the Executive shall not be deemed to have terminated his employment for Good Reason unless: (i) the Executive terminates his employment no later than ninety (90) days following his initial discovery of the above referenced event or condition which is the basis for such termination; and (ii) the Executive provides to the Company a written notice of the existence of the above-referenced event or condition which is the basis for the termination within forty-five (45) days following his initial discovery of such event or condition, and the Company fails to remedy such event or condition within thirty (30) days following the receipt of such notice.

C. CHANGE OF CONTROL.  For purposes of this Agreement, a "Change of Control" of the Company shall be deemed to occur if there is a transaction in which (i) a Person acquires ownership of stock that, together with stock held by such Person, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; or (ii) a Person (other than a Person controlled, directly or indirectly, by shareholders of the Company) acquires fifty percent (50%) or more of the gross fair market value of the assets of the Company over a twelve (12) week period.

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For purposes of the above, the terms "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, and shall include a "group" as defined in Section 13(d) thereof.  It is intended that the definition of Change of Control complies with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and all questions or determinations in connection with any such Change of Control shall be construed and interpreted in accordance with the provisions of such Regulations.  Notwithstanding the above, a Change of Control shall occur only if it constitutes a "change of control" within the meaning of Section 409A of the Code and the regulations promulgated thereunder.

4. COMPENSATION.

A. ANNUAL BASE SALARY.  Executive shall be paid an annual base salary of $275,000.00, subject to review each calendar year and possible increase in the sole discretion of the Board, payable in equal twice monthly installments (the "Annual Base Salary"), provided, however, Annual Base Salary earned between the Start Date and April 30, 2017, shall be paid on the first regular payroll date following the Execution Date.

B. ANNUAL BONUS.  For each fiscal year of employment during which the Company employs the Executive, Executive shall be eligible to receive a bonus (the "Annual Bonus") based on the Company meeting certain performance criteria.  Executive's target annual bonus will equal seventy-five percent (75%) of Executive's Annual Base Salary (the "Target Annual Bonus").  The Annual Bonus will range from thirty-five percent (35%) to two hundred percent (200%) of the Target Annual Bonus.  The Annual Bonus formula and performance criteria for calendar year 2017 will be based: (i) fifty percent (50%) on the Company meeting at least eighty percent (80%) and up to one hundred and twenty percent (120%) of its target revenue for the fiscal year; and (ii) fifty percent (50%) on the Company meeting at least eighty percent (80%) and up to one hundred and twenty percent (120%) of its target EBITDA for the fiscal year.  A table showing the Target Annual Bonus payable at various increments is attached hereto as Attachment A.  The Company's target revenue and target EBITDA shall be set forth in its 10-Q for the first quarter of 2017 to be filed by the Company in May of 2017.  The Annual Bonus formula and performance criteria for calendar years 2018 and 2019 will be based: (i) one third (1/3) on the Company meeting at least eighty percent (80%) and up to one hundred and twenty percent (120%) of its target revenue for the applicable fiscal year; (ii) one-third (1/3) on the Company meeting at least eighty percent (80%) and up to one hundred and twenty percent (120%) of its target EBITDA for the applicable fiscal year, and (c) one-third (1/3) on the Company meeting at least eighty percent (80%) and up to one hundred and twenty percent (120%) of another objective key performance indicator (the "KPI Target") for the applicable fiscal year to be determined by the Board, or the Compensation Committee of the Board, after consultation with the Company's Chief Executive Officer and Executive.  A table showing the Target Annual Bonus payable at various increments for calendar years 2018 and 2019 is attached hereto as Attachment B.  The Company's target revenue, target EBITDA and the KPI Target for calendar years 2018 and 2019 shall be set forth in its 10-K for calendar years 2017 and 2018 to be filed in March of 2018 and 2019. For purposes of this Agreement, "EBITDA" shall mean earnings before interest, taxes, depreciation and amortization calculated in accordance with generally accepted accounting principles consistent with the application of such concepts in developing the Company's annual budget, subject to adjustments for one-time occurrences outside the ordinary course of business as deemed appropriate by the Company's Compensation Committee.

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The Annual Bonus payable to Executive shall be paid no later than 2-1/2 months following the end of the calendar year with respect to which the Annual Bonus was earned.

Except as otherwise provided in Section 7 below, Executive shall only be entitled to receive an Annual Bonus if Executive is employed by the Company pursuant to this Agreement at the close of business on the last day of the applicable fiscal year with respect to the Annual Bonus.

If the Company's financial statements are restated for a period for which an Annual Bonus has been paid under the terms of this Agreement, the Annual Bonus amount for such period will be re-calculated by the Company (the "Recalculated Bonus Amount").  In any such event, the difference between the Annual Bonus in question and the Recalculated Bonus Amount shall be paid to or refunded by the Executive, as applicable, not later than sixty (60) days after the restatement, provided that no such adjustments will be made at any time after the 2^nd anniversary of the Annual Bonus payment in question.

C. SIGNING BONUS.  Executive shall receive a signing bonus in the amount of $275,000.00 within three (3) days after the Execution Date.

D. SPECIAL TRANSACTION BONUS.  If the closing of a Change of Control occurs before the one year anniversary of the Execution Date and Executive is employed by the Company on the closing date, then Executive shall be paid within five (5) days after the Change of Control a bonus (the "Special Transaction Bonus") of up to $706,250, which will be calculated pursuant to the criteria set forth in Attachment C to this Agreement.  The Special Transaction Bonus is in addition to any Annual Bonus Executive may earn pursuant to Section 4(B) of this Agreement, or any Change of Control Termination Payment or any Termination Payment Executive is entitled to be paid pursuant to Section 7 of this Agreement.

5. EXECUTIVE BENEFITS AND REIMBURSEMENTS.  Executive will be entitled to twenty (20) paid-time-off (PTO) days of vacation per fiscal year. The Executive will be eligible to participate in, without action by the Board or any committee thereof, any benefits and perquisites available to executive officers of the Company, including any group health, dental, life insurance, disability, or other form of executive benefit plan or program of the Company now existing or that may be later adopted by the Company (collectively, the "Executive Benefits"). The Company shall reimburse Executive for all ordinary and necessary business expenditures made by Executive in connection with, or in furtherance of, his employment. Subject to Section 18 of this Agreement, the business expenditure and other reimbursements described above will be paid upon presentation by Executive of expense statements, receipts, vouchers or such other supporting information as may from time to time be reasonably requested by the Board.

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6. EQUITY GRANT. On the Execution Date, Executive shall be granted (a) 37,267 restricted ordinary shares of the Company (the "Restricted Stock") under the terms of the magicJack Vocaltec Ltd. 2013 Stock Incentive Plan, as may be amended and/or restated from time to time (the "Plan"), and (b) stock options to purchase 470,791 shares of the Company's common stock under the terms of the Amended and Restated magicJack Vocaltec Ltd. 2013 Stock Incentive Plan (the "Amended Plan"), at an exercise price equal to the greater of 115% of the fair market value of the Company's common stock as of the market close on May 5, 2017, or $9.51 (the "Options"), provided that the Options shall be forfeited if the Amended Plan and its terms are not approved by the shareholders of the Company within one (1) year following the Execution Date. The Options and Restricted Stock will vest as set forth in the Option Agreement and Restricted Stock Agreement granting the Options and the Restricted Stock.

7. TERMINATION.  Either the Executive or the Company may terminate the Executive's employment under this Agreement for any reason upon not less than thirty (30) days prior written notice.

A. TERMINATION OF EMPLOYMENT BY THE EXECUTIVE FOR GOOD REASON OR BY THE COMPANY WITHOUT CAUSE.  Upon the termination of the Executive's employment prior to a Change of Control under this Agreement by the Executive for Good Reason or by the Company without Cause, the Executive shall be entitled to be paid a termination payment (the "Termination Payment") equal to one (1) times the aggregate of (i) Executive's Annual Base Salary, and (ii) Executives Target Annual Bonus, at the time of such termination. The Termination Payment shall be paid in lump sum within fifteen (15) days after the Company's receipt of a general release that has become irrevocable as specified in Section 7(F) following any termination pursuant to this Section 7(A).

B. TERMINATION OF EMPLOYMENT BY RESIGNATION OF EXECUTIVE WITHOUT GOOD REASON, BY THE COMPANY WITH CAUSE, DEATH OR DISABILITY. Upon the termination of the Executive's employment by the resignation of  Executive without Good Reason, by the Company with Cause, death, disability or for any other reason other than a reason described in Sections 7(A) or 7(C), the Executive shall be due no further compensation other than what is due and owing through the effective date of such Executive's resignation or termination (including any Annual Bonus that may be due and payable to the Executive).

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C. TERMINATION OF EMPLOYMENT BY THE EXECUTIVE FOR GOOD REASON OR BY THE COMPANY WITHOUT CAUSE FOLLOWING A CHANGE OF CONTROL.  If upon or within six (6) months subsequent to a Change of Control, that both (i) closes at any time more than six months following the Execution Date and (ii) is either (x) a transaction described in Section 3(C)(i)  in which the purchase price is greater than or equal to $9.51 per share, or (y) a transaction described in Section 3(C)(ii) where the enterprise value is greater than or equal to $9.51 per share (a "Qualifying Change in Control"), the Executive's employment under this Agreement is terminated by the Executive for Good Reason or by the Company without Cause ("Change of Control Termination"), the Executive shall be entitled to and paid a termination payment (the "Change of Control Termination Payment") equal to one and one-half (1.5) times the aggregate of (i) Executive's Annual Base Salary, and (ii) Executives Target Annual Bonus (as if the applicable performance criteria have been met at the level that would result in payment of the Target Annual Bonus at the 100% level irrespective of whether or not that is the case); provided, however, a Qualifying Change of Control shall be deemed not to occur if such transaction results from a written agreement entered into between the Company and a Person described in Section 3(C)(i) or Section 3(C)(ii) within six months following the Execution Date (regardless as to when such transaction closes).  The Change of Control Termination Payment shall be made within five (5) days after a Change of Control Termination.

D. TERMINATION OF EMPLOYMENT BY THE EXECUTIVE FOR GOOD REASON OR BY THE COMPANY WITHOUT CAUSE WITHIN 180 DAYS PRIOR TO A CHANGE OF CONTROL.  If the Executive's employment under this Agreement is terminated by the Executive for Good Reason or by the Company without Cause one hundred eighty (180) days prior to the Company's execution of an agreement which, if consummated, would constitute a Qualifying Change of Control, then upon consummation of such Qualifying Change of Control, Executive shall receive an additional payment equal to the difference between (i) the Change of Control Termination Payment described in Section 7(C) and (ii) any Termination Payment previously provided to Executive under Section 7(A).  Any additional payment pursuant to this Section 7(D) shall be made within five (5) days after a Change of Control.

E. PAYMENT REDUCTION UNDER SECTION 280G. Notwithstanding any other provision of this Agreement, in the event that the Change of Control Termination Payment or any payment or benefit received or to be received by Executive (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement) (collectively, the "Total Benefits") would be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), the Total Benefits shall be reduced to the extent necessary so that no portion of the Total Benefits is subject to the Excise Tax; provided, however, that no such reduction in the Total Benefits shall be made if by not making such reduction, Executive's Retained Amount (as hereinafter defined) would be greater than Executive's Retained Amount if the Total Benefits are not so reduced.  In the event any such reduction is required, the Total Benefits shall be reduced in the following order: (i) the Change of Control Termination Payment, the Termination Payment, and the payment provided for by Section 7(D) (pro rata to the extent more than one is payable), (ii) any other portion of the Total Benefits that are not subject to Section 409A of the Code (other than Total Benefits resulting from any accelerated vesting of equity-based awards), (iv) Total Benefits that are subject to Section 409A of the Code in reverse order of payment, and (v) Total Benefits that are not subject to Section 409A and arise from any accelerated vesting of any equity-based awards.  All determinations with respect to this Section 7(D) and the assumptions to be utilized in arriving at such determination shall be made by an independent public accounting firm with a national reputation in the United States that is reasonably agreed to by the Executive and the Company (the "Accounting Firm") which shall provide detailed support and calculations both to the Company and to Executive. The parties hereto hereby elect to use the applicable Federal rate that is in effect on the date this Agreement is entered into for purposes of determining the present value of any payments provided for hereunder for purposes of Section 280G of the Code.  "Retained Amount" shall mean the present value (as determined in accordance with sections 280G(b)(2)(A)(ii) and 280G(d)(4) of the Code) of the Total Benefits net of all federal, state and local taxes imposed on Executive with respect thereto.

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F. GENERAL RELEASE OF CLAIMS.  Executive shall not be entitled to any Termination Payment, Change of Control Termination Payment, or the payment provided for by Section 7.D (each, a "Severance Payment") unless (i) Executive has executed and delivered to the Company a general release of claims (in such form as the Executive and the Company shall reasonably agree) (the "Release") and such Release has become irrevocable under the Age Discrimination in Employment Act (ADEA) and its terms not later than fifty-six (56) days after the date of Executive's termination of employment hereunder.  Notwithstanding anything herein to the contrary, in the event such 56-day period falls into two (2) calendar years, the Severance Payment shall not be paid until the second calendar year but in no event later than 60 days following date of Executive's termination of employment.The Company shall deliver to Executive a copy of the Release not later than three (3) days after the Company's termination of Executive's employment without Cause or Executive's termination of Employment for Good Reason.

G. NO OFFSET AND NO MITIGATION.  Executive shall not be required to mitigate any damages resulting from a breach by the Company of this Agreement by seeking other comparable employment. The amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation or benefits earned by or provided to Executive as a result of his employment by another employer.

H. CONTINUING OBLIGATIONS AFTER TERMINATION.  Following termination of employment, Executive shall have the following continuing obligations to the Company:  (i) to cooperate in good faith with the Company, without any additional compensation, with respect to any legal matters involving potential or actual litigation relating to an event occurring during the Employment Term, and any renewals thereof, of which event Executive has actual knowledge; and, (ii) to cooperate in good faith with the Company, without any additional compensation, to transfer and transition Executive's pending and prior work and work-related information to a person designated by the Company.  The Company agrees to make reasonable efforts to schedule such assistance at times that do not interfere with Executive's employment or other business activities, and to reimburse Executive for reasonable travel costs incurred by Executive in providing such assistance upon presentation by Executive of documentation required by Company expense reimbursement policies, provided, however, that the obligations in clause (ii) shall end: (x)  one (1) year after Executive's last day of employment with the Company, if Executive is eligible to be paid any Termination Payment or Change of Control Termination Payment after his employment ends pursuant to Section 7(A) or 7(C) of this Agreement, or (y) ninety (90) days after Executive's last day of employment with the Company, if Executive is not eligible to be paid any Termination Payment or Change of Control Termination Payment after his employment ends pursuant to Section 7(A) or 7(C) of this Agreement.

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8. REPRESENTATIONS.  The Executive hereby represents and warrants to the Company that (i) the execution, delivery and full performance of this Agreement by the Executive does not and will not conflict with, breach, violate or cause a default under any agreement, contract or instrument to which the Executive is a party or any judgment, order or decree to which the Executive is subject; and (ii) upon the execution and delivery of this Agreement by the Executive and the Company, this Agreement will be the Executive's valid and binding obligation, enforceable in accordance with its terms.

9. INTENTIONALLY OMITTED.

10. ASSIGNMENT; THIRD PARTY BENEFICIARY.  This Agreement, and the Executive's rights and obligations hereunder, may not be assigned, subcontracted, or delegated by the Executive.  The Company may only assign its rights, and delegate its obligations, hereunder to any successor in interest, provided, however, the Company may not delegate its obligations under Section 4(D) or Section 7(D) of this Agreement.  The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon and enforceable by its respective successors and assigns. Neither the Executive nor the Executive's beneficiary or beneficiaries will have any right to receive any compensation or other benefits under this Agreement, except at the time, in the amounts and in the manner provided in this Agreement.  As used in this Agreement, the term "successor" means any person, firm, corporation or other business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the capital stock or assets of the Company.

11. PREVAILING PARTY FEES; GOVERNING LAW.  If either party breaches this Agreement, or any dispute arises out of, arises under, or relates to, this Agreement, the prevailing party shall be entitled to its reasonable attorneys' fees, paralegals' fees, and costs, at all levels.  In the event of any litigation arising out of or relating to this Agreement, the exclusive venue shall be in Palm Beach County, Florida, and shall be governed by the laws of the State of Florida, without regard to its choice of law principles, except where the application of federal law applies, and shall be decided by a judge, not a jury.  THE PARTIES SPECIFICALLY WAIVE THEIR RIGHT TO A TRIAL BY JURY. In the event that either Party applies to seal any papers produced or filed in any judicial proceedings to preserve confidentiality (the "Moving Party"), both Parties hereby specifically agree (a) the Moving Party will provide the attorneys for the other Party with copies of all such papers; (b) the other Party will not oppose such application; and (c) the other Party will use his or its best efforts to join such application.

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12. CONFIDENTIALITY, NON-COMPETITION AND WORK PRODUCT; HANDBOOK.  The Company considers the protection of its confidential information, proprietary materials and goodwill to be extremely important.  Given the confidential nature of various aspects of our business, Employee may not discuss the fact or terms of this Agreement or any employment discussions with anyone other than a member of the Company's management team and members of Employee's immediate family (and, if relevant, your recruiting firm, financial advisor or lawyer).  In addition, as is true of all Company employees, Employee will be required to sign and return an agreement relating to confidentiality, non-competition and work product (the "PIIA") by no later than the Effective Date as a condition of employment.  A copy of the PIIA is provided with this Agreement.  Employee will also be required to review and acknowledge receipt of magicJack's Employment Handbook (the "Handbook"), and Employee's agreement to comply with the terms of the Handbook and the policies contained therein, by returning a signed copy of the Acknowledge Form included in the Handbook no later than the Effective Date.  A copy of the Handbook is included with this Agreement.

13. ENTIRE AGREEMENT.  This Agreement, the PIIA and the Handbook (collectively, the "Executive Agreements") constitute the only agreements between Company and the Executive regarding the Executive's employment by the Company. The Executive Agreements supersede any and all other agreements and understandings, written or oral, between the Company and the Executive regarding the subject matter hereof and thereof. A waiver by either party of any provision of this Agreement or any breach of such provision in an instance will not be deemed or construed to be a waiver of such provision for the future, or of any subsequent breach of such provision. This Agreement may be amended, modified or changed only by further written agreement between the Company and the Executive, duly executed by both Parties.

14. NO WAIVER.  No failure to exercise, and no delay in exercising, any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right, power or privilege hereunder preclude the exercise of any other right, power or privilege.  No waiver of any breach of any provision shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision, nor shall any waiver be implied from any course of dealing between the Parties.  No extension of time for performance of any obligations or other acts hereunder or under any other agreement shall be deemed to be an extension of the time for performance of any other obligations or any other acts.  The rights and remedies of the Parties under this Agreement are in addition to all other rights and remedies, at law or in equity, that they may have against each other.  All rights are cumulative under this Agreement.

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15. SEVERABILITY; SURVIVAL.  In the event that any provision of this Agreement is found to be void and unenforceable by a court of competent jurisdiction, then such unenforceable provision shall be deemed modified so as to be enforceable (or if not subject to modification then eliminated herefrom) to the extent necessary to permit the remaining provisions to be enforced in accordance with the Parties' intention. The provisions of Section 8 (and the restrictive covenants contained therein) shall survive the termination for any reason of this Agreement and/or the Executive's relationship with the Company.

16. NOTICES.  Any and all notices required or permitted to be given hereunder will be in writing and will be deemed to have been given when deposited in United States mail, certified or registered mail, postage prepaid. Any notice to be given by the Executive hereunder will be addressed to the Company to the attention of Chief Executive Officer at 222 Lakeview Avenue, Suite 1600, West Palm Beach, Florida 33401. Any notice to be given to the Executive will be addressed to the Executive at the Executive's residence address last provided by the Executive to the Company. Either party may change the address to which notices are to be addressed by notice in writing to the other party given in accordance with the terms of this Section.

17. HEADINGS.  Section headings are for convenience of reference only and shall not limit or otherwise affect the meaning or interpretation of this Agreement or any of its terms and conditions.

18. COUNTERPARTS/ELECTRONIC TRANSMISSION.  This Agreement may be signed in any number of counterparts and transmitted via electronic means (email, facsimile, etc.), each of which shall be an original but all of which together shall constitute one and the same instrument.

19. SECTION 409A COMPLIANCE.

A. GENERAL.  It is the intention of both the Company and the Executive that the benefits and rights to which the Executive is entitled pursuant to this Agreement comply with Code Section 409A or exceptions thereto and the provisions of this Agreement shall be construed in a manner consistent with that intention. If the Executive or the Company believes, at any time, that any such benefit or right that is subject to Code Section 409A does not so comply, it shall promptly advise the other and shall negotiate reasonably and in good faith to amend the terms of such benefits and rights such that they comply with Code Section 409A (with the most limited possible economic effect on the Executive and on the Company).

B. DISTRIBUTIONS ON ACCOUNT OF SEPARATION FROM SERVICE.  To the extent required to comply with Code Section 409A, any payment or benefit required to be paid under this Agreement on account of termination of the Executive's service (or any other similar term) shall be made only in connection with a "separation from service" with respect to the Executive within the meaning of Code Section 409A.

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C. NO ACCELERATION OF PAYMENTS.  Neither the Company nor the Executive, individually or in combination, may accelerate any payment or benefit that is subject to Code Section 409A, except in compliance with Code Section 409A and the provisions of this Agreement, and no amount that is subject to Code Section 409A shall be paid prior to the earliest date on which it may be paid without violating Code Section 409A.

D. SIX MONTH DELAY FOR SPECIFIED EMPLOYEES. In the event that the Executive is a "specified employee" (as described in Code Section 409A), and any payment or benefit payable pursuant to this Agreement constitutes deferred compensation under Code Section 409A, then, to the extent required to comply with Section 409A of the Code, no such payment or benefit shall be made before the date that is six months after the Executive's "separation from service" (as described in Code Section 409A) (or, if earlier, the date of the Executive's death). Any payment or benefit delayed by reason of the prior sentence shall be paid out or provided in a single lump sum at the end of such required delay period in order to catch up to the original payment schedule.

E. TREATMENT OF EACH INSTALLMENT AS A SEPARATE PAYMENT.  For purposes of applying the provisions of Code Section 409A to this Agreement, each separately identified amount to which the Executive is entitled under this Agreement shall be treated as a separate payment. In addition, to the extent permissible under Code Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments.

F. REIMBURSEMENTS AND IN-KIND BENEFITS.  With respect to reimbursements and in‑kind benefits that may be provided under the Agreement (the "Reimbursement Plans"), to the extent any benefits provided under the Reimbursement Plans are subject to Section 409A, the Reimbursement Plans shall meet the following requirements:

(i)      Reimbursement Plans shall use an objectively determinable, nondiscretionary definition of the expenses eligible for reimbursement or of the in-kind benefits to be provided;

(ii)     Reimbursement Plans shall provide that the amount of expenses eligible for reimbursement, or in-kind benefits provided, during the Executive's taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided, however, that Reimbursement Plans providing for reimbursement of expenses referred to in Code Section 105(b) shall not fail to meet the requirement of this Section 17(F)(ii) solely because such Reimbursement Plans provide for a limit on the amount of expenses that may be reimbursed under such arrangements over some or all of the period in which Reimbursement Plans remain in effect;

(iii)    The reimbursement of an eligible expense is made on or before the last day of Executive's taxable year following the taxable year in which the expense was incurred; and

(iv)    The right to reimbursement or in-kind benefits under the Reimbursement Plans shall not be subject to liquidation or exchange for another benefit.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

11

IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement under seal effective as of the Effective Date.

MAGICJACK VOCALTEC LTD.

Signature:   /s/ Don Carlos Bell III

Name:          Don Carlos Bell III

Title:            Chief Executive Officer

Dated:         May 8, 2017

EXECUTIVE

Signature:   /s/ Thomas E. D. Fuller

Name:          Thomas E. D. Fuller

Dated:         May 8, 2017

12

ATTACHMENT A

% of Revenue Target			Annual Target Bonus*		% of EBITDA Target			Annual Target Bonus*
<80		%	$	-	<80		%	$	-
	80	%	$	36,093.75		80	%	$	36,093.75
	81	%	$	39,445.31		81	%	$	39,445.31
	82	%	$	42,796.88		82	%	$	42,796.88
	83	%	$	46,148.44		83	%	$	46,148.44
	84	%	$	49,500.00		84	%	$	49,500.00
	85	%	$	52,851.57		85	%	$	52,851.57
	86	%	$	56,203.13		86	%	$	56,203.13
	87	%	$	59,554.69		87	%	$	59,554.69
	88	%	$	62,906.25		88	%	$	62,906.25
	89	%	$	66,257.82		89	%	$	66,257.82
	90	%	$	69,609.38		90	%	$	69,609.38
	91	%	$	72,960.94		91	%	$	72,960.94
	92	%	$	76,312.51		92	%	$	76,312.51
	93	%	$	79,664.07		93	%	$	79,664.07
	94	%	$	83,015.63		94	%	$	83,015.63
	95	%	$	86,367.20		95	%	$	86,367.20
	96	%	$	89,718.76		96	%	$	89,718.76
	97	%	$	93,070.32		97	%	$	93,070.32
	98	%	$	96,421.88		98	%	$	96,421.88
	99	%	$	99,773.45		99	%	$	99,773.45
	100	%	$	103,125.01		100	%	$	103,125.01
	101	%	$	108,281.26		101	%	$	108,281.26
	102	%	$	113,437.51		102	%	$	113,437.51
	103	%	$	118,593.76		103	%	$	118,593.76
	104	%	$	123,750.01		104	%	$	123,750.01
	105	%	$	128,906.26		105	%	$	128,906.26
	106	%	$	134,062.51		106	%	$	134,062.51
	107	%	$	139,218.76		107	%	$	139,218.76
	108	%	$	144,375.01		108	%	$	144,375.01
	109	%	$	149,531.26		109	%	$	149,531.26
	110	%	$	154,687.51		110	%	$	154,687.51
	111	%	$	159,843.76		111	%	$	159,843.76
	112	%	$	165,000.01		112	%	$	165,000.01
	113	%	$	170,156.26		113	%	$	170,156.26
	114	%	$	175,312.51		114	%	$	175,312.51
	115	%	$	180,468.76		115	%	$	180,468.76
	116	%	$	185,625.01		116	%	$	185,625.01
	117	%	$	190,781.26		117	%	$	190,781.26
	118	%	$	195,937.51		118	%	$	195,937.51
	119	%	$	201,093.76		119	%	$	201,093.76
	120	%	$	206,250.00		120	%	$	206,250.00
>120		%	$	206,250.00	>120		%	$	206,250.00
*Based on Target Bonus of $206,250

13

ATTACHMENT B

% of Revenue Target			Annual Target Bonus*		% of EBITDA Target			Annual Target Bonus*		% of KPI Target			Annual Target Bonus*
<80		%	$	-	<80		%	$	-	<80		%	$	-
	80	%	$	24,062.50		80	%	$	24,062.50		80	%	$	24,062.50
	81	%	$	26,296.88		81	%	$	26,296.88		81	%	$	26,296.88
	82	%	$	28,531.25		82	%	$	28,531.25		82	%	$	28,531.25
	83	%	$	30,765.63		83	%	$	30,765.63		83	%	$	30,765.63
	84	%	$	33,000.00		84	%	$	33,000.00		84	%	$	33,000.00
	85	%	$	35,234.38		85	%	$	35,234.38		85	%	$	35,234.38
	86	%	$	37,468.75		86	%	$	37,468.75		86	%	$	37,468.75
	87	%	$	39,703.13		87	%	$	39,703.13		87	%	$	39,703.13
	88	%	$	41,937.50		88	%	$	41,937.50		88	%	$	41,937.50
	89	%	$	44,171.88		89	%	$	44,171.88		89	%	$	44,171.88
	90	%	$	46,406.25		90	%	$	46,406.25		90	%	$	46,406.25
	91	%	$	48,640.63		91	%	$	48,640.63		91	%	$	48,640.63
	92	%	$	50,875.00		92	%	$	50,875.00		92	%	$	50,875.00
	93	%	$	53,109.38		93	%	$	53,109.38		93	%	$	53,109.38
	94	%	$	55,343.75		94	%	$	55,343.75		94	%	$	55,343.75
	95	%	$	57,578.13		95	%	$	57,578.13		95	%	$	57,578.13
	96	%	$	59,812.50		96	%	$	59,812.50		96	%	$	59,812.50
	97	%	$	62,046.88		97	%	$	62,046.88		97	%	$	62,046.88
	98	%	$	64,281.25		98	%	$	64,281.25		98	%	$	64,281.25
	99	%	$	66,515.63		99	%	$	66,515.63		99	%	$	66,515.63
	100	%	$	68,750.00		100	%	$	68,750.00		100	%	$	68,750.00
	101	%	$	72,187.50		101	%	$	72,187.50		101	%	$	72,187.50
	102	%	$	75,625.00		102	%	$	75,625.00		102	%	$	75,625.00
	103	%	$	79,062.50		103	%	$	79,062.50		103	%	$	79,062.50
	104	%	$	82,500.00		104	%	$	82,500.00		104	%	$	82,500.00
	105	%	$	85,937.50		105	%	$	85,937.50		105	%	$	85,937.50
	106	%	$	89,375.00		106	%	$	89,375.00		106	%	$	89,375.00
	107	%	$	92,812.50		107	%	$	92,812.50		107	%	$	92,812.50
	108	%	$	96,250.00		108	%	$	96,250.00		108	%	$	96,250.00
	109	%	$	99,687.50		109	%	$	99,687.50		109	%	$	99,687.50
	110	%	$	103,125.00		110	%	$	103,125.00		110	%	$	103,125.00
	111	%	$	106,562.50		111	%	$	106,562.50		111	%	$	106,562.50
	112	%	$	110,000.00		112	%	$	110,000.00		112	%	$	110,000.00
	113	%	$	113,437.50		113	%	$	113,437.50		113	%	$	113,437.50
	114	%	$	116,875.00		114	%	$	116,875.00		114	%	$	116,875.00
	115	%	$	120,312.50		115	%	$	120,312.50		115	%	$	120,312.50
	116	%	$	123,750.00		116	%	$	123,750.00		116	%	$	123,750.00
	117	%	$	127,187.50		117	%	$	127,187.50		117	%	$	127,187.50
	118	%	$	130,625.00		118	%	$	130,625.00		118	%	$	130,625.00
	119	%	$	134,062.50		119	%	$	134,062.50		119	%	$	134,062.50
	120	%	$	137,500.00		120	%	$	137,500.00		120	%	$	137,500.00
>120		%	$	137,500.00	>120		%	$	137,500.00	>120		%	$	137,500.00
*Based on Target Bonus of $206,250

14

CONFIDENTIAL TREATMENT REQUESTED FOR INFORMATION ON ATTACHMENT C OMITTED HERE AND

FILED SEPARATELY WITH THE COMMISSION

ATTACHMENT C

Special Transaction Bonus Calculation

A Special Transaction Bonus as described in Section 4(D) of the Agreement will be calculated for a "Change of Control" as described in Section 3(C)(i)  based on [**********************]  or for a "Change of Control" as described in Section 3(C)(ii)  based on [******************], as follows:

· Price/value less than [************] – $0;

· Price/value [************] - $500,000

· Price/value [************] - $706,250

EX-10.7

Exhibit 10.7

NAME OF OPTIONEE: Thomas E. D. Fuller

DATE OF GRANT: May 8, 2017

EXERCISE PRICE: $9.51

COVERED SHARES: 470,791

AMENDED AND RESTATED MAGICJACK VOCALTEC LTD

2013 STOCK INCENTIVE PLAN

STOCK OPTION AGREEMENT

1.     Definitions.  In this Agreement, capitalized terms used herein and not defined in the Plan or elsewhere herein shall have the following meanings:

1.1     “Agreement” means this Stock Option Agreement.

1.2     “Cause” means in the reasonable judgment of the Board: (i) Optionee commits fraud, theft or embezzlement against the Company or any Affiliate; (ii) Optionee commits a felony or a crime involving moral turpitude; (iii) Optionee refuses to execute or materially breaches the terms of the Company’s Insider Trading Policy or FD/Media Policy as in effect from time-to-time, (iv) Optionee breaches any of the terms of the Employment Agreement and fails to cure such breach within thirty (30) days after the receipt of written notice of such breach from the Company; or (v) Optionee engages in gross negligence or willful misconduct that causes harm to the business and operations of the Company or an Affiliate.

1.3     “Change of Control”means and shall be deemed to occur if (i) a Person acquires ownership of stock that, together with stock held by such Person, constituting more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; or (ii) a Person (other than a Person controlled, directly or indirectly, by shareholders of the Company) acquires fifty percent (50%) or more of the gross fair market value of the assets of the Company over a twelve (12) week period.

1.4     “Covered Shares” means the Ordinary Shares subject to the Option.

1.5     “Date of Exercise” means the date on which the Company receives notice pursuant to Section 4.1 of the exercise, in whole or in part, of the Option.

1.6     “Date of Expiration” means the date on which the Option shall expire, which shall be the earliest of the following times:

(a)     the date of the first notification to the Optionee that the Optionee’s Service is terminated by the Company or an Affiliate for Cause;

(b)     six (6) months after termination of the Optionee’s Service for any reason other than by the Company or an Affiliate for Cause; or

(c)     five years after the Date of Grant.

1.7     “Date of Grant” means the date set forth at the beginning of this Agreement.

1.8     “Disability” means total and permanent disability under Section 22(e)(3) of the Code or Participant’s becoming entitled to long-term disability benefits under the long-term disability plan or policy of the Company and/or its Affiliates that covers Participant, if any.

1.9     “Employment Agreement” means the Employment Agreement by and between Executive and the Company of near or even date herewith.

1.10   “Exchange Act” means the Securities Exchange Act of 1934, as amended.

1.11   “Exercise Price” means the dollar amount per Ordinary Share set forth on page 1 of this Agreement as the Exercise Price, as it may be adjusted from time to time pursuant to the Plan.

1.12   “Good Reason” means termination by Optionee of his employment upon the occurrence of one of the following events or conditions without the consent of the Optionee:

(i) A material reduction in the authority, duties or responsibilities of the Optionee;

(ii) Any material reduction in the Optionees’s Annual Base Salary or Target Annual Bonus as set forth in the Employment Agreement; or

(iii) Any material breach of the Employment Agreement by the Company.

Notwithstanding the foregoing,  Optionee shall not be deemed to have terminated his employment for Good Reason unless: (i) Optionee terminates his employment no later than ninety (90) days following his initial discovery of the above referenced event or condition which is the basis for such termination; and (ii) Optionee provides to the Company a written notice of the existence of the above referenced event or condition which is the basis for the termination within forty-five (45) days following his initial discovery of such event or condition, and the Company fails to remedy such event or condition within thirty (30) days following the receipt of such notice.

1.13   “Option” means the stock option granted to the Optionee in Section 2 of this Agreement.

1.14   “Optionee” means the person identified on page 1 of this Agreement.

1.15   “Person” means the term “person” within the meaning of Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d)(3) and 14(d) thereof.

1.16   “Plan” means the Amended and Restated magicJack Vocaltec Ltd. 2013 Stock Incentive Plan.

2

1.17   “Service” means, if the Optionee is (a) an employee of the Company and/or any of its Affiliates (as determined by the Committee in its reasonable discretion), the Optionee’s service as an employee of the Company and/or any of its Affiliates, (b) a member of the Board or the board of directors of an Affiliate but not an employee of the Company or any of its Affiliates (as determined by the Committee in its reasonable discretion), the Optionee’s service as a member of such Board or board of directors, or (c) a consultant or independent contractor to the Company or any of its Affiliates (as determined by the Committee in its reasonable discretion) and is not described in the preceding clause (b), the Optionee’s service as a consultant or independent contractor to the Company and/or any of its Affiliates.

Capitalized terms used herein but not defined herein shall have the meanings assigned in the Plan.

2.     Grant of Option.  Pursuant to the Plan and subject to the terms of this Agreement, the Company hereby grants to the Optionee, as of the Date of Grant, the Option to purchase from the Company that number of shares identified as the “Covered Shares” on page 1 of this Agreement, exercisable at the Exercise Price.

3.     Terms of the Option.

3.1     Type of Option.  The Option is intended to be a Nonqualified Stock Option.

3.2     Option Period; Exercisability.  The Option may be exercised in whole shares during the period commencing on the Date of Grant and terminating on the Date of Expiration, as follows:

(a)     no part of the Option may be exercised until the first anniversary of the Date of Grant;

(b)     beginning on the first anniversary of the Date of Grant, the Option may be exercised as to thirty-three and one-third percent (33-1/3%) of the Covered Shares;

(c)     beginning on March 13, 2019, the Option may be exercised as to an additional thirty-three and one-third percent (33-1/3%) of the Covered Shares; and

(d)     beginning on March 13, 2020, the Option may be exercised as to all of the Covered Shares.

3

Notwithstanding the foregoing, if, after the first anniversary of the Date of Grant, (I) Optionee’s Service ends as a result of Optionee’s death or Disability, then the Option may be exercised to the extent not previously exercised, as to a number of Covered Shares equal to (a) the total number of Covered Shares multiplied by (b) (i) the number of days elapsed between the Date of Grant and the termination date, divided by (c) one thousand ninety-six (1,096); or (II) the Optionee’s Service is terminated by the Company without Cause or by the Optionee for Good Reason, then the Option may be exercised, to the extent not previously exercised, as to a number of Covered Shares equal to (a) total number of Covered Shares multiplied by (b) (i) the number of days elapsed between the Date of Grant and the termination date, plus (ii) ninety (90) days, divided by (c) one thousand ninety-six (1,096) days; by way of example, if Optionee’s Service is terminated by the Company without Cause or by the Optionee for Good reason on the date that is five hundred (500) days after the date of Grant, the Option will be exercisable as to 53.83% (590/1096) of the Covered Shares minus any shares as to which the Option previously has been exercised.  In the event of a Change of Control on or after the first anniversary of the Grant Date, but prior to (x) termination of Participant’s Service, and (y) the third anniversary of the Date of Grant, the Option will be exercisable as as described in Section 13.2 of the Company’s Amended and Restated 2013 Stock Incentive Plan.  If Optionee’s Service is terminated by the Company without Cause or by the Optionee for Good Reason within 180 days prior to a Change of Control occurring on or after the first anniversary of the Grant Date, the Option will be exercisable as to all of the Covered Shares immediately prior to consummation of such Change of Control.  If Optionee’s Service is terminated within 180 days after a Change of Control occurring on or after the first anniversary of the Grant Date, and Optionee has been granted a substantially equivalent award of options to purchase Acquiror’s equity securities in substitution of any portion of the Option (the “Substituted Options”), the Acquiror shall be obligated to pay Optionee an amount equal to the difference between the Change of Control proceeds Optionee would have received had the Option been exercised as to all the Covered Shares immediately prior to closing of such Change of Control, and the amount of Change of Control proceeds actually received by Optionee as a result of exercising the Option immediately prior to such Change of Control, provided that Optionee forfeits all of the Substituted Options issued to him by the Acquiror.

3.3     Nontransferability. The Option is not transferable by the Optionee other than by will or by the laws of descent and distribution, and is exercisable, during the Optionee’s lifetime, only by the Optionee, or, in the event of the Optionee’s death or disability, by the Optionee’s legal representative.  Optionee acknowledges and agrees that any Shares acquired by the Optionee hereunder may not be transferred by Optionee during the term of the Employment Agreement, whether through sale or otherwise, without the prior written approval of the Committee.

3.4     Payment of the Exercise Price.  The Optionee, upon exercise, in whole or in part, of the Option, may pay the Exercise Price by any or all of the following means, either alone or in combination:

(a)     cash or check payable to the order of the Company;

(b)     if at the time of exercise, the Ordinary Shares are listed for trading on a national securities exchange, delivery (either actual or constructive) of shares of unencumbered Ordinary Shares (provided that such shares, if acquired under the Option or under any other option or award granted under the Plan or any other plan sponsored or mentioned by the Company, have been held by the Optionee for such period, if any, as the Committee may specify) that have an aggregate Fair Market Value on the Date of Exercise equal to that portion of the Exercise Price being paid by delivery of such shares;

(c)     if at the time of exercise, the Ordinary Shares are listed for trading on a national securities exchange and in accordance with such rules as may be specified by the Committee, delivery to the Company of a properly executed exercise notice and irrevocable instructions to a registered securities broker promptly to deliver to the Company cash equal to the Exercise Price for that portion of the Option being exercised; or

4

(d)     if at the time of exercise the Ordinary Shares are listed for trading on a national securities exchange, by directing the Company to withhold from the Ordinary Shares to be issued upon exercise of the Option (or portion thereof) a number of Ordinary Shares having a Fair Market Value not in excess of the aggregate Exercise Price of the Option (or portion thereof) being exercised, with payment of the balance of the Exercise Price being made pursuant to Section 3.4(a), 3.4(b) and/or Section 3.4(c).

4.     Exercise.

4.1     Notice.  The Option shall be exercised, in whole or in part by the delivery to the Company of written notice in the form of Exhibit A hereto.

4.2     Withholding.  The Company’s obligation to issue or deliver Ordinary Shares upon the exercise of the Option shall be subject to the satisfaction of any applicable federal, state and local tax withholding requirements.  The Optionee may satisfy any such withholding obligation by any of the following means or by a combination of such means: (a) tendering a cash payment or (b) if at the time the withholding obligation arises, the Ordinary Shares are listed for trading on a national securities exchange, authorizing the Company to withhold Ordinary Shares from the shares otherwise issuable to the Optionee upon exercise of the Option.  For purposes of this Section 4.2, Ordinary Shares that are withheld or delivered to satisfy applicable withholding taxes shall be valued at their Fair Market Value on the date the withholding tax obligation arises, and in no event shall the aggregate Fair Market Value of the Ordinary Shares withheld pursuant to this Section 4.2 exceed the minimum amount of taxes required to be withheld in connection with exercise of the Option.

4.3     Effect.  The exercise, in whole or in part, of the Option shall cause a reduction in the number of Covered Shares as to which the Option may be exercised in an amount equal to the number of Ordinary Shares as to which the Option is exercised.

4.4     Legends.  The Optionee agrees that the certificates evidencing the Ordinary Shares issued upon exercise of the Option may include any legend which the Committee deems appropriate to reflect the transfer and other restrictions contained in the Plan, this Agreement, or to comply with applicable laws.

4.5     Rights as Stockholder.  The Optionee shall have no rights as a stockholder with respect to any Ordinary Shares subject to the Option until and unless such shares are issued to the Optionee pursuant to this Agreement.

4.6     Service.  Neither the grant of the Option evidenced by this Agreement nor any term or provision of this Agreement shall constitute or be evidence of any understanding, express or implied, on the part of the Company to employ or retain the Optionee for any period.

4.7     Subject to the Plan.  The Option evidenced by this Agreement and the exercise thereof are subject to the terms and conditions of the Plan, which is incorporated by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any rights or benefits under this Agreement.  In addition, the Option (including its exercise) is subject to any rules and regulations promulgated by the Committee.

5

4.8     Governing Law.  The validity, construction, interpretation and enforceability of this agreement shall be determined and governed by the laws of the State of Florida without giving effect to the principles of conflicts of laws.

5.     Stockholder Approval.  Optionee acknowledges that the Plan and this Agreement require stockholder approval at the next annual or special meeting of stockholders following adoption and approval by the Board.  If the adoption of the Plan and approval of this Agreement is not approved by the Company’s stockholders within one (1) year following the Date of Grant, this Agreement shall be cancelled and void ab initio immediately following such next annual or special meeting of stockholders.

6.     Severability.  If any provision of this Agreement shall be held to be invalid, illegal or unenforceable in any material respect, such provision shall be replaced with a provision that is as close as possible in effect to such invalid, illegal or unenforceable provision, and still be valid, legal and enforceable, and the validity, legality and enforceability of the remainder of this Agreement shall not in any way be affected or impaired thereby.

IN WITNESS WHEREOF, the Company has caused this Agreement to be signed on its behalf by the undersigned, thereunto duly authorized, effective as of the Date of Grant.

MAGICJACK VOCALTEC LTD.

By:  /s/ Don Carlos Bell III 

        Don Carlos Bell III

        Chief Executive Officer

Accepted and agreed to as of the Date of Grant:

/s/ Thomas E. D. Fuller

Thomas E. D. Fuller

6

“EXHIBIT A”

EXERCISE OF OPTION

Board of Directors

magicJack VocalTec Ltd.

Ladies and Gentlemen:

6.1     The undersigned, the Optionee under the Stock Option Agreement (“Agreement”) identified as Option No. ____—___ granted pursuant to the means the Amended and Restated magicJack Vocaltec Ltd. 2013 Stock Incentive Plan, hereby irrevocably elects to exercise the Option granted in the Agreement to purchase ___ shares of Ordinary Shares (the “Option Shares”), and herewith makes payment of $ in the form of (check all that apply and if more than one is checked, indicate the amount to be paid by each payment method):

☐  Cash or Check:

☐  Ordinary Shares:

☐  Brokerage Transaction:

☐  Withholding of Ordinary Shares:

  The undersigned hereby elects to satisfy applicable withholding requirements by (check all that apply and, if more than one is checked, indicate the amount to be withheld by each withholding method):

☐  Cash or Check:

☐  Withholding of Ordinary Shares:

Capitalized terms used herein but not defined shall have the meanings ascribed to such terms in the Agreement:

Date:                                                                                          

                                                                                                                                                         (Signature of Optionee)

Date received by magicJack VocalTec Ltd: 

7

Received by:

Note: Ordinary Shares being delivered in payment of all or any part of the Exercise Price must be represented by certificates registered in the name of the Optionee and duly endorsed by the Optionee and by each and every other co-owner in whose name the shares may also be registered.

8

Amendment to Option Agreement

This Option Agreement Amendment (“Amendment”) is entered into by and between MagicJack VocalTec Ltd., a company formed under the laws of Israel (“Company”) and Thomas E.D. Fuller  (“Executive”) as of July 27, 2017, for the purpose of amending that certain Stock Option Agreement by and between the Company and Executive with a grant date of May 8, 2017 (the “Option Agreement”) issued pursuant to the Company’s Amended and Restated 2013 Stock Incentive Plan (the “Plan”).

RECITALS:

A. The Option Agreement was entered into on May 8, 2017 pursuant to resolutions of the Compensation Committee and Board of Directors of the Company of even date;

B. The resolutions of the Committee and the Board provided that the Option Agreement was subject to the approval by the Company’s shareholders of amendments to Plan, including an amendment to increase the number of shares available for issuance under the Plan;

C. Section 5 of the Option Agreement mistakenly provides that the Option Agreement is also subject to approval of the Company’s shareholders; and

D. The Company and Executive wish to amend the Option Agreement to remove the mistaken reference to the Agreement being subject to shareholder approval.

In consideration of the foregoing, the mutual obligations of the Company and the Executive under the Option Agreement, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive agree to amend the Option Agreement as follows:

Section 5 of the Option Agreement is hereby deleted and replaced with the following:

5. Stockholder Approval. Optionee acknowledges that the Plan requires stockholder approval at the next annual or special meeting of stockholders following adoption and approval by the Board. If the adoption of the Plan is not approved by the Company’s stockholders within one (1) year following the Date of Grant, this Agreement shall be cancelled and void ab initio immediately following such next annual or special meeting of stockholders.

Other than as modified by this Amendment, the Option Agreement remains unchanged.

MAGICJACK VOCALTEC LTD.

By: /s/ Don Carlos Bell III/s/ Thomas E.D. Fuller

       Don Carlos Bell IIIThomas E.D. Fuller

       Chief Executive Officer

9

EX-10.8

Exhibit 10.8

NAME OF PARTICIPANT: Thomas E. D. Fuller

DATE OF GRANT: May 8, 2017

NUMBER OF RESTRICTED SHARES GRANTED: 37,267

MAGICJACK VOCALTEC LTD

2013 STOCK INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

1.            Definitions.  In this Agreement, capitalized terms used herein and not defined in the Plan or elsewhere herein shall have the following meanings:

1.1          “Agreement” means this Restricted Stock Agreement.

1.2          “Cause” means if, in the reasonable judgment of the Board: (i) Participant commits fraud, theft or embezzlement against the Company or any Affiliate; (ii) Participant commits a felony or a crime involving moral turpitude; (iii) Participant refuses to execute or materially breaches the terms of the Company’s Insider Trading Policy or FD/Media Policy as in effect from time-to-time, (iv) Participant breaches any of the terms of the Employment Agreement and fails to cure such breach within thirty (30) days after the receipt of written notice of such breach from the Company; or (v) Participant engages in gross negligence or willful misconduct that causes harm to the business and operations of the Company or an Affiliate.

1.3          “Change of Control”means and shall be deemed to occur if (i) a Person acquires ownership of stock that, together with stock held by such Person, constituting more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; or (ii) a Person (other than a Person controlled, directly or indirectly, by shareholders of the Company) acquires fifty percent (50%) or more of the gross fair market value of the assets of the Company over a twelve (12) week period.

1.4          “Date of Grant” means the date set forth at the beginning of this Agreement.

1.5          “Disability” means total and permanent disability under Section 22(e)(3) of the Code or Participant’s becoming entitled to long-term disability benefits under the long-term disability plan or policy of the Company and/or its Affiliates that covers Participant, if any.

1.6          “Employment Agreement” means the Employment Agreement by and between Participant and the Company of near or even date herewith.

1.7          “Exchange Act” means the Securities Exchange Act of 1934, as amended.

1.8          “Good Reason” means termination by Participant of Participant’s employment upon the occurrence of one of the following events or conditions without the consent of Participant:

(i) A material reduction in the authority, duties or responsibilities of Participant;

(ii) Any material reduction in Participant’s Annual Base Salary or Target Annual Bonus as set forth in the Employment Agreement; or

(iii) Any material breach of the Employment Agreement by the Company.

Notwithstanding the foregoing,  Participant shall not be deemed to have terminated his employment for Good Reason unless: (i) Participant terminates his employment no later than ninety (90) days following his initial discovery of the above referenced event or condition which is the basis for such termination; and (ii) Participant provides to the Company a written notice of the existence of the above referenced event or condition which is the basis for the termination within forty-five (45) days following Participant’s initial discovery of such event or condition, and the Company fails to remedy such event or condition within thirty (30) days following the receipt of such notice.

1.9          “Participant” means the person identified on page 1 of this Agreement.

1.10        “Person” means the term “person” within the meaning of Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d)(3) and 14(d) thereof.

1.11        “Plan” means the magicJack Vocaltec Ltd. 2013 Stock Incentive Plan as amended and/or restated from time-to-time.

1.12        “Restricted Shares” means the Ordinary Shares granted by, and subject to, the terms of this Agreement.

1.13        “Service” means, if Participant is (a) an employee of the Company and/or any of its Affiliates (as determined by the Committee in its reasonable discretion), Participant’s service as an employee of the Company and/or any of its Affiliates, (b) a member of the Board or the board of directors of an Affiliate but not an employee of the Company or any of its Affiliates (as determined by the Committee in its reasonable discretion), Participant’s service as a member of such Board or board of directors, or (c) a consultant or independent contractor to the Company or any of its Affiliates (as determined by the Committee in its reasonable discretion) and is not described in the preceding clause (b), Participant’s service as a consultant or independent contractor to the Company and/or any of its Affiliates.

Capitalized terms used herein but not defined herein shall have the meanings assigned in the Plan.

2.            Grant of Restricted Shares.  Pursuant to the Plan and subject to the terms of this Agreement, the Company hereby grants to Participant, as of the Date of Grant, the number of Restricted Shares identified on page 1 of this Agreement.

2

3.            Restrictions Prior to Vesting; Forfeiture. 

3.1          Restrictions on Transfer.  The Restricted Shares (including the right to vote such shares and receive any dividends thereon) may not be transferred, sold, pledged, exchanged, assigned or otherwise encumbered or disposed of by Participant except to the extent the Restricted Shares have become vested in accordance with Section 4 hereof; provided, however, that the Grantee’s interest in the Restricted Shares may be transferred pursuant to will or the laws of descent and distribution.  Any purported transfer, encumbrance or other disposition of the Restricted Shares in violation of this Agreement will be null and void, and the other party to any such purported transaction will not obtain any rights to or interest in the Restricted Shares. 

3.2          Forfeiture of Restricted Shares.  Upon Participant’s termination of Service the Restricted Shares will be forfeited and canceled except to the extent they have become vested in accordance with Section 4.

3.3          Implementation of Restrictions.  The certificate(s) or book entries for Restricted Shares granted hereby shall bear and appropriate legend, as determined by the Committee, to the effect that the shares are subject to the restrictions set forth in this Agreement.  In the event of a stock split, stock dividend spin-off, exchange of shares, recapitalization or the like (each, a “Capital Event”), in respect of or affecting the Ordinary Shares, the terms and conditions of this Agreement shall apply to the securities or other property issued in connection with the Capital Event in respect of the Restricted Shares on the same basis, and to the same extent, as they apply to Restricted Shares in respect of which they were issued.

4.            Vesting.  The Restricted Shares shall vest as follows:

(a)          no part of the Restricted Shares shall be eligible to become vested until the first anniversary of the Date of Grant;

(b)          on the first anniversary of the Date of Grant, thirty-three and one-third percent (33-1/3%) of the number of Restricted Shares granted hereby shall become vested;

(c)          on March 13, 2019, an additional thirty-three and one-third percent (33-1/3%) of the number of Restricted Shares granted hereby shall become vested; and

(d)          on March 13, 2020, all Restricted Shares that have not previously become vested shall become vested.

If the Restricted Shares would become vested as to a fractional share, the number of Restricted Shares becoming vested shall be rounded down to the nearest whole share.

3

Notwithstanding the foregoing, if, after the first anniversary of the Date of Grant, (I) Participant’s Service ends as a result of Participant’s death or Disability, then the above vesting schedule shall be adjusted such that the number of Restricted Shares vested immediately following such termination, including all previously vested Restricted Shares, shall be equal to (a) the total number of Restricted Shares granted hereunder multiplied by (b) the number of days elapsed between Date of Grant and the termination date, divided by (b) one thousand ninety-six (1,096) days; or (II) Participant’s Service is terminated by the Company without Cause or by Participant for Good Reason, then the above vesting schedule shall be adjusted such that the number of Restricted Shares vested immediately following such termination, including all previously vested Restricted Shares, shall be equal to (a) the total number of Restricted Shares granted hereunder multiplied by (b) (i) the number of days elapsed between Date of Grant and the termination date, plus (ii) ninety (90) days, divided by (c) one thousand ninety-six (1,096) days; by way of example, if Participant’s Service is terminated by the Company without Cause or by the Participant for Good reason on the date that is five hundred (500) days after Date of Grant, 53.83% of the (590/1096) of the Restricted Shares shall be vested, including any previously vested Restricted Shares which have been transferred by Participant.  In the event of a Change of Control on or after the first anniversary of the Grant Date, but prior to (x) termination of Participant’s Service, and (y) the third anniversary of the Date of Grant, the Restricted Shares shall thereupon become vested as described in Section 13.2 of the Company’s Amended and Restated 2013 Stock Incentive Plan to be submitted by the Company for shareholder approval within thirty (30) days following the Grant Date, the terms of which are incorporated herein by reference.  If Participant’s Service is terminated by the Company without Cause or by the Participant for Good Reason within 180 days prior to a Change of Control occurring on or after the first anniversary of the Grant Date, all Restricted Shares shall become vested immediately prior to consummation of such Change of Control.  If Participant’s Service is terminated within 180 days after a Change of Control occurring on or after the first anniversary of the Grant Date, and Participant has been granted a substantially equivalent award of the Acquiror’s equity securities in substitution of any portion of the Restricted Shares (the “Substituted Shares”), the Acquiror shall be obligated to pay Participant an amount equal to the difference between the Change of Control proceeds Participant would have received had all of his Restricted Shares been vested immediately prior to such Change of Control, and the amount of Change of Control proceeds actually received by Participant in exchange for his vested Restricted Shares as a result of such Change of Control, provided that Participant forfeits all of the Substituted Shares issued to him by the Acquiror.

5.            Nontransferability. Participant acknowledges and agrees that after any Restricted Shares become vested they may not be transferred by Participant during the term of the Employment Agreement, whether through sale or otherwise, without the prior written approval of the Committee.

6.            Withholding.  The Company’s obligation to issue or deliver Ordinary Shares not subject to the restrictions and forfeiture provisions set forth in Section 3 hereof upon the vesting of Restricted Shares, shall be subject to the satisfaction of any applicable federal, state and local tax withholding requirements.  Such withholding obligation will be satisfied by the Company’s withholding of a number of Ordinary Shares from the unrestricted shares otherwise issuable or deliverable to Participant upon the vesting of the Restricted Shares giving rise to the withholding obligation with a value equal to such withholding obligation.  For purposes of this Section 6, Ordinary Shares that are withheld or delivered to satisfy applicable withholding taxes shall be valued at their Fair Market Value on the date the withholding tax obligation arises, and in no event shall the aggregate Fair Market Value of the Ordinary Shares withheld pursuant to this Section 6 exceed the minimum amount of taxes required to be withheld in connection with the vesting of Restricted Shares.

4

7.            Legends.  Participant agrees that the certificates evidencing the Ordinary Shares issued or delivered after any vesting of the Restricted Shares may include any legend which the Committee deems appropriate to reflect the transfer and other restrictions contained in the Plan, this Agreement, or to comply with applicable laws.

8.            Rights as Stockholder.  Except as provided in Section 3 hereof, Participant shall have all the rights and privileges of a stockholder with respect to the Restricted Shares, including (but not limited to) the right to vote the Restricted Shares and the right to receive dividends.  All such rights and privileges shall cease upon forfeiture of the Restricted Shares.

9.            Service.  Neither the grant of the Restricted Shares evidenced by this Agreement nor any term or provision of this Agreement shall constitute or be evidence of any understanding, express or implied, on the part of the Company to employ or retain Participant for any period.

10.          Subject to the Plan.  The Restricted Shares evidenced by this Agreement are subject to the terms and conditions of the Plan, which is incorporated by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any rights or benefits under this Agreement.  In addition, the Restricted Shares are subject to any rules and regulations promulgated by the Committee.

11.          Governing Law.  The validity, construction, interpretation and enforceability of this agreement shall be determined and governed by the laws of the State of Florida without giving effect to the principles of conflicts of laws.

12.          Severability.  If any provision of this Agreement shall be held to be invalid, illegal or unenforceable in any material respect, such provision shall be replaced with a provision that is as close as possible in effect to such invalid, illegal or unenforceable provision, and still be valid, legal and enforceable, and the validity, legality and enforceability of the remainder of this Agreement shall not in any way be affected or impaired thereby.

5

IN WITNESS WHEREOF, the Company has caused this Agreement to be signed on its behalf by the undersigned, thereunto duly authorized, effective as of the Date of Grant.

MAGICJACK VOCALTEC LTD.
By:	/s/ Don Carlos Bell III
	Don Carlos Bell III
	Chief Executive Officer

Accepted and agreed to as of the Date of Grant:

/s/ Thomas E. D. Fuller

Thomas E. D. Fuller

6

EX-10.11

Exhibit 10.11

AMENDMENTS TO INDEPENDENT CONTRACTOR AND STOCK OPTION

AGREEMENTS AND RELEASES OF CLAIMS

WHEREAS, magicJack Vocaltec Ltd. and all of its direct and indirect subsidiaries (collectively, the “Company”) and Gerald T. Vento (“Vento”) entered into an Independent Contractor Agreement dated as of March 9, 2017 (the “Independent Contractor Agreement”) and magicJack Vocaltec Ltd. and Vento entered into a Stock Option Agreement dated as of April 2, 2013 (the “Option Agreement”);

WHEREAS, the parties desire to amend the Independent Contractor Agreement and the Option Agreement (together, the “Agreements”), and to release and waive claims against each other, as set forth in this amendment to the Agreements (“Amendment”),

NOW, THEREFORE, the parties hereto agree as follows:

1.          All capitalized terms in this Amendment not otherwise defined herein have the meanings defined in the Agreements.

2.          In consideration of the Company’s release of claims against Vento as set forth herein, the Stock Option Agreement is hereby amended to authorize Vento to surrender the entire Option without payment by the Company, and Vento hereby surrenders the entire Option to purchase 722,782 Covered Shares without any payment by the Company.

3.          The first sentence of Section 3 of the Independent Contractor Agreement is hereby amended to read as follows:

“The Contractor shall commence providing services on the Effective Date and shall continue until December 26, 2017, unless terminated prior to such date by either party in accordance with this Section 3 (the “Term”), but may be terminated sooner by Contractor upon thirty (30) days’ advance written notice or by the Company immediately for Cause or upon thirty (30) days’ advance notice other than for Cause, provided that, the provisions below shall apply in the event of a termination of this Agreement.”

4.          Release by Vento.  Vento agrees that by executing this Amendment he does hereby, for himself, his heirs, executors, administrators, representatives, successors and assigns, release and forever discharge the Company and its attorneys, present and former employees, agents, present and former officers, directors, parents, subsidiaries, divisions, and all affiliated or related companies, predecessors, successors, assigns or representatives, and all persons acting for, by, through, under or in concert with any of them (collectively, “Released Parties”), of and from any and all claims, demands, causes of action, suits, debts, accounts, claims for attorney’s fees, interest, expenses and costs, damages, judgments, and executions of any nature whatsoever (“Claims”), which Vento, his heirs, executors, administrators, representatives, successors, or assigns, had or now has, from the beginning of time to the date hereof, against the Company and the Released Parties, whether known or unknown, whether based in contract (including without limitation the Independent Contractor Agreement) or tort, or on Title VII of the Civil Rights Act, the Americans With Disabilities Act, the Family Medical Leave Act, or any other federal or state statute, common law, rule or regulation.  Vento acknowledges that by signing this Amendment, Vento is waiving his rights to bring any claim of any sort (a) arising in the past or in the future from or related to the Option Agreement, and (b) arising from the beginning of time to the date hereof related to his employment or termination of employment with the Company, his service on the Board of Directors of the Company (“Board”) or his performing Consulting Services.  Notwithstanding the foregoing, the Company acknowledges and agrees that the foregoing release does not apply to any of the Company’s obligations to indemnify Vento under any agreement or applicable laws or to Vento’s rights with respect to any equity interests in magicJack Vocaltec Ltd. other than rights granted in the Option Agreement, which are waived by this Amendment.

5.          Release by the Company.  The Company agrees that by executing this Amendment it hereby, for itself, its subsidiaries and each of their successors and assigns, releases and forever discharges Vento and his representatives of and from any and all Claims arising from any acts or omissions of Vento that were actually known to the Company’s Chief Executive Officer, Executive Vice President of Finance or Board on or before June 18, 2017, that the Company had or now has, from the beginning of time to the date hereof.

6.          This Amendment, and the amendments to the Agreements set forth herein, are effective as of June 19, 2017.  Except as specifically amended by this Amendment, the Independent Contractor Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects.

7.          This Amendment shall be governed by and construed and interpreted in accordance with the laws of the State of Florida, exclusive of any choice of law rules.

8.          This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument.  The parties agree that this Agreement may be signed either (a) by using electronic signatures facilitated by a U.S. E-SIGN Act-compliant (i.e., the Electronic Signatures in Global and National Commerce Act - ESIGN, Pub.L. 106-229, 114 Stat. 464, enacted June 30, 2000, 15 U.S.C. ch.96) electronic signature provider (“e-signatures”), in which case the e-signature shall have the same effect as original signatures, and the party using an e-signature will be subject to the provisions of the U.S. E-SIGN Act, or (b) by delivering a PDF copy of an executed counterpart to the other party or its counsel by email, in which case the PDF copy shall have the same effect as an original signature.

magicJack Vocaltec Ltd
By:	/s/ Don Bell	/s/ Gerald T. Vento
Name:	Don Bell	Gerald T. Vento
Title:	Chief Executive Officer

2

EX-31.1

Exhibit 31.1

MAGICJACK VOCALTEC LTD.

CERTIFICATIONS PURSUANT TO

RULES 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Don C. Bell III, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of magicJack VocalTec Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2017

/s/ Don C. Bell III                                                                

Don C. Bell III

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

MAGICJACK VOCALTEC LTD.

CERTIFICATIONS PURSUANT TO

RULES 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Thomas Fuller, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of magicJack VocalTec Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2017

/s/ Thomas Fuller                                                                

Thomas Fuller

Chief Financial Officer

EX-32.1

Exhibit 32.1

MAGICJACK VOCALTEC LTD.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of magicJack VocalTec Ltd. (the “Company”) on Form 10-Q for the period ending June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to the best of his knowledge:

1.   The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 as amended; and

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 9, 2017

/s/ Don C. Bell III                                                                

Don C. Bell III

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

MAGICJACK VOCALTEC LTD.

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of magicJack VocalTec Ltd. (the “Company”) on Form 10-Q for the period ending June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to the best of his knowledge:

1.   The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 as amended; and

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 9, 2017

/s/ Thomas Fuller                                                                

Thomas Fuller

Chief Financial Officer

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Jul. 31, 2017
Document And Entity Information
Entity Registrant Name	MAGICJACK VOCALTEC LTD
Entity Central Index Key	0001005699
Document Type	10-Q
Document Period End Date	Jun. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		16,113,050
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2017

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands		Jun. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents		$ 47,041	$ 52,394
Investments, at fair value		369	447
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $433 and $402, respectively		2,095	3,171
Inventories		2,646	4,441
Deferred costs		1,918	2,319
Prepaid income taxes		2,713	527
Receivable from earnout escrow		2,000	2,000
Deposits and other current assets		4,465	1,970
Total current assets		63,247	67,269
Property and equipment, net		3,173	3,805
Intangible assets, net		11,533	28,854
Goodwill		32,304	47,185
Deferred tax assets		35,659	26,568
Deposits and other non-current assets		793	836
Total assets		146,709	174,517
Current liabilities:
Accounts payable		1,846	2,790
Income tax payable			1,527
Accrued expenses and other current liabilities		10,549	8,426
Deferred revenue, current portion		44,886	48,507
Total current liabilities		57,281	61,250
Deferred revenue, net of current portion	[1]	41,510	44,201
Other non-current liabilities		12,577	10,866
Total liabilities		111,368	116,317
Commitments and contingencies (Note 10)
Capital equity
Ordinary shares, No par value; 100,000 shares authorized; 25,055 and 25,039 shares issued at June 30, 2017 and December 31, 2016, respectively		111,783	111,783
Additional paid-in capital		13,845	13,567
Treasury stock (8,942 and 8,988 shares at June 30, 2017and December 31, 2016, respectively)		(119,410)	(120,300)
Retained earnings		29,123	53,785
Total magicJack VocalTec, LTD. shareholders's equity		35,341	58,835
Noncontrolling interest			(635)
Total capital equity		35,341	58,200
Total liabilities and capital equity		$ 146,709	$ 174,517

[1] Deferred revenue, non-current, is comprised entirely of deferred revenues originating from the sale of access right renewals.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Statement of Financial Position [Abstract]
Allowance for doubtful accounts and billing adjustments	$ 433	$ 402
Ordinary shares, shares authorized	100,000	100,000
Ordinary shares, no par value	$ 0	$ 0
Ordinary shares, shares issued	25,055	25,039
Treasury stock, shares	8,942	8,988

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Income Statement [Abstract]
Net revenues	$ 22,381	$ 25,301	$ 45,578	$ 49,000
Cost of revenues	8,166	9,838	17,617	18,047
Gross profit	14,215	15,463	27,961	30,953
Operating expenses:
Marketing	2,120	1,758	4,527	2,979
General and administrative	9,544	8,252	22,369	17,187
Impairment of intangible assets and goodwill			31,527
Research and development	1,462	1,247	2,961	2,347
Total operating expenses	13,126	11,257	61,384	22,513
Operating income (loss)	1,089	4,206	(33,423)	8,440
Other income (expense):
Interest and dividend income	17	9	23	16
Other income (expense), net	(13)	2	(30)	(5)
Total other income (expense)	4	11	(7)	11
Income (loss) before income taxes	1,093	4,217	(33,430)	8,451
Income tax expense (benefit)	2,587	1,702	(8,768)	5,202
Net (loss) income	(1,494)	2,515	(24,662)	3,249
Net (loss) income attributable to noncontrolling interest	(67)	304		304
Net (loss) income attributable to magicJack VocalTec Ltd. common shareholders	$ (1,561)	$ 2,819	$ (24,662)	$ 3,553
(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:
Basic	$ (0.10)	$ 0.18	$ (1.54)	$ 0.23
Diluted	$ (0.10)	$ 0.18	$ (1.54)	$ 0.22
Weighted average common shares outstanding:
Basic	16,078	15,853	16,056	15,750
Diluted	16,078	15,872	16,056	15,914

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UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CAPITAL EQUITY - 6 months ended Jun. 30, 2017 - USD ($) shares in Thousands, $ in Thousands		Common Stock	Additional Paid-in Capital	Treasury Stock	Retained Earnings	Noncontrolling Interest	Total
Balance at Dec. 31, 2016		$ 111,783	$ 13,567	$ (120,300)	$ 53,785	$ (635)	$ 58,200
Balance, shares at Dec. 31, 2016		25,039		(8,988)
Share-based compensation			1,303				1,303
Issuance of ordinary shares			(1,025)	$ 1,025
Issuance of ordinary shares, shares				83
Reclassification of shares	[1]
Reclassification of shares, shares	[1]	16		(16)
Purchase of treasury stock				$ (135)			(135)
Purchase of treasury stock, shares				(21)
Deconsolidation of subsidiary						635	635
Net loss					(24,662)		(24,662)
Balance at Jun. 30, 2017		$ 111,783	$ 13,845	$ (119,410)	$ 29,123		$ 35,341
Balance, shares at Jun. 30, 2017		25,055		(8,942)

[1] represents shares previously recorded as treasury stock that were reclassified as they were issued as new ordinary shares.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Cash flows from operating activities:
Net (loss) income	$ (24,662)	$ 3,249
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Provision for doubtful accounts and billing adjustments	126	152
Share-based compensation	1,303	2,250
Depreciation and amortization	2,419	2,182
Impairment of goodwill and intangible assets	31,527
Loss on sale of assets	18
Increase of uncertain tax positions	1,809	1,187
Deferred income tax (benefit) provision	(9,091)	935
Change in operating assets and liabilities
Accounts receivable	943	713
Inventories	1,690	1,595
Deferred costs	318	275
Prepaid Income taxes	(2,846)	1,912
Deposits and other current assets	(2,415)	(431)
Other non-current assets	322	(40)
Accounts payable	(707)	455
Income taxes payable	38
Accrued expenses and other current liabilities	2,123	(1,016)
Deferred revenue	(6,038)	(4,999)
Other non-current liabilities	(1,003)	(70)
Net cash (used in) provided by operating activities	(4,126)	8,349
Cash flows from investing activities:
Purchase of investments		(80)
Purchases of property and equipment	(248)	(159)
Proceeds from sale of investment	245
Acquisition of Broadsmart		(40,019)
Acquisition of intangible assets	(1,089)
Net cash used in investing activities	(1,092)	(40,258)
Cash flows from financing activities:
Purchase of treasury stock	(135)
Proceeds from exercise of ordinary share options		1
Net cash (used by) provided by financing activities	(135)	1
Net (decrease) increase in cash and cash equivalents	(5,353)	(31,908)
Cash and cash equivalents, beginning of period	52,394	78,589
Cash and cash equivalents, end of period	47,041	46,681
Supplemental disclosures:
Income taxes paid	3,293	1,240
Non-cash investing and financing activities:
Ordinary shares issued for acquisition of Broadsmart		$ 1,676

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DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

NOTE 1 –DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

magicJack VocalTec Ltd. and its subsidiaries (the “Company”) is the cloud communications leader that invented the magicJack device as well as other telecommunication products and services. The Company is a vertically integrated group of companies, with capabilities including Voice-over-Internet-Protocol (“VoIP”) services and related equipment sales, micro-processor chip design and development of the magicJack device. In addition to residential consumers, the Company provides VoIP services and related equipment to small to medium sized businesses at competitive prices and wholesales telephone service to VoIP providers and telecommunication carriers.  In 2016, the Company acquired a provider of hosted Unified Communication as a Service (“UCaaS”) and seller of hardware and network equipment focusing on medium-to-large, multi-location enterprise customers.

magicJack devices weigh about one ounce and plug into the USB port on a computer or into a power adapter and high speed Internet source, providing users with complete phone service for home, business and travel. magicJack devices come with the right to access the Company’s servers ("access right"), which provides customers the ability to obtain free telephone services. Access rights are renewable. The Company currently offers the magicJack GO version of the device, which has its own CPU and can connect a regular phone directly to the user’s broadband modem/router and function as a standalone phone without using a computer.  The sale of devices is done through distribution channels that include retailers, wholesalers and direct to customer sales via the Company’s web-site.

The Company also offers magicJack mobile apps, which are applications that allow users to make and receive telephone calls through their smart phones or devices. The Company currently offers the magicApp, magicJack Connect and magicJack Spark. The magicApp and magicJack Connect are mobile apps available for both iOS and Android. In July 2017, the Company launched magicJack Spark on iOS devices.  The mobile apps allow customers to place and receive telephone calls in the U.S. or Canada on their mobile devices through either an existing or new magicJack account. The mobile apps also give users the ability to add a second phone number to their smart phone for a monthly or annual fee. Customers may purchase international minutes to place telephone calls through the magicJack device or mobile apps to locations outside of the U.S. and Canada.

The Company was incorporated in the State of Israel in 1989 and is domiciled in Netanya, Israel, with executive and administrative offices, a warehouse and a customer care call center in West Palm Beach, Florida. In addition the Company has offices for technology management in Franklin, Tennessee, research and development in Plano, Texas, and Sunnyvale, California and the UCaaS provider in Fort Lauderdale, Florida.

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements are prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the Company’s unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. The balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The Company’s unaudited condensed consolidated financial statements are the basis for the discussion and analysis of the Company’s results of operations, liquidity and capital resources. References to authoritative accounting literature in this report, where applicable, are based on the Accounting Standards Codification (“ASC”). The Company’s functional and reporting currency is the United States Dollar (“U.S. Dollar”), which is the currency of the primary economic environment in which its consolidated operations are conducted. Transactions and balances originally denominated in U.S. Dollars are presented at their original amounts. Transactions and balances in currencies other than U.S. Dollars, including New Israeli Shekels (“NIS”) and Polish Zloty (“PLN”), are re-measured in dollars and any gains or losses are recognized in the Company's unaudited condensed consolidated statement of operations in the period they occur.

Prior to 2016, the Company prepared its consolidated financial statements on the basis of being a single reporting entity. In 2016, with the acquisition of North American Telecommunications Corporation (“NATC”) d/b/a Broadsmart (“Broadsmart”) and the internal development of magicJack SMB, Inc. (“SMB”), the Company began reporting the results of its operations as separate reportable segments – “Core Consumer,” “Enterprise” and “SMB”. During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB Segment within the Core Consumer segment. Accordingly, this segment will not show activity for periods after March 31, 2017. Refer to Note 16, “Segment Reporting” for further details.

Approximately 86% of the Company’s consolidated revenues in the three and six months ended June 30, 2017, were from sales to customers located in the United States. Approximately 90% of the Company’s consolidated revenues in the three and six months ended June 30, 2016 were from sales to customers located in the United States.

The majority of Core Consumer segment revenues were generated from sales of the magicJack product line and accompanying software access rights, which were $17.1 million and $19.5 million for the three months ended June 30, 2017 and 2016, respectively, and $35.2 million and $39.6 million for the six months ended June 30, 2017 and 2016, respectively. The Core Consumer segment also provides its customers with the ability to make prepaid international calls by purchasing prepaid minutes for use with the magicJack devices and mobile apps. Revenues generated from the usage of prepaid minutes were $1.2 million and $1.5 million for the three months ended June 30, 2017 and 2016, respectively, and $2.4 million and $3.2 million for the six months ended June 30, 2017 and 2016, respectively.

The Enterprise segment was launched with the acquisition of Broadsmart on March 16, 2016.  The majority of Enterprise segment revenues were generated from Broadsmart hosted UCaaS services and sales of hardware and equipment which were $3.0 million and $2.9 million for the three months ended June 30, 2017 and 2016, respectively, and $5.7 million and $3.4 million for the six months ended June 30, 2017 and 2016, respectively.

The SMB segment did not generate significant revenue for the three and six months ended June 30, 2016, or the three months ended March 31, 2017.

Basis of Consolidation

The Company’s unaudited condensed consolidated financial statements include the accounts of magicJack VocalTec and its wholly owned subsidiaries. The results of Broadsmart Global, Inc. have been included since March 17, 2016.  The results of SMB have been included since the first quarter of 2016.  All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications may have been made to prior period financial statement amounts to conform to the current presentation. The results for the three and six months ended June 30, 2017 may not be indicative of the results for the entire year ending December 31, 2017. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 16, 2017.

Noncontrolling Interest

During the year ended December 31, 2016, the Company formed a new subsidiary and entered into a joint venture with an unrelated third party which resulted in the Company having a 60% controlling interest in the joint venture which began selling a line of high-technology residential consumer products in the fourth quarter of fiscal year 2016. On March 31, 2017, this interest was reduced to 36% and on May 31, 2017 the Company sold its remaining interest to the unrelated third party.  Based on the difference between the sales price from the agreement and the carrying value of the asset, the Company recognized an impairment loss of $0.4 million in general and administrative expense in the Core Consumer segment of the unaudited condensed consolidated statement of operations for the six months ended June 30, 2017.

The operations of the joint venture for the three and six months ended June 30, 2017 and 2016 were not significant to the Company’s financial statements. The Company’s consolidated financial statements for the three and six months ended June 30, 2016, include adjustments to income attributable to magicJack VocalTec Ltd. common shareholders of $0.3 million, to recognize the impact of the noncontrolling interest.  The Company’s consolidated financial statements included a loss of $0.1 million for the three months ended June 30, 2017, but did not include any adjustments to income attributable to magicJack VocalTec Ltd. common shareholders for the six months ended June 30, 2017. The Company has determined that the joint venture did not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a separate reportable segment. As such, it was included in the “Other” category of the Company’s segment reconciliation. Refer to Note 16, “Segment Reporting,” for further details

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SUMMARY OF ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2017

Accounting Policies [Abstract]

SUMMARY OF ACCOUNTING POLICIES

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

A summary of significant accounting policies used in preparing the Company’s financial statements, including a summary of recent accounting pronouncements that may affect its financial statements in the future, follows:

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and judgments are revised periodically as required. Actual results could differ from those estimates. Significant estimates include allowances for billing adjustments and doubtful accounts, the recoverability of long-lived assets and goodwill, income taxes, income tax valuation allowance, uncertain tax liabilities, the value of ordinary shares issued in asset acquisitions, business combinations or underlying the Company’s ordinary share options, and estimates of likely outcomes related to certain contingent liabilities.

The Company evaluates its estimates on an ongoing basis. The Company's estimates and assumptions are based on factors such as historical experience, trends within the Company and the telecommunications industry, general economic conditions and on various other assumptions that it believes to be reasonable under the circumstances. The results of such assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily available. Actual results may differ from the Company's estimates and assumptions as a result of varying market and economic conditions, and may result in lower revenues and net income.

Fair Value

The Company accounts for financial instruments in accordance with ASC 820, "Fair Value Measurements and Disclosures", which provides a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s judgements about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Valuation based on inputs that are unobservable and significant to the overall fair value measurement.

When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. Fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or the Company) will not be fulfilled. For the Company's financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. The Company’s assets and liabilities measured on a recurring basis at fair value may include marketable securities and time deposits. As of June 30, 2017 and December 31, 2016, all of them were Level 1 instruments. The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses are expected to approximate fair value because of their immediate availability, near term maturities or potential interest payments at settlement.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity at acquisition of three months or less to be cash equivalents.

Investments

Investments consist of interest bearing time deposits with maturity dates of greater than 90 days totaling $369 thousand and $447 thousand at June 30, 2017 and December 31, 2016, respectively.  The value of time deposits at June 30, 2017 and December 31, 2016 was determined based on face value, which approximates fair value and is a Level 1 input. There was no realized gain or loss on investments for the three and six months ended June 30, 2017 and 2016.

Allowance for Doubtful Accounts and Billing Adjustments

The Company maintains an allowance for doubtful accounts and billing adjustments based on the expected collectability of its accounts receivables. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance includes estimates of billing adjustments, which are negotiated with other telecommunications carriers and are common in the telecommunications industry.

Certain Risks and Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and accounts receivable. Cash equivalents generally consist of money market instruments.

The Company places its cash and cash equivalents in high quality financial institutions and management believes that the Company is not exposed to any significant risk on its cash accounts. The Company maintains accounts with various banks and brokerage organizations and constantly monitors the creditworthiness of these institutions. Cash accounts at each U.S. bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 thousand in the aggregate and may exceed federally insured limits. Cash accounts at Israeli or Polish banks are not insured. The Company has never experienced any losses related to these balances. At June 30, 2017, the Company had cash and cash equivalents totaling $47.0 million, which included (i) $46.4 million in U.S. financial institutions, and (ii) $0.6 million in foreign financial institutions.

The Company’s non-interest bearing cash balances in U.S. banks included $1.6 million in one individual financial institution which was fully insured. A total of $0.2 million, primarily held in another financial institution, exceeded insurance limits at June 30, 2017. The Company had money market accounts with financial institutions with balances totaling approximately $44.4 million at June 30, 2017.

For the Core Consumer segment, no telecommunication carrier accounted for more than 10% of the segment’s gross accounts receivable at June 30, 2017 and December 31, 2016. One U.S. retail customer accounted for approximately 11% of the segment’s gross accounts receivable at June 30, 2017 and three retail customers accounted for approximately 34% of the segment’s gross accounts receivable at December 31, 2016. For the three and six months ended June 30, 2017 and 2016, no telecommunications carrier or retailer accounted for more than 10% of the segment’s total operating revenues.

For the Enterprise segment, two U.S. retail customers accounted for approximately 37% of gross accounts receivable at June 30, 2017. No customer accounted for more than 10% of gross accounts receivable at December 31, 2016.  For the three months ended June 30, 2017 and 2016, two customers accounted for approximately 34% and 28% of the segment’s total operating revenues, respectively. For the six months ended June 30, 2017 and 2016, two customers accounted for approximately 32% and 28% of the segment’s total operating revenues, respectively.

For the SMB segment, accounts receivable were not significant at December 31, 2016. The segment’s operating revenues were not significant for the three and six months ended June 30, 2016 or the three months ended March 31, 2017.

Inventories

Inventories are stated at the lower of cost or market, with cost primarily determined using the first-in first-out cost method. Inventory is written off at the point it is determined to be obsolete.

Receivable from Earnout Escrow

The 2016 acquisition of Broadsmart, described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, included a contingent earnout payment of $2.0 million in cash, if the acquired assets generated 2016 revenues of at least $15.6 million. The $2.0 million was paid into escrow at the time of closing. Revenues for the year ended December 31, 2016 did not reach the target and the Company has requested return of the funds, which are recorded on the accompanying unaudited condensed consolidated balance sheets as a receivable from earnout escrow.

Property, Equipment and Depreciation Expense

Property and equipment are accounted for under ASC 360, “Property, Plant and Equipment” and consist primarily of servers, computer hardware, furniture, and leasehold improvements. Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to fifteen years. Leasehold improvements are depreciated over the shorter of the term of the lease or useful life of the assets. The cost of substantial improvements is capitalized while the cost of maintenance and repairs are charged to operating expenses as incurred.  Refer to Note 6, “Property and Equipment” for further details.

The Company reviews property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Property and equipment to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management believes there was no impairment of the Company’s property or equipment at June 30, 2017.

The Company’s hardware consists of routers, gateways and servers that enable the Company’s telephony services. Some of these assets may be subject to technological risks and rapid market changes due to the introduction of new technology, products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives and the carrying value of these assets. Changes in estimated useful lives are accounted for on a prospective basis starting with the period in which the change in estimate is made in accordance with ASC 250-10, “Accounting Changes and Error.”

Intangible Assets

Identifiable intangible assets are stated at cost and accounted based on whether the useful life of the asset is definite or indefinite. Identified intangible assets with definite useful lives are amortized using the accelerated and straight-line methods over their estimated useful lives, which range from one to seventeen years. Intangible assets with indefinite lives are not amortized to operations, but instead are reviewed for impairment at least annually, or more frequently if there is an indicator of impairment.

The Company reviews definite lived intangible assets subject to amortization for possible impairment using a three-step approach.  Under the first step, management determines whether an indicator of impairment is present (a “Triggering Event”). If a Triggering Event has occurred, the second step is to test for recoverability based on a comparison of the asset’s carrying amount with the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, the third step is to recognize an impairment loss for the excess of the asset’s carrying amount over its fair value. Intangible assets subject to amortization to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

The Company recognized impairment charges of $16.6 million on intangible assets during the six months ended June 30, 2017. There were no impairment charges recognized on intangible assets during the six months ended June 30, 2016. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 6, “Intangible Assets” for further details.

The costs of developing the Company’s intellectual property rights, intellectual property right applications and technology are charged to research and development expense as incurred.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination. Goodwill is not amortized to operations, but instead is reviewed for impairment at least annually, or more frequently if there is an indicator of impairment. Indicators include, but are not limited to: sustained operating losses or a trend of poor operating performance and a decrease in the Company’s market capitalization below its book value.

The Company’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairment charges in the future.

With the acquisition of Broadsmart and the founding of SMB in 2016, management began evaluating each of these new business lines separately and has allocated goodwill between the three reporting units that correspond to the reportable segments – “Core Consumer,” “Enterprise” and “SMB”. Refer to Note 7, “Goodwill” and Note 16, “Segment Reporting” for further details.

The Company may utilize a qualitative assessment to determine if it is "more-likely-than-not" that the fair value of the reporting unit is less than its carrying value. If so, an impairment test must be performed. If not, no further testing is required and the Company documents the relevant qualitative factors that support its fair value. Qualitative factors may include, but are not limited to: macroeconomic conditions, industry and market considerations, cost factors that may have a negative effect on earnings, overall financial performance, and other relevant entity-specific events.

In prior years, the Company used the two-step goodwill impairment test.  In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other” which eliminated step two of the goodwill impairment test. The Company adopted ASU 2017-04 on a prospective basis in the first quarter of 2017.

The Company recognized impairment charges of $14.9 million on goodwill for the Enterprise reporting unit, the full balance for that unit, during the six months ended June 30, 2017. There was no impairment of goodwill during the six months ended June 30, 2016. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 7, “Goodwill” for further details.

Deferred Revenues

Deferred revenues for the Core Consumer segment consist primarily of billings and payments for magicJack devices and access rights renewals received in advance of revenue recognition. The Company bills and collects in advance for magicJack devices, which include an initial access right period, and access right renewals.  The Company recognizes revenue from device sales and access right renewals ratably over the access right period, as described above.

For the Enterprise segment, deferred revenues consist of UCaaS hardware or equipment purchased but not yet delivered. The Company recognizes revenue from UCaaS hardware or equipment sales in the period they are delivered and put into service.

Deferred revenues to be recognized over the next twelve months are classified as current on the consolidated balance sheets, with the remainder classified as non-current.

Net Revenues

Net revenues consists of revenue from sales of magicJack devices to retailers, wholesalers or directly to customers, access right renewal fees, fees charged for shipping magicJack devices, usage of domestic and international prepaid minutes, access charges to other carriers, recurring sales of the Company’s hosted UCaaS voice services, non-recurring sales of equipment related to its UCaaS services and other miscellaneous charges. The Company typically enters into multi-year agreements, typically with durations of three to five years, to provide the hosted voice and other services. The Company earns revenue from the sale of the hardware and network equipment necessary to operate its UCaaS services directly to its customers. All revenue is recorded net of sales returns and allowances.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 605, "Revenue Recognition", which provides authoritative guidance on revenue recognition. For arrangements that include more than one product or service (deliverables), the Company applies Section 25 of ASC 605, “Multiple-Element Arrangements”. ASC 605-25 establishes criteria for separating deliverables into different units of accounting and allocating consideration to those units of accounting.  The Company is transitioning to ASC 606, “Revenue from Contracts with Customers”, which will be implemented in 2018.

Core Consumer Segment

magicJack Devices

 magicJack devices include an initial access right, which qualify as multiple deliverables per ASC 605-25.  Since the device and initial access right are interdependent and not sold separately, they are accounted for as a combined unit of accounting. Direct sales of devices include shipping charges and 30 days to return the device and cancel the service.  For retail sales of devices, there is a delay between shipment to the retailer and the ultimate sale to a customer (end-user). Based on sales and inventory data provided by retail partners, the Company’s estimate of the delay was 30 days and 90 days for the three and six months ended June 30, 2017 and 2016, respectively. The Company defers revenue recognition on direct sales for the 30 day return period and on retail sales for the delay period, after which the Company recognizes the revenue from device sales ratably over the remaining initial access right period.

Access Right Renewals and Mobile Apps

Customers may renew access rights for periods ranging from one month to five years. The revenue associated with access right renewals is deferred and recognized ratably over the extended access right period. Revenue from the sale of mobile apps is recognized ratably over the access right period.

Other magicJack-Related Products

The Company offers customers other optional products related to their magicJack devices and services, such as insurance, custom or vanity phone numbers, Canadian phone numbers, the ability to either change their existing phone numbers or port them to a magicJack device, and battery powerbanks for mobile devices. These revenues are recognized at the time of sale, with the exception of sales of the battery powerbank which are recognized when shipped.

Prepaid Minutes and Access and Wholesale Charges

The Company generates revenues from the sales of prepaid international minutes to customers, fees for origination of calls to 800-numbers, and access fees charged to other telecommunication carriers on a per-minute basis for Interexchange Carriers (“IXC”) calls terminated on the Company’s servers. Revenues from access fee charges to other telecommunication carriers are recorded based on rates set forth in the respective state and federal tariffs or negotiated contract rates, less a provision for billing adjustments. Revenues from prepaid minutes and access and wholesale charges are recognized as minutes are used.

Sales Return Policy

The Company offers some of its direct sales customers a 30-day free trial before they have to pay for their magicJack device. The Company does not recognize revenue until the 30-day trial period has expired and a customer’s credit card has been charged.

Returns from retailers are accepted on an authorized basis for devices deemed defective. The Company may offer certain retailers the limited right to return any unsold merchandise from their initial stocking orders. The Company also accepts returns of battery powerbanks for mobile devices within 30 days of sale. The Company estimates potential returns under these arrangements at point of sale and re-estimates potential returns on a quarterly basis. For the three and six months ended June 30, 2017 and 2016, the Company’s estimates of returns and actual returns from initial stocking orders have not been materially different.

Enterprise Segment

UCaaS services and equipment sales related to the Broadsmart subsidiary qualify as multiple deliverables per ASC 605-25.  Since the equipment and services are sold separately and can be used with other products and services, they are accounted for as separate units of accounting. The Company recognizes revenues from sales of its hosted services in the period the services are provided over the term of the respective customer agreements. Customers are billed monthly in advance for these recurring services and in arrears for one time service charges and other certain usage charges.  Revenues from sales of hardware and network equipment are recognized in the period that the equipment is delivered. Revenues from the sale of equipment purchased but not yet delivered are deferred and recognized in the period that the hardware or equipment is delivered and put into service.

SMB Segment

The SMB segment provided phone equipment and services that were interdependent and not sold separately. As such they were accounted for as a combined unit of accounting under ASC 605-25.  Some agreements included a refund period or a promotion for free introductory service.  Revenue recognition was deferred for either period, after which the Company recognized the revenue for the combined unit ratably over the remaining service period.  Revenues from this segment were not significant for the three and six months ended June 30, 2016.  The SMB segment did not generate significant revenue for the three months ended March 31, 2017.  During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment. Accordingly, this segment will not show activity for periods after March 31, 2017.

Cost of Revenues

Core Consumer Segment

Cost of revenues for the Core Consumer segment includes direct costs of operation of the Company’s servers, which are expensed as incurred. These costs include the Company’s internal operating costs, depreciation and amortization expense, access and interconnection charges to terminate domestic and international telephone calls on the public switched telephone network and related taxes. Direct costs also include regulatory costs, server maintenance, and costs to co-locate the Company’s equipment in other telephone companies’ facilities. Direct costs of producing magicJack devices are deferred on shipment and charged to cost of sales ratably over the initial access right period. Deferred costs are included in current assets in the Company’s consolidated balance sheets.

Costs incurred for shipping and handling and credit card charges are included in cost of revenues and are expensed as incurred. Costs for shipping and handling and credit card charges were $0.8 million for the three months ended June 30, 2017 and 2016, $1.7 million and $1.8 million for the six months ended June 30, 2017 and 2016, respectively. Starting in the second quarter of 2017, these amounts include SMB.

Enterprise Segment

Cost of revenues related to the Company’s UCaaS services include direct costs of providing the services, which are expensed as incurred. These costs include charges for access to the public switched telephone network, internet service for its customers, maintenance costs for its software, commissions, credit card charges, contract labor for installation and depreciation and amortization. The Company also incurs costs for hardware and equipment sold to customers, along with related delivery costs, which are recognized in the period they are delivered and put into service.

SMB Segment

Costs of revenue for the SMB segment included direct costs of providing the services, which were expensed as incurred, and costs for phone equipment, which were recognized ratably over the service period.  Costs of revenue from this segment were not significant for the three and six months ended June 30, 2016. The SMB segment did not incur significant costs of revenue for the three months ended March 31, 2017.

Marketing Expenses

Marketing expenses consist primarily of advertising media buys for television commercials, internet and print advertising, marketing related personnel costs and other marketing projects including sponsorships. Marketing costs are expensed when incurred. A break-down of marketing expense by category is as follows (in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Advertising media buys	$	664	$	751	$	1,919	$	1,416
Marketing personnel related		412		199		1,221		387
Other marketing projects		1,044		808		1,387		1,176
Total marketing expenses	$	2,120	$	1,758	$	4,527	$	2,979

Research and Development Expenses

The Company’s research and development activities consist primarily of the design and development of its proprietary software used in the magicJack devices, mobile apps and servers, as well as the development of new products and applications for use in its VoIP service offerings. The Company accounts for research and development costs in accordance with applicable accounting pronouncements. These pronouncements specify that costs incurred internally in researching and developing a product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all costs should be capitalized until the product is available for general release to customers. The Company has determined that technological feasibility for its products is reached after all high-risk development issues have been resolved through internal and customer base testing. Generally, new products offered to customers and improvements to the Company’s servers are placed in service on attainment of technological feasibility. The Company has not capitalized any of its research and development activities and related costs.

Share-based Compensation

Share-based compensation generally consists of option grants or ordinary share and restricted stock units awards to directors, officers, employees or consultants. We account for share-based compensation in accordance with ASC 718, "Compensation - Stock Compensation", which requires companies to estimate the fair value of equity-based payment awards on the date of grant based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period. Refer to Note 12, “Share-Based Compensation” for further details.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates. Any changes in enacted tax rates or tax laws are included in the provision for income taxes in the period of enactment. The Company’s net deferred tax assets consist primarily of foreign net operating loss carry-forwards, timing differences between recognition of income for book and tax purposes, and the tax benefit related to the impairment of intangible assets, including goodwill, in the Enterprise segment. The Company records a valuation allowance to reduce the net deferred tax assets to the amount that it estimates is more-likely-than-not to be realized. The Company periodically reviews the composition of its deferred tax assets and related valuation allowances and will make adjustments if available evidence indicates that it is more likely than not a change in the carrying amounts is required. The Company increased the valuation allowance by $15 thousand and $30 thousand during the three and six months ended June 30, 2017, respectively. The Company decreased the valuation allowance by $0.3 million and $0.6 million during the three and six months ended June 30, 2016, respectively.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions that are not more likely than not, no tax benefit has been recognized in the financial statements. The Company revised its liability for uncertain tax positions by an increase of $0.4 million and $1.8 million in the three and six months ended June 30, 2017, respectively, due primarily to an increase in uncertain tax positions related to various state issues and the revaluation impact of certain Israeli uncertain tax positions.  The Company revised its liability for uncertain tax positions by an increase of $1.2 million in the three and six months ended June 30, 2016, due primarily to an increase in uncertain tax positions related to state taxes and the revaluation impact of certain Israeli uncertain tax positions.

The Company records its income tax expense for interim financial statements by using an estimated annual effective income tax rate based on its expected annual results after consideration of permanent nontaxable items. The tax benefits of net operating loss carry-forwards expected to be realized through 2017 and changes in other deferred tax assets and liabilities are recognized during interim periods based on an annual forecast as of the interim reporting date. At June 30, 2017, the estimated annual effective income tax rate is expected to approximate 22.4%, excluding discrete tax items, which includes federal, foreign, state and local taxes. This rate may fluctuate due to changes in jurisdictional income and to the timing of other discrete period transactions during the remainder of the year.

Comprehensive Income

Comprehensive income attributable to common shareholders, as defined, includes all changes in equity (net assets) during a period from non-owner sources. There were no items of comprehensive income in the six months ended June 30, 2017 and 2016.

Earnings (Loss) per Share Attributable to Common Shareholders

Net income or loss per share attributable to the Company’s common shareholders – basic, is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during each period. Net income or loss per share attributable to the Company’s common shareholders – diluted, is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Potential common shares consist of shares issuable upon the exercise or settlement of options to purchase common shares or restricted stock units.

Business Combinations

The Company accounts for business combinations under ASC 805, “Business Combinations” using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period and final determination of the values of assets acquired or liabilities assumed, any subsequent adjustments are recorded to the consolidated statements of operations. The Company includes the results of all acquisitions in its Consolidated Financial Statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expense.

Acquisition-related integration costs also include expenses directly related to integrating and reorganizing acquired businesses, employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in general and administrative expense.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which is the new ASC 606. The standard requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. On July 9, 2015, the FASB deferred the effective dates of the standard by one year. As a result, the standard will be effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted, but cannot precede the original effective date (annual and interim reporting periods beginning after December 15, 2016). The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period presented. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” to provide clarification regarding the application of the principal-versus-agent guidance. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” to clarify the guidance for identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB also issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides narrow scope improvements and technical expedients on assessing collectibility, presentation of sales taxes, evaluating contract modifications and completed contracts at transition and the disclosure requirement for the effect of the accounting change for the period of adoption. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606” which made minor corrections and improvements to certain narrow aspects of the guidance. The Company has internally performed a preliminary review of the new guidance and has engaged consultants to document the appropriate revenue recognition for its various products and services and assist in the implementation of any required changes.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO"). The Company adopted ASU 2015-11 on a prospective basis in the first quarter of 2017.  Prior periods were not retrospectively adjusted.

In February 2016, the FASB issued ASU 2016-02, “Leases”. ASU 2016-02 requires that long-term lease arrangements be recognized on the balance sheet. The standard is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 changed the accounting for certain aspects of stock options and other share-based compensation. This accounting standard requires companies to recognize excess tax benefits or expenses related to the vesting or settlement of employee share-based awards (i.e., the difference between the actual tax benefit realized and the tax benefit initially recognized for financial reporting purposes) as income tax benefits or expenses in the quarterly Financial Statements. The standard also requires companies to record a windfall tax benefit when it arises, subject to normal valuation allowance considerations, instead of delaying recognition until the benefit reduces current taxes payable. The Company adopted ASU 2016-09 on a prospective basis in the first quarter of 2017. For the six months ended June 30, 2017, this adoption had no tax impact to the Company.  The Company will continue to monitor this for each reporting period going forward.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 reduces the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The ASU should be applied retrospectively to all periods presented. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other than Inventory”. ASU 2016-16 requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The ASU should be applied retrospectively as an adjustment to retained earnings. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other”.  ASU 2017-04 eliminates step two of the goodwill impairment test. The standard is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted.  The Company early adopted ASU 2017-04 on a prospective basis in the first quarter of 2017. Prior periods were not retrospectively adjusted.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification Accounting”. ASU 2017-09 provides guidance on determining which changes to share-based awards require modification accounting under ASC 718. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

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IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL

6 Months Ended

Jun. 30, 2017

Impairment Of Intangible Assets Including Goodwill

SUMMARY OF IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL

NOTE 3 – IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL

As part of the Company’s quarterly impairment reviews for intangible assets with indefinite lives, including goodwill, management determined that there were no impairment indicators as of June 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.

As was previously disclosed in the Company’s Form 10-K filed on March 16, 2017, the Broadsmart business which comprises the Enterprise segment was underperforming and steps were being taken to improve operating results including the February 2017 hiring of a new Chief Operating Officer for the segment and the hiring of additional sales and marketing personnel dedicated to obtaining new business.  The new Chief Operating Officer for the Enterprise segment and the new Executive Management team recently completed a comprehensive review of the Enterprise segment’s business prospects and through this process revised the projections for its operating results downward.  Additionally, Broadsmart received notification in early April 2017 that a major customer would not be renewing its contract and management anticipates the loss of another one of the Enterprise segment’s significant customers.  Combined, these customers accounted for approximately 29% of the Enterprise segment’s revenue in 2016.  Management considered the revised projections and customer losses to be indicators of potential impairment, and accordingly performed impairment testing of its long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017 utilizing its revised projections for Broadsmart.

Based on the impairment indicators as of March 31, 2017 discussed above, the Company engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill as of March 31, 2017. The valuation estimated the fair value of Broadsmart’s identified intangible assets not subject to amortization based on the relief from royalty method, which requires an estimate of a reasonable royalty rate, identification of relevant projected revenues and expenses, and selection of an appropriate discount rate. The Company recorded an impairment charge of $0.9 million for the carrying value in excess of the fair value.

For long-lived assets, including definite-lived intangible assets subject to amortization, management totaled the undiscounted cash flows expected to result from the use of these assets and their eventual disposition and noted that the sum did not exceed the carrying amount of the assets, indicating further impairment testing was necessary for these assets as of March 31, 2017. The estimated fair value of definite-lived intangible assets subject to amortization as of March 31, 2017, was based on discounted future cash flows.  The Company recorded impairment losses of $15.7 million for the carrying value in excess of the fair value.

Based on a discounted future cash-flows approach, the third party valuation estimated the fair value of the Enterprise reporting unit to be $17.9 million.  Recognition of the goodwill impairment resulted in a tax benefit which was recorded as a deferred tax asset.  Since the deferred tax asset increases the carrying value of the reporting unit, it would result in an additional impairment. The accounting guidance requires an entity to calculate the impairment charge and the deferred tax effect using a simultaneous equation method, which effectively grosses up the goodwill impairment charge to account for the related deferred tax benefit so that the resulting carrying value does not exceed the calculated fair value. The simultaneous equation calculation resulted in an impairment charge that exceeded the carrying value of the goodwill. Since the guidance limits goodwill impairments to the carrying value of goodwill, the Company recognized an impairment loss of $14.9 million, the full carrying value of goodwill.

In total, impairment losses of $31.5 million were recognized in operating expenses of the Enterprise segment for the first quarter ended March 31, 2017.  The impaired assets were (in thousands):

	March 31, 2017
	Carrying Amount		Fair Value		Impairment
Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
Goodwill		14,881		-		14,881
		37,127		5,600		31,527

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INVENTORIES

6 Months Ended

Jun. 30, 2017

Inventory Disclosure [Abstract]

INVENTORIES

NOTE 4 – INVENTORIES

Raw materials represent components used in the manufacturing of the magicJack devices, held by the Company or by a Chinese manufacturer on consignment. Finished goods are comprised primarily of magicJack devices on hand or in transit to the Company’s distribution center in the United States and customer equipment, as well as hardware and equipment pending delivery or sale to Enterprise segment customers. Inventories were comprised of the following (in thousands):

	June 30, 2017		December 31, 2016
Raw materials	$	669	$	1,455
Finished goods		1,977		2,986
Total	$	2,646	$	4,441

The Company wrote-off obsolete inventory of approximately $2 thousand and $3 thousand during the three months ended June 30, 2017 and June 30, 2016, respectively, and $403 thousand and $80 thousand during the six months ended June 30, 2017 and June 30, 2016, respectively. Inventory write-offs are reflected in cost of revenues in the unaudited condensed consolidated statements of operations.

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PROPERTY AND EQUIPMENT

6 Months Ended

Jun. 30, 2017

Property, Plant and Equipment [Abstract]

PROPERTY AND EQUIPMENT

NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

	Estimated
	Useful Lives		June 30,			December 31,
	(in years)		2017			2016
Switches		3 - 15	$	9,721		$	9,699
Computers		3		2,629			2,866
Furniture		5 - 7		281			269
Leasehold-improvements		*		848			893
Accumulated depreciation				(10,306	)		(9,922	)
Total			$	3,173		$	3,805

* The estimated useful life for leasehold improvements is the shorter of the term of the lease or life of the asset.

Depreciation expense for the three months ended June 30, 2017 and 2016 was $0.3 million. Depreciation expense for the six months ended June 30, 2017 and 2016 was $0.7 million and $0.5 million, respectively.

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INTANGIBLE ASSETS

6 Months Ended

Jun. 30, 2017

Intangible Assets, Net (Excluding Goodwill) [Abstract]

INTANGIBLE ASSETS

NOTE 6 – INTANGIBLE ASSETS

Identified intangible assets consisted of the following (in thousands):

		June 30, 2017								December 31, 2016
	Estimated	Gross								Gross
	Useful Lives	Carrying		Accumulated					Weighted-	Carrying		Accumulated					Weighted-
	(in years)	Amount		Amortization			Net		Average Life	Amount		Amortization			Net		Average Life
Technology	3 - 17	$	3,110	$	(2,914	)	$	196	4.76	$	3,110	$	(2,854	)	$	256	4.71
Intellectual property rights	3 - 17		14,162		(11,377	)	$	2,785	4.71		14,162		(10,794	)		3,368	4.87
Covenants not-to-compete and not-to-sue	2 - 5		2,185		(2,120	)	$	65	1.92		2,185		(2,107	)		78	3.17
Tradename	3 - 6		131		(131	)	$	-	0.00		131		(131	)		-	0.00
Customer relationships	5 - 10		4,900		(633	)	$	4,267	8.71		22,600		(2,249	)		20,351	9.21
Backlog	1		800		(800	)	$	-	0.00		800		(800	)		-	0.00
Software license	10		2,296		(211	)	$	2,085	1.95		1,207		(80	)		1,127	8.00
Process know how	5		400		(16	)	$	384	5.50		1,100		(87	)		1,013	6.08
Other			1		(1	)	$	-	0.00		-		-			-	0.00
Intangible assets subject to amortization			27,985		(18,203	)		9,782			45,295		(19,102	)		26,193
Tradename			1,700		-		$	1,700	N/A		2,600		-			2,600	N/A
Domain names			51		-		$	51	N/A		61		-			61	N/A
Total intangible assets		$	29,736	$	(18,203	)	$	11,533		$	47,956	$	(19,102	)	$	28,854

Amortization expense for the three months ended June 30, 2017 and 2016 was $0.6 million and $1.1 million, respectively. Amortization expense for the six months ended June 30, 2017 and 2016 was $1.8 million and $1.7 million, respectively.

As part of the Company’s quarterly impairment reviews for intangible assets with indefinite lives, including goodwill, management determined that there were no impairment indicators as of June 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.  Due tothe knowable impairment indicators discussed in Note 3, “Impairment of Intangible Assets, Including Goodwill”, the Company engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017. Based on the results of the valuation, impairment losses of $16.6 million were recognized on the following intangible assets in operating expenses under the Enterprise segment in the unaudited condensed consolidated statements of operations for the quarter ended March 31, 2017:

	March 31, 2017
	Carrying Amount		Fair Value		Impairment
Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
	$	22,246	$	5,600	$	16,646

No impairment losses were recognized on intangible assets for the six months ended June 30, 2016.

Based on the carrying value of identified intangible assets recorded at June 30, 2017, the amortization expense for the future fiscal years is expected to be as follows (in thousands):

Fiscal Year	Amortization Expense
Six months ending December 31, 2017	$	1,343
2018		2,231
2019		1,619
2020		1,079
2021		766
Thereafter		2,744
	$	9,782

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GOODWILL

6 Months Ended

Jun. 30, 2017

Goodwill Abstract

GOODWILL

NOTE 7 – GOODWILL

The changes in the carrying amount of goodwill for the six months ended June 30, 2017, were as follows (in thousands):

	Six Months Ended June 30, 2017
	Core Consumer		Enterprise			SMB		Other		Consolidated
Balance, beginning of period	$	32,304	$	14,881		$	-	$	-	$	47,185
2017 impairment		-		(14,881	)		-		-		(14,881	)
Balance, end of period	$	32,304	$	-		$	-	$	-	$	32,304

As part of the Company’s quarterly impairment reviews for intangible assets with indefinite lives, including goodwill, management determined that there were no impairment indicators as of June 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.  Due tothe knowable impairment indicators discussed in Note 3, “Impairment of Intangible Assets, Including Goodwill”, the Company engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017.

Based on a discounted future cash-flows approach, the third party valuation estimated the fair value of the Enterprise reporting unit to be $17.9 million.  Recognition of the goodwill impairment resulted in a tax benefit which was recorded as a deferred tax asset.  Since the deferred tax asset increases the carrying value of the reporting unit, it would result in an additional impairment. The accounting guidance requires an entity to calculate the impairment charge and the deferred tax effect using a simultaneous equations method, which effectively grosses up the goodwill impairment charge to account for the related deferred tax benefit so that the resulting carrying value does not exceed the calculated fair value.  The resulting impairment is limited to the carrying value of goodwill.  In the valuation performed for the Company the impairment calculated using the simultaneous equation method resulted in an impairment charge that exceeded the carrying value of the goodwill.  Accordingly, an impairment loss of $14.9 million on goodwill was recognized in operating expenses under the Enterprise segment in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2017.

The application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgment, and the use of significant estimates and assumptions, is required to estimate the fair value of reporting units, including estimating future cash flows, future market conditions, and determining the appropriate discount rates, growth rates, and operating margins, among others.

The discounted cash flow analyses factor in assumptions on revenue and expense growth rates. These estimates are based upon the Company’s historical experience, best estimates of future activity, and a cost structure necessary to achieve the related revenues.

Additionally, these discounted cash flow analyses factor in expected amounts of working capital and weighted average cost of capital. The Company believes the assumptions are reasonable. However, there can be no assurance that its estimates and assumptions made for purposes of the goodwill impairment testing, at the annual Measurement Date, will prove to be accurate predictions of the future. Changes in these estimates and assumptions as previously noted, could result in the need to conduct additional goodwill impairment tests in the future and could ultimately result in an impairment charge. In addition, a change in the Company’s reporting units could materially affect the determination of the fair value for each reporting unit, which could trigger impairment in the future. The Company will continue to review its results against forecasts and assess its assumptions to ensure they continue to be appropriate.

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DEFERRED COSTS AND REVENUES

6 Months Ended

Jun. 30, 2017

DEFERRED COSTS AND REVENUES [Abstract]

DEFERRED COSTS AND REVENUES

NOTE 8 – DEFERRED COSTS AND REVENUES

All deferred costs and deferred revenues to be recognized over the next twelve months are classified as current on the Company’s unaudited condensed consolidated balance sheets. The remaining deferred revenue amounts are classified as non-current on the unaudited condensed consolidated balance sheets.

Deferred revenues were comprised of the following at June 30, 2017 and December 31, 2016 (in thousands):

	June 30, 2017		December 31, 2016
magicJack devices	$	6,313	$	7,962
Access right renewals		35,187		36,515
Mobile apps		772		808
Prepaid minutes		2,426		2,851
Other		188		371
Deferred revenue, current		44,886		48,507
Deferred revenue, non-current*		41,510		44,201
Total deferred revenue	$	86,396	$	92,708

* Deferred revenue, non-current, is comprised entirely of deferred revenues originating from the sale of access right renewals.

Costs necessary to fulfill the Company’s obligations to provide VoIP telephone service to new and existing customers who have purchased magicJack devices, mobile apps or renewed access rights are expensed as incurred. For the Core Consumer segment, such costs were approximately $2.4 million and $3.2 million for the three months ended June 30, 2017 and 2016, respectively, and $5.1 million and $6.7 million for the six months ended June 30, 2017 and 2016, respectively. For the Enterprise segment, such costs were approximately $0.8 million for the three months ended June 30, 2017 and 2016, and $1.3 million and $1.0 million for the six months ended June 30, 2017 and 2016, respectively. Costs related to providing broadband telephone service to SMB segment customers were not significant for the three and six months ended June 30, 2016 and the three months ended March 31, 2017.

Deferred revenues as of June 30, 2017 are expected to be recognized in future years as follows (in thousands):

Recognition Period	Estimated Recognition of Deferred Revenues
Next 12 months	$	44,886
13-24 Months		17,489
25-36 Months		11,075
37-48 months		6,940
49-60 Months		3,318
61+ Months		2,688
	$	86,396

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OTHER LIABILITIES

6 Months Ended

Jun. 30, 2017

Other Liabilities Disclosure [Abstract]

OTHER LIABILITIES

NOTE 9 – OTHER LIABILITIES

As of June 30, 2017 and December 31, 2016, other non-current liabilities primarily consisted of provisions for uncertain tax positions of $12.1 million and $10.4 million, respectively.

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2017

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is subject to various legal proceedings and claims, including intellectual property claims, contractual and commercial disputes, employment claims, state and local tax matters and other matters which arise in the ordinary course of business. The Company vigorously defends claims made against it, and management regularly evaluates the status of legal proceedings in which the Company is involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred and to determine if accruals are appropriate. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s business, operating results, financial condition or cash flows. However, an unexpected adverse resolution of one or more of these matters could have a material adverse effect on the Company’s results of operations in a particular fiscal year or quarter.

On March 11, 2016, a purported class action lawsuit was filed against the Company, its then Chief Executive Officer, Gerald Vento, and its then Chief Financial Officer, Jose Gordo (together, "the Defendants"), in the United States District Court for the Southern District of New York. Thereafter, on August 18, 2016, the Plaintiff filed an Amended Complaint.  The Amended Complaint alleges that the Company and Mr. Gordo made false and misleading statements regarding the financial performance and guidance during the alleged class period of November 12, 2013 to March 12, 2014. The Plaintiff asserted claims that (i) the Company and Mr. Gordo violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and SEC Rule 10b-5; and (ii) that Mr. Vento and Mr. Gordo violated Section 20(a) of the Exchange Act by virtue of their control over the Company.  For himself and for the class, the Plaintiff seeks damages, attorneys' fees and costs, and equitable/injunctive relief or such other relief as the court deems proper. The Defendants answered the Amended Complaint on December 23, 2016.  On June 23, 2017, the parties agreed in principle to a mediated settlement in which the Defendants would pay $3,650,000 to settle all claims, while denying all claims and allegations against them by the Plaintiff.  The agreement is subject to certain conditions, including approval of the Company's Board of Directors and the negotiation of a definitive Stipulation of Settlement, which would then have to be approved by the Court. The Company has insurance coverage applicable to this settlement with a retention amount of $1.0 million. As of June 30, 2017, the Company has accrued $3.1 million of expense and a $2.7 million receivable related to this item, reflecting anticipated future expenditures and reimbursement from insurance coverage.

Tax Contingencies

The Company believes that it files all required tax returns and pays all required federal, state and municipal taxes (such as sales, excise, utility, and ad valorem taxes), fees and surcharges. The Company is the subject of inquiries and examinations by various states and municipalities in the normal course of business. In accordance with generally accepted accounting principles, the Company makes a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company vigorously defends its rights and tax positions. However, if a government entity were to prevail in any matter, it could have a material adverse effect on the Company’s financial condition, results of operation and cash flows. In addition, it is at least reasonably possible that a potential loss may exist for tax contingencies in addition to the provisions taken by the Company. For those potential additional tax contingencies which can be reasonably estimated, that additional potential liability ranges from $0 to $2.5 million dollars.

The Company is currently under examination for potential state tax liabilities. On June 8, 2017, the Company offered to settle the examinations for payment of $0.6 million and the agreement to remit certain taxes on a prospective basis.

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TREASURY STOCK

6 Months Ended

Jun. 30, 2017

Treasury Stock Abstract

TREASURY STOCK

NOTE 11 –TREASURY STOCK

In January 2017, the Company reclassified 16,666 shares previously issued out of treasury stock as they had been issued as new ordinary shares. In April 2017, the Company issued 6,996 of its ordinary shares held as treasury shares with a cost of $86 thousand, or $12.32 per share, to Board members as a result of restricted stock units vesting. In May 2017, the Company issued 76,211 of its ordinary shares held as treasury shares with a cost of $939 thousand, or $12.32 per share, to an executive officer as a result of restricted stock units vesting. In May 2017, the Company purchased 20,844 of its ordinary shares at $6.50 per share, for an aggregate purchase price of approximately $135 thousand, in settlement of the withholding tax liability on the vesting of those restricted stock units.

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SHARE-BASED COMPENSATION

6 Months Ended

Jun. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

SHARE-BASED COMPENSATION

NOTE 12 – SHARE-BASED COMPENSATION

The Company has granted ordinary share options, issued restricted stock units and ordinary shares as an alternative or supplement to the compensation of its executives, employees, directors and outside consultants. The Company’s share-based compensation program is a long-term retention program intended to attract and reward talented executives, employees and outside consultants, and align their interests with stockholders. The Company is currently granting share-based awards under the magicJack VocalTec Ltd. 2013 Stock Incentive Plan and the magicJack VocalTec Ltd. 2013 Israeli Stock Incentive Plan (together, the “2013 Plans”). In July 2013, the shareholders approved the 2013 Plans at the annual general meeting of shareholders to allow grants of ordinary share options, restricted stock units and ordinary shares. In April 2014, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of June 30, 2017, the aggregate number of shares subject to awards under the 2013 Plans, as amended, was 3,600,000. In July 2017, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant to 5,600,000. Refer to Note 17, “Subsequent Events” for further details.  The Company had previously granted shares under the VocalTec amended Master Stock Plan (the “2003 Plan”) which expired in April 2013. Share-based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation expense for awards with only service conditions and a graded vesting on a straight-line basis over the requisite vesting period for the entire award.

The Company’s share-based compensation expense for ordinary share options and issued restricted stock units for the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Ordinary share options	$	230	$	822	$	613	$	1,458
Restricted stock units		337		425		690		792
	$	567	$	1,247	$	1,303	$	2,250

The detail of total share-based compensation recognized by classification on the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017			2016
Cost of revenues	$	96	$	23	$	102		$	29
Marketing		10		33		14			76
General and administrative		461		1,123		1,197			2,019
Research and development		-		68		(10	)		126
	$	567	$	1,247	$	1,303		$	2,250

The decrease in share-based compensation is due primarily to the forfeitures related to reduced headcount and awards that were fully expensed in prior periods.

Ordinary Share Options

Ordinary share options granted under the 2013 Plans have a five-year life and typically vest over a period of 36 months beginning at the date of grant. The 2013 Plans, as amended, currently allow for a maximum term of five years for awards granted. The following table provides additional information regarding ordinary share options issued, outstanding and exercisable for the year ended December 31, 2016, and six months ended June 30, 2017 (aggregate intrinsic value in thousands):

Date of Grant	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining  Contractual Term (in years)		Aggregate Intrinsic Value(1)
January 1, 2016		2,527,427		$	12.98		3.61	$	-
Granted		1,107,040		$	7.09
Exercised		(2,500	)	$	3.96
Forfeited		(34,740	)	$	8.83
Expired or cancelled		(109,168	)	$	13.57
December 31, 2016		3,488,059		$	11.13		3.11	$	-
Granted		100,000		$	6.85
Exercised		-
Forfeited(2)		(2,501,614	)	$	11.12
Expired or cancelled		-
Outstanding at June 30, 2017 (unaudited)		1,086,445		$	10.78		0.86	$	-
Vested at June 30, 2017 (unaudited)		986,445		$	11.18		0.62	$	-

(1) The aggregate intrinsic value is the amount by which the market value for the Company's common stock exceeds the weighted average exercise price of the outstanding stock options on the measurement date.

(2) In 2017, two former executive officers surrendered a total of 1,244,777 ordinary share options with a weighted average exercise price of $14.57. Additionally, 1,256,837 options with a weighted average strike price of $7.70 were forfeited by terminated executives in the SMB and Enterprise segments. The surrender of options resulted in a $2.4 million increase in tax expense during the second quarter.

Share-based compensation expense recognized for ordinary share options was approximately $0.2 million and $0.8 million for the three months ended June 30, 2017 and 2016, respectively, and $0.6 million and $1.5 million for the six months ended June 30, 2017 and 2016, respectively. No ordinary share options were exercised during the six months ended June 30, 2017. The total intrinsic value of ordinary share options exercised during the six months ended June 30, 2016 was $4 thousand. As of June 30, 2017, there was approximately $162 thousand of unrecognized share-based compensation expense related to unvested ordinary share options, which is expected to be recognized over a weighted average remaining period of 1.71 years.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company's stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company's expected stock price volatility over the term of the awards, assumed employee exercise behaviors, risk-free interest rate and expected dividends. For purposes of valuing ordinary share options, the Company used historical volatility at the date of grant. The approximate risk-free interest rate was based on the U.S. Treasury yield for comparable periods. The Company has experienced forfeitures in the past and estimates a forfeiture rate for awards issued when deemed applicable. The expected term of the ordinary share options was calculated using the simplified method in accordance with section 10-S99 of ASC 718, "Compensation - Stock Compensation".  The Company does not expect to pay dividends on its ordinary shares in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. The Company granted 100,000 ordinary share options during the six months ended June 30, 2017 with a weighted average fair value of $2.62. The Company granted 1,107,040 ordinary share options during the six months ended June 30, 2016 with a weighted average fair value of $2.75.  The grants were measured using the following assumptions:

	Six Months Ended June 30,
	2017			2016
Expected term (in years)		3.22 to 3.23			3.50
Dividend yield		0.00	%		0.00	%
Expected volatility		48.77 to 49.56	%	52.15% to 52.47		%
Risk free interest rate		1.53	%	0.95% to 1.13		%
Forfeiture rate		0.00	%		0.00	%

Restricted Stock Units

The Company may also award non-vested restricted stock units to its executives, employees, directors and outside consultants under the 2013 Plans, which may vest based on service or a combination of service and other conditions, such as market share price. The compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. Each non-vested stock unit, upon vesting, represents the right to receive one ordinary share of the Company. During the six months ended June 30, 2017 and 2016 the Company granted 80,282 and 295,305 restricted stock units, respectively, under the 2013 Plans, as amended.

The following table summarizes the Company’s restricted stock unit activity for the six months ended June 30, 2017:

				Average
	Number of			Fair Value
	Shares			at Grant Date
December 31, 2016		482,085		$	7.70
Granted		80,282		$	7.99
Vested		(83,210	)	$	12.31
Forfeited		(248,876	)	$	7.45
Non-vested at June 30, 2017		230,281		$	6.74

Share-based compensation expense recognized for restricted stock units was approximately $0.3 million and $0.4 million for the three months ended June 30, 2017 and 2016, respectively, and $0.7 million and $0.8 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was approximately $1.3 million in unrecognized share-based compensation costs related to restricted stock units. The unrecognized share-based compensation expense is expected to be recognized over a weighted average remaining period of 1.21 years.

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INCOME TAXES

6 Months Ended

Jun. 30, 2017

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 13 – INCOME TAXES

Total income tax expense (benefit) was $2.6 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively, and ($8.8) million and $5.2 million for the six months ended June 30, 2017 and 2016, respectively. The calculation of the Company’s effective income tax rate for the three and six months ended June 30, 2017 and 2016 was (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Income before income taxes	$	1,093		$	4,217		$	(33,430	)	$	8,451
Income tax expense (benefit)		2,587			1,702			(8,768	)		5,202
Effective income tax rate		236.69	%		40.36	%		26.23	%		61.55	%

The Company primarily operates in the U.S. and Israel, and the Company’s Israeli operations are subject to a statutory income tax rate of 24% in 2017 and 23% in 2018 which is lower than the Company’s U.S. federal income tax rate of 34% as of June 30, 2017.

For the three months ended June 30, 2017, the Company recorded income tax expense of $2.6 million, which is higher than the expected tax expense of $0.4 million, using the statutory income tax rate of 34% due primarily to reductions in the Company’s deferred tax assets related to the surrender of stock options by certain former executive officers and forfeiture of options totalling $2.4 million. Additionally, the effective tax rate was impacted by increases to uncertain tax positions of $0.4 million, the revaluation of our Israeli NOLs of ($0.2) million and other smaller discrete items. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations

For the six months ended June 30, 2017, the Company recorded an income tax benefit of ($8.8) million, which is lower than the expected tax benefit of ($11.4) million, using the statutory rate of 34%, due, in part, to revaluations of the Israel net operating loss carryforwards of ($1.0) million, increases to uncertain tax positions of $1.8 million, and a reduction to deferred tax assets related to surrender of stock options and option forfeitures of $2.4 million. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

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NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE

6 Months Ended

Jun. 30, 2017

(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:

NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE

NOTE 14 – NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE

Net income (loss) attributable to common shareholders per share – basic, is calculated by dividing net (loss) income attributable to the Company’s common shareholders (the “Numerator”), by the weighted average number of common shares outstanding during the period, (the “Denominator”). Net (loss) income attributable to common shareholders per share – diluted, is computed by increasing the basic denominator to include the number of common shares that would have been issued if the Company’s dilutive potential common shares had been exercised.  The Company’s potential common shares are the share-based awards (ordinary share options and restricted stock units)discussed in Note 12, “Share-Based Compensation”.

The Company calculates the diluted denominator using the treasury stock method, which assumes that all exercise proceeds are used to repurchase common shares, reducing the net number of shares to be added. Share-based awards only have a dilutive effect when the average stock price for the period exceeds their exercise price (“they are in the money”) and the entity has net income.

The following table presents the computation of basic and diluted net (loss) income per common share attributable to shareholders (in thousands, except for per share information):

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Numerator:
Net income (loss) attributable to common shareholders	$	(1,561	)	$	2,819	$	(24,662	)	$	3,553
Denominator:
Denominator for basic net income per share -
weighted average ordinary shares outstanding		16,078			15,853		16,056			15,750
Effect of dilutive share-based awards outstanding		-			17		-			157
Effect of dilutive share-based awards vested,
exercised or expired during the period		-			2		-			7
Denominator for diluted net income per share -
weighted average ordinary shares outstanding		16,078			15,872		16,056			15,914
Net income (loss) per common share attributable to
common shareholders:
Basic	$	(0.10	)	$	0.18	$	(1.54	)	$	0.23
Diluted	$	(0.10	)	$	0.18	$	(1.54	)	$	0.22
Anti-dilutive share-based awards not included above		1,317			3,812		1,317			2,812

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BROADSMART ACQUISITION

6 Months Ended

Jun. 30, 2017

Business Combinations [Abstract]

BROADSMART ACQUISITION

NOTE 15 – BROADSMART ACQUISITION

In March 2016, the Company acquired the assets of Broadsmart for approximately (i) $38.0 million in cash, (ii) 233,402 shares of the Company's ordinary shares issued from treasury stock with a fair value of $1.7 million based on closing market price per share as of the date of the acquisition, and (iii) additional contingent cash payments of (a) up to $0.2 million, if two certain individuals ($0.1 million for each) previously employed by Broadsmart do not accept the Company's employment offer, and (b) $2.0 million, if the acquired assets generated 2016 revenues of at least $15.6 million.

At the time of closing, $3.0 million of the cash consideration was paid into escrow to cover indemnification claims by the Company against the sellers. No asset or liability is included in the accompanying unaudited condensed consolidated balance sheets for this item.

Neither of the contingent payments had been made as of June 30, 2017. The $0.2 million is included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets. The $2.0 million was paid into escrow at the time of closing. Revenues for the year ended December 31, 2016 did not reach the target and the Company has requested return of the funds, which were recorded as a $2.0 million receivable from earnout escrow in the accompanying unaudited condensed consolidated balance sheets.

The acquired assets and liabilities were recorded at their estimated fair values on the balance sheet for the Enterprise segment on March 17, 2016. The results of operations of the Broadsmart business have been included in the Company’s consolidated financial statements, under the Enterprise segment, since that date. During the year ended December 31, 2016, the Company recognized an impairment loss of $0.5 million on one of the Broadsmart intangible assets.  During the first quarter ended March 31, 2017, the Company recognized impairment charges of $31.5 million on Broadsmart intangible assets, including goodwill.  The carrying value of the Broadsmart business after the impairment was $18.5 million at March 31, 2017. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets” and Note 7, “Goodwill” for further details.

On June 23, 2017 the founders of Broadsmart left the Company.  On August 4, 2017, the Company reached a  mutual agreement with the founders, and certain affiliated companies, that included release to the Company of $1.0 million of the $3.0 million held in escrow to cover indemnification claims and the $2.0 million earn-out amount.  The remaining $2.0 million will remain in escrow, pursuant to the provisions of the purchase agreement, to cover specific potential claims by the Company.  The  agreement also provides that the Company will execute an agreement to acquire certain assets of NATC for $10 thousand, subject to any required regulatory approvals. The agreement is subject to a seven day revocation period in which the founders have the right to rescind the agreement. Refer to Note 17, "Subsequent Events" for further details.

Pro Forma Financial Information

The following table presents the unaudited pro forma combined results of operations of the Company and Broadsmart for the six months ended June 30, 2016, as if the acquisition of Broadsmart had occurred on January 1, 2016. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2016.

	Six Months Ended
	June 30, 2016
Net revenues	$	51,540
Net income	$	3,658

The pro forma results are based on estimates and assumptions, which the Company believes are reasonable. The pro forma results include adjustments primarily related to amortization of acquired intangible assets, depreciation, interest expense, and transaction costs expensed during the period.

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SEGMENT REPORTING

6 Months Ended

Jun. 30, 2017

Segment Reporting [Abstract]

SEGMENT REPORTING

NOTE 16 – SEGMENT REPORTING

Reportable segments are defined under U.S. GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by a company's chief operating decision makers in deciding how to allocate resources and assess performance.

Historically, the Company has not had separate reportable segments. However, with the acquisition of Broadsmart and the founding of the SMB business during 2016, management evaluated each of these new business lines separately and determined that the Company had separate reportable segments – "Core Consumer," "Enterprise" and "SMB". These segments were organized by the products and services that are sold and the customers that are served.  During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment. Accordingly, the SMB segment will not show activity for periods after March 31, 2017.  The below table includes an "Other" segment to capture the Company's interest in a joint venture that does not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a reportable segment.  The Company measures and evaluates its reportable segments based on revenues and gross profit margins. The Company's segments and their principal activities consist of the following:

Core Consumer

This segment represents a vertically integrated group of companies, a micro-processor chip design company, an appserver and session border controller company, a wholesale provider of VoIP services, a softphone company, the developer and provider of the magicJack device, and a wholesaler of telephone service to VoIP providers and telecommunication carriers. This segment represents the historical magicJack Core Consumer business.

magicJack is the cloud communications leader that invented the magicJack device and other magicJack products and services. magicJack devices and mobile apps provide customers the ability to make and receive telephone calls in the U.S. or Canada with no additional cost.   Customers may also purchase international minutes to place telephone calls outside of the U.S. and Canada.

Enterprise

This segment includes Broadsmart, which is a provider of UCaaS hardware and connectivity for enterprise customers.

SMB

Through this segment, started during 2016, the Company provided VoIP services to small to medium sized businesses. The expenses of this restructuring included severance for the majority of the employees in the segment and future rent payments for the Alpharetta, GA office.

Other

This segment included the Company’s 60% controlling interest in a joint venture which began selling a line of high-technology residential consumer products in the fourth quarter of fiscal year 2016. On March 31, 2017, this interest was reduced to 36% and on May 31, 2017 the Company sold its remaining interest to the unrelated third party. The Company has determined that the joint venture did not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a reportable segment. As such, it was included in the “Other” segment.

Selected information for the three and six month periods ended June 30, 2017 and 2016 and as of June 30, 2017 and December 31, 2016 is presented by reportable segment below (in thousands):

	For the Three Months Ended June 30, 2017
	Previous Core Consumer			SMB		Revised Core Consumer			Enterprise		Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	19,334			-	$	19,334			3,088		(1	)		(40	)	$	22,381
Cost of revenues		6,185			-		6,185			2,000		(19	)		-			8,166
Gross profit (loss)		13,149			-		13,149			1,088		18			(40	)		14,215
Marketing		1,884			-		1,884			247		(11	)		-			2,120
General and administrative		8,966			-		8,966			755		(137	)		(40	)		9,544
Impairment of goodwill and
intangible assets		-			-		-			-		-			-			-
Research and development		1,462			-		1,462			-		-			-			1,462
Operating expenses		12,312			-		12,312			1,002		(148	)		(40	)		13,126
Operating income (loss)		837			-		837			86		166			-			1,089
Interest and dividend income		17			-		17			-		-			-			17
Other expenses, net		(13	)		-		(13	)		-		-			-			(13	)
Income (loss) before income taxes	$	841		$	-	$	841		$	86	$	166		$	-		$	1,093
Other Data:
Capital expenditures	$	1,064			-	$	1,064			10		-			-		$	1,074
Depreciation expense	$	272			-	$	272			61		(2	)		-		$	331
Amortization expense	$	380			-	$	380			183		-			-		$	563

	For the Six Months Ended June 30, 2017
	Previous Core Consumer			SMB			Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	39,764			116		$	39,880			5,771			-		(73	)	$	45,578
Cost of revenues		13,342			131			13,473			4,144			-		-			17,617
Gross profit (loss)		26,422			(15	)		26,407			1,627			-		(73	)		27,961
Marketing		2,962			1,089			4,051			476			-		-			4,527
General and administrative		19,274			1,056			20,330			2,112			-		(73	)		22,369
Impairment of goodwill and
intangible assets		-			-			-			31,527			-		-			31,527
Research and development		2,364			596			2,960			1			-		-			2,961
Operating expenses		24,600			2,741			27,341			34,116			-		(73	)		61,384
Operating income (loss)		1,822			(2,756	)		(934	)		(32,489	)		-		-			(33,423	)
Interest and dividend income		23			-			23			-			-		-			23
Other expenses, net		(30	)		-			(30	)		-			-		-			(30	)
Income (loss) before income taxes	$	1,815		$	(2,756	)	$	(941	)	$	(32,489	)	$	-	$	-		$	(33,430	)
Other Data:
Capital expenditures	$	1,094			-		$	1,094			72			-		-		$	1,166
Depreciation expense	$	537			21		$	558			107			-		-		$	665
Amortization expense	$	723			-		$	723			1,031			-		-		$	1,754

	June 30, 2017
	Previous Core Consumer		SMB		Revised Core Consumer		Enterprise		Other		Intercompany		Consolidated
Balance Sheet Data:
Goodwill	$	32,304		-	$	32,304		-		-		-	$	32,304
Total assets	$	126,986		-	$	126,986		19,723		-		-	$	146,709

	For the Three Months Ended June 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	22,361			-		$	22,361			2,967			7			(34	)	$	25,301
Cost of revenues		7,353			14			7,367			2,462			9			-			9,838
Gross profit (loss)		15,008			(14	)		14,994			505			(2	)		(34	)		15,463
Marketing		1,162			369			1,531			80			147			-			1,758
General and administrative		5,184			1,548			6,732			1,131			423			(34	)		8,252
Research and development		947			295			1,242			-			5			-			1,247
Operating expenses		7,293			2,212			9,505			1,211			575			(34	)		11,257
Operating income (loss)		7,715			(2,226	)		5,489			(706	)		(577	)		-			4,206
Interest and dividend income		(9	)		-			(9	)		-			-			-			(9	)
Other expenses, net		(2	)		-			(2	)		-			-			-			(2	)
Income (loss) before income taxes	$	7,726		$	(2,226	)	$	5,500		$	(706	)	$	(577	)	$	-		$	4,217
Other Data:
Capital expenditures	$	5			154		$	159			-			-			-		$	159
Depreciation expense	$	223			3		$	226			55			-			-		$	281
Amortization expense	$	434			-		$	434			676			-			-		$	1,110

	For the Six Months Ended June 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	45,580			-		$	45,580			3,447			7			(34	)	$	49,000
Cost of revenues		15,295			14			15,309			2,729			9			-			18,047
Gross profit (loss)		30,285			(14	)		30,271			718			(2	)		(34	)		30,953
Marketing		2,321			374			2,695			77			207			-			2,979
General and administrative		12,259			3,046			15,305			1,373			543			(34	)		17,187
Research and development		1,977			365			2,342						5			-			2,347
Operating expenses		16,557			3,785			20,342			1,450			755			(34	)		22,513
Operating income (loss)		13,728			(3,799	)		9,929			(732	)		(757	)		-			8,440
Interest and dividend income		(16	)		-			(16	)		-			-			-			(16	)
Other expenses, net		5			-			5			-			-			-			5
Income (loss) before income taxes	$	13,739		$	(3,799	)	$	9,940		$	(732	)	$	(757	)	$	-		$	8,451
Other Data:
Capital expenditures	$	5			154		$	159			-			-			-		$	159
Depreciation expense	$	462			3		$	465			64			-			-		$	529
Amortization expense	$	903			-		$	903			751			-			-		$	1,654

	December 31, 2016
	Previous Core Consumer		SMB			Restated Core Consumer		Enterprise		Other		Intercompany		Consolidated
Balance Sheet Data:
Goodwill	$	32,304		-		$	32,304		14,881		-		-	$	47,185
Total assets	$	142,870		(9,447	)	$	133,423		40,839		255		-	$	174,517

Prior year allocations have been reclassified to conform to current year presentation.

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SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2017

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 17 – SUBSEQUENT EVENTS

Under Israeli law, CEO compensation must be approved by shareholders.  The Company held a special shareholder meeting on July 31, 2017, to approve the compensation packages for Don Carlos Bell, III, the Company’s Chief Executive Officer (“CEO”),  a change in compensation payable to non-employe Directors, and amendments to the Company’s compensation policy and amendments to the 2013 Stock Incentive Plans including an  increase in the number of share based awards available for grants under the plans to 5,600,000. Shareholders approved all proposals.

On August 4, 2017, the Company reached a mutual agreement with the founders of Broadsmart, and certain affiliated companies, that will release to the Company of $1.0 million of the $3.0 million held in escrow to cover indemnification claims and the $2.0 million earn-out amount.  The remaining $2.0 million will remain in escrow, pursuant to the provisions of the purchase agreement, to cover specific potential claims by the Company.  The agreement also provided that the Company will execute an agreement to acquire certain assets of NATC for $10 thousand, subject to any required regulatory approvals. The agreement is subject to a seven day revocation period in which the founders have the right to rescind the agreement.

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SUMMARY OF ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2017

Accounting Policies [Abstract]

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and judgments are revised periodically as required. Actual results could differ from those estimates. Significant estimates include allowances for billing adjustments and doubtful accounts, the recoverability of long-lived assets and goodwill, income taxes, income tax valuation allowance, uncertain tax liabilities, the value of ordinary shares issued in asset acquisitions, business combinations or underlying the Company’s ordinary share options, and estimates of likely outcomes related to certain contingent liabilities.

The Company evaluates its estimates on an ongoing basis. The Company's estimates and assumptions are based on factors such as historical experience, trends within the Company and the telecommunications industry, general economic conditions and on various other assumptions that it believes to be reasonable under the circumstances. The results of such assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily available. Actual results may differ from the Company's estimates and assumptions as a result of varying market and economic conditions, and may result in lower revenues and net income.

Fair Value

Fair Value

The Company accounts for financial instruments in accordance with ASC 820, "Fair Value Measurements and Disclosures", which provides a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s judgements about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Valuation based on inputs that are unobservable and significant to the overall fair value measurement.

When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. Fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or the Company) will not be fulfilled. For the Company's financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. The Company’s assets and liabilities measured on a recurring basis at fair value may include marketable securities and time deposits. As of June 30, 2017 and December 31, 2016, all of them were Level 1 instruments. The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses are expected to approximate fair value because of their immediate availability, near term maturities or potential interest payments at settlement.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity at acquisition of three months or less to be cash equivalents.

Investments

Investments

Investments consist of interest bearing time deposits with maturity dates of greater than 90 days totaling $369 thousand and $447 thousand at June 30, 2017 and December 31, 2016, respectively.  The value of time deposits at June 30, 2017 and December 31, 2016 was determined based on face value, which approximates fair value and is a Level 1 input. There was no realized gain or loss on investments for the three and six months ended June 30, 2017 and 2016.

Allowance for Doubtful Accounts and Billing Adjustments

Allowance for Doubtful Accounts and Billing Adjustments

The Company maintains an allowance for doubtful accounts and billing adjustments based on the expected collectability of its accounts receivables. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance includes estimates of billing adjustments, which are negotiated with other telecommunications carriers and are common in the telecommunications industry.

Certain Risks and Concentrations

Certain Risks and Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and accounts receivable. Cash equivalents generally consist of money market instruments.

The Company places its cash and cash equivalents in high quality financial institutions and management believes that the Company is not exposed to any significant risk on its cash accounts. The Company maintains accounts with various banks and brokerage organizations and constantly monitors the creditworthiness of these institutions. Cash accounts at each U.S. bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 thousand in the aggregate and may exceed federally insured limits. Cash accounts at Israeli or Polish banks are not insured. The Company has never experienced any losses related to these balances. At June 30, 2017, the Company had cash and cash equivalents totaling $47.0 million, which included (i) $46.4 million in U.S. financial institutions, and (ii) $0.6 million in foreign financial institutions.

The Company’s non-interest bearing cash balances in U.S. banks included $1.6 million in one individual financial institution which was fully insured. A total of $0.2 million, primarily held in another financial institution, exceeded insurance limits at June 30, 2017. The Company had money market accounts with financial institutions with balances totaling approximately $44.4 million at June 30, 2017.

For the Core Consumer segment, no telecommunication carrier accounted for more than 10% of the segment’s gross accounts receivable at June 30, 2017 and December 31, 2016. One U.S. retail customer accounted for approximately 11% of the segment’s gross accounts receivable at June 30, 2017 and three retail customers accounted for approximately 34% of the segment’s gross accounts receivable at December 31, 2016. For the three and six months ended June 30, 2017 and 2016, no telecommunications carrier or retailer accounted for more than 10% of the segment’s total operating revenues.

For the Enterprise segment, two U.S. retail customers accounted for approximately 37% of gross accounts receivable at June 30, 2017. No customer accounted for more than 10% of gross accounts receivable at December 31, 2016.  For the three months ended June 30, 2017 and 2016, two customers accounted for approximately 34% and 28% of the segment’s total operating revenues, respectively. For the six months ended June 30, 2017 and 2016, two customers accounted for approximately 32% and 28% of the segment’s total operating revenues, respectively.

For the SMB segment, accounts receivable were not significant at December 31, 2016. The segment’s operating revenues were not significant for the three and six months ended June 30, 2016 or the three months ended March 31, 2017.

Inventories

Inventories

Inventories are stated at the lower of cost or market, with cost primarily determined using the first-in first-out cost method. Inventory is written off at the point it is determined to be obsolete.

Receivable from Earnout Escrow

Receivable from Earnout Escrow

The 2016 acquisition of Broadsmart, described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, included a contingent earnout payment of $2.0 million in cash, if the acquired assets generated 2016 revenues of at least $15.6 million. The $2.0 million was paid into escrow at the time of closing. Revenues for the year ended December 31, 2016 did not reach the target and the Company has requested return of the funds, which are recorded on the accompanying unaudited condensed consolidated balance sheets as a receivable from earnout escrow.

Property, Equipment and Depreciation Expense

Property, Equipment and Depreciation Expense

Property and equipment are accounted for under ASC 360, “Property, Plant and Equipment” and consist primarily of servers, computer hardware, furniture, and leasehold improvements. Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to fifteen years. Leasehold improvements are depreciated over the shorter of the term of the lease or useful life of the assets. The cost of substantial improvements is capitalized while the cost of maintenance and repairs are charged to operating expenses as incurred.  Refer to Note 6, “Property and Equipment” for further details.

The Company reviews property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Property and equipment to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management believes there was no impairment of the Company’s property or equipment at June 30, 2017.

The Company’s hardware consists of routers, gateways and servers that enable the Company’s telephony services. Some of these assets may be subject to technological risks and rapid market changes due to the introduction of new technology, products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives and the carrying value of these assets. Changes in estimated useful lives are accounted for on a prospective basis starting with the period in which the change in estimate is made in accordance with ASC 250-10, “Accounting Changes and Error.”

Intangible Assets

Intangible Assets

Identifiable intangible assets are stated at cost and accounted based on whether the useful life of the asset is definite or indefinite. Identified intangible assets with definite useful lives are amortized using the accelerated and straight-line methods over their estimated useful lives, which range from one to seventeen years. Intangible assets with indefinite lives are not amortized to operations, but instead are reviewed for impairment at least annually, or more frequently if there is an indicator of impairment.

The Company reviews definite lived intangible assets subject to amortization for possible impairment using a three-step approach.  Under the first step, management determines whether an indicator of impairment is present (a “Triggering Event”). If a Triggering Event has occurred, the second step is to test for recoverability based on a comparison of the asset’s carrying amount with the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, the third step is to recognize an impairment loss for the excess of the asset’s carrying amount over its fair value. Intangible assets subject to amortization to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

The Company recognized impairment charges of $16.6 million on intangible assets during the six months ended June 30, 2017. There were no impairment charges recognized on intangible assets during the six months ended June 30, 2016. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 6, “Intangible Assets” for further details.

The costs of developing the Company’s intellectual property rights, intellectual property right applications and technology are charged to research and development expense as incurred.

Goodwill

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination. Goodwill is not amortized to operations, but instead is reviewed for impairment at least annually, or more frequently if there is an indicator of impairment. Indicators include, but are not limited to: sustained operating losses or a trend of poor operating performance and a decrease in the Company’s market capitalization below its book value.

The Company’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairment charges in the future.

With the acquisition of Broadsmart and the founding of SMB in 2016, management began evaluating each of these new business lines separately and has allocated goodwill between the three reporting units that correspond to the reportable segments – “Core Consumer,” “Enterprise” and “SMB”. Refer to Note 7, “Goodwill” and Note 16, “Segment Reporting” for further details.

The Company may utilize a qualitative assessment to determine if it is "more-likely-than-not" that the fair value of the reporting unit is less than its carrying value. If so, an impairment test must be performed. If not, no further testing is required and the Company documents the relevant qualitative factors that support its fair value. Qualitative factors may include, but are not limited to: macroeconomic conditions, industry and market considerations, cost factors that may have a negative effect on earnings, overall financial performance, and other relevant entity-specific events.

In prior years, the Company used the two-step goodwill impairment test.  In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other” which eliminated step two of the goodwill impairment test. The Company adopted ASU 2017-04 on a prospective basis in the first quarter of 2017.

The Company recognized impairment charges of $14.9 million on goodwill for the Enterprise reporting unit, the full balance for that unit, during the six months ended June 30, 2017. There was no impairment of goodwill during the six months ended June 30, 2016. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 7, “Goodwill” for further details.

Deferred Revenues

Deferred Revenues

Deferred revenues for the Core Consumer segment consist primarily of billings and payments for magicJack devices and access rights renewals received in advance of revenue recognition. The Company bills and collects in advance for magicJack devices, which include an initial access right period, and access right renewals.  The Company recognizes revenue from device sales and access right renewals ratably over the access right period, as described above.

For the Enterprise segment, deferred revenues consist of UCaaS hardware or equipment purchased but not yet delivered. The Company recognizes revenue from UCaaS hardware or equipment sales in the period they are delivered and put into service.

Deferred revenues to be recognized over the next twelve months are classified as current on the consolidated balance sheets, with the remainder classified as non-current.

Net Revenues

Net Revenues

Net revenues consists of revenue from sales of magicJack devices to retailers, wholesalers or directly to customers, access right renewal fees, fees charged for shipping magicJack devices, usage of domestic and international prepaid minutes, access charges to other carriers, recurring sales of the Company’s hosted UCaaS voice services, non-recurring sales of equipment related to its UCaaS services and other miscellaneous charges. The Company typically enters into multi-year agreements, typically with durations of three to five years, to provide the hosted voice and other services. The Company earns revenue from the sale of the hardware and network equipment necessary to operate its UCaaS services directly to its customers. All revenue is recorded net of sales returns and allowances.

Revenue Recognition

Revenue Recognition

The Company recognizes revenue in accordance with ASC 605, "Revenue Recognition", which provides authoritative guidance on revenue recognition. For arrangements that include more than one product or service (deliverables), the Company applies Section 25 of ASC 605, “Multiple-Element Arrangements”. ASC 605-25 establishes criteria for separating deliverables into different units of accounting and allocating consideration to those units of accounting.  The Company is transitioning to ASC 606, “Revenue from Contracts with Customers”, which will be implemented in 2018.

Core Consumer Segment

magicJack Devices

 magicJack devices include an initial access right, which qualify as multiple deliverables per ASC 605-25.  Since the device and initial access right are interdependent and not sold separately, they are accounted for as a combined unit of accounting. Direct sales of devices include shipping charges and 30 days to return the device and cancel the service.  For retail sales of devices, there is a delay between shipment to the retailer and the ultimate sale to a customer (end-user). Based on sales and inventory data provided by retail partners, the Company’s estimate of the delay was 30 days and 90 days for the three and six months ended June 30, 2017 and 2016, respectively. The Company defers revenue recognition on direct sales for the 30 day return period and on retail sales for the delay period, after which the Company recognizes the revenue from device sales ratably over the remaining initial access right period.

Access Right Renewals and Mobile Apps

Customers may renew access rights for periods ranging from one month to five years. The revenue associated with access right renewals is deferred and recognized ratably over the extended access right period. Revenue from the sale of mobile apps is recognized ratably over the access right period.

Other magicJack-Related Products

The Company offers customers other optional products related to their magicJack devices and services, such as insurance, custom or vanity phone numbers, Canadian phone numbers, the ability to either change their existing phone numbers or port them to a magicJack device, and battery powerbanks for mobile devices. These revenues are recognized at the time of sale, with the exception of sales of the battery powerbank which are recognized when shipped.

Prepaid Minutes and Access and Wholesale Charges

The Company generates revenues from the sales of prepaid international minutes to customers, fees for origination of calls to 800-numbers, and access fees charged to other telecommunication carriers on a per-minute basis for Interexchange Carriers (“IXC”) calls terminated on the Company’s servers. Revenues from access fee charges to other telecommunication carriers are recorded based on rates set forth in the respective state and federal tariffs or negotiated contract rates, less a provision for billing adjustments. Revenues from prepaid minutes and access and wholesale charges are recognized as minutes are used.

Sales Return Policy

The Company offers some of its direct sales customers a 30-day free trial before they have to pay for their magicJack device. The Company does not recognize revenue until the 30-day trial period has expired and a customer’s credit card has been charged.

Returns from retailers are accepted on an authorized basis for devices deemed defective. The Company may offer certain retailers the limited right to return any unsold merchandise from their initial stocking orders. The Company also accepts returns of battery powerbanks for mobile devices within 30 days of sale. The Company estimates potential returns under these arrangements at point of sale and re-estimates potential returns on a quarterly basis. For the three and six months ended June 30, 2017 and 2016, the Company’s estimates of returns and actual returns from initial stocking orders have not been materially different.

Enterprise Segment

UCaaS services and equipment sales related to the Broadsmart subsidiary qualify as multiple deliverables per ASC 605-25.  Since the equipment and services are sold separately and can be used with other products and services, they are accounted for as separate units of accounting. The Company recognizes revenues from sales of its hosted services in the period the services are provided over the term of the respective customer agreements. Customers are billed monthly in advance for these recurring services and in arrears for one time service charges and other certain usage charges.  Revenues from sales of hardware and network equipment are recognized in the period that the equipment is delivered. Revenues from the sale of equipment purchased but not yet delivered are deferred and recognized in the period that the hardware or equipment is delivered and put into service.

SMB Segment

The SMB segment provided phone equipment and services that were interdependent and not sold separately. As such they were accounted for as a combined unit of accounting under ASC 605-25.  Some agreements included a refund period or a promotion for free introductory service.  Revenue recognition was deferred for either period, after which the Company recognized the revenue for the combined unit ratably over the remaining service period.  Revenues from this segment were not significant for the three and six months ended June 30, 2016.  The SMB segment did not generate significant revenue for the three months ended March 31, 2017.  During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment. Accordingly, this segment will not show activity for periods after March 31, 2017.

Cost of Revenues

Cost of Revenues

Core Consumer Segment

Cost of revenues for the Core Consumer segment includes direct costs of operation of the Company’s servers, which are expensed as incurred. These costs include the Company’s internal operating costs, depreciation and amortization expense, access and interconnection charges to terminate domestic and international telephone calls on the public switched telephone network and related taxes. Direct costs also include regulatory costs, server maintenance, and costs to co-locate the Company’s equipment in other telephone companies’ facilities. Direct costs of producing magicJack devices are deferred on shipment and charged to cost of sales ratably over the initial access right period. Deferred costs are included in current assets in the Company’s consolidated balance sheets.

Costs incurred for shipping and handling and credit card charges are included in cost of revenues and are expensed as incurred. Costs for shipping and handling and credit card charges were $0.8 million for the three months ended June 30, 2017 and 2016, $1.7 million and $1.8 million for the six months ended June 30, 2017 and 2016, respectively. Starting in the second quarter of 2017, these amounts include SMB.

Enterprise Segment

Cost of revenues related to the Company’s UCaaS services include direct costs of providing the services, which are expensed as incurred. These costs include charges for access to the public switched telephone network, internet service for its customers, maintenance costs for its software, commissions, credit card charges, contract labor for installation and depreciation and amortization. The Company also incurs costs for hardware and equipment sold to customers, along with related delivery costs, which are recognized in the period they are delivered and put into service.

SMB Segment

Costs of revenue for the SMB segment included direct costs of providing the services, which were expensed as incurred, and costs for phone equipment, which were recognized ratably over the service period.  Costs of revenue from this segment were not significant for the three and six months ended June 30, 2016. The SMB segment did not incur significant costs of revenue for the three months ended March 31, 2017.

Marketing Expenses

Marketing Expenses

Marketing expenses consist primarily of advertising media buys for television commercials, internet and print advertising, marketing related personnel costs and other marketing projects including sponsorships. Marketing costs are expensed when incurred. A break-down of marketing expense by category is as follows (in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Advertising media buys	$	664	$	751	$	1,919	$	1,416
Marketing personnel related		412		199		1,221		387
Other marketing projects		1,044		808		1,387		1,176
Total marketing expenses	$	2,120	$	1,758	$	4,527	$	2,979

Research and Development Expenses

Research and Development Expenses

The Company’s research and development activities consist primarily of the design and development of its proprietary software used in the magicJack devices, mobile apps and servers, as well as the development of new products and applications for use in its VoIP service offerings. The Company accounts for research and development costs in accordance with applicable accounting pronouncements. These pronouncements specify that costs incurred internally in researching and developing a product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all costs should be capitalized until the product is available for general release to customers. The Company has determined that technological feasibility for its products is reached after all high-risk development issues have been resolved through internal and customer base testing. Generally, new products offered to customers and improvements to the Company’s servers are placed in service on attainment of technological feasibility. The Company has not capitalized any of its research and development activities and related costs.

Share-based Compensation

Share-based Compensation

Share-based compensation generally consists of option grants or ordinary share and restricted stock units awards to directors, officers, employees or consultants. We account for share-based compensation in accordance with ASC 718, "Compensation - Stock Compensation", which requires companies to estimate the fair value of equity-based payment awards on the date of grant based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period. Refer to Note 12, “Share-Based Compensation” for further details.

Income Taxes

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates. Any changes in enacted tax rates or tax laws are included in the provision for income taxes in the period of enactment. The Company’s net deferred tax assets consist primarily of foreign net operating loss carry-forwards, timing differences between recognition of income for book and tax purposes, and the tax benefit related to the impairment of intangible assets, including goodwill, in the Enterprise segment. The Company records a valuation allowance to reduce the net deferred tax assets to the amount that it estimates is more-likely-than-not to be realized. The Company periodically reviews the composition of its deferred tax assets and related valuation allowances and will make adjustments if available evidence indicates that it is more likely than not a change in the carrying amounts is required. The Company increased the valuation allowance by $15 thousand and $30 thousand during the three and six months ended June 30, 2017, respectively. The Company decreased the valuation allowance by $0.3 million and $0.6 million during the three and six months ended June 30, 2016, respectively.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions that are not more likely than not, no tax benefit has been recognized in the financial statements. The Company revised its liability for uncertain tax positions by an increase of $0.4 million and $1.8 million in the three and six months ended June 30, 2017, respectively, due primarily to an increase in uncertain tax positions related to various state issues and the revaluation impact of certain Israeli uncertain tax positions.  The Company revised its liability for uncertain tax positions by an increase of $1.2 million in the three and six months ended June 30, 2016, due primarily to an increase in uncertain tax positions related to state taxes and the revaluation impact of certain Israeli uncertain tax positions.

The Company records its income tax expense for interim financial statements by using an estimated annual effective income tax rate based on its expected annual results after consideration of permanent nontaxable items. The tax benefits of net operating loss carry-forwards expected to be realized through 2017 and changes in other deferred tax assets and liabilities are recognized during interim periods based on an annual forecast as of the interim reporting date. At June 30, 2017, the estimated annual effective income tax rate is expected to approximate 22.4%, excluding discrete tax items, which includes federal, foreign, state and local taxes. This rate may fluctuate due to changes in jurisdictional income and to the timing of other discrete period transactions during the remainder of the year.

Comprehensive Income

Comprehensive Income

Comprehensive income attributable to common shareholders, as defined, includes all changes in equity (net assets) during a period from non-owner sources. There were no items of comprehensive income in the six months ended June 30, 2017 and 2016.

Earnings (Loss) per Share Attributable to Common Shareholders

Earnings (Loss) per Share Attributable to Common Shareholders

Net income or loss per share attributable to the Company’s common shareholders – basic, is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during each period. Net income or loss per share attributable to the Company’s common shareholders – diluted, is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Potential common shares consist of shares issuable upon the exercise or settlement of options to purchase common shares or restricted stock units.

Business Combinations

Business Combinations

The Company accounts for business combinations under ASC 805, “Business Combinations” using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period and final determination of the values of assets acquired or liabilities assumed, any subsequent adjustments are recorded to the consolidated statements of operations. The Company includes the results of all acquisitions in its Consolidated Financial Statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expense.

Acquisition-related integration costs also include expenses directly related to integrating and reorganizing acquired businesses, employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in general and administrative expense.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which is the new ASC 606. The standard requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. On July 9, 2015, the FASB deferred the effective dates of the standard by one year. As a result, the standard will be effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted, but cannot precede the original effective date (annual and interim reporting periods beginning after December 15, 2016). The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period presented. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” to provide clarification regarding the application of the principal-versus-agent guidance. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” to clarify the guidance for identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB also issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides narrow scope improvements and technical expedients on assessing collectibility, presentation of sales taxes, evaluating contract modifications and completed contracts at transition and the disclosure requirement for the effect of the accounting change for the period of adoption. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606” which made minor corrections and improvements to certain narrow aspects of the guidance. The Company has internally performed a preliminary review of the new guidance and has engaged consultants to document the appropriate revenue recognition for its various products and services and assist in the implementation of any required changes.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO"). The Company adopted ASU 2015-11 on a prospective basis in the first quarter of 2017.  Prior periods were not retrospectively adjusted.

In February 2016, the FASB issued ASU 2016-02, “Leases”. ASU 2016-02 requires that long-term lease arrangements be recognized on the balance sheet. The standard is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 changed the accounting for certain aspects of stock options and other share-based compensation. This accounting standard requires companies to recognize excess tax benefits or expenses related to the vesting or settlement of employee share-based awards (i.e., the difference between the actual tax benefit realized and the tax benefit initially recognized for financial reporting purposes) as income tax benefits or expenses in the quarterly Financial Statements. The standard also requires companies to record a windfall tax benefit when it arises, subject to normal valuation allowance considerations, instead of delaying recognition until the benefit reduces current taxes payable. The Company adopted ASU 2016-09 on a prospective basis in the first quarter of 2017. For the six months ended June 30, 2017, this adoption had no tax impact to the Company.  The Company will continue to monitor this for each reporting period going forward.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 reduces the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The ASU should be applied retrospectively to all periods presented. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other than Inventory”. ASU 2016-16 requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The ASU should be applied retrospectively as an adjustment to retained earnings. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other”.  ASU 2017-04 eliminates step two of the goodwill impairment test. The standard is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted.  The Company early adopted ASU 2017-04 on a prospective basis in the first quarter of 2017. Prior periods were not retrospectively adjusted.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation: Scope of Modification Accounting”. ASU 2017-09 provides guidance on determining which changes to share-based awards require modification accounting under ASC 718. The standard is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted.  The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.

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SUMMARY OF ACCOUNTING POLICIES (Tables)

6 Months Ended

Jun. 30, 2017

Accounting Policies [Abstract]

Schedule of Marketing Expense

Marketing costs are expensed when incurred. A break-down of marketing expense by category is as follows (in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Advertising media buys	$	664	$	751	$	1,919	$	1,416
Marketing personnel related		412		199		1,221		387
Other marketing projects		1,044		808		1,387		1,176
Total marketing expenses	$	2,120	$	1,758	$	4,527	$	2,979

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IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL (Tables)

6 Months Ended

Jun. 30, 2017

Impairment Of Intangible Assets Including Goodwill Tables

Schedule of impairment losses

The impaired assets were (in thousands):

	March 31, 2017
	Carrying Amount		Fair Value		Impairment
Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
Goodwill		14,881		-		14,881
		37,127		5,600		31,527

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INVENTORIES (Tables)

6 Months Ended

Jun. 30, 2017

Inventory Disclosure [Abstract]

Schedule of Inventories

Inventories were comprised of the following (in thousands):

	June 30, 2017		December 31, 2016
Raw materials	$	669	$	1,455
Finished goods		1,977		2,986
Total	$	2,646	$	4,441

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PROPERTY AND EQUIPMENT (Tables)

6 Months Ended

Jun. 30, 2017

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

Property and equipment consisted of the following (in thousands):

	Estimated
	Useful Lives		June 30,			December 31,
	(in years)		2017			2016
Switches		3 - 15	$	9,721		$	9,699
Computers		3		2,629			2,866
Furniture		5 - 7		281			269
Leasehold-improvements		*		848			893
Accumulated depreciation				(10,306	)		(9,922	)
Total			$	3,173		$	3,805

* The estimated useful life for leasehold improvements is the shorter of the term of the lease or life of the asset.

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INTANGIBLE ASSETS (Tables)

6 Months Ended

Jun. 30, 2017

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Schedule of Finite-Lived Intangible Assets

Identified intangible assets consisted of the following (in thousands):

		June 30, 2017								December 31, 2016
	Estimated	Gross								Gross
	Useful Lives	Carrying		Accumulated					Weighted-	Carrying		Accumulated					Weighted-
	(in years)	Amount		Amortization			Net		Average Life	Amount		Amortization			Net		Average Life
Technology	3 - 17	$	3,110	$	(2,914	)	$	196	4.76	$	3,110	$	(2,854	)	$	256	4.71
Intellectual property rights	3 - 17		14,162		(11,377	)	$	2,785	4.71		14,162		(10,794	)		3,368	4.87
Covenants not-to-compete and not-to-sue	2 - 5		2,185		(2,120	)	$	65	1.92		2,185		(2,107	)		78	3.17
Tradename	3 - 6		131		(131	)	$	-	0.00		131		(131	)		-	0.00
Customer relationships	5 - 10		4,900		(633	)	$	4,267	8.71		22,600		(2,249	)		20,351	9.21
Backlog	1		800		(800	)	$	-	0.00		800		(800	)		-	0.00
Software license	10		2,296		(211	)	$	2,085	1.95		1,207		(80	)		1,127	8.00
Process know how	5		400		(16	)	$	384	5.50		1,100		(87	)		1,013	6.08
Other			1		(1	)	$	-	0.00		-		-			-	0.00
Intangible assets subject to amortization			27,985		(18,203	)		9,782			45,295		(19,102	)		26,193
Tradename			1,700		-		$	1,700	N/A		2,600		-			2,600	N/A
Domain names			51		-		$	51	N/A		61		-			61	N/A
Total intangible assets		$	29,736	$	(18,203	)	$	11,533		$	47,956	$	(19,102	)	$	28,854

Schedule of Lived intangible assets Valuation

Based on the results of the valuation, impairment losses of $16.6 million were recognized on the following intangible assets in operating expenses under the Enterprise segment in the unaudited condensed consolidated statements of operations for the quarter ended March 31, 2017:

	March 31, 2017
	Carrying Amount		Fair Value		Impairment
Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
	$	22,246	$	5,600	$	16,646

Schedule of Future Amortization Expense

Based on the carrying value of identified intangible assets recorded at June 30, 2017, the amortization expense for the future fiscal years is expected to be as follows (in thousands):

Fiscal Year	Amortization Expense
Six months ending December 31, 2017	$	1,343
2018		2,231
2019		1,619
2020		1,079
2021		766
Thereafter		2,744
	$	9,782

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GOODWILL (Tables)

6 Months Ended

Jun. 30, 2017

Goodwill Tables

Schedule of Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2017, were as follows (in thousands):

	Six Months Ended June 30, 2017
	Core Consumer		Enterprise			SMB		Other		Consolidated
Balance, beginning of period	$	32,304	$	14,881		$	-	$	-	$	47,185
2017 impairment		-		(14,881	)		-		-		(14,881	)
Balance, end of period	$	32,304	$	-		$	-	$	-	$	32,304

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DEFERRED COSTS AND REVENUES (Tables)

6 Months Ended

Jun. 30, 2017

DEFERRED COSTS AND REVENUES [Abstract]

Schedule of Deferred Revenue

Deferred revenues were comprised of the following at June 30, 2017 and December 31, 2016 (in thousands):

	June 30, 2017		December 31, 2016
magicJack devices	$	6,313	$	7,962
Access right renewals		35,187		36,515
Mobile apps		772		808
Prepaid minutes		2,426		2,851
Other		188		371
Deferred revenue, current		44,886		48,507
Deferred revenue, non-current*		41,510		44,201
Total deferred revenue	$	86,396	$	92,708

* Deferred revenue, non-current, is comprised entirely of deferred revenues originating from the sale of access right renewals.

Schedule of Future Payments of Deferred Revenue

Deferred revenues as of June 30, 2017 are expected to be recognized in future years as follows (in thousands):

Recognition Period	Estimated Recognition of Deferred Revenues
Next 12 months	$	44,886
13-24 Months		17,489
25-36 Months		11,075
37-48 months		6,940
49-60 Months		3,318
61+ Months		2,688
	$	86,396

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SHARE-BASED COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Share-Based Compensation Expense

The Company’s share-based compensation expense for ordinary share options and issued restricted stock units for the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Ordinary share options	$	230	$	822	$	613	$	1,458
Restricted stock units		337		425		690		792
	$	567	$	1,247	$	1,303	$	2,250

Schedule of Stock-Based Compensation Expense by Income Statement Classification

The detail of total share-based compensation recognized by classification on the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017			2016
Cost of revenues	$	96	$	23	$	102		$	29
Marketing		10		33		14			76
General and administrative		461		1,123		1,197			2,019
Research and development		-		68		(10	)		126
	$	567	$	1,247	$	1,303		$	2,250

Schedule of Stock Option Activity

The following table provides additional information regarding ordinary share options issued, outstanding and exercisable for the year ended December 31, 2016, and six months ended June 30, 2017 (aggregate intrinsic value in thousands):

Date of Grant	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining  Contractual Term (in years)		Aggregate Intrinsic Value(1)
January 1, 2016		2,527,427		$	12.98		3.61	$	-
Granted		1,107,040		$	7.09
Exercised		(2,500	)	$	3.96
Forfeited		(34,740	)	$	8.83
Expired or cancelled		(109,168	)	$	13.57
December 31, 2016		3,488,059		$	11.13		3.11	$	-
Granted		100,000		$	6.85
Exercised		-
Forfeited(2)		(2,501,614	)	$	11.12
Expired or cancelled		-
Outstanding at June 30, 2017 (unaudited)		1,086,445		$	10.78		0.86	$	-
Vested at June 30, 2017 (unaudited)		986,445		$	11.18		0.62	$	-

(1) The aggregate intrinsic value is the amount by which the market value for the Company's common stock exceeds the weighted average exercise price of the outstanding stock options on the measurement date.

(2) In 2017, two former executive officers surrendered a total of 1,244,777 ordinary share options with a weighted average exercise price of $14.57. Additionally, 1,166,205 options with a weighted average strike price of $7.79 were forfeited by terminated executives in the SMB and Enterprise segments. The surrender of options resulted in a $2.4 million increase in tax expense during the second quarter.

Schedule of Fair Value Assumptions

The Company granted 1,107,040 ordinary share options during the six months ended June 30, 2016 with a weighted average fair value of $2.75.  The grants were measured using the following assumptions:

	Six Months Ended June 30,
	2017			2016
Expected term (in years)		3.22 to 3.23			3.50
Dividend yield		0.00	%		0.00	%
Expected volatility		48.77 to 49.56	%	52.15% to 52.47		%
Risk free interest rate		1.53	%	0.95% to 1.13		%
Forfeiture rate		0.00	%		0.00	%

Schedule of Restricted Stock Unit Activity

The following table summarizes the Company’s restricted stock unit activity for the six months ended June 30, 2017:

				Average
	Number of			Fair Value
	Shares			at Grant Date
December 31, 2016		482,085		$	7.70
Granted		80,282		$	7.99
Vested		(83,210	)	$	12.31
Forfeited		(248,876	)	$	7.45
Non-vested at June 30, 2017		230,281		$	6.74

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INCOME TAXES (Tables)

6 Months Ended

Jun. 30, 2017

Income Tax Disclosure [Abstract]

Schedule of Effective Income Tax Rate

The calculation of the Company’s effective income tax rate for the three and six months ended June 30, 2017 and 2016 was (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Income before income taxes	$	1,093		$	4,217		$	(33,430	)	$	8,451
Income tax expense (benefit)		2,587			1,702			(8,768	)		5,202
Effective income tax rate		236.69	%		40.36	%		26.23	%		61.55	%

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NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2017

(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:

Schedule of Computation of Net Income Per Share

The following table presents the computation of basic and diluted net (loss) income per common share attributable to shareholders (in thousands, except for per share information):

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Numerator:
Net income (loss) attributable to common shareholders	$	(1,561	)	$	2,819	$	(24,662	)	$	3,553
Denominator:
Denominator for basic net income per share -
weighted average ordinary shares outstanding		16,078			15,853		16,056			15,750
Effect of dilutive share-based awards outstanding		-			17		-			157
Effect of dilutive share-based awards vested,
exercised or expired during the period		-			2		-			7
Denominator for diluted net income per share -
weighted average ordinary shares outstanding		16,078			15,872		16,056			15,914
Net income (loss) per common share attributable to
common shareholders:
Basic	$	(0.10	)	$	0.18	$	(1.54	)	$	0.23
Diluted	$	(0.10	)	$	0.18	$	(1.54	)	$	0.22
Anti-dilutive share-based awards not included above		1,317			3,812		1,317			2,812

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BROADSMART ACQUISITION (Tables)

6 Months Ended

Jun. 30, 2017

Business Combinations [Abstract]

Schedule of Pro Forma Results

The following table presents the unaudited pro forma combined results of operations of the Company and Broadsmart for the six months ended June 30, 2016, as if the acquisition of Broadsmart had occurred on January 1, 2016. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2016.

	Six Months Ended
	June 30, 2016
Net revenues	$	51,540
Net income	$	3,658

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SEGMENT REPORTING (Tables)

6 Months Ended

Jun. 30, 2017

Segment Reporting [Abstract]

Schedule of Operating Segment Information

Selected information for the three and six month periods ended June 30, 2017 and 2016 and as of June 30, 2017 and December 31, 2016 is presented by reportable segment below (in thousands):

	For the Three Months Ended June 30, 2017
	Previous Core Consumer			SMB		Revised Core Consumer			Enterprise		Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	19,334			-	$	19,334			3,088		(1	)		(40	)	$	22,381
Cost of revenues		6,185			-		6,185			2,000		(19	)		-			8,166
Gross profit (loss)		13,149			-		13,149			1,088		18			(40	)		14,215
Marketing		1,884			-		1,884			247		(11	)		-			2,120
General and administrative		8,966			-		8,966			755		(137	)		(40	)		9,544
Impairment of goodwill and
intangible assets		-			-		-			-		-			-			-
Research and development		1,462			-		1,462			-		-			-			1,462
Operating expenses		12,312			-		12,312			1,002		(148	)		(40	)		13,126
Operating income (loss)		837			-		837			86		166			-			1,089
Interest and dividend income		17			-		17			-		-			-			17
Other expenses, net		(13	)		-		(13	)		-		-			-			(13	)
Income (loss) before income taxes	$	841		$	-	$	841		$	86	$	166		$	-		$	1,093
Other Data:
Capital expenditures	$	1,064			-	$	1,064			10		-			-		$	1,074
Depreciation expense	$	272			-	$	272			61		(2	)		-		$	331
Amortization expense	$	380			-	$	380			183		-			-		$	563

	For the Six Months Ended June 30, 2017
	Previous Core Consumer			SMB			Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	39,764			116		$	39,880			5,771			-		(73	)	$	45,578
Cost of revenues		13,342			131			13,473			4,144			-		-			17,617
Gross profit (loss)		26,422			(15	)		26,407			1,627			-		(73	)		27,961
Marketing		2,962			1,089			4,051			476			-		-			4,527
General and administrative		19,274			1,056			20,330			2,112			-		(73	)		22,369
Impairment of goodwill and
intangible assets		-			-			-			31,527			-		-			31,527
Research and development		2,364			596			2,960			1			-		-			2,961
Operating expenses		24,600			2,741			27,341			34,116			-		(73	)		61,384
Operating income (loss)		1,822			(2,756	)		(934	)		(32,489	)		-		-			(33,423	)
Interest and dividend income		23			-			23			-			-		-			23
Other expenses, net		(30	)		-			(30	)		-			-		-			(30	)
Income (loss) before income taxes	$	1,815		$	(2,756	)	$	(941	)	$	(32,489	)	$	-	$	-		$	(33,430	)
Other Data:
Capital expenditures	$	1,094			-		$	1,094			72			-		-		$	1,166
Depreciation expense	$	537			21		$	558			107			-		-		$	665
Amortization expense	$	723			-		$	723			1,031			-		-		$	1,754

	June 30, 2017
	Previous Core Consumer		SMB		Revised Core Consumer		Enterprise		Other		Intercompany		Consolidated
Balance Sheet Data:
Goodwill	$	32,304		-	$	32,304		-		-		-	$	32,304
Total assets	$	126,986		-	$	126,986		19,723		-		-	$	146,709

	For the Three Months Ended June 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	22,361			-		$	22,361			2,967			7			(34	)	$	25,301
Cost of revenues		7,353			14			7,367			2,462			9			-			9,838
Gross profit (loss)		15,008			(14	)		14,994			505			(2	)		(34	)		15,463
Marketing		1,162			369			1,531			80			147			-			1,758
General and administrative		5,184			1,548			6,732			1,131			423			(34	)		8,252
Research and development		947			295			1,242			-			5			-			1,247
Operating expenses		7,293			2,212			9,505			1,211			575			(34	)		11,257
Operating income (loss)		7,715			(2,226	)		5,489			(706	)		(577	)		-			4,206
Interest and dividend income		(9	)		-			(9	)		-			-			-			(9	)
Other expenses, net		(2	)		-			(2	)		-			-			-			(2	)
Income (loss) before income taxes	$	7,726		$	(2,226	)	$	5,500		$	(706	)	$	(577	)	$	-		$	4,217
Other Data:
Capital expenditures	$	5			154		$	159			-			-			-		$	159
Depreciation expense	$	223			3		$	226			55			-			-		$	281
Amortization expense	$	434			-		$	434			676			-			-		$	1,110

	For the Six Months Ended June 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	45,580			-		$	45,580			3,447			7			(34	)	$	49,000
Cost of revenues		15,295			14			15,309			2,729			9			-			18,047
Gross profit (loss)		30,285			(14	)		30,271			718			(2	)		(34	)		30,953
Marketing		2,321			374			2,695			77			207			-			2,979
General and administrative		12,259			3,046			15,305			1,373			543			(34	)		17,187
Research and development		1,977			365			2,342						5			-			2,347
Operating expenses		16,557			3,785			20,342			1,450			755			(34	)		22,513
Operating income (loss)		13,728			(3,799	)		9,929			(732	)		(757	)		-			8,440
Interest and dividend income		(16	)		-			(16	)		-			-			-			(16	)
Other expenses, net		5			-			5			-			-			-			5
Income (loss) before income taxes	$	13,739		$	(3,799	)	$	9,940		$	(732	)	$	(757	)	$	-		$	8,451
Other Data:
Capital expenditures	$	5			154		$	159			-			-			-		$	159
Depreciation expense	$	462			3		$	465			64			-			-		$	529
Amortization expense	$	903			-		$	903			751			-			-		$	1,654

	December 31, 2016
	Previous Core Consumer		SMB			Restated Core Consumer		Enterprise		Other		Intercompany		Consolidated
Balance Sheet Data:
Goodwill	$	32,304		-		$	32,304		14,881		-		-	$	47,185
Total assets	$	142,870		(9,447	)	$	133,423		40,839		255		-	$	174,517

XML

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Mar. 31, 2017	Dec. 31, 2016
Ownership percentage in joint venture					36.00%	60.00%
Percentage of revenues derived from sales to customers in the United States	86.00%	90.00%	86.00%	90.00%
Comprehensive income attributable to noncontrolling interest	$ 100	$ 300		$ 300
General and administrative [Member]
Impairment loss			400
Magicjack devices [Member]
Revenues	17,100	19,500	35,200	39,600
Prepaid Minutes [Member]
Revenues	1,200	1,500	2,400	3,200
Broadsmart Services Hardware and Equipment [Member]
Revenues	$ 3,000	$ 2,900	$ 5,700	$ 3,400

XML

SUMMARY OF ACCOUNTING POLICIES (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended				6 Months Ended		12 Months Ended
	Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2016	Mar. 31, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016	Dec. 31, 2015
Shipping and handling and credit card charges	$ 800		$ 800		$ 1,700	$ 1,800
Insured cash balance	250				250
Uninsured cash balance	200				200
Cash and cash equivalents	47,041		46,681		47,041	46,681	$ 52,394	$ 78,589
Money market accounts	44,400				44,400
Valuation allowance increase (decrease)	15		300		30	600
Increase (decrease) in uncertain tax positions	400		$ 1,200		$ 1,809	1,187
Estimated annual effective income tax rate					22.40%
Earnout Payment							2,000
Revenues acquired by assets				$ 15,600			15,600
Receivable from escrow	2,000				$ 2,000		2,000
Impairment of intangible assets					16,600
Contingent payment							2,000
Impairment of goodwill		$ 14,900			14,900
Time Deposits [Member]
Fair Value	369				369		$ 447
Foreign [Member]
Cash and cash equivalents	600				600
Single Financial Institution, Concentration Risk [Member]
Cash and cash equivalents	$ 1,600				$ 1,600
Minimum [Member]
Estimated useful life, Property and equipment					3 years
Estimated useful lives, Intangible assets					1 year
Maximum [Member]
Estimated useful life, Property and equipment					15 years
Estimated useful lives, Intangible assets					17 years
Accounts Receivable [Member]
Percentage of concentration risk					10.00%		10.00%
Accounts Receivable [Member] | One U.S. retail [Member]
Percentage of concentration risk					11.00%
Accounts Receivable [Member] | Customer Three [Member]
Percentage of concentration risk							34.00%
Accounts Receivable [Member] | Two U.S. retail [Member]
Percentage of concentration risk					37.00%
Sales Revenue, Net [Member]
Percentage of concentration risk	10.00%	29.00%	10.00%		10.00%	10.00%
Sales Revenue, Net [Member] | Customer Two [Member]
Percentage of concentration risk	34.00%		28.00%		32.00%	28.00%

XML

SUMMARY OF ACCOUNTING POLICIES (Schedule of Marketing Expense) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Total marketing expenses	$ 2,120	$ 1,758	$ 4,527	$ 2,979
Advertising Media Buys [Member]
Total marketing expenses	664	751	1,919	1,416
Marketing Personnel Related [Member]
Total marketing expenses	412	199	1,221	387
Other Marketing Projects [Member]
Total marketing expenses	$ 1,044	$ 808	$ 1,387	$ 1,176

XML

IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended			6 Months Ended
	Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Indefinite-lived intangible assets impairment charges		$ 900
Definite-lived intangible assets impairment charges		15,700
Fair value of the Enterprise reporting unit		$ 17,900
Sales Revenue, Net [Member]
Enterprise segment revenue percentage	10.00%	29.00%	10.00%	10.00%	10.00%

XML

IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL (Schedule of Impairment) (Details) - USD ($) $ in Thousands	3 Months Ended			6 Months Ended
	Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Carrying Amount	$ 11,533			$ 11,533		$ 28,854
Impairment				$ 31,527
Customer Relationships [Member]
Carrying Amount		$ 19,572
Fair Value		4,400
Impairment		15,172
Process Know How [Member]
Carrying Amount		974
Fair Value		400
Impairment		574
Tradename [Member]
Carrying Amount		1,700
Fair Value		800
Impairment		900
Goodwill [Member]
Carrying Amount		14,881
Fair Value
Impairment		14,881
Intangible assets [Member]
Carrying Amount		37,127
Fair Value		5,600
Impairment		$ 31,527

XML

INVENTORIES (Schedule of Inventory) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Inventory Disclosure [Abstract]
Raw materials	$ 669	$ 1,455
Finished goods	1,977	2,986
Total	$ 2,646	$ 4,441

XML

INVENTORIES (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Inventory Disclosure [Abstract]
Write-down of obsolete inventory	$ 2	$ 3	$ 403	$ 80

XML

PROPERTY AND EQUIPMENT (Schedule of Property and Equipment) (Details) - USD ($) $ in Thousands		6 Months Ended
		Jun. 30, 2017	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Accumulated depreciation		$ (10,306)	$ (9,922)
Property and equipment, net		$ 3,173	3,805
Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated Useful Lives (in years)		3 years
Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated Useful Lives (in years)		15 years
Switches [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross		$ 9,721	9,699
Switches [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated Useful Lives (in years)		3 years
Switches [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated Useful Lives (in years)		15 years
Computers [Member]
Property, Plant and Equipment [Line Items]
Estimated Useful Lives (in years)		3 years
Property and equipment, gross		$ 2,629	2,866
Furniture [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross		$ 281	269
Furniture [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated Useful Lives (in years)		5 years
Furniture [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated Useful Lives (in years)		7 years
Leasehold-improvements [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	[1]	$ 848	$ 893

[1] The estimated useful life for leasehold improvements is the shorter of the term of the lease or life of the asset.

XML

PROPERTY AND EQUIPMENT (Schedule of Depreciation Expense) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 300	$ 300	$ 700	$ 500

XML

INTANGIBLE ASSETS (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Amortization expense	$ 600	$ 1,100	$ 1,800	$ 1,700
Intangible assets, net	$ 11,533		11,533		$ 28,854
Impairment of intangible assets			$ 16,600

XML

INTANGIBLE ASSETS (Schedule of Intangible Assets) (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2017	Dec. 31, 2016	Mar. 31, 2017
Intangible assets subject to amortization
Gross Carrying Amount	$ 27,985	$ 45,295
Accumulated Amortization	(18,203)	(19,102)
Net	9,782	26,193
Total intangible assets
Gross Carrying Amount	29,736	47,956
Accumulated Amortization	(18,230)	(19,102)
Net	$ 11,533	28,854
Minimum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	1 year
Maximum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	17 years
Technology [Member]
Intangible assets subject to amortization
Gross Carrying Amount	$ 3,110	3,110
Accumulated Amortization	(2,914)	(2,854)
Net	$ 196	$ 256
Weighted-Average Life	4 years 9 months 3 days	4 years 8 months 16 days
Technology [Member] | Minimum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	3 years
Technology [Member] | Maximum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	17 years
Domain [Member]
Intangible assets subject to amortization
Gross Carrying Amount	$ 51	$ 61
Accumulated Amortization
Net	51	61
Intellectual Property Rights [Member]
Intangible assets subject to amortization
Gross Carrying Amount	14,162	14,162
Accumulated Amortization	(11,377)	(10,794)
Net	$ 2,785	$ 3,368
Weighted-Average Life	4 years 8 months 16 days	4 years 10 months 14 days
Intellectual Property Rights [Member] | Minimum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	3 years
Intellectual Property Rights [Member] | Maximum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	17 years
Covenant Not-to-Compete And Not-to-Sue [Member]
Intangible assets subject to amortization
Gross Carrying Amount	$ 2,185	$ 2,185
Accumulated Amortization	(2,120)	(2,107)
Net	$ 65	$ 78
Weighted-Average Life	1 year 11 months 1 day	3 years 2 months 1 day
Covenant Not-to-Compete And Not-to-Sue [Member] | Minimum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	2 years
Covenant Not-to-Compete And Not-to-Sue [Member] | Maximum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	5 years
Tradename [Member]
Intangible assets subject to amortization
Gross Carrying Amount	$ 131	$ 131
Accumulated Amortization	(131)	(131)
Net
Gross Carrying Amount	1,700	2,600
Accumulated Amortization
Net	$ 1,700	2,600
Total intangible assets
Net			$ 1,700
Tradename [Member] | Minimum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	3 years
Tradename [Member] | Maximum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	6 years
Customer Relationships [Member]
Intangible assets subject to amortization
Gross Carrying Amount	$ 4,900	22,600
Accumulated Amortization	(633)	(2,249)
Net	$ 4,267	$ 20,351
Weighted-Average Life	8 years 8 months 16 days	9 years 2 months 16 days
Total intangible assets
Net			19,572
Customer Relationships [Member] | Minimum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	5 years
Customer Relationships [Member] | Maximum [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	10 years
Backlog [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	1 year
Gross Carrying Amount	$ 800	$ 800
Accumulated Amortization	(800)	(800)
Net
Software License [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	10 years
Gross Carrying Amount	$ 2,296	1,207
Accumulated Amortization	(211)	(80)
Net	$ 2,085	$ 1,127
Weighted-Average Life	1 year 11 months 12 days	8 years
Process Know How [Member]
Intangible assets subject to amortization
Estimated Useful Lives (in years)	5 years
Gross Carrying Amount	$ 400	$ 1,100
Accumulated Amortization	(16)	(87)
Net	$ 384	$ 1,013
Weighted-Average Life	5 years 6 months	6 years 29 days
Total intangible assets
Net			$ 974
Other [Member]
Intangible assets subject to amortization
Gross Carrying Amount	$ 1
Accumulated Amortization	(1)
Net

XML

INTANGIBLE ASSETS (Schedule of Amortization Expense) (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2017 USD ($)
Carrying Amount	$ 22,246
Fair Value	5,600
Impairment	16,646
Customer Relationships [Member]
Carrying Amount	19,572
Fair Value	4,400
Impairment	15,172
Process Know How [Member]
Carrying Amount	974
Fair Value	400
Impairment	574
Tradename [Member]
Carrying Amount	1,700
Fair Value	800
Impairment	$ 900

XML

INTANGIBLE ASSETS (Schedule of Future Amortization Expense of Intangible Assets) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Amortization expense for future fiscal years:
Six months ending December 31, 2017	$ 1,343
2018	2,231
2019	1,619
2020	1,079
2021	766
Thereafter	2,744
Total	$ 9,782	$ 26,193

XML

GOODWILL (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Mar. 31, 2017	Jun. 30, 2017	Jun. 30, 2016
Goodwill Narrative Details
Estimated Fair Value of Valuation		$ 17,900
Impairment of goodwill	$ 14,900	$ 14,900

XML

GOODWILL (Schedule of Goodwill) (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Mar. 31, 2017	Jun. 30, 2017	Jun. 30, 2016
Balance, beginning of period	$ 47,185	$ 47,185
2017 impairment	(14,900)	(14,900)
Balance, end of period		32,304
Revised Core Consumer [Member]
Balance, beginning of period	32,304	32,304
2017 impairment
Balance, end of period		32,304
Enterprise [Member]
Balance, beginning of period	14,881	14,881
2017 impairment		(14,881)
Balance, end of period
SMB [Member]
Balance, beginning of period
2017 impairment
Balance, end of period
Other [Member]
Balance, beginning of period
2017 impairment
Balance, end of period

XML

DEFERRED COSTS AND REVENUES (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Revised Core Consumer [Member]
Costs incurred to fulfill obligations	$ 2,400	$ 3,200	$ 5,100	$ 6,700
Enterprise Segment [Member]
Costs incurred to fulfill obligations	$ 800	$ 800	$ 1,300	$ 1,000

XML

DEFERRED COSTS AND REVENUES (Schedule of Deferred Revenue) (Details) - USD ($) $ in Thousands		Jun. 30, 2017	Dec. 31, 2016
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		$ 44,886	$ 48,507
Deferred revenue, non-current	[1]	41,510	44,201
Total deferred revenues		86,396	92,708
Magicjack devices [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		6,313	7,962
Acces Right Renewals [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		35,187	36,515
Mobile apps [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		772	808
Prepaid Minutes [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		2,426	2,851
Other [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		$ 188	$ 371

[1] Deferred revenue, non-current, is comprised entirely of deferred revenues originating from the sale of access right renewals.

XML

DEFERRED COSTS AND REVENUES (Schedule of Future Payments of Deferred Revenue) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
DEFERRED COSTS AND REVENUES [Abstract]
Next 12 months	$ 44,886
13-24 Months	17,489
25-36 Months	11,075
37-48 months	6,940
49-60 Months	3,318
61+ Months	2,688
Total deferred revenues	$ 86,396	$ 92,708

XML

OTHER LIABILITIES (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2017	Dec. 31, 2016
Other Liabilities Disclosure [Abstract]
Non-current liability for uncertain tax positions	$ 12,100	$ 10,400

XML

COMMITMENTS AND CONTINGENCIES (Details) - USD ($) $ in Thousands		1 Months Ended	6 Months Ended
	Jun. 08, 2017	Jun. 23, 2017	Jun. 30, 2017
Loss Contingencies [Line Items]
Litigation settlement		$ 3,650	$ 1,000
Accrued expenses			3,100
Accrued receivable			2,700
Offered to settle the examinations	$ 600
Minimum [Member]
Loss Contingencies [Line Items]
Range of potential liabilities			0
Maximum [Member]
Loss Contingencies [Line Items]
Range of potential liabilities			$ 2,500

XML

TREASURY STOCK (Details) - Treasury Stock - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended
	May 31, 2017	Apr. 30, 2017	Jan. 31, 2017
Issuance of shares, shares	20,844		16,666
Issuance of shares	$ 135
The fair value price per share of treasury stock acquired	$ 6.50
Board Members [Member]
Issuance of shares, shares		6,996
Issuance of shares		$ 86
Ordinary shares, closing price per share		$ 12.32
Executive Officer [Member]
Issuance of shares, shares	76,211
Issuance of shares	$ 939
Ordinary shares, closing price per share	$ 12.32

XML

SHARE-BASED COMPENSATION (Narrative) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended			12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017		Jun. 30, 2016	Dec. 31, 2016	Jul. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options authorized	3,600,000		3,600,000
Increase in tax expense	$ 2,400
Options forfeited			2,501,614	[1]		34,740
Options weighted average price			$ 11.12	[1]		$ 8.83
Share-based compensation	$ 567	$ 1,247	$ 1,303		$ 2,250
Options granted			100,000		1,107,040	1,107,040
Weighted-average fair value of options granted			$ 2.62		$ 2.75
Restricted stock units granted			80,282		295,305
Subsequent Event [Member] | Chief Executive Officer [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Awards available for grant							5,600,000
Ordinary share options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options, contractual term			5 years
Vesting period			36 months
Increase in tax expense			$ 2,400
Options surrendered by executive officer	1,244,777		1,244,777
Options surrendered by executive officer, price per share	$ 14.57		$ 14.57
Options forfeited	1,256,837
Options weighted average price	$ 7.70
Share-based compensation	$ 230	822	$ 613		$ 1,458
Intrinsic value of options exercised during the period					4
Unrecognized compensation cost	162		$ 162
Expected cost period to be recognized			1 year 8 months 16 days
Restricted stock units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation	337	$ 425	$ 690		$ 792
Unrecognized compensation cost	$ 1,300		$ 1,300
Expected cost period to be recognized			1 year 2 months 16 days

[1] In 2017, two former executive officers surrendered a total of 1,244,777 ordinary share options with a weighted average exercise price of $14.57. Additionally, 1,166,205 options with a weighted average strike price of $7.79 were forfeited by terminated executives in the SMB and Enterprise segments. The surrender of options resulted in a $2.4 million increase in tax expense during the second quarter.

XML

SHARE-BASED COMPENSATION (Schedule of Share-Based Compensation Expense) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	$ 567	$ 1,247	$ 1,303	$ 2,250
Ordinary share options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	230	822	613	1,458
Restricted stock units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	$ 337	$ 425	$ 690	$ 792

XML

SHARE-BASED COMPENSATION (Schedule of Stock-Based Compensation by Income Statement Classification) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	$ 567	$ 1,247	$ 1,303	$ 2,250
Cost of revenues [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	96	23	102	29
Marketing [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	10	33	14	76
General and administrative [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	461	1,123	1,197	2,019
Research and development [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances		$ 68	$ (10)	$ 126

XML

SHARE-BASED COMPENSATION (Schedule of Stock Option Activity) (Details) - USD ($)		6 Months Ended			12 Months Ended
		Jun. 30, 2017		Jun. 30, 2016	Dec. 31, 2016	Dec. 31, 2015
Number of Options
Beginning balance		3,488,059		2,527,427	2,527,427
Granted		100,000		1,107,040	1,107,040
Exercised					(2,500)
Forfeited		(2,501,614)	[1]		(34,740)
Expired or cancelled					(109,168)
Ending balance		1,086,445			3,488,059	2,527,427
Vested at June 30, 2017 (unaudited)		986,445
Weighted Average Exercise Price
Beginning balance		$ 11.13		$ 12.98	$ 12.98
Granted		6.85			7.09
Exercised					3.96
Forfeited		11.12	[1]		8.83
Expired or cancelled					13.57
Ending balance		10.78			$ 11.13	$ 12.98
Vested at June 30, 2017 (unaudited)		$ 11.18
Weighted Average Remaining Contractual Term (in years)
Weighted average remaining contractual term outstanding		10 months 10 days			3 years 1 month 9 days	3 years 7 months 10 days
Vested at June 30, 2017 (unaudited)		7 months 13 days
Aggregate Intrinsic Value
Beginning balance	[2]
Ending balance	[2]
Vested at June 30, 2017 (unaudited)	[2]

[1] In 2017, two former executive officers surrendered a total of 1,244,777 ordinary share options with a weighted average exercise price of $14.57. Additionally, 1,166,205 options with a weighted average strike price of $7.79 were forfeited by terminated executives in the SMB and Enterprise segments. The surrender of options resulted in a $2.4 million increase in tax expense during the second quarter.

[2] The aggregate intrinsic value is the amount by which the market value for the Company's common stock exceeds the weighted average exercise price of the outstanding stock options on the measurement date.

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SHARE-BASED COMPENSATION (Schedule of Fair Value Assumptions) (Details)	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term (in years)		3 years 6 months
Dividend yield	0.00%	0.00%
Risk free interest rate	1.53%
Forfeiture rate	0.00%	0.00%
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term (in years)	3 years 2 months 19 days
Expected volatility	48.77%	52.15%
Risk free interest rate		0.95%
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term (in years)	3 years 2 months 23 days
Expected volatility	49.56%	52.47%
Risk free interest rate		1.13%

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SHARE-BASED COMPENSATION (Schedule of Restricted Stock Unit Activity) (Details) - $ / shares	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Number of Shares
Balance at the beginning of period	482,085
Granted	80,282	295,305
Vested	(83,210)
Forfeited	(248,876)
Balance at the end of period	230,281
Average Fair Value at Grant Date
Balance at the beginning of period	$ 7.70
Granted	7.99
Vested	12.31
Forfeited	7.45
Balance at the end of period	$ 6.74

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INCOME TAXES (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2016
Income Tax Examination [Line Items]
Income tax expense (benefit)	$ 2,587	$ 1,702		$ (8,768)	$ 5,202
Effective tax rate				22.40%
Federal tax at statutory rate	34.00%			34.00%
Expected tax provision				$ 11,400
Reduction of deferred tax assets	$ 400			2,400
Increase in uncertain tax positions	2,600	$ 1,700		8,800	$ 5,200
Net Operating Loss Carryforwards	200			$ 200
Increase in tax expense	$ 2,400
Israel [Member]
Income Tax Examination [Line Items]
Effective tax rate				24.00%
Israel [Member] | Scenario, Forecast [Member]
Income Tax Examination [Line Items]
Effective tax rate			23.00%

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INCOME TAXES (Schedule of Effective Income Tax Rate) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Income Tax Disclosure [Abstract]
Income before income taxes	$ 1,093	$ 4,217	$ (33,430)	$ 8,451
Income tax expense (benefit)	$ 2,587	$ 1,702	$ (8,768)	$ 5,202
Effective income tax rate	236.69%	40.36%	26.23%	61.55%

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NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE (Schedule of earnings per share) (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:
Net income (loss) attributable to common shareholders	$ (1,561)	$ 2,819	$ (24,662)	$ 3,553
Denominator for basic net income per share - weighted average ordinary shares outstanding	16,078	15,853	16,056	15,750
Effect of dilutive share-based awards outstanding		17		157
Effect of dilutive share-based awards vested, exercised or expired during the period		2		7
Denominator for diluted net income per share - weighted average ordinary shares outstanding	16,078	15,872	16,056	15,914
Net income (loss) per common share attributable to common shareholders:
Basic	$ (0.10)	$ 0.18	$ (1.54)	$ 0.23
Diluted	$ (0.10)	$ 0.18	$ (1.54)	$ 0.22
Anti-dilutive share-based awards not included above	1,317	3,812	1,317	2,812

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BROADSMART ACQUISITION (Narrative) (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		6 Months Ended	12 Months Ended
	Jun. 23, 2017	Mar. 31, 2017	Mar. 31, 2016	Jun. 30, 2017	Dec. 31, 2016
Cash paid for acquisition			$ 38,000
Additional contingent payment			200
Additional payment received			2,000
Revenues acquired by assets			15,600		$ 15,600
Earnout Payment					2,000
Cash consideration at the closing in escrow			$ 3,000	$ 2,000
Issued ordinary shares			233,402
Fair value of shares issued			$ 1,700
Receivable from escrow				2,000	2,000
Impairment of intangible assets					$ 500
Impairment charge intangible assets, including goodwill		$ 31,500
Carrying Amount				$ 22,246
Broadsmart [Member]
Earnout Payment	$ 2,000
Amount held in escrow	3,000
Remaining amount in escrow	2,000
Settlement with founders	1,000
Assets acquired	$ 10
Carrying Amount		$ 18,500
Two certain individuals [Member]
Additional contingent payment			$ 200

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BROADSMART ACQUISITION (Schedule of Pro Forma Results) (Details) - Broadsmart [Member] $ in Thousands	6 Months Ended
	Jun. 30, 2016 USD ($)
Net revenues	$ 51,540
Net Income	$ 3,658

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SEGMENT REPORTING (Narrative) (Details)	Mar. 31, 2017	Dec. 31, 2016
Percentage of controlling interest in a joint venture	36.00%	60.00%
Other [Member]
Percentage of controlling interest in a joint venture	36.00%	60.00%

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SEGMENT REPORTING (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Net revenues	$ 22,381	$ 25,301	$ 45,578	$ 49,000
Cost of revenues	8,166	9,838	17,617	18,047
Gross profit (loss)	14,215	15,463	27,961	30,953
Marketing	2,120	1,758	4,527	2,979
General and administrative	9,544	8,252	22,369	17,187
Impairment of goodwill and intangible assets			31,527
Research and development	1,462	1,247	2,961	2,347
Operating expenses	13,126	11,257	61,384	22,513
Operating income (loss)	1,089	4,206	(33,423)	8,440
Interest and dividend income	17	(9)	23	(16)
Other expenses, net	(13)	(2)	(30)	5
Income (loss) before income taxes	1,093	4,217	(33,430)	8,451
Capital expenditures	1,074	159	1,166	159
Depreciation expense	331	281	665	529
Amortization expense	600	1,100	1,800	1,700
Goodwill	32,304		32,304		$ 47,185
Total assets	146,709		146,709		174,517
Previous Core Consumer [Member]
Net revenues	19,334	22,361	39,764	45,580
Cost of revenues	6,185	7,353	13,342	15,295
Gross profit (loss)	13,149	15,008	26,422	30,285
Marketing	1,884	1,162	2,962	2,321
General and administrative	8,966	5,184	19,274	12,259
Impairment of goodwill and intangible assets
Research and development	1,482	947	2,364	1,977
Operating expenses	12,312	7,293	24,600	16,557
Operating income (loss)	837	7,715	1,822	13,728
Interest and dividend income	17	(9)	23	(16)
Other expenses, net	(13)	(2)	(30)	2
Income (loss) before income taxes	841	7,726	1,815	13,739
Capital expenditures	1,064	5	1,094	5
Depreciation expense	272	223	537	462
Amortization expense	380	434	723	903
SMB [Member]
Net revenues			116
Cost of revenues		14	131	14
Gross profit (loss)		(14)	(15)	(14)
Marketing		369	1,089	374
General and administrative		1,548	1,056	3,046
Impairment of goodwill and intangible assets
Research and development		295	596	365
Operating expenses		2,212	2,741	3,785
Operating income (loss)		(2,226)	(2,756)	(3,799)
Interest and dividend income
Other expenses, net
Income (loss) before income taxes		(2,226)	(2,756)	(3,799)
Capital expenditures		154		154
Depreciation expense		3	21	3
Amortization expense
Goodwill
Total assets					(9,447)
Revised Core Consumer [Member]
Net revenues	19,334	22,361	39,880	45,580
Cost of revenues	6,185	7,367	13,473	15,309
Gross profit (loss)	13,149	14,994	26,407	30,271
Marketing	1,884	1,531	4,051	2,695
General and administrative	8,966	6,732	20,330	15,305
Impairment of goodwill and intangible assets
Research and development	1,462	1,242	2,960	2,342
Operating expenses	12,312	9,505	27,341	20,342
Operating income (loss)	837	5,489	(934)	9,929
Interest and dividend income	17	(9)	23	(16)
Other expenses, net	(13)	(2)	(30)	5
Income (loss) before income taxes	841	5,500	(941)	9,940
Capital expenditures	1,064	159	1,094	159
Depreciation expense	272	226	558	465
Amortization expense	380	434	723	903
Goodwill	32,304		32,304		32,304
Total assets	126,986		126,986		133,423
Enterprise [Member]
Net revenues	3,088	2,967	5,771	3,447
Cost of revenues	2,000	2,462	4,144	2,729
Gross profit (loss)	1,088	505	1,627	718
Marketing	247	80	476	77
General and administrative	755	1,131	2,112	1,373
Impairment of goodwill and intangible assets			31,527
Research and development			1
Operating expenses	1,002	1,211	34,116	1,450
Operating income (loss)	86	(706)	(32,489)	(732)
Interest and dividend income
Other expenses, net
Income (loss) before income taxes	86	(706)	(32,489)	(732)
Capital expenditures	10		72
Depreciation expense	61	55	107	64
Amortization expense	183	676	1,031	751
Goodwill					14,881
Total assets	19,723		19,723		40,839
Other [Member]
Net revenues	(1)	7		7
Cost of revenues	(19)	9		9
Gross profit (loss)	18	(2)		(2)
Marketing	(11)	147		207
General and administrative	(137)	423		543
Impairment of goodwill and intangible assets
Research and development		5		5
Operating expenses	(148)	575		755
Operating income (loss)	166	(577)		(757)
Interest and dividend income
Other expenses, net
Income (loss) before income taxes	166	(577)		(757)
Capital expenditures
Depreciation expense	(2)
Amortization expense
Goodwill
Total assets					255
Intercompany [Member]
Net revenues	(40)	(34)	(73)	(34)
Cost of revenues
Gross profit (loss)	(40)	(34)	(73)	(34)
Marketing
General and administrative	(40)	(34)	(73)	(34)
Impairment of goodwill and intangible assets
Research and development
Operating expenses	(40)	(34)	(73)	(34)
Operating income (loss)
Interest and dividend income
Other expenses, net
Income (loss) before income taxes
Capital expenditures
Depreciation expense
Amortization expense
Goodwill
Total assets

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SUBSEQUENT EVENTS (Details) - Subsequent Event [Member] - USD ($) $ in Thousands	Aug. 04, 2017	Jul. 31, 2017
XYZ Company [Member]
Subsequent Event [Line Items]
Aggregate amount of all losses in respect of indemnification	$ 3,000
Settlement with founders	1,000
Remaining amount in escrow	$ 2,000
Chief Executive Officer [Member]
Subsequent Event [Line Items]
Awards available for grant		5,600,000