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 September 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 16,115,383 ordinary shares with no par value outstanding at October 31, 2017.

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
	ITEM 1.	Financial Statements
		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	33
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	46
	ITEM 4.	Controls and Procedures	46
PART II		OTHER INFORMATION
	ITEM 1.	Legal Proceedings	47
	ITEM 1A.	Risk Factors	47
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
	ITEM 3.	Defaults Upon Senior Securities	47
	ITEM 4.	Mine Safety Disclosures	47
	ITEM 5.	Other Information	47
	ITEM 6.	Exhibits	48

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.

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PART I – FINANCIAL INFORMATION

ITEM 1.     Financial Statements

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 (in thousands)

	September 30,			December 31,
	2017			2016
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	51,254		$	52,394
Investments, at fair value		369			447
Accounts receivable, net of allowance for doubtful accounts and billing adjustments
of $264 and $402, respectively		2,521			3,171
Inventories		2,047			4,441
Deferred costs		1,933			2,319
Prepaid income taxes		2,374			527
Receivable from earnout escrow		-			2,000
Deposits and other current assets		1,267			1,970
Total current assets		61,765			67,269
Property and equipment, net		3,074			3,805
Intangible assets, net		10,877			28,854
Goodwill		32,304			47,185
Deferred tax assets		34,478			26,568
Deposits and other non-current assets		866			836
Total assets	$	143,364		$	174,517
LIABILITIES AND CAPITAL EQUITY
Current liabilities:
Accounts payable	$	3,201		$	2,790
Income tax payable		-			1,527
Accrued expenses and other current liabilities		6,049			8,426
Deferred revenue, current portion		42,972			48,507
Total current liabilities		52,222			61,250
Deferred revenue, net of current portion		40,071			44,201
Other non-current liabilities		12,529			10,866
Total liabilities		104,822			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 September 30, 2017 and December 31, 2016, respectively		111,783			111,783
Additional paid-in capital		14,566			13,567
Treasury stock (8,940 and 8,988 shares at September 30, 2017
and December 31, 2016, respectively)		(119,381	)		(120,300	)
Retained earnings		31,574			53,785
Total magicJack VocalTec, Ltd. shareholders's equity		38,542			58,835
Noncontrolling interest		-			(635	)
Total capital equity		38,542			58,200
Total liabilities and capital equity	$	143,364		$	174,517

See accompanying notes to condensed consolidated financial statements.

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MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except per share information)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Net revenues	$	21,657		$	24,572		$	67,235		$	73,572
Cost of revenues		7,830			9,509			25,447			27,556
Gross profit		13,827			15,063			41,788			46,016
Operating expenses:
Marketing		1,933			2,680			6,460			5,659
General and administrative		7,330			7,143			29,699			24,330
Impairment of intangible assets and goodwill		-			498			31,527			498
Research and development		1,477			1,314			4,438			3,661
Gain on mark-to-market		(894	)		(2,000	)		(894	)		(2,000	)
Total operating expenses		9,846			9,635			71,230			32,148
Operating income (loss)		3,981			5,428			(29,442	)		13,868
Other income (expense):
Interest and dividend income		42			5			65			21
Other income (expense), net		2			(6	)		(28	)		(11	)
Total other income (expense)		44			(1	)		37			10
Income (loss) before income taxes		4,025			5,427			(29,405	)		13,878
Income tax expense (benefit)		1,574			2,205			(7,194	)		7,407
Net (loss) income		2,451			3,222			(22,211	)		6,471
Net income attributable to noncontrolling interest		-			177			-			481
Net (loss) income attributable to magicJack VocalTec Ltd. common shareholders	$	2,451		$	3,399		$	(22,211	)	$	6,952
(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:
Basic	$	0.15		$	0.21		$	(1.38	)	$	0.44
Diluted	$	0.15		$	0.21		$	(1.38	)	$	0.44
Weighted average common shares outstanding:
Basic		16,114			15,857			16,076			15,786
Diluted		16,114			15,865			16,076			15,935

See accompanying notes to condensed consolidated financial statements.

4

 MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CAPITAL EQUITY

(in thousands)

	Common Stock				Additional Paid-in Capital			Treasury Stock						Retained Earnings			Noncontrolling Interest			Total Capital Equity
	Number		Amount					Number			Amount
Balance, January 1, 2017		25,039	$	111,783	$	13,567			(8,988	)	$	(120,300	)	$	53,785		$	(635	)	$	58,200
Share-based compensation		-		-		2,053			-			-			-			-			2,053
Issuance of ordinary shares		-		-		(1,054	)		85			1,054			-			-			-
Reclassification of shares *		16		-		-			(16	)		-			-			-			-
Purchase of treasury stock		-		-		-			(21	)		(135	)		-			-			(135	)
Deconsolidation of subsidiary		-		-		-			-			-			-			635			635
Net loss		-		-		-			-			-			(22,211	)		-			(22,211	)
Balance, September 30, 2017 (unaudited)		25,055	$	111,783	$	14,566			(8,940	)	$	(119,381	)	$	31,574		$	-		$	38,542

* 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.

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MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Nine Months Ended
	September 30,
	2017			2016
Cash flows from operating activities:
Net (loss) income	$	(22,211	)	$	6,471
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for doubtful accounts and billing adjustments		8			210
Share-based compensation		2,053			3,169
Depreciation and amortization		3,397			3,510
Gain on mark-to-market		-			(2,000	)
Impairment of goodwill and intangible assets		31,527			498
Loss on sale of assets		115			-
Increase of uncertain tax positions		1,789			1,548
Deferred income tax (benefit) provision		(7,910	)		626
Change in operating assets and liabilities
Accounts receivable		635			656
Inventories		2,289			1,562
Deferred costs		303			(219	)
Prepaid income taxes		(2,507	)		2,237
Deposits and other current assets		673			(187	)
Other non-current assets		249			28
Receivable from earnout escrow		2,000			-
Accounts payable		648			1,495
Income taxes payable		38			1,764
Accrued expenses and other current liabilities		(2,377	)		(237	)
Deferred revenue		(9,391	)		(7,737	)
Other non-current liabilities		(993	)		(110	)
Net cash provided by operating activities		335			13,284
Cash flows from investing activities:
Purchase of investments		-			(80	)
Purchases of property and equipment		(510	)		(256	)
Proceeds from sale of investment		245			-
Proceeds from sale of property and equipment		15			-
Acquisition of Broadsmart		-			(40,019	)
Acquisition of intangible assets		(1,090	)		-
Net cash used in investing activities		(1,340	)		(40,355	)
Cash flows from financing activities:
Purchase of treasury stock		(135	)		-
Proceeds from exercise of ordinary share options		-			8
Net cash (used by) provided by financing activities		(135	)		8
Net (decrease) in cash and cash equivalents		(1,140	)		(27,063	)
Cash and cash equivalents, beginning of period		52,394			78,589
Cash and cash equivalents, end of period	$	51,254		$	51,526

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 Nine Months Ended September 30,
	2017		2016
Supplemental disclosures:
Income taxes paid	$	3,313	$	1,304
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 2017, the Company launched magicJack Spark on iOS and Android 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 85% and 86% of the Company’s consolidated revenues in the three and nine months ended September 30, 2017, respectively, were from sales to customers located in the United States. Approximately 90% of the Company’s consolidated revenues in the three and nine months ended September 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 $16.8 million and $19.2 million for the three months ended September 30, 2017 and 2016, respectively, and $52.0 million and $58.8 million for the nine months ended September 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 $1.1 million and $1.4 million for the three months ended September 30, 2017 and 2016, respectively, and $3.5 million and $4.6 million for the nine months ended September 30, 2017 and 2016, respectively. Revenues generated from access and wholesale charges were $0.9 million and $1.2 million for the three months ended September 30, 2017 and 2016, respectively, and $2.9 million and $3.9 million for the nine months ended September 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 $2.6 million and $2.8 million for the three months ended September 30, 2017 and 2016, respectively, and $8.3 million and $6.2 million for the nine months ended September 30, 2017 and 2016, respectively.

The SMB segment did not generate significant revenue for the three and nine months ended September 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 nine months ended September 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 June 30, 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 nine months ended September 30, 2017.

The operations of the joint venture for the three and nine months ended September 30, 2017 and 2016 were not significant to the Company’s financial statements. The Company’s consolidated financial statements for the three and nine months ended September 30, 2016, include adjustments to income attributable to magicJack VocalTec Ltd. common shareholders of $0.2 million and $0.5 million, respectively, to recognize the impact of the noncontrolling interest.  The Company’s consolidated financial statements did not include any adjustments to income attributable to magicJack VocalTec Ltd. common shareholders for the three and nine months ended September 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.

9

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 September 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.

10

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 September 30, 2017 and December 31, 2016, respectively.  The value of time deposits at September 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 nine months ended September 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 September 30, 2017, the Company had cash and cash equivalents totaling $51.3 million, which included (i) $50.4 million in U.S. financial institutions, and (ii) $0.9 million in foreign financial institutions.

The Company’s non-interest bearing cash balances in U.S. banks which included $1.8 million in one individual financial institution, were fully insured, except for $106 thousand that exceeded insurance limits at September 30, 2017. The Company had money market accounts with financial institutions with balances totaling approximately $48.5 million at September 30, 2017.

For the Core Consumer segment, no telecommunication carrier accounted for more than 10% of the segment’s gross accounts receivable at September 30, 2017 and December 31, 2016. One U.S. retail customer accounted for approximately 13% of the segment’s gross accounts receivable at September 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 nine months ended September 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 36% of gross accounts receivable at September 30, 2017. No customer accounted for more than 10% of gross accounts receivable at December 31, 2016.  For the three months ended September 30, 2017 and 2016, two customers accounted for approximately 27% and 30% of the segment’s total operating revenues, respectively. For the nine months ended September 30, 2017 and 2016, two customers accounted for approximately 30% 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 nine months ended September 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 recorded the funds on the accompanying unaudited condensed consolidated balance sheets as a receivable from earnout escrow.  These funds were received during the nine months ended September 30, 2017.

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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 5, “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 September 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 and $0.5 million on intangible assets during the nine months ended September 30, 2017 and 2016, respectively. 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.

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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 nine months ended September 30, 2017. There was no impairment of goodwill during the nine months ended September 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 nine months ended September 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.

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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 nine months ended September 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 nine months ended September 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.

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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 $0.7 million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively, and $2.4 million and $2.7 million for the nine months ended September 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 nine months ended September 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 Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Advertising media buys	$	550	$	1,556	$	2,469	$	3,056
Marketing personnel related		586		668		1,806		1,287
Other marketing projects		797		456		2,185		1,316
Total marketing expenses	$	1,933	$	2,680	$	6,460	$	5,659

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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 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 $44 thousand during the three and nine months ended September 30, 2017, respectively. The Company increased the valuation allowance by $0.3 million and decreased the valuation allowance by $0.2 million during the three and nine months ended September 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 a decrease of $20 thousand and an increase of $1.6 million in the three and nine months ended September 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 $0.3 million and $1.5 million in the three and nine months ended September 30, 2016, 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 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 September 30, 2017, the estimated annual effective income tax rate is expected to approximate 22.0%, 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 nine months ended September 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 of options to purchase ordinary shares or the vesting of restricted stock.

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.

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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 will adopt the requirements of the new standard in the first quarter of 2018 and has preliminarily selected the modified retrospective transition method. Under this method, the standard will be applied only to the most current period presented and the cumulative effect of applying the standard will be recognized at the date of initial application.  The Company is also considering optional practical expedients related to applying the new standard to its costs of obtaining contracts and to its portfolios of contracts. The Company is reviewing its accounting policies, processes, and system requirements and has engaged consultants to assist with and document the analysis as well as the implementation of any required changes. The Company is also evaluating the potential impact on the Company’s financial condition, results of operations and cash flows, as well as its financial statement disclosures. The Company anticipates completing its assessment by December 31, 2017.

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 nine months ended September 30, 2017, this adoption had no tax impact to the Company.  The Company will continue to monitor this for each reporting period going forward.

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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.

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 September 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 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.

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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

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):

	September 30, 2017		December 31, 2016
Raw materials	$	648	$	1,455
Finished goods		1,399		2,986
Total	$	2,047	$	4,441

The Company (recovered) wrote-off obsolete inventory of approximately ($33) thousand and $146 thousand during the three months ended September 30, 2017 and 2016, respectively, and $370 thousand and $229 thousand during the nine months ended September 30, 2017 and September 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		September 30,			December 31,
	(in years)		2017			2016
Switches		3 - 15	$	9,877		$	9,699
Computers		3		2,619			2,866
Furniture		5 - 7		201			269
Leasehold-improvements		*		847			893
Accumulated depreciation				(10,470	)		(9,922	)
Total			$	3,074		$	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 September 30, 2017 and 2016 was $0.3 million. Depreciation expense for the nine months ended September 30, 2017 and 2016 was $1.0 million and $0.9 million, respectively.

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NOTE 6 – INTANGIBLE ASSETS

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

	Estimated Useful Lives (in years)		September 30, 2017									December 31, 2016
			Gross Carrying		Accumulated Amortization					Weighted- Average Life		Gross Carrying		Accumulated Amortization					Weighted- Average Life
			Amount					Net				Amount					Net
Technology		3 - 17	$	3,110	$	(2,944	)	$	166		4.51	$	3,110	$	(2,854	)	$	256		4.71
Intellectual property rights		3 - 17		14,162		(11,671	)	$	2,491		4.46		14,162		(10,794	)		3,368		4.87
Covenants not-to-compete and not-to-sue		2 - 5		2,185		(2,129	)	$	56		1.67		2,185		(2,107	)		78		3.17
Tradename		3 - 6		131		(131	)	$	-		-		131		(131	)		-		-
Customer relationships		5 - 10		4,900		(766	)	$	4,134		8.46		22,600		(2,249	)		20,351		9.21
Backlog		1		800		(800	)	$	-		-		800		(800	)		-		-
Software license		10		2,297		(386	)	$	1,911		1.70		1,207		(80	)		1,127		8.00
Process know how		5		400		(32	)	$	368		5.50		1,100		(87	)		1,013		6.08
Other				-				$	-		-		-		-			-		-
Intangible assets subject to amortization				27,985		(18,859	)		9,126				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	$	(18,859	)	$	10,877			$	47,956	$	(19,102	)	$	28,854

Amortization expense for the three months ended September 30, 2017 and 2016 was $0.7 million and $1.0 million, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $2.4 million and $2.7 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 September 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

During the three and nine months ended September 30, 2016, impairment losses of $0.5 million were recognized in General and Administrative expense under the Consumer segment in the statement of operations. The impairments were comprised of: (i) a Telecom license included in the “Other” category of amortizable intangible assets for $249 thousand (net of accumulated amortization) deemed obsolete, and (ii) domain names not subject to amortization for $249 thousand that were not renewed.

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

Fiscal Year	Amortization Expense
Three months ending December 31, 2017	$	687
2018		2,231
2019		1,619
2020		1,079
2021		766
Thereafter		2,744
	$	9,126

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NOTE 7 – GOODWILL

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

	Nine Months Ended September 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 September 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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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 September 30, 2017 and December 31, 2016 (in thousands):

	September 30, 2017		December 31, 2016
magicJack devices	$	5,801	$	7,962
Access right renewals		34,034		36,515
Mobile apps		716		808
Prepaid minutes		2,301		2,851
Other		120		371
Deferred revenue, current		42,972		48,507
Deferred revenue, non-current*		40,071		44,201
Total deferred revenue	$	83,043	$	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 $2.9 million for the three months ended September 30, 2017 and 2016, respectively, and $7.5 million and $9.6 million for the nine months ended September 30, 2017 and 2016, respectively. For the Enterprise segment, such costs were approximately $0.6 million and $0.8 million for the three months ended September 30, 2017 and 2016, respectively, and $1.9 million and $1.7 million for the nine months ended September 30, 2017 and 2016, respectively. Costs related to providing broadband telephone service to SMB segment customers were not significant for the three and nine months ended September 30, 2016 and the three months ended March 31, 2017.

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

Recognition Period	Estimated Recognition of Deferred Revenues
Next 12 months	$	42,972
13-24 Months		16,698
25-36 Months		10,769
37-48 months		6,702
49-60 Months		3,268
61+ Months		2,634
	$	83,043

NOTE 9 – OTHER LIABILITIES

As of September 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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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   subject to negotiation of a definitive Stipulation of Settlement, which would then have to be approved by the Court. The parties thereafter entered into a definitive Stipulation of Settlement.  On September 29, 2017, the court entered an order granting preliminary approval to the settlement and scheduled a final hearing on approval of the settlement for January 19, 2018. The Company has insurance coverage applicable to this settlement with a retention amount of $1.0 million. As of September 30, 2017, the Company has accrued $0.3 million of expense, reflecting anticipated future expenditures for the remaining deductible under its insurance coverage.

On August 11, 2017, a putative class action lawsuit was filed against the Company and its Board of Directors in the United States District Court for the Southern District of Florida.  The complaint alleges claims against the Company and its Board of Directors for violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, arising from statements in the April 2017 Proxy and the July 2017 Proxy that allegedly misrepresented material facts. The Company has not responded to the initial complaint but plans to file a motion to dismiss.  The Company believes that the case is without merit and cannot estimate the amount of potential liability, if any, that could arise from this issue.  The Company does not believe that the case will have a material adverse effect on its business, operating results, financial condition or cash flows.

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.

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. As of September 30, 2017, the Company has not reached agreement with the taxing authority.

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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 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 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 the restricted stock.

In August 2017, the Company issued 2,333 of its ordinary shares held as treasury shares with a cost of $29 thousand, or $12.32 per share, to a Board member as a result of restricted stock vesting.

NOTE 12 – SHARE-BASED COMPENSATION

The Company has granted ordinary share optionsand restricted stock 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 Amended and Restated magicJack VocalTec Ltd. 2013 Stock Incentive Plan and the Amended and Restated 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 and ordinary shares. In April 2014 and July 2017, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of September 30, 2017, the aggregate number of shares subject to awards under the 2013 Plans, as amended, was 5,600,000. The Company had previously granted shares under the VocalTec amended Master Stock Plan (the “2003 Plan”) which expired in April 2013. 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 restricted stock for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Ordinary share options	$	407	$	408	$	1,020	$	1,866
Restricted stock		343		511		1,033		1,303
	$	750	$	919	$	2,053	$	3,169

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017			2016
Cost of revenues	$	57	$	24	$	159		$	53
Marketing		50		49		64			125
General and administrative		643		820		1,840			2,839
Research and development		-		26		(10	)		152
	$	750	$	919	$	2,053		$	3,169

The decrease in share-based compensation is due primarily to forfeitures related to reduced headcount and awards that fully vested 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 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 nine months ended September 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		2,896,304		$	9.42
Exercised		-		$	-
Forfeited(2)		(2,501,614	)	$	11.12
Expired or cancelled		(276,436	)	$	11.01
Outstanding at September 30, 2017 (unaudited)		3,606,313		$	9.78		3.80	$	-
Vested at September 30, 2017 (unaudited)		710,009		$	11.24		0.75	$	-

(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 $0.4 million for the three months ended September 30, 2017 and 2016, and $1.0 million and $1.9 million for the nine months ended September 30, 2017 and 2016, respectively. No ordinary share options were exercised during the nine months ended September 30, 2017. The total intrinsic value of ordinary share options exercised during the nine months ended September 30, 2016 was $6 thousand. As of September 30, 2017, there was approximately $5.7 million 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 2.42 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 2,896,304 ordinary share options during the nine months ended September 30, 2017 with a weighted average fair value of $2.14. The Company granted 1,107,040 ordinary share options during the nine months ended September 30, 2016 with a weighted average fair value of $2.75.  The grants were measured using the following assumptions:

	Nine Months Ended September 30,
	2017			2016
Expected term (in years)	3.22 to 3.50				3.50
Dividend yield		0.00	%		0.00	%
Expected volatility		48.88	%	52.15% to 52.47		%
Risk free interest rate	1.53% to 1.63		%	0.95% to 1.13		%
Forfeiture rate		0.00	%		0.00	%

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Restricted Stock

The Company may also award restricted stock 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. During the nine months ended September 30, 2017 and 2016 the Company granted 276,890 and 295,305 restricted stock awards, respectively, under the 2013 Plans, as amended.

The following table summarizes the Company’s restricted stock award activity for the nine months ended September 30, 2017:

				Average
	Number of Shares			Fair Value
				at Grant Date
December 31, 2016		482,085		$	7.70
Granted		276,890		$	8.08
Vested		(85,543	)	$	12.17
Forfeited		(248,876	)	$	7.45
Non-vested at September 30, 2017		424,556		$	7.37

Share-based compensation expense recognized for restricted stock was approximately $0.3 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and $1.0 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was approximately $2.5 million in unrecognized share-based compensation costs related to restricted stock. The unrecognized share-based compensation expense is expected to be recognized over a weighted average remaining vesting period of 0.57 years.

NOTE 13 – INCOME TAXES

Total income tax expense (benefit) was $1.6 million and $2.2 million for the three months ended September 30, 2017 and 2016, respectively, and ($7.2) million and $7.4 million for the nine months ended September 30, 2017 and 2016, respectively. The calculation of the Company’s effective income tax rate for the three and nine months ended September 30, 2017 and 2016 was (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Income before income taxes	$	4,025		$	5,427		$	(29,405	)	$	13,878
Income tax expense (benefit)		1,574			2,205			(7,194	)		7,407
Effective income tax rate		39.11	%		40.63	%		24.47	%		53.37	%

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 September 30, 2017.

For the three months ended September 30, 2017, the Company recorded income tax expense of $1.6 million, which is higher than the expected tax expense of $1.4 million, using the statutory income tax rate of 34% due to reductions in the Company’s deferred tax assets related to the forfeiture of options totaling $0.5 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 nine months ended September 30, 2017, the Company recorded an income tax benefit of ($7.2) million, which is lower than the expected tax benefit of ($10.0) million, using the statutory rate of 34%, due, in part, to revaluations of the Israel net operating loss carryforwards of ($0.8) 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 $2.8 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 ordinary shares that would have been issued if the Company’s dilutive potential common shares had been exercised or vested.  The Company’s potential common shares are the share-based awards (ordinary share options and restricted stock)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 (“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 September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
Numerator:
Net income (loss) attributable to common shareholders	$	2,451	$	3,399	$	(22,211	)	$	6,952
Denominator:
Denominator for basic net income per share -
weighted average ordinary shares outstanding		16,114		15,857		16,076			15,786
Effect of dilutive share-based awards outstanding		-		6		-			141
Effect of dilutive share-based awards vested,
exercised or expired during the period		-		2		-			8
Denominator for diluted net income per share -
weighted average ordinary shares outstanding		16,114		15,865		16,076			15,935
Net income (loss) per common share attributable to
common shareholders:
Basic	$	0.15	$	0.21	$	(1.38	)	$	0.44
Diluted	$	0.15	$	0.21	$	(1.38	)	$	0.44
Anti-dilutive share-based awards not included above		4,030,869		3,835,350		4,030,869			2,836,850

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.

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.

Neither of the contingent payments had been made as of September 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 recorded a $2.0 million receivable from earnout escrow and a gain on mark-to-market in the accompanying unaudited condensed consolidated balance sheets and statements of operations.

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On June 23, 2017, the founders of Broadsmart left the Company.  On August 4, 2017, the Company reached a mutual agreement with the founders 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 until March 2019, pursuant to the provisions of the purchase agreement, to cover potential claims by the Company for telecommunications taxes.  During the nine months ended September 30, 2017, the Company collected both escrow amounts.  The $1.0 million was recorded as a gain on mark-to-market, less amounts due from the founders and the $2.0 million receivable from earnout escrow was removed.

The agreement also provided that the Company will execute an agreement to acquire certain assets of North American Telecommunications Inc. (“NATC”) for $10 thousand, subject to any required regulatory approvals.

Pro Forma Financial Information

The following table presents the unaudited pro forma combined results of operations of the Company and Broadsmart for the nine months ended September 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.

	Nine Months Ended
	September 30, 2016
Net revenues	$	76,113
Net income	$	6,878

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 June 30, 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 nine month periods ended September 30, 2017 and 2016 and as of September 30, 2017 and December 31, 2016 is presented by reportable segment below (in thousands):

	For the Three Months Ended September 30, 2017
	Previous Core Consumer			SMB		Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	19,010			-	$	19,010			2,691			-		(44	)	$	21,657
Cost of revenues		6,099			-		6,099			1,731			-		-			7,830
Gross profit (loss)		12,911			-		12,911			960			-		(44	)		13,827
Marketing		1,563			-		1,563			370			-		-			1,933
General and
administrative		6,656			-		6,656			718			-		(44	)		7,330
Impairment of goodwill
and intangible assets		-			-		-			-			-		-			-
Research and
development		1,472			-		1,472			5			-		-			1,477
Gain on mark-to-market		(894	)		-		(894	)		-			-		-			(894	)
Operating expenses		8,797			-		8,797			1,093			-		(44	)		9,846
Operating income (loss)		4,114			-		4,114			(133	)		-		-			3,981
Other Data:
Depreciation expense	$	254			-	$	254			67			-		-		$	321
Amortization expense	$	472			-	$	472			184			-		-		$	656

	For the Nine Months Ended September 30, 2017
	Previous Core Consumer			SMB			Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	58,774			116		$	58,890			8,462			-		(117	)	$	67,235
Cost of revenues		19,441			131			19,572			5,875			-		-			25,447
Gross profit (loss)		39,333			(15	)		39,318			2,587			-		(117	)		41,788
Marketing		4,525			1,089			5,614			846			-		-			6,460
General and
administrative		25,930			1,056			26,986			2,830			-		(117	)		29,699
Impairment of goodwill
and intangible assets		-			-			-			31,527			-		-			31,527
Research and
development		3,836			596			4,432			6			-		-			4,438
Gain on mark-to-market		(894	)		-			(894	)		-			-		-			(894	)
Operating expenses		33,397			2,741			36,138			35,209			-		(117	)		71,230
Operating income (loss)		5,936			(2,756	)		3,180			(32,622	)		-		-			(29,442	)
Other Data:
Depreciation expense	$	790			21		$	811			175			-		-		$	986
Amortization expense	$	1,196			-		$	1,196			1,215			-		-		$	2,411

	September 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	$	123,257		-	$	123,257		20,140		-		(33	)	$	143,364

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	For the Three Months Ended September 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	21,752			19		$	21,771			2,862			5			(66	)	$	24,572
Cost of revenues		7,174			32			7,206			2,264			39			-			9,509
Gross profit (loss)		14,578			(13	)		14,565			598			(34	)		(66	)		15,063
Marketing		1,441			1,026			2,467			67			146			-			2,680
General and
administrative		4,610			1,538			6,148			795			266			(66	)		7,143
Impairment of goodwill
and intangible assets		498			-			498			-			-			-			498
Research and
development		913			401			1,314			-			-			-			1,314
Gain on mark-to-market		(2,000	)		-			(2,000	)		-			-			-			(2,000	)
Operating expenses		5,462			2,965			8,427			862			412			(66	)		9,635
Operating income (loss)		9,116			(2,978	)		6,138			(264	)		(446	)		-			5,428
Other Data:
Depreciation expense	$	264			17		$	281			50			-			-		$	331
Amortization expense	$	364			-		$	364			633			-			-		$	997

	For the Nine Months Ended September 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	67,299			19		$	67,318			6,309			11			(66	)	$	73,572
Cost of revenues		22,469			46			22,515			4,993			48			-			27,556
Gross profit (loss)		44,830			(27	)		44,803			1,316			(37	)		(66	)		46,016
Marketing		3,762			1,400			5,162			144			353			-			5,659
General and
administrative		16,834			4,584			21,418			2,168			810			(66	)		24,330
Impairment of goodwill
and intangible assets		498			-			498			-			-			-			498
Research and
development		2,890			766			3,656			-			5			-			3,661
Gain on mark-to-market		(2,000	)		-			(2,000	)		-			-			-			(2,000	)
Operating expenses		21,984			6,750			28,734			2,312			1,168			(66	)		32,148
Operating income (loss)		22,846			(6,777	)		16,069			(996	)		(1,205	)		-			13,868
Other Data:
Depreciation expense	$	725			20		$	745			114			-			-		$	859
Amortization expense	$	1,267			-		$	1,267			1,384			-			-		$	2,651

	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

On November 9, 2017, the Company entered into a definitive agreement with B. Riley Financial, Inc. under the terms of which, B. Riley Financial has agreed to purchase all of the outstanding ordinary shares of the Company for $8.71 per share in a merger transaction.  The agreement is contingent upon shareholder and regulatory approval in the United States and Israel.  For additional information, please refer to the Company’s Current Report on Form 8-K filed on November 9, 2017.

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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 September 30, 2017 and for the three and nine month periods ended September 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  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 85% and 86% of our consolidated revenues in the three and nine months ended September 30, 2017, respectively, were from sales to customers located in the United States. Approximately 90% of our consolidated revenues in the three and nine months ended September 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 nine months ended September 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 September 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 nine months ended September 30, 2017 (in thousands).

	September 30,		December 31,
	2017		2016		Change
	(Unaudited)
Cash and cash equivalents	$	51,254	$	52,394	$	(1,140	)	(2.2	)%
Inventories	$	2,047	$	4,441	$	(2,394	)	(53.9	)
Prepaid income taxes	$	2,374	$	527	$	1,847		350.5
Receivable from earnout escrow	$	-	$	2,000	$	(2,000	)	(100.0	)
Intangible assets, net	$	10,877	$	28,854	$	(17,977	)	(62.3	)
Goodwill	$	32,304	$	47,185	$	(14,881	)	(31.5	)
Deferred tax asset	$	34,478	$	26,568	$	7,910		29.8
Income tax payable	$	-	$	1,527	$	(1,527	)	(100.0	)
Accrued expenses and other current liabilities	$	6,049	$	8,426	$	(2,377	)	(28.2	)
Total deferred revenue	$	83,043	$	92,708	$	(9,665	)	(10.4	)
Other non-current liabilities	$	12,529	$	10,866	$	1,663		15.3

During the nine months ended September 30, 2017, cash and cash equivalents decreased $1.1 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 business, and legal fees and other costs associated with our response to activist shareholder initiatives, the strategic process and other ongoing litigation matters. These decreases were partially offset by the receipt of the $2.0 million receivable from the earn-out escrow and an additional $1.0 million in escrow funds related to the Broadsmart acquisition. Refer to Note 15, “Broadsmart Acquisition” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details. A detailed discussion of this change is provided in “Liquidity and Capital Resources”.

During the nine months ended September 30, 2017, inventories decreased $2.4 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 nine months ended September 30, 2017, prepaid income taxes increased $1.8 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 nine months ended September 30, 2017, receivable from earnout escrow decreased $2.0 million due to collection of the escrow funds.

During the nine months ended September 30, 2017, intangible assets decreased $18.0 million. The decrease in intangible assets is primarily attributable to the $16.6 million impairment of intangible assets for the Enterprise reporting unit, and $2.4 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 nine months ended September 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 nine months ended September 30, 2017, deferred tax asset increased $7.9 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.

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During the nine months ended September 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.

During the nine months ended September 30, 2017, accrued expenses and other current liabilities decreased $2.4 million due primarily to the following items that were accrued for as of December 31, 2016 that were satisfied during the nine months ended September 30, 2017; (i) a $0.6 million accrual for retailer promotions, (ii) a $0.6 million payroll accrual related to restricted stock vestings, (iii) a $0.5 million accrual for in-transit inventory, and (iv) $0.6 million in accrued expenses related to the SMB business.

During the nine months ended September 30, 2017, total deferred revenue decreased $9.7 million due primarily to the recognition of 2016 deferred revenue exceeding the deferral associated with 2017 sales.

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

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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 September 30,						2017 Compared to					Nine Months Ended September 30,						2017 Compared to
	2017			2016			2016					2017			2016			2016
Net Revenues
Sale of magicJack devices	$	2,608		$	2,849		$	(241	)	(8.5	)%	$	7,954		$	9,641		$	(1,687	)	(17.5	)
Access right renewals		12,778			14,456			(1,678	)	(11.6	)		39,328			44,464			(5,136	)	(11.6	)
Shipping and handling		297			228			69		30.3			1,012			609			403		66.2
magicJack-related products		1,126			1,638			(512	)	(31.3	)		3,723			4,082			(359	)	(8.8	)
Prepaid minutes		1,111			1,390			(279	)	(20.1	)		3,490			4,606			(1,116	)	(24.2	)
Access and wholesale charges		897			1,158			(261	)	(22.5	)		2,944			3,898			(954	)	(24.5	)
UCaaS		2,646			2,830			(184	)	(6.5	)		8,344			6,243			2,101		33.7
Other		194			23			171		*			440			29			411		*
Total Net Revenue		21,657			24,572			(2,915	)	(11.9	)		67,235			73,572			(6,337	)	(8.6	)
Cost of Revenues
Cost of devices and related
products		1,701			2,325			(624	)	(26.8	)		6,285			6,450			(165	)	(2.6	)
Shipping and handling		273			481			(208	)	(43.2	)		1,094			1,310			(216	)	(16.5	)
Credit card processing fees		396			441			(45	)	(10.2	)		1,273			1,405			(132	)	(9.4	)
Network and carrier charges		2,436			2,866			(430	)	(15.0	)		7,510			9,601			(2,091	)	(21.8	)
UCaaS		1,731			2,264			(533	)	(23.5	)		5,875			4,993			882		17.7
Other		1,293			1,132			161		14.2			3,410			3,797			(387	)	(10.2	)
Total Cost of Revenues		7,830			9,509			(1,679	)	(17.7	)		25,447			27,556			(2,109	)	(7.7	)
Gross Profit		13,827			15,063			(1,236	)	(8.2	)		41,788			46,016			(4,228	)	(9.2	)
Operating expenses:
Marketing		1,933			2,680			(747	)	(27.9	)		6,460			5,659			801		14.2
General and administrative		7,330			7,143			187		2.6			29,699			24,330			5,369		22.1
Impairment of goodwill and
intangible assets		-			498			(498	)	(100.0	)		31,527			498			31,029		*
Research and development		1,477			1,314			163		12.4			4,438			3,661			777		21.2
Gain on mark-to-market		(894	)		(2,000	)		1,106		55.3			(894	)		(2,000	)		1,106		55.3
Total operating expenses		9,846			9,635			211		2.2			71,230			32,148			39,082		121.6
Operating income		3,981			5,428			(1,447	)	(26.7	)		(29,442	)		13,868			(43,310	)	(312.3	)
Other income (expense):
Interest and dividend income		42			5			37		*			65			21			44		*
Interest expense		-			-			-		*			-			-			-		*
Other income (expense), net		2			(6	)		8		*			(28	)		(11	)		(17	)	*
Total other income (expense)		44			(1	)		45		*			37			10			27		*
(Loss) income before
income taxes		4,025			5,427			(1,402	)	(25.8	)		(29,405	)		13,878			(43,283	)	(311.9	)
Income tax (benefit) expense		1,574			2,205			(631	)	(28.6	)		(7,194	)		7,407			(14,601	)	(197.1	)
Net (loss) income	$	2,451		$	3,222		$	(771	)	(23.9	)	$	(22,211	)	$	6,471		$	(28,682	)	(443.2	)

* - Not meaningful.

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Core Consumer Segment

	Three Months Ended September 30,						2017 Compared to					Nine Months Ended September 30,						2017 Compared to
	2017			2016			2016					2017			2016			2016
Net Revenues	$	19,010		$	21,771		$	(2,761	)	(12.7	)%	$	58,890		$	67,318		$	(8,296	)	(12.3	)
Cost of revenues		6,100			7,206			(1,106	)	(15.3	)		19,573			22,515			(2,942	)	(13.1	)
Gross Profit		12,910			14,565			(1,655	)	(11.4	)		39,317			44,803			(5,354	)	(12.0	)
Operating expenses:
Marketing		1,563			2,467			(904	)	(36.6	)		5,614			5,162			452		8.8
General and administrative		6,656			6,148			508		8.3			26,986			21,418			5,700		26.8
Impairment of goodwill and																			-
intangible assets		-			498			(498	)	(100.0	)		-			498			(498	)	(100.0	)
Research and development		1,472			1,314			158		12.0			4,432			3,656			776		21.2
Gain on mark-to-market		(894	)		(2,000	)		1,106		55.3			(894	)		(2,000	)		1,106		55.3
Total operating expenses		8,797			8,427			370		4.4			36,138			28,734			7,536		26.3
Operating income		4,113			6,138			(2,025	)	(33.0	)		3,179			16,069			(12,890	)	(80.2	)

Enterprise Segment

	Three Months Ended September 30,						2017 Compared to					Nine Months Ended September 30,						2017 Compared to
	2017			2016			2016					2017			2016			2016
Net Revenues	$	2,691		$	2,862		$	(171	)	(6.0	)%	$	8,462		$	6,309		$	2,153		34.1
Cost of revenues		1,731			2,264			(533	)	(23.5	)		5,875			4,993			882		17.7
Gross Profit		960			598			362		60.5			2,587			1,316			1,271		96.6
Operating expenses:
Marketing		370			67			303		452.2			846			144			702		487.5
General and administrative		718			795			(77	)	(9.7	)		2,830			2,168			662		30.5
Impairment of goodwill and
intangible assets		-			-			-		-			31,527			-			31,527		100.0
Research and development		5			-			5		100.0			6			-			6		100.0
Total operating expenses		1,093			862			231		26.8			35,209			2,312			32,897		*
Operating income		(133	)		(264	)		131		49.6			(32,622	)		(996	)		(31,626	)	*

Other Segment

	Three Months Ended September 30,					2017 Compared to					Nine Months Ended September 30,					2017 Compared to
	2017		2016			2016					2017		2016			2016
Net Revenues	$	-	$	5		$	(5	)	(100.0	)%	$	-	$	11		$	(11	)	(100.0	)
Cost of revenues		-		39			(39	)	(100.0	)		-		48			(48	)	(100.0	)
Gross Profit		-		(34	)		34		100.0			-		(37	)		37		100.0
Operating expenses:
Marketing		-		146			(146	)	(100.0	)		-		353			(353	)	(100.0	)
General and administrative		-		266			(266	)	(100.0	)		-		810			(810	)	(100.0	)
Research and development		-		-			-		-			-		5			(5	)	(100.0	)
Total operating expenses		-		412			(412	)	(100.0	)		-		1,168			(1,168	)	(100.0	)
Operating income		-		(446	)		446		100.0			-		(1,205	)		1,205		100.0

39

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 and mobile apps – 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: Represent revenues from access rights granted to users of the magicApp, magicJack Connect App and magicJack Spark 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 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;

40

· 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 SEPTEMBER 30, 2017 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016

Net Revenues

Total net revenue was $21.7 million and $24.6 million for the three months ended September 30, 2017 and 2016, respectively, representing a decrease of $2.9 million, or 11.9%. The decrease was primarily attributable to the following:

· $1.7 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;

· $0.5 million decrease in revenues from magicJack related products primarily due to discontinuing the sale and promotion of the  powerbank in the third quarter of 2017;

· $0.3 million decrease in revenues from prepaid minutes reflecting declining usage levels; and

· $0.3 million decrease in revenues from access and wholesale charges primarily due to lower network traffic.

For the three months ended September 30, 2017 and 2016, sales of the magicJack devices through retail outlets represented approximately 60% and 56%, respectively, of sales of all magicJack devices sold. For the same periods, direct sales represented approximately 40% and 44%, respectively, of magicJack devices sold. For the three months ended September 30, 2017 and 2016, no retailer accounted for more than 10% of our consolidated net revenue.

Cost of Revenues

Total cost of revenues was $7.8 million and $9.5 million for the three months ended September 30, 2017 and 2016, respectively, representing a decrease of approximately $1.7 million, or 17.7%.

· This decrease in cost of revenues was primarily attributable to: (i) a $0.6 million decrease in cost of devices and related products reflecting lower sales, (ii) a $0.4 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 (iii) $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 $9.8 million and $9.6 million for three months ended September 30, 2017 and 2016, respectively, representing an increase of $0.2 million, or 2.2%. This change in operating expenses is primarily attributable to:

· a $1.1 million decrease in unusual gains on mark-to-market related to Broadsmart, Refer to Note 15, “Broadsmart Acquisition” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

· offset by

i. a $0.7 million decrease in marketing expenses primarily related to marketing spend in the SMB business of $1.0 million during 2016 that was non-recuring in 2017.

ii. a $0.5 million impairment charge in the Core Consumer segment in 2016 that was non-recuring in 2017.

41

Income Taxes

Total income tax expense was $1.6 million and $2.2 million for the three months ended September 30, 2017 and 2016, respectively. The calculation of our effective income tax rate for the three months ended September 30, 2017 and 2016 was (in thousands):

	Three Months Ended
	September 30,
	2017			2016
Income before income taxes	$	4,025		$	5,427
Income tax expense		1,574			2,205
Effective income tax rate		39.11	%		40.63	%

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 September 30, 2017.

For the three months ended September 30, 2017, we recorded income tax expense of $1.6 million, which is higher than the expected tax expense of $1.4 million, using the statutory income tax rate of 34% due primarily to reductions in our deferred tax assets related to the forfeiture of options totaling $0.4 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 22.0%, 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 Income Attributable to Common Shareholders

As a result of the foregoing items, net income attributable to common shareholders decreased to $2.5 million in the three months ended September 30, 2017, as compared to net income attributable to common shareholders of $3.4 million in the three months ended September 30, 2016. Net income attributable to common shareholders per diluted ordinary share was $0.15 for the three months ended September 30, 2017, as compared to net income attributable to common shareholders of $0.21 per diluted ordinary share in the prior year. The change was primarily due to declining revenue and lower gains on mark-to-market related to Broadsmart included in operating expenses.

NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2016

Net Revenues

Total net revenue was $67.2 million and $73.6 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $6.3 million, or 8.6%. The decrease was primarily attributable to the following:

· $1.7 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;

· $5.1 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;

· $1.1 million decrease in revenues from prepaid minutes resulting from declining usage levels; and

· $1.0 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 i) an increase of $2.1 million in revenues from UCaaS reflecting a full nine months of revenue in the current year, ii) an increase of $0.4 million in shipping and handling and iii) an increase of $0.4 million in other revenues.

For the nine months ended September 30, 2017 and 2016, sales of the magicJack devices through retail outlets represented approximately 52% and 54%, respectively, of sales of all magicJack devices sold. For the same periods, direct sales represented approximately 48% and 46%, respectively, of magicJack devices sold. For the nine months ended September 30, 2017 and 2016, no retailer accounted for more than 10% of our consolidated net revenue.

42

Cost of Revenues

Total cost of revenues was $25.4 million and $27.6 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of approximately $2.1 million, or 7.7%.  The primary changes in cost of revenues were: (i) a $2.1 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) $0.4 million decrease in other cost of revenues primarily attributable to a decrease in personnel related costs; partially offset by: i) a $0.9 million increase in UCaaS related cost of goods sold, reflecting a full nine months of operations.

Operating Expenses

Total operating expenses were $71.2 million and $32.1 million for nine months ended September 30, 2017 and 2016, respectively, representing an increase of $39.1 million, or 121.6%. This change in operating expenses is primarily attributable to:

· A $31.0 increase in impairment of intangible assets consisting of a $31.5 million impairment of intangible assets, including goodwill, related to the Enterprise segment in 2017 compared to $0.5 million impairment of domain names and other intangibles in 2016. 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 $0.8 million increase in marketing expense, primarily related to increased advertising research in the Core Consumer segment and a shift from marketing the magicJack device to marketing magicJack Spark,

· a $5.4 million increase in G&A expense due to several factors including:

i. a $5.7 million increase in costs related to the Core Consumer segment, primarily composed of: a) a $3.3 million increase in personnel related expenses primarily reflecting severance and new executive officer compensation including sign-on bonuses, b) a $4.5 million increase in legal fees related to the response to activist shareholders, strategic process and other litigation matters, and c) a $0.4 million asset impairment related to our exit from our joint venture in the home consumer product market; partially offset by a $3.5 million decrease in costs related to SMB activity reflecting the scaling back of the Alpharetta location and

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

iii. These increases were partially offset by a $0.8 million decrease in costs related to other initiatives.

· a $0.8 million increase in R&D expense, primarily related to increases in personnel for the Core Consumer segment for product development of the new Spark mobile app and a new chip for future device upgrades.

· A $1.1 million decrease in unusual gains on mark-to-market related to Broadsmart.  Refer to Note 15, “Broadsmart Acquisition” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

Income Taxes

Total income tax (benefit) expense was ($7.2) million and $7.4 million for the nine months ended September 30, 2017 and 2016, respectively. The calculation of our effective income tax rate for the nine months ended September 30, 2017 and 2016 was (in thousands):

	Nine Months Ended
	September 30,
	2017			2016
(Loss) income before income taxes	$	(29,405	)	$	13,878
Income tax (benefit) expense		(7,194	)		7,407
Effective income tax rate		24.47	%		53.37	%

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 September 30, 2017.

For the nine months ended September 30, 2017, we recorded an income tax benefit of ($7.2) million, which is lower than the expected tax benefit of ($10.0) million, using the statutory income tax rate of 34% due, in part, to 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 totaling $2.8 million, partially offset by revaluations of our Israel net operating loss carryforwards of ($0.8) 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 22.0%, 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.

43

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 ($22.2) million in the nine months ended September 30, 2017, as compared to net income attributable to common shareholders of $7.0 million in the nine months ended September 30, 2016. Net loss attributable to common shareholders per diluted ordinary share was ($1.38) for the nine months ended September 30, 2017, as compared to net income attributable to common shareholders of $0.44 per diluted ordinary share in the prior year. The change was primarily due to the impairment of the Enterprise segment intangible assets, declining revenue in the Core business and an increase in operating expenses related to the Company’s response to activist shareholders and other legal matters as well as costs associated with management change.

BUSINESS TRENDS

Revenues in our Core Consumer segment continued to decline during the nine months ended September 30, 2017. We remain encouraged by the loyalty of our existing customer base and we continue to undertake efforts to improve retention, invest in new product development and innovation, capitalize on our strong retail distribution, and optimize the marketing of our magicJack products.  During the three months ended September 30, 2017, we implemented initiatives to optimize auto-renewal and reduce breakage. We remain encouraged at the progress we have made. 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 mobile second line 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 nine months ended September 30, 2017, we continued steps to improve the operating results and bolster integration efforts for the Enterprise segment.   We continue to focus on improving customer churn and expanding Broadsmart sales channels.  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. 

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations, cash on hand and investments. As of September 30, 2017, we had cash and cash equivalents of $51.3 million, investments of $0.4 million and net accounts receivable of $2.5 million. Our accounts payable at September 30, 2017 were $3.2 million.

During the nine months ended September 30, 2017, we generated operating cash flows of $0.3 million, as compared to $13.3 million for the nine months ended September 30, 2016. The $13.0 million decrease was primarily due to payment of $3.3 million in income taxes, declining sales in the core magicJack business during the nine months ended September 30, 2017, and higher general and administrative expenses, primarily reflecting costs associated with executive management changes, management’s response to activist shareholder initiatives and the strategic process. The net loss was ($22.2) million for the nine months ended September 30, 2017 as compared to net income of $6.5 million for the nine months ended September 30, 2016.

We currenty have approximately $51 million in cash and cash equivalents. The distribution of funds to shareholders is governed by Israeli law which places certain restrictions on a company’s ability to declare dividends, perform share buy-backs and make other cash distributions.  As an Israeli entity, the Company must comply with those restrictions, which would cause any such cash distribution or use of cash to be subject to significant delays.

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.

44

Cash Flow – Operating Activities

Net cash provided by operating activities was $0.3 million and $13.0 million for the nine months ended September 30, 2017 and 2016, respectively.

During the nine months ended September 30, 2017, net cash provided by operating activities was primarily attributable to:

· ($22.2) million of net loss, which included $31.0 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) $3.4 million of depreciation and amortization expense, (iii) $2.1 million of stock-based compensation expense, and (iv) a $1.8 million increase in uncertain tax positions, partially offset by a $7.9 million deferred income tax benefit;  and

· Changes in operating assets and liabilities of (i) a $2.5 million increase in prepaid income taxes, (ii) a $0.7 million increase in deposits and other current assets, (iii) a $9.4 million decrease in deferred revenue, (iv) a $2.4 million decrease in accrued expenses and other current liabilities. and (v) a $1.0 million decrease in other non-current liabilities.  These items were partially offset by (i) a $0.6 million decrease in accounts receivable, ii) a $2.3 million decrease in inventory levels, iii) a $2.0 million decrease in receivable from earnout escrow and iv) a $0.6 million increase in accounts payable.

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

· $6.5 million of net income which included $7.6 million in non-cash items consisting primarily of (i) $3.2 million of stock-based compensation expense, (ii) $3.5 million of depreciation and amortization expense, (iii) a $0.5 million impairment of intangible assets, (iv) a $1.5 million increase in uncertain tax positions, and (v) a $0.6 million increase in deferred income tax provision, partially offset by a $2.0 million gain on mark-to-market related to the Broadsmart Earnout Payment;

· 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 $2.2 million decrease in prepaid income taxes; (iv) a $1.5 million increase in accounts payable, and (v) a $1.8 million increase in income taxes payable. These items were partially offset by: (i) a $7.8 million decrease in deferred revenue; (ii) a $0.2 million decrease in accrued expenses and other current liabilities; (iii) a $0.2 million increase in deposits and other current assets; (iv) a $0.1 million decrease in other non-current liabilities, and (v) a $0.2 million increase in deferred costs.

Cash Flow – Investing Activities

Net cash used in investing activities was $1.3 million and $40.4 million for the nine months ended September 30, 2017, and 2016, respectively. Net cash used in investing activities during the nine months ended September 30, 2017 was primarily attributable to the acquisition of software licenses. Net cash used in investing activities during the nine months ended September 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 nine months ended September 30, 2017 and 2016.

Off-Balance Sheet Arrangements

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

45

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 September 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 September 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) in the Core business that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  During the quarter ended September 30, 2017, as part of the process of further integrating and consolidating the back-office function of the Enterprise segment with the Core business, the Company began the process of implementing changes to the accounts receivable and billing functions that it believes will ultimately result in improvements to processes and procedures.  The Company does not believe that these changes will materially affect our internal control over financial reporting.

46

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.

47

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 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017)**
10.7*	Stock Option Agreement between the Company and Thomas Fuller, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017)
10.8*	Restricted Stock Agreement between the Company and Thomas Fuller, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 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 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 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.

48

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: November 9, 2017	By: /s/ Don C. Bell, III Don C. Bell. III President and Chief Executive Officer
Dated: November 9, 2017	By: /s/ Thomas Fuller Thomas Fuller Executive Vice President and Chief Financial Officer

49

Exhibit Index

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.

50

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: November 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: November 9, 2017

/s/ Thomas Fuller                                                                

Thomas Fuller

Executive Vice President and 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 September 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:  November 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 September 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:  November 9, 2017

/s/ Thomas Fuller                                                                

Thomas Fuller

Executive Vice President and Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Oct. 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	Sep. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		16,115,383
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2017

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands		Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents		$ 51,254	$ 52,394
Investments, at fair value		369	447
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $264 and $402, respectively		2,521	3,171
Inventories		2,047	4,441
Deferred costs		1,933	2,319
Prepaid income taxes		2,374	527
Receivable from earnout escrow			2,000
Deposits and other current assets		1,267	1,970
Total current assets		61,765	67,269
Property and equipment, net		3,074	3,805
Intangible assets, net		10,877	28,854
Goodwill		32,304	47,185
Deferred tax assets		34,478	26,568
Deposits and other non-current assets		866	836
Total assets		143,364	174,517
Current liabilities:
Accounts payable		3,201	2,790
Income tax payable			1,527
Accrued expenses and other current liabilities		6,049	8,426
Deferred revenue, current portion		42,972	48,507
Total current liabilities		52,222	61,250
Deferred revenue, net of current portion	[1]	40,071	44,201
Other non-current liabilities		12,529	10,866
Total liabilities		104,822	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 September 30, 2017 and December 31, 2016, respectively		111,783	111,783
Additional paid-in capital		14,566	13,567
Treasury stock (8,940 and 8,988 shares at September 30, 2017 and December 31, 2016, respectively)		(119,381)	(120,300)
Retained earnings		31,574	53,785
Total magicJack VocalTec, Ltd. shareholders's equity		38,542	58,835
Noncontrolling interest			(635)
Total capital equity		38,542	58,200
Total liabilities and capital equity		$ 143,364	$ 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	Sep. 30, 2017	Dec. 31, 2016
Statement of Financial Position [Abstract]
Allowance for doubtful accounts and billing adjustments	$ 264	$ 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	8,940	8,988

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Income Statement [Abstract]
Net revenues	$ 21,657	$ 24,572	$ 67,235	$ 73,572
Cost of revenues	7,830	9,509	25,447	27,556
Gross profit	13,827	15,063	41,788	46,016
Operating expenses:
Marketing	1,933	2,680	6,460	5,659
General and administrative	7,330	7,143	29,699	24,330
Impairment of intangible assets and goodwill		498	31,527	498
Research and development	1,477	1,314	4,438	3,661
Gain on mark-to-market	(894)	(2,000)	(894)	(2,000)
Total operating expenses	9,846	9,635	71,230	32,148
Operating income (loss)	3,981	5,428	(29,442)	13,868
Other income (expense):
Interest and dividend income	42	5	65	21
Other income (expense), net	2	(6)	(28)	(11)
Total other income (expense)	44	(1)	37	10
Income (loss) before income taxes	4,025	5,427	(29,405)	13,878
Income tax expense (benefit)	1,574	2,205	(7,194)	7,407
Net (loss) income	2,451	3,222	(22,211)	6,471
Net income attributable to noncontrolling interest		177		481
Net (loss) income attributable to magicJack VocalTec Ltd. common shareholders	$ 2,451	$ 3,399	$ (22,211)	$ 6,952
(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:
Basic	$ 0.15	$ 0.21	$ (1.38)	$ 0.44
Diluted	$ 0.15	$ 0.21	$ (1.38)	$ 0.44
Weighted average common shares outstanding:
Basic	16,114	15,857	16,076	15,786
Diluted	16,114	15,865	16,076	15,935

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CAPITAL EQUITY - 9 months ended Sep. 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			2,053				2,053
Issuance of ordinary shares			(1,054)	$ 1,054
Issuance of ordinary shares, shares				85
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					(22,211)		(22,211)
Balance at Sep. 30, 2017		$ 111,783	$ 14,566	$ (119,381)	$ 31,574		$ 38,542
Balance, shares at Sep. 30, 2017		25,055		(8,940)

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

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net (loss) income	$ (22,211)	$ 6,471
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for doubtful accounts and billing adjustments	8	210
Share-based compensation	2,053	3,169
Depreciation and amortization	3,397	3,510
Gain on mark-to-market	(894)	(2,000)
Impairment of goodwill and intangible assets	31,527	498
Loss on sale of assets	115
Increase of uncertain tax positions	1,789	1,548
Deferred income tax (benefit) provision	(7,910)	626
Change in operating assets and liabilities
Accounts receivable	635	656
Inventories	2,289	1,562
Deferred costs	303	(219)
Prepaid Income taxes	(2,507)	2,237
Deposits and other current assets	673	(187)
Other non-current assets	249	28
Receivable from earnout escrow	2,000
Accounts payable	648	1,495
Income taxes payable	38	1,764
Accrued expenses and other current liabilities	(2,377)	(237)
Deferred revenue	(9,391)	(7,737)
Other non-current liabilities	(993)	(110)
Net cash provided by operating activities	335	13,284
Cash flows from investing activities:
Purchase of investments		(80)
Purchases of property and equipment	(510)	(256)
Proceeds from sale of investment	245
Proceeds from sale of property and equipment	15
Acquisition of Broadsmart		(40,019)
Acquisition of intangible assets	(1,090)
Net cash used in investing activities	(1,340)	(40,355)
Cash flows from financing activities:
Purchase of treasury stock	(135)
Proceeds from exercise of ordinary share options		8
Net cash (used by) provided by financing activities	(135)	8
Net (decrease) in cash and cash equivalents	(1,140)	(27,063)
Cash and cash equivalents, beginning of period	52,394	78,589
Cash and cash equivalents, end of period	51,254	51,526
Supplemental disclosures:
Income taxes paid	3,313	1,304
Non-cash investing and financing activities:
Ordinary shares issued for acquisition of Broadsmart		$ 1,676

XML

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

9 Months Ended

Sep. 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 2017, the Company launched magicJack Spark on iOS and Android 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 85% and 86% of the Company’s consolidated revenues in the three and nine months ended September 30, 2017, respectively, were from sales to customers located in the United States. Approximately 90% of the Company’s consolidated revenues in the three and nine months ended September 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 $16.8 million and $19.2 million for the three months ended September 30, 2017 and 2016, respectively, and $52.0 million and $58.8 million for the nine months ended September 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 $1.1 million and $1.4 million for the three months ended September 30, 2017 and 2016, respectively, and $3.5 million and $4.6 million for the nine months ended September 30, 2017 and 2016, respectively. Revenues generated from access and wholesale charges were $0.9 million and $1.2 million for the three months ended September 30, 2017 and 2016, respectively, and $2.9 million and $3.9 million for the nine months ended September 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 $2.6 million and $2.8 million for the three months ended September 30, 2017 and 2016, respectively, and $8.3 million and $6.2 million for the nine months ended September 30, 2017 and 2016, respectively.

The SMB segment did not generate significant revenue for the three and nine months ended September 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 nine months ended September 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 June 30, 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 nine months ended September 30, 2017.

The operations of the joint venture for the three and nine months ended September 30, 2017 and 2016 were not significant to the Company’s financial statements. The Company’s consolidated financial statements for the three and nine months ended September 30, 2016, include adjustments to income attributable to magicJack VocalTec Ltd. common shareholders of $0.2 million and $0.5 million, respectively, to recognize the impact of the noncontrolling interest.  The Company’s consolidated financial statements did not include any adjustments to income attributable to magicJack VocalTec Ltd. common shareholders for the three and nine months ended September 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

9 Months Ended

Sep. 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 September 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 September 30, 2017 and December 31, 2016, respectively.  The value of time deposits at September 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 nine months ended September 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 September 30, 2017, the Company had cash and cash equivalents totaling $51.3 million, which included (i) $50.4 million in U.S. financial institutions, and (ii) $0.9 million in foreign financial institutions.

The Company’s non-interest bearing cash balances in U.S. banks which included $1.8 million in one individual financial institution, were fully insured, except for $106 thousand that exceeded insurance limits at September 30, 2017. The Company had money market accounts with financial institutions with balances totaling approximately $48.5 million at September 30, 2017.

For the Core Consumer segment, no telecommunication carrier accounted for more than 10% of the segment’s gross accounts receivable at September 30, 2017 and December 31, 2016. One U.S. retail customer accounted for approximately 13% of the segment’s gross accounts receivable at September 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 nine months ended September 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 36% of gross accounts receivable at September 30, 2017. No customer accounted for more than 10% of gross accounts receivable at December 31, 2016.  For the three months ended September 30, 2017 and 2016, two customers accounted for approximately 27% and 30% of the segment’s total operating revenues, respectively. For the nine months ended September 30, 2017 and 2016, two customers accounted for approximately 30% 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 nine months ended September 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 recorded the funds on the accompanying unaudited condensed consolidated balance sheets as a receivable from earnout escrow.  These funds were received during the nine months ended September 30, 2017.

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 5, “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 September 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 and $0.5 million on intangible assets during the nine months ended September 30, 2017 and 2016, respectively. 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 nine months ended September 30, 2017. There was no impairment of goodwill during the nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 $0.7 million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively, and $2.4 million and $2.7 million for the nine months ended September 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 nine months ended September 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 Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Advertising media buys	$	550	$	1,556	$	2,469	$	3,056
Marketing personnel related		586		668		1,806		1,287
Other marketing projects		797		456		2,185		1,316
Total marketing expenses	$	1,933	$	2,680	$	6,460	$	5,659

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 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 $44 thousand during the three and nine months ended September 30, 2017, respectively. The Company increased the valuation allowance by $0.3 million and decreased the valuation allowance by $0.2 million during the three and nine months ended September 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 a decrease of $20 thousand and an increase of $1.6 million in the three and nine months ended September 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 $0.3 million and $1.5 million in the three and nine months ended September 30, 2016, 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 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 September 30, 2017, the estimated annual effective income tax rate is expected to approximate 22.0%, 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 nine months ended September 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 of options to purchase ordinary shares or the vesting of restricted stock.

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 will adopt the requirements of the new standard in the first quarter of 2018 and has preliminarily selected the modified retrospective transition method. Under this method, the standard will be applied only to the most current period presented and the cumulative effect of applying the standard will be recognized at the date of initial application.  The Company is also considering optional practical expedients related to applying the new standard to its costs of obtaining contracts and to its portfolios of contracts. The Company is reviewing its accounting policies, processes, and system requirements and has engaged consultants to assist with and document the analysis as well as the implementation of any required changes. The Company is also evaluating the potential impact on the Company’s financial condition, results of operations and cash flows, as well as its financial statement disclosures. The Company anticipates completing its assessment by December 31, 2017.

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 nine months ended September 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

9 Months Ended

Sep. 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 September 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 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

9 Months Ended

Sep. 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):

	September 30, 2017		December 31, 2016
Raw materials	$	648	$	1,455
Finished goods		1,399		2,986
Total	$	2,047	$	4,441

The Company (recovered) wrote-off obsolete inventory of approximately ($33) thousand and $146 thousand during the three months ended September 30, 2017 and 2016, respectively, and $370 thousand and $229 thousand during the nine months ended September 30, 2017 and September 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

9 Months Ended

Sep. 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		September 30,			December 31,
	(in years)		2017			2016
Switches		3 - 15	$	9,877		$	9,699
Computers		3		2,619			2,866
Furniture		5 - 7		201			269
Leasehold-improvements		*		847			893
Accumulated depreciation				(10,470	)		(9,922	)
Total			$	3,074		$	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 September 30, 2017 and 2016 was $0.3 million. Depreciation expense for the nine months ended September 30, 2017 and 2016 was $1.0 million and $0.9 million, respectively.

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INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2017

Intangible Assets, Net (Excluding Goodwill) [Abstract]

INTANGIBLE ASSETS

NOTE 6 – INTANGIBLE ASSETS

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

	Estimated		September 30, 2017									December 31, 2016
	Useful Lives		Gross Carrying		Accumulated Amortization					Weighted- Average Life		Gross Carrying		Accumulated Amortization					Weighted- Average Life
	(in years)		Amount					Net				Amount					Net
Technology		3 - 17	$	3,110	$	(2,944	)	$	166		4.51	$	3,110	$	(2,854	)	$	256		4.71
Intellectual property rights		3 - 17		14,162		(11,671	)	$	2,491		4.46		14,162		(10,794	)		3,368		4.87
Covenants not-to-compete and not-to-sue		2 - 5		2,185		(2,129	)	$	56		1.67		2,185		(2,107	)		78		3.17
Tradename		3 - 6		131		(131	)	$	-		-		131		(131	)		-		-
Customer relationships		5 - 10		4,900		(766	)	$	4,134		8.46		22,600		(2,249	)		20,351		9.21
Backlog		1		800		(800	)	$	-		-		800		(800	)		-		-
Software license		10		2,297		(386	)	$	1,911		1.70		1,207		(80	)		1,127		8.00
Process know how		5		400		(32	)	$	368		5.50		1,100		(87	)		1,013		6.08
Other				-				$	-		-		-		-			-		-
Intangible assets subject to amortization				27,985		(18,859	)		9,126				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	$	(18,859	)	$	10,877			$	47,956	$	(19,102	)	$	28,854

Amortization expense for the three months ended September 30, 2017 and 2016 was $0.7 million and $1.0 million, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $2.4 million and $2.7 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 September 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

During the three and nine months ended September 30, 2016, impairment losses of $0.5 million were recognized in General and Administrative expense under the Consumer segment in the statement of operations. The impairments were comprised of: (i) a Telecom license included in the “Other” category of amortizable intangible assets for $249 thousand (net of accumulated amortization) deemed obsolete, and (ii) domain names not subject to amortization for $249 thousand that were not renewed.

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

Fiscal Year	Amortization Expense
Three months ending December 31, 2017	$	687
2018		2,231
2019		1,619
2020		1,079
2021		766
Thereafter		2,744
	$	9,126

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GOODWILL

9 Months Ended

Sep. 30, 2017

Goodwill Abstract

GOODWILL

NOTE 7 – GOODWILL

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

	Nine Months Ended September 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 September 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

9 Months Ended

Sep. 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 September 30, 2017 and December 31, 2016 (in thousands):

	September 30, 2017		December 31, 2016
magicJack devices	$	5,801	$	7,962
Access right renewals		34,034		36,515
Mobile apps		716		808
Prepaid minutes		2,301		2,851
Other		120		371
Deferred revenue, current		42,972		48,507
Deferred revenue, non-current*		40,071		44,201
Total deferred revenue	$	83,043	$	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 $2.9 million for the three months ended September 30, 2017 and 2016, respectively, and $7.5 million and $9.6 million for the nine months ended September 30, 2017 and 2016, respectively. For the Enterprise segment, such costs were approximately $0.6 million and $0.8 million for the three months ended September 30, 2017 and 2016, respectively, and $1.9 million and $1.7 million for the nine months ended September 30, 2017 and 2016, respectively. Costs related to providing broadband telephone service to SMB segment customers were not significant for the three and nine months ended September 30, 2016 and the three months ended March 31, 2017.

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

Recognition Period	Estimated Recognition of Deferred Revenues
Next 12 months	$	42,972
13-24 Months		16,698
25-36 Months		10,769
37-48 months		6,702
49-60 Months		3,268
61+ Months		2,634
	$	83,043

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OTHER LIABILITIES

9 Months Ended

Sep. 30, 2017

Other Liabilities Disclosure [Abstract]

OTHER LIABILITIES

NOTE 9 – OTHER LIABILITIES

As of September 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

9 Months Ended

Sep. 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 subject to negotiation of a definitive Stipulation of Settlement, which would then have to be approved by the Court. The parties thereafter entered into a definitive Stipulation of Settlement. On September 29, 2017, the court entered an order granting preliminary approval to the settlement and scheduled a final hearing on approval of the settlement for January 19, 2018. The Company has insurance coverage applicable to this settlement with a retention amount of $1.0 million. As of September 30, 2017, the Company has accrued $0.3 million of expense, reflecting anticipated future expenditures for the remaining deductible under its insurance coverage.

On August 11, 2017, a putative class action lawsuit was filed against the Company and its Board of Directors in the United States District Court for the Southern District of Florida.  The complaint alleges claims against the Company and its Board of Directors for violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, arising from statements in the April 2017 Proxy and the July 2017 Proxy that allegedly misrepresented material facts. The Company has not responded to the initial complaint but plans to file a motion to dismiss.  The Company believes that the case is without merit and cannot estimate the amount of potential liability, if any, that could arise from this issue.  The Company does not believe that the case will have a material adverse effect on its business, operating results, financial condition or cash flows.

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.

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. As of September 30, 2017, the Company has not reached agreement with the taxing authority.

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TREASURY STOCK

9 Months Ended

Sep. 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 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 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 the restricted stock.

In August 2017, the Company issued 2,333 of its ordinary shares held as treasury shares with a cost of $29 thousand, or $12.32 per share, to a Board member as a result of restricted stock vesting. 

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SHARE-BASED COMPENSATION

9 Months Ended

Sep. 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 optionsand restricted stock 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 Amended and Restated magicJack VocalTec Ltd. 2013 Stock Incentive Plan and the Amended and Restated 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 and ordinary shares. In April 2014 and July 2017, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of September 30, 2017, the aggregate number of shares subject to awards under the 2013 Plans, as amended, was 5,600,000. The Company had previously granted shares under the VocalTec amended Master Stock Plan (the “2003 Plan”) which expired in April 2013. 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 restricted stock for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Ordinary share options	$	407	$	408	$	1,020	$	1,866
Restricted stock		343		511		1,033		1,303
	$	750	$	919	$	2,053	$	3,169

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017			2016
Cost of revenues	$	57	$	24	$	159		$	53
Marketing		50		49		64			125
General and administrative		643		820		1,840			2,839
Research and development		-		26		(10	)		152
	$	750	$	919	$	2,053		$	3,169

The decrease in share-based compensation is due primarily to forfeitures related to reduced headcount and awards that fully vested 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 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 nine months ended September 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		2,896,304		$	9.42
Exercised		-		$	-
Forfeited(2)		(2,501,614	)	$	11.12
Expired or cancelled		(276,436	)	$	11.01
Outstanding at September 30, 2017 (unaudited)		3,606,313		$	9.78		3.80	$	-
Vested at September 30, 2017 (unaudited)		710,009		$	11.24		0.75	$	-

(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 $0.4 million for the three months ended September 30, 2017 and 2016, and $1.0 million and $1.9 million for the nine months ended September 30, 2017 and 2016, respectively. No ordinary share options were exercised during the nine months ended September 30, 2017. The total intrinsic value of ordinary share options exercised during the nine months ended September 30, 2016 was $6 thousand. As of September 30, 2017, there was approximately $5.7 million 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 2.42 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 2,896,304 ordinary share options during the nine months ended September 30, 2017 with a weighted average fair value of $2.14. The Company granted 1,107,040 ordinary share options during the nine months ended September 30, 2016 with a weighted average fair value of $2.75.  The grants were measured using the following assumptions:

	Nine Months Ended September 30,
	2017			2016
Expected term (in years)	3.22 to 3.50				3.50
Dividend yield		0.00	%		0.00	%
Expected volatility		48.88	%	52.15% to 52.47		%
Risk free interest rate	1.53% to 1.63		%	0.95% to 1.13		%
Forfeiture rate		0.00	%		0.00	%

Restricted Stock

The Company may also award restricted stock 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. During the nine months ended September 30, 2017 and 2016 the Company granted 276,890 and 295,305 restricted stock awards, respectively, under the 2013 Plans, as amended.

The following table summarizes the Company’s restricted stock award activity for the nine months ended September 30, 2017:

				Average
	Number of Shares			Fair Value
				at Grant Date
December 31, 2016		482,085		$	7.70
Granted		276,890		$	8.08
Vested		(85,543	)	$	12.17
Forfeited		(248,876	)	$	7.45
Non-vested at September 30, 2017		424,556		$	7.37

Share-based compensation expense recognized for restricted stock was approximately $0.3 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and $1.0 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was approximately $2.5 million in unrecognized share-based compensation costs related to restricted stock. The unrecognized share-based compensation expense is expected to be recognized over a weighted average remaining vesting period of 0.57 years.

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INCOME TAXES

9 Months Ended

Sep. 30, 2017

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 13 – INCOME TAXES

Total income tax expense (benefit) was $1.6 million and $2.2 million for the three months ended September 30, 2017 and 2016, respectively, and ($7.2) million and $7.4 million for the nine months ended September 30, 2017 and 2016, respectively. The calculation of the Company’s effective income tax rate for the three and nine months ended September 30, 2017 and 2016 was (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Income before income taxes	$	4,025		$	5,427		$	(29,405	)	$	13,878
Income tax expense (benefit)		1,574			2,205			(7,194	)		7,407
Effective income tax rate		39.11	%		40.63	%		24.47	%		53.37	%

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 September 30, 2017.

For the three months ended September 30, 2017, the Company recorded income tax expense of $1.6 million, which is higher than the expected tax expense of $1.4 million, using the statutory income tax rate of 34% due to reductions in the Company’s deferred tax assets related to the forfeiture of options totaling $0.5 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 nine months ended September 30, 2017, the Company recorded an income tax benefit of ($7.2) million, which is lower than the expected tax benefit of ($10.0) million, using the statutory rate of 34%, due, in part, to revaluations of the Israel net operating loss carryforwards of ($0.8) 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 $2.8 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

9 Months Ended

Sep. 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 ordinary shares that would have been issued if the Company’s dilutive potential common shares had been exercised or vested.  The Company’s potential common shares are the share-based awards (ordinary share options and restricted stock)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 (“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 September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
Numerator:
Net income (loss) attributable to common shareholders	$	2,451	$	3,399	$	(22,211	)	$	6,952
Denominator:
Denominator for basic net income per share -
weighted average ordinary shares outstanding		16,114		15,857		16,076			15,786
Effect of dilutive share-based awards outstanding		-		6		-			141
Effect of dilutive share-based awards vested,
exercised or expired during the period		-		2		-			8
Denominator for diluted net income per share -
weighted average ordinary shares outstanding		16,114		15,865		16,076			15,935
Net income (loss) per common share attributable to
common shareholders:
Basic	$	0.15	$	0.21	$	(1.38	)	$	0.44
Diluted	$	0.15	$	0.21	$	(1.38	)	$	0.44
Anti-dilutive share-based awards not included above		4,030,869		3,835,350		4,030,869			2,836,850

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BROADSMART ACQUISITION

9 Months Ended

Sep. 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.

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.

Neither of the contingent payments had been made as of September 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 recorded a $2.0 million receivable from earnout escrow and a gain on mark-to-market in the accompanying unaudited condensed consolidated balance sheets and statements of operations.

On June 23, 2017, the founders of Broadsmart left the Company.  On August 4, 2017, the Company reached a mutual agreement with the founders 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 until March 2019, pursuant to the provisions of the purchase agreement, to cover potential claims by the Company for telecommunications taxes.  During the nine months ended September 30, 2017, the Company collected both escrow amounts.  The $1.0 million was recorded as a gain on mark-to-market, less amounts due from the founders and the $2.0 million receivable from earnout escrow was removed.

The agreement also provided that the Company will execute an agreement to acquire certain assets of North American Telecommunications Inc. (“NATC”) for $10 thousand, subject to any required regulatory approvals.

Pro Forma Financial Information

The following table presents the unaudited pro forma combined results of operations of the Company and Broadsmart for the nine months ended September 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.

	Nine Months Ended
	September 30, 2016
Net revenues	$	76,113
Net income	$	6,878

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

9 Months Ended

Sep. 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 June 30, 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 nine month periods ended September 30, 2017 and 2016 and as of September 30, 2017 and December 31, 2016 is presented by reportable segment below (in thousands):

	For the Three Months Ended September 30, 2017
	Previous Core Consumer			SMB		Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	19,010			-	$	19,010			2,691			-		(44	)	$	21,657
Cost of revenues		6,099			-		6,099			1,731			-		-			7,830
Gross profit (loss)		12,911			-		12,911			960			-		(44	)		13,827
Marketing		1,563			-		1,563			370			-		-			1,933
General and
administrative		6,656			-		6,656			718			-		(44	)		7,330
Impairment of goodwill
and intangible assets		-			-		-			-			-		-			-
Research and
development		1,472			-		1,472			5			-		-			1,477
Gain on mark-to-market		(894	)		-		(894	)		-			-		-			(894	)
Operating expenses		8,797			-		8,797			1,093			-		(44	)		9,846
Operating income (loss)		4,114			-		4,114			(133	)		-		-			3,981
Other Data:
Depreciation expense	$	254			-	$	254			67			-		-		$	321
Amortization expense	$	472			-	$	472			184			-		-		$	656

	For the Nine Months Ended September 30, 2017
	Previous Core Consumer			SMB			Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	58,774			116		$	58,890			8,462			-		(117	)	$	67,235
Cost of revenues		19,441			131			19,572			5,875			-		-			25,447
Gross profit (loss)		39,333			(15	)		39,318			2,587			-		(117	)		41,788
Marketing		4,525			1,089			5,614			846			-		-			6,460
General and
administrative		25,930			1,056			26,986			2,830			-		(117	)		29,699
Impairment of goodwill
and intangible assets		-			-			-			31,527			-		-			31,527
Research and
development		3,836			596			4,432			6			-		-			4,438
Gain on mark-to-market		(894	)		-			(894	)		-			-		-			(894	)
Operating expenses		33,397			2,741			36,138			35,209			-		(117	)		71,230
Operating income (loss)		5,936			(2,756	)		3,180			(32,622	)		-		-			(29,442	)
Other Data:
Depreciation expense	$	790			21		$	811			175			-		-		$	986
Amortization expense	$	1,196			-		$	1,196			1,215			-		-		$	2,411

	September 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	$	123,257		-	$	123,257		20,140		-		(33	)	$	143,364

	For the Three Months Ended September 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	21,752			19		$	21,771			2,862			5			(66	)	$	24,572
Cost of revenues		7,174			32			7,206			2,264			39			-			9,509
Gross profit (loss)		14,578			(13	)		14,565			598			(34	)		(66	)		15,063
Marketing		1,441			1,026			2,467			67			146			-			2,680
General and
administrative		4,610			1,538			6,148			795			266			(66	)		7,143
Impairment of goodwill
and intangible assets		498			-			498			-			-			-			498
Research and
development		913			401			1,314			-			-			-			1,314
Gain on mark-to-market		(2,000	)		-			(2,000	)		-			-			-			(2,000	)
Operating expenses		5,462			2,965			8,427			862			412			(66	)		9,635
Operating income (loss)		9,116			(2,978	)		6,138			(264	)		(446	)		-			5,428
Other Data:
Depreciation expense	$	264			17		$	281			50			-			-		$	331
Amortization expense	$	364			-		$	364			633			-			-		$	997

	For the Nine Months Ended September 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	67,299			19		$	67,318			6,309			11			(66	)	$	73,572
Cost of revenues		22,469			46			22,515			4,993			48			-			27,556
Gross profit (loss)		44,830			(27	)		44,803			1,316			(37	)		(66	)		46,016
Marketing		3,762			1,400			5,162			144			353			-			5,659
General and
administrative		16,834			4,584			21,418			2,168			810			(66	)		24,330
Impairment of goodwill
and intangible assets		498			-			498			-			-			-			498
Research and
development		2,890			766			3,656			-			5			-			3,661
Gain on mark-to-market		(2,000	)		-			(2,000	)		-			-			-			(2,000	)
Operating expenses		21,984			6,750			28,734			2,312			1,168			(66	)		32,148
Operating income (loss)		22,846			(6,777	)		16,069			(996	)		(1,205	)		-			13,868
Other Data:
Depreciation expense	$	725			20		$	745			114			-			-		$	859
Amortization expense	$	1,267			-		$	1,267			1,384			-			-		$	2,651

	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

9 Months Ended

Sep. 30, 2017

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 17 – SUBSEQUENT EVENTS

On November 9, 2017, the Company entered into a definitive agreement with B. Riley Financial, Inc. under the terms of which, B. Riley Financial has agreed to purchase all of the outstanding ordinary shares of the Company for $8.71 per share in a merger transaction.  The agreement is contingent upon shareholder and regulatory approval in the United States and Israel.  For additional information, please refer to the Company’s Current Report on Form 8-K filed on November 9, 2017.

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SUMMARY OF ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 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 September 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 September 30, 2017 and December 31, 2016, respectively.  The value of time deposits at September 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 nine months ended September 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 September 30, 2017, the Company had cash and cash equivalents totaling $51.3 million, which included (i) $50.4 million in U.S. financial institutions, and (ii) $0.9 million in foreign financial institutions.

The Company’s non-interest bearing cash balances in U.S. banks which included $1.8 million in one individual financial institution, were fully insured, except for $106 thousand that exceeded insurance limits at September 30, 2017. The Company had money market accounts with financial institutions with balances totaling approximately $48.5 million at September 30, 2017.

For the Core Consumer segment, no telecommunication carrier accounted for more than 10% of the segment’s gross accounts receivable at September 30, 2017 and December 31, 2016. One U.S. retail customer accounted for approximately 13% of the segment’s gross accounts receivable at September 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 nine months ended September 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 36% of gross accounts receivable at September 30, 2017. No customer accounted for more than 10% of gross accounts receivable at December 31, 2016.  For the three months ended September 30, 2017 and 2016, two customers accounted for approximately 27% and 30% of the segment’s total operating revenues, respectively. For the nine months ended September 30, 2017 and 2016, two customers accounted for approximately 30% 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 nine months ended September 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 recorded the funds on the accompanying unaudited condensed consolidated balance sheets as a receivable from earnout escrow.  These funds were received during the nine months ended September 30, 2017.

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 5, “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 September 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 and $0.5 million on intangible assets during the nine months ended September 30, 2017 and 2016, respectively. 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 nine months ended September 30, 2017. There was no impairment of goodwill during the nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 $0.7 million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively, and $2.4 million and $2.7 million for the nine months ended September 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 nine months ended September 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 Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Advertising media buys	$	550	$	1,556	$	2,469	$	3,056
Marketing personnel related		586		668		1,806		1,287
Other marketing projects		797		456		2,185		1,316
Total marketing expenses	$	1,933	$	2,680	$	6,460	$	5,659

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 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 $44 thousand during the three and nine months ended September 30, 2017, respectively. The Company increased the valuation allowance by $0.3 million and decreased the valuation allowance by $0.2 million during the three and nine months ended September 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 a decrease of $20 thousand and an increase of $1.6 million in the three and nine months ended September 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 $0.3 million and $1.5 million in the three and nine months ended September 30, 2016, 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 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 September 30, 2017, the estimated annual effective income tax rate is expected to approximate 22.0%, 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 nine months ended September 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 of options to purchase ordinary shares or the vesting of restricted stock

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 will adopt the requirements of the new standard in the first quarter of 2018 and has preliminarily selected the modified retrospective transition method. Under this method, the standard will be applied only to the most current period presented and the cumulative effect of applying the standard will be recognized at the date of initial application.  The Company is also considering optional practical expedients related to applying the new standard to its costs of obtaining contracts and to its portfolios of contracts. The Company is reviewing its accounting policies, processes, and system requirements and has engaged consultants to assist with and document the analysis as well as the implementation of any required changes. The Company is also evaluating the potential impact on the Company’s financial condition, results of operations and cash flows, as well as its financial statement disclosures. The Company anticipates completing its assessment by December 31, 2017.

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 nine months ended September 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)

9 Months Ended

Sep. 30, 2017

Accounting Policies [Abstract]

Schedule of Marketing Expense

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 Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Advertising media buys	$	550	$	1,556	$	2,469	$	3,056
Marketing personnel related		586		668		1,806		1,287
Other marketing projects		797		456		2,185		1,316
Total marketing expenses	$	1,933	$	2,680	$	6,460	$	5,659

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IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL (Tables)

9 Months Ended

Sep. 30, 2017

Impairment Of Intangible Assets Including Goodwill Tables

Schedule of impairment losses

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 (Tables)

9 Months Ended

Sep. 30, 2017

Inventory Disclosure [Abstract]

Schedule of 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):

	September 30, 2017		December 31, 2016
Raw materials	$	648	$	1,455
Finished goods		1,399		2,986
Total	$	2,047	$	4,441

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PROPERTY AND EQUIPMENT (Tables)

9 Months Ended

Sep. 30, 2017

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

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

	Estimated
	Useful Lives		September 30,			December 31,
	(in years)		2017			2016
Switches		3 - 15	$	9,877		$	9,699
Computers		3		2,619			2,866
Furniture		5 - 7		201			269
Leasehold-improvements		*		847			893
Accumulated depreciation				(10,470	)		(9,922	)
Total			$	3,074		$	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)

9 Months Ended

Sep. 30, 2017

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Schedule of Finite-Lived Intangible Assets

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

	Estimated		September 30, 2017									December 31, 2016
	Useful Lives		Gross Carrying		Accumulated Amortization					Weighted- Average Life		Gross Carrying		Accumulated Amortization					Weighted- Average Life
	(in years)		Amount					Net				Amount					Net
Technology		3 - 17	$	3,110	$	(2,944	)	$	166		4.51	$	3,110	$	(2,854	)	$	256		4.71
Intellectual property rights		3 - 17		14,162		(11,671	)	$	2,491		4.46		14,162		(10,794	)		3,368		4.87
Covenants not-to-compete and not-to-sue		2 - 5		2,185		(2,129	)	$	56		1.67		2,185		(2,107	)		78		3.17
Tradename		3 - 6		131		(131	)	$	-		-		131		(131	)		-		-
Customer relationships		5 - 10		4,900		(766	)	$	4,134		8.46		22,600		(2,249	)		20,351		9.21
Backlog		1		800		(800	)	$	-		-		800		(800	)		-		-
Software license		10		2,297		(386	)	$	1,911		1.70		1,207		(80	)		1,127		8.00
Process know how		5		400		(32	)	$	368		5.50		1,100		(87	)		1,013		6.08
Other				-				$	-		-		-		-			-		-
Intangible assets subject to amortization				27,985		(18,859	)		9,126				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	$	(18,859	)	$	10,877			$	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 September 30, 2017, the amortization expense for the future fiscal years is expected to be as follows (in thousands):

Fiscal Year	Amortization Expense
Three months ending December 31, 2017	$	687
2018		2,231
2019		1,619
2020		1,079
2021		766
Thereafter		2,744
	$	9,126

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GOODWILL (Tables)

9 Months Ended

Sep. 30, 2017

Goodwill Tables

Schedule of Goodwill

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

	Nine Months Ended September 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)

9 Months Ended

Sep. 30, 2017

DEFERRED COSTS AND REVENUES [Abstract]

Schedule of Deferred Revenue

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

	September 30, 2017		December 31, 2016
magicJack devices	$	5,801	$	7,962
Access right renewals		34,034		36,515
Mobile apps		716		808
Prepaid minutes		2,301		2,851
Other		120		371
Deferred revenue, current		42,972		48,507
Deferred revenue, non-current*		40,071		44,201
Total deferred revenue	$	83,043	$	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 September 30, 2017 are expected to be recognized in future years as follows (in thousands):

Recognition Period	Estimated Recognition of Deferred Revenues
Next 12 months	$	42,972
13-24 Months		16,698
25-36 Months		10,769
37-48 months		6,702
49-60 Months		3,268
61+ Months		2,634
	$	83,043

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SHARE-BASED COMPENSATION (Tables)

9 Months Ended

Sep. 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 restricted stock for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Ordinary share options	$	407	$	408	$	1,020	$	1,866
Restricted stock		343		511		1,033		1,303
	$	750	$	919	$	2,053	$	3,169

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 nine months ended September 30, 2017 and 2016 was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017			2016
Cost of revenues	$	57	$	24	$	159		$	53
Marketing		50		49		64			125
General and administrative		643		820		1,840			2,839
Research and development		-		26		(10	)		152
	$	750	$	919	$	2,053		$	3,169

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 nine months ended September 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		2,896,304		$	9.42
Exercised		-		$	-
Forfeited(2)		(2,501,614	)	$	11.12
Expired or cancelled		(276,436	)	$	11.01
Outstanding at September 30, 2017 (unaudited)		3,606,313		$	9.78		3.80	$	-
Vested at September 30, 2017 (unaudited)		710,009		$	11.24		0.75	$	-

(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.

Schedule of Fair Value Assumptions

The grants were measured using the following assumptions:

	Nine Months Ended September 30,
	2017			2016
Expected term (in years)	3.22 to 3.50				3.50
Dividend yield		0.00	%		0.00	%
Expected volatility		48.88	%	52.15% to 52.47		%
Risk free interest rate	1.53% to 1.63		%	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 award activity for the nine months ended September 30, 2017:

				Average
	Number of Shares			Fair Value
				at Grant Date
December 31, 2016		482,085		$	7.70
Granted		276,890		$	8.08
Vested		(85,543	)	$	12.17
Forfeited		(248,876	)	$	7.45
Non-vested at September 30, 2017		424,556		$	7.37

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INCOME TAXES (Tables)

9 Months Ended

Sep. 30, 2017

Income Tax Disclosure [Abstract]

Schedule of Effective Income Tax Rate

Total income tax expense (benefit) was $1.6 million and $2.2 million for the three months ended September 30, 2017 and 2016, respectively, and ($7.2) million and $7.4 million for the nine months ended September 30, 2017 and 2016, respectively. The calculation of the Company’s effective income tax rate for the three and nine months ended September 30, 2017 and 2016 was (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Income before income taxes	$	4,025		$	5,427		$	(29,405	)	$	13,878
Income tax expense (benefit)		1,574			2,205			(7,194	)		7,407
Effective income tax rate		39.11	%		40.63	%		24.47	%		53.37	%

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NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE (Tables)

9 Months Ended

Sep. 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 September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
Numerator:
Net income (loss) attributable to common shareholders	$	2,451	$	3,399	$	(22,211	)	$	6,952
Denominator:
Denominator for basic net income per share -
weighted average ordinary shares outstanding		16,114		15,857		16,076			15,786
Effect of dilutive share-based awards outstanding		-		6		-			141
Effect of dilutive share-based awards vested,
exercised or expired during the period		-		2		-			8
Denominator for diluted net income per share -
weighted average ordinary shares outstanding		16,114		15,865		16,076			15,935
Net income (loss) per common share attributable to
common shareholders:
Basic	$	0.15	$	0.21	$	(1.38	)	$	0.44
Diluted	$	0.15	$	0.21	$	(1.38	)	$	0.44
Anti-dilutive share-based awards not included above		4,030,869		3,835,350		4,030,869			2,836,850

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BROADSMART ACQUISITION (Tables)

9 Months Ended

Sep. 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 nine months ended September 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.

	Nine Months Ended
	September 30, 2016
Net revenues	$	76,113
Net income	$	6,878

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SEGMENT REPORTING (Tables)

9 Months Ended

Sep. 30, 2017

Segment Reporting [Abstract]

Schedule of Operating Segment Information

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

	For the Three Months Ended September 30, 2017
	Previous Core Consumer			SMB		Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	19,010			-	$	19,010			2,691			-		(44	)	$	21,657
Cost of revenues		6,099			-		6,099			1,731			-		-			7,830
Gross profit (loss)		12,911			-		12,911			960			-		(44	)		13,827
Marketing		1,563			-		1,563			370			-		-			1,933
General and
administrative		6,656			-		6,656			718			-		(44	)		7,330
Impairment of goodwill
and intangible assets		-			-		-			-			-		-			-
Research and
development		1,472			-		1,472			5			-		-			1,477
Gain on mark-to-market		(894	)		-		(894	)		-			-		-			(894	)
Operating expenses		8,797			-		8,797			1,093			-		(44	)		9,846
Operating income (loss)		4,114			-		4,114			(133	)		-		-			3,981
Other Data:
Depreciation expense	$	254			-	$	254			67			-		-		$	321
Amortization expense	$	472			-	$	472			184			-		-		$	656

	For the Nine Months Ended September 30, 2017
	Previous Core Consumer			SMB			Revised Core Consumer			Enterprise			Other		Intercompany			Consolidated
Statement of Operations:
Net revenues	$	58,774			116		$	58,890			8,462			-		(117	)	$	67,235
Cost of revenues		19,441			131			19,572			5,875			-		-			25,447
Gross profit (loss)		39,333			(15	)		39,318			2,587			-		(117	)		41,788
Marketing		4,525			1,089			5,614			846			-		-			6,460
General and
administrative		25,930			1,056			26,986			2,830			-		(117	)		29,699
Impairment of goodwill
and intangible assets		-			-			-			31,527			-		-			31,527
Research and
development		3,836			596			4,432			6			-		-			4,438
Gain on mark-to-market		(894	)		-			(894	)		-			-		-			(894	)
Operating expenses		33,397			2,741			36,138			35,209			-		(117	)		71,230
Operating income (loss)		5,936			(2,756	)		3,180			(32,622	)		-		-			(29,442	)
Other Data:
Depreciation expense	$	790			21		$	811			175			-		-		$	986
Amortization expense	$	1,196			-		$	1,196			1,215			-		-		$	2,411

	September 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	$	123,257		-	$	123,257		20,140		-		(33	)	$	143,364

	For the Three Months Ended September 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	21,752			19		$	21,771			2,862			5			(66	)	$	24,572
Cost of revenues		7,174			32			7,206			2,264			39			-			9,509
Gross profit (loss)		14,578			(13	)		14,565			598			(34	)		(66	)		15,063
Marketing		1,441			1,026			2,467			67			146			-			2,680
General and
administrative		4,610			1,538			6,148			795			266			(66	)		7,143
Impairment of goodwill
and intangible assets		498			-			498			-			-			-			498
Research and
development		913			401			1,314			-			-			-			1,314
Gain on mark-to-market		(2,000	)		-			(2,000	)		-			-			-			(2,000	)
Operating expenses		5,462			2,965			8,427			862			412			(66	)		9,635
Operating income (loss)		9,116			(2,978	)		6,138			(264	)		(446	)		-			5,428
Other Data:
Depreciation expense	$	264			17		$	281			50			-			-		$	331
Amortization expense	$	364			-		$	364			633			-			-		$	997

	For the Nine Months Ended September 30, 2016
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	67,299			19		$	67,318			6,309			11			(66	)	$	73,572
Cost of revenues		22,469			46			22,515			4,993			48			-			27,556
Gross profit (loss)		44,830			(27	)		44,803			1,316			(37	)		(66	)		46,016
Marketing		3,762			1,400			5,162			144			353			-			5,659
General and
administrative		16,834			4,584			21,418			2,168			810			(66	)		24,330
Impairment of goodwill
and intangible assets		498			-			498			-			-			-			498
Research and
development		2,890			766			3,656			-			5			-			3,661
Gain on mark-to-market		(2,000	)		-			(2,000	)		-			-			-			(2,000	)
Operating expenses		21,984			6,750			28,734			2,312			1,168			(66	)		32,148
Operating income (loss)		22,846			(6,777	)		16,069			(996	)		(1,205	)		-			13,868
Other Data:
Depreciation expense	$	725			20		$	745			114			-			-		$	859
Amortization expense	$	1,267			-		$	1,267			1,384			-			-		$	2,651

	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

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DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 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	85.00%	90.00%	86.00%	90.00%
Comprehensive income attributable to noncontrolling interest		$ 200		$ 500
General and administrative [Member]
Impairment loss			400
Magicjack devices [Member]
Revenues	16,800	19,200	52,000	58,800
Prepaid Minutes [Member]
Revenues	1,100	1,400	3,500	4,600
Access and wholesale charges [Member]
Revenues	900	1,200	2,900	3,900
Broadsmart Services Hardware and Equipment [Member]
Revenues	$ 2,600	$ 2,800	$ 8,300	$ 6,200

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SUMMARY OF ACCOUNTING POLICIES (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended				9 Months Ended		12 Months Ended
	Sep. 30, 2017	Mar. 31, 2017	Sep. 30, 2016	Mar. 31, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015
Shipping and handling and credit card charges	$ 700		$ 900		$ 2,400	$ 2,700
Insured cash balance	250				250
Cash and cash equivalents	51,254		51,526		51,254	51,526	$ 52,394	$ 78,589
Money market accounts	48,500				48,500
Valuation allowance increase (decrease)	15		300		44	(200)
Increase (decrease) in uncertain tax positions	(20)		$ 300		$ 1,789	1,548
Estimated annual effective income tax rate					22.00%
Earnout Payment							2,000
Revenues acquired by assets				$ 15,600			15,600
Receivable from escrow							2,000
Impairment of intangible assets					16,600	500
Contingent payment							2,000
Impairment of goodwill		$ 14,900			14,881
Time Deposits [Member]
Fair Value	369				369		$ 447
U.S. financial institutions [Member]
Cash and cash equivalents	50,400				50,400
Foreign [Member]
Cash and cash equivalents	900				900
Single Financial Institution, Concentration Risk [Member]
Insured cash balance	106				106
Cash and cash equivalents	$ 1,800				$ 1,800
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					13.00%
Accounts Receivable [Member] | Customer Three [Member]
Percentage of concentration risk							34.00%
Accounts Receivable [Member] | Two U.S. retail [Member]
Percentage of concentration risk					36.00%
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	27.00%		30.00%		30.00%	28.00%

XML

SUMMARY OF ACCOUNTING POLICIES (Schedule of Marketing Expense) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Total marketing expenses	$ 1,933	$ 2,680	$ 6,460	$ 5,659
Advertising Media Buys [Member]
Total marketing expenses	550	1,556	2,469	3,056
Marketing Personnel Related [Member]
Total marketing expenses	586	668	1,806	1,287
Other Marketing Projects [Member]
Total marketing expenses	$ 797	$ 456	$ 2,185	$ 1,316

XML

IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2017	Mar. 31, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 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			9 Months Ended
	Sep. 30, 2017	Mar. 31, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Carrying Amount	$ 10,877			$ 10,877		$ 28,854
Impairment			$ 498	$ 31,527	$ 498
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	Sep. 30, 2017	Dec. 31, 2016
Inventory Disclosure [Abstract]
Raw materials	$ 648	$ 1,455
Finished goods	1,399	2,986
Total	$ 2,047	$ 4,441

XML

INVENTORIES (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Inventory Disclosure [Abstract]
Write-down of obsolete inventory	$ (33)	$ 146	$ 370	$ 229

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PROPERTY AND EQUIPMENT (Schedule of Property and Equipment) (Details) - USD ($) $ in Thousands		9 Months Ended
		Sep. 30, 2017	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Accumulated depreciation		$ (10,470)	$ (9,922)
Property and equipment, net		$ 3,074	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		$ 9,877	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		$ 2,619	2,866
Furniture [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross		$ 201	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]	$ 847	$ 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		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 300	$ 300	$ 1,000	$ 900

XML

INTANGIBLE ASSETS (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Amortization expense	$ 656	$ 997	$ 2,411	$ 2,651
Impairment of intangible assets			16,600	$ 500
General and Administrative expense [Member]
Impairment of intangible assets			500
Other [Member]
Impairment of intangible assets			249
Domain [Member]
Impairment of intangible assets			$ 249

XML

INTANGIBLE ASSETS (Schedule of Intangible Assets) (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016	Mar. 31, 2017
Intangible assets subject to amortization
Gross Carrying Amount	$ 27,985	$ 45,295
Accumulated Amortization	(18,859)	(19,102)
Net	9,126	26,193
Total intangible assets
Gross Carrying Amount	29,736	47,956
Accumulated Amortization	(18,859)	(19,102)
Net	$ 10,877	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	(2,944)	(2,854)
Net	$ 166	$ 256
Weighted-Average Life	4 years 6 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	(11,671)	(10,794)
Net	$ 2,491	$ 3,368
Weighted-Average Life	4 years 5 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	(2,129)	(2,107)
Net	$ 56	$ 78
Weighted-Average Life	1 year 8 months 2 days	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	(766)	(2,249)
Net	$ 4,134	$ 20,351
Weighted-Average Life	8 years 5 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	$ 2,297	1,207
Accumulated Amortization	(386)	(80)
Net	$ 1,911	$ 1,127
Weighted-Average Life	1 year 8 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	(32)	(87)
Net	$ 368	$ 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
Accumulated Amortization
Net

XML

INTANGIBLE ASSETS (Schedule of Amortization Expense) (Details) $ in Thousands	9 Months Ended
	Sep. 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	Sep. 30, 2017	Dec. 31, 2016
Amortization expense for future fiscal years:
Three months ending December 31, 2017	$ 687
2018	2,231
2019	1,619
2020	1,079
2021	766
Thereafter	2,744
Total	$ 9,126	$ 26,193

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GOODWILL (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2017	Sep. 30, 2017	Sep. 30, 2016
Goodwill Narrative Details
Estimated Fair Value of Valuation		$ 17,900
Impairment of goodwill	$ 14,900	$ 14,881

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GOODWILL (Schedule of Goodwill) (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2017	Sep. 30, 2017	Sep. 30, 2016
Balance, beginning of period	$ 47,185	$ 47,185
2017 impairment	(14,900)	(14,881)
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		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Revised Core Consumer [Member]
Costs incurred to fulfill obligations	$ 2,400	$ 2,900	$ 7,500	$ 9,600
Enterprise Segment [Member]
Costs incurred to fulfill obligations	$ 600	$ 800	$ 1,900	$ 1,700

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DEFERRED COSTS AND REVENUES (Schedule of Deferred Revenue) (Details) - USD ($) $ in Thousands		Sep. 30, 2017	Dec. 31, 2016
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		$ 42,972	$ 48,507
Deferred revenue, non-current	[1]	40,071	44,201
Total deferred revenues		83,043	92,708
Magicjack devices [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		5,801	7,962
Acces Right Renewals [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		34,034	36,515
Mobile apps [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		716	808
Prepaid Minutes [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		2,301	2,851
Other [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenue, current		$ 120	$ 371

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

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DEFERRED COSTS AND REVENUES (Schedule of Future Payments of Deferred Revenue) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
DEFERRED COSTS AND REVENUES [Abstract]
Next 12 months	$ 42,972
13-24 Months	16,698
25-36 Months	10,769
37-48 months	6,702
49-60 Months	3,268
61+ Months	2,634
Total deferred revenues	$ 83,043	$ 92,708

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OTHER LIABILITIES (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Other Liabilities Disclosure [Abstract]
Non-current liability for uncertain tax positions	$ 12,100	$ 10,400

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COMMITMENTS AND CONTINGENCIES (Details) - USD ($) $ in Thousands		1 Months Ended	9 Months Ended
	Jun. 08, 2017	Jun. 23, 2017	Sep. 30, 2017
Loss Contingencies [Line Items]
Litigation settlement		$ 3,650	$ 1,000
Accrued expenses			300
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

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TREASURY STOCK (Details) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended
	Aug. 31, 2017	May 31, 2017	Apr. 30, 2017	Jan. 31, 2017
Board Members [Member]
Issuance of shares, shares	2,333
Issuance of shares	$ 29
The fair value price per share of treasury stock acquired	$ 12.32
Treasury Stock
Issuance of shares, shares		20,844		16,666
Issuance of shares		$ 135
The fair value price per share of treasury stock acquired		$ 6.50
Treasury Stock | Board Members [Member]
Issuance of shares, shares			6,996
Issuance of shares			$ 86
Ordinary shares, closing price per share			$ 12.32
Treasury Stock | Executive Officer [Member]
Issuance of shares, shares		76,211
Issuance of shares		$ 939
Ordinary shares, closing price per share		$ 12.32

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SHARE-BASED COMPENSATION (Narrative) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended	9 Months Ended			12 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Jun. 30, 2017	Sep. 30, 2017		Sep. 30, 2016	Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Increase in tax expense				$ 2,800
Options forfeited				2,501,614	[1]		34,740
Options weighted average price				$ 11.12	[1]		$ 8.83
Share-based compensation	$ 750	$ 919		$ 2,053		$ 3,169
Options granted				2,896,304		1,107,040	1,107,040
Weighted-average fair value of options granted				$ 2.14		$ 2.75
Restricted stock units granted				276,890		295,305
Ordinary share options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options authorized	5,600,000			5,600,000
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	$ 407	408		$ 1,020		$ 1,866
Intrinsic value of options exercised during the period						6
Unrecognized compensation cost	5,700			$ 5,700
Expected cost period to be recognized				2 years 5 months 1 day
Restricted stock units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation	343	$ 511		$ 1,033		$ 1,303
Unrecognized compensation cost	$ 2,500			$ 2,500
Expected cost period to be recognized				6 months 25 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, 1,256,837 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.

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SHARE-BASED COMPENSATION (Schedule of Share-Based Compensation Expense) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	$ 750	$ 919	$ 2,053	$ 3,169
Ordinary share options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	407	408	1,020	1,866
Restricted stock units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	$ 343	$ 511	$ 1,033	$ 1,303

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SHARE-BASED COMPENSATION (Schedule of Stock-Based Compensation by Income Statement Classification) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	$ 750	$ 919	$ 2,053	$ 3,169
Cost of revenues [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	57	24	159	53
Marketing [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	50	49	64	125
General and administrative [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances	643	820	1,840	2,839
Research and development [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based issuances		$ 26	$ (10)	$ 152

XML

SHARE-BASED COMPENSATION (Schedule of Stock Option Activity) (Details) - USD ($)		9 Months Ended			12 Months Ended
		Sep. 30, 2017		Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015
Number of Options
Beginning balance		3,488,059		2,527,427	2,527,427
Granted		2,896,304		1,107,040	1,107,040
Exercised					(2,500)
Forfeited		(2,501,614)	[1]		(34,740)
Expired or cancelled		(276,436)			(109,168)
Ending balance		3,606,313			3,488,059	2,527,427
Vested at June 30, 2017 (unaudited)		710,009
Weighted Average Exercise Price
Beginning balance		$ 11.13		$ 12.98	$ 12.98
Granted		9.42			7.09
Exercised					3.96
Forfeited		11.12	[1]		8.83
Expired or cancelled		11.01			13.57
Ending balance		9.78			$ 11.13	$ 12.98
Vested at June 30, 2017 (unaudited)		$ 11.24
Weighted Average Remaining Contractual Term (in years)
Weighted average remaining contractual term outstanding		3 years 9 months 18 days			3 years 1 month 9 days	3 years 7 months 10 days
Vested at June 30, 2017 (unaudited)		9 months
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, 1,256,837 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.

[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.

XML

SHARE-BASED COMPENSATION (Schedule of Fair Value Assumptions) (Details)	9 Months Ended
	Sep. 30, 2017	Sep. 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%
Expected volatility	48.88%
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		52.15%
Risk free interest rate	1.53%	0.95%
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term (in years)	3 years 6 months
Expected volatility		52.47%
Risk free interest rate	1.63%	1.13%

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SHARE-BASED COMPENSATION (Schedule of Restricted Stock Unit Activity) (Details) - $ / shares	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Number of Shares
Balance at the beginning of period	482,085
Granted	276,890	295,305
Vested	(85,543)
Forfeited	(248,876)
Balance at the end of period	424,556
Average Fair Value at Grant Date
Balance at the beginning of period	$ 7.70
Granted	8.08
Vested	12.17
Forfeited	7.45
Balance at the end of period	$ 7.37

XML

INCOME TAXES (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Jun. 30, 2018	Sep. 30, 2017	Sep. 30, 2016
Income Tax Examination [Line Items]
Income tax expense (benefit)	$ 1,574	$ 2,205		$ (7,194)	$ 7,407
Effective tax rate				22.00%
Federal tax at statutory rate	34.00%			34.00%
Expected tax provision	$ 1,400			$ 10,000
Reduction of deferred tax assets	500
Increase in uncertain tax positions				1,800	$ 1,000
Net Operating Loss Carryforwards	$ 800			800
Increase in tax expense				$ 2,800
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%

XML

INCOME TAXES (Schedule of Effective Income Tax Rate) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Income Tax Disclosure [Abstract]
Income before income taxes	$ 4,025	$ 5,427	$ (29,405)	$ 13,878
Income tax expense (benefit)	$ 1,574	$ 2,205	$ (7,194)	$ 7,407
Effective income tax rate	39.11%	40.63%	24.47%	53.37%

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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		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:
Net income (loss) attributable to common shareholders	$ 2,451	$ 3,399	$ (22,211)	$ 6,952
Denominator for basic net income per share - weighted average ordinary shares outstanding	16,114	15,857	16,076	15,786
Effect of dilutive share-based awards outstanding		6		141
Effect of dilutive share-based awards vested, exercised or expired during the period		2		8
Denominator for diluted net income per share - weighted average ordinary shares outstanding	16,114	15,865	16,076	15,935
Net income (loss) per common share attributable to common shareholders:
Basic	$ 0.15	$ 0.21	$ (1.38)	$ 0.44
Diluted	$ 0.15	$ 0.21	$ (1.38)	$ 0.44
Anti-dilutive share-based awards not included above	4,030,869	3,835,350	4,030,869	2,836,850

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BROADSMART ACQUISITION (Narrative) (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended				9 Months Ended		12 Months Ended
	Jun. 23, 2017	Sep. 30, 2017	Mar. 31, 2017	Sep. 30, 2016	Mar. 31, 2016	Sep. 30, 2017	Sep. 30, 2016	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		$ 2,000			$ 3,000	$ 2,000
Issued ordinary shares					233,402
Fair value of shares issued					$ 1,700
Receivable from escrow								2,000
Gain on mark-to-market		894		$ 2,000		894	$ 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
Receivable from escrow		$ 2,000				2,000
Assets acquired	$ 10
Gain on mark-to-market						$ 1,000
Carrying Amount			$ 18,500
Two certain individuals [Member]
Additional contingent payment					$ 100

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BROADSMART ACQUISITION (Schedule of Pro Forma Results) (Details) - Broadsmart [Member] $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($)
Net revenues	$ 76,113
Net Income	$ 6,878

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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		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Net revenues	$ 21,657	$ 24,572	$ 67,235	$ 73,572
Cost of revenues	7,830	9,509	25,447	27,556
Gross profit (loss)	13,827	15,063	41,788	46,016
Marketing	1,933	2,680	6,460	5,659
General and administrative	7,330	7,143	29,699	24,330
Impairment of goodwill and intangible assets		498	31,527	498
Research and development	1,477	1,314	4,438	3,661
Gain on mark-to-market	(894)	(2,000)	(894)	(2,000)
Operating expenses	9,846	9,635	71,230	32,148
Operating income (loss)	3,981	5,428	(29,442)	13,868
Depreciation expense	321	331	986	859
Amortization expense	656	997	2,411	2,651
Goodwill	32,304		32,304		$ 47,185
Total assets	143,364		143,364		174,517
Previous Core Consumer [Member]
Net revenues	19,010	21,752	58,774	67,299
Cost of revenues	6,099	7,174	19,441	22,469
Gross profit (loss)	12,911	14,578	39,333	44,830
Marketing	1,563	1,441	4,525	3,762
General and administrative	6,656	4,610	25,930	16,834
Impairment of goodwill and intangible assets		498		498
Research and development	1,472	913	3,836	2,890
Gain on mark-to-market	(894)	(2,000)	(894)	(2,000)
Operating expenses	8,797	5,462	33,397	21,984
Operating income (loss)	4,114	9,116	5,936	22,846
Depreciation expense	254	264	790	725
Amortization expense	472	364	1,196	1,267
Goodwill	32,304		32,304		32,304
Total assets	123,257		123,257		142,870
SMB [Member]
Net revenues		19	116	19
Cost of revenues		32	131	46
Gross profit (loss)		(13)	(15)	(27)
Marketing		1,026	1,089	1,400
General and administrative		1,538	1,056	4,584
Impairment of goodwill and intangible assets
Research and development		401	596	766
Gain on mark-to-market
Operating expenses		2,965	2,741	6,750
Operating income (loss)		(2,978)	(2,756)	(6,777)
Depreciation expense		17	21	20
Amortization expense
Goodwill
Total assets					(9,447)
Revised Core Consumer [Member]
Net revenues	19,010	21,771	58,890	67,318
Cost of revenues	6,099	7,206	19,572	22,515
Gross profit (loss)	12,911	14,565	39,318	44,803
Marketing	1,563	2,467	5,614	5,162
General and administrative	6,656	6,148	26,986	21,418
Impairment of goodwill and intangible assets		498		498
Research and development	1,472	1,314	4,432	3,656
Gain on mark-to-market	(894)	(2,000)	(894)	(2,000)
Operating expenses	8,797	8,427	36,138	28,734
Operating income (loss)	4,114	6,138	3,180	16,069
Depreciation expense	254	281	811	745
Amortization expense	472	364	1,196	1,267
Goodwill	32,304		32,304		32,304
Total assets	123,257		123,257		133,423
Enterprise [Member]
Net revenues	2,691	2,862	8,462	6,309
Cost of revenues	1,731	2,264	5,875	4,993
Gross profit (loss)	960	598	2,587	1,316
Marketing	370	67	846	144
General and administrative	718	795	2,830	2,168
Impairment of goodwill and intangible assets			31,527
Research and development	5		6
Gain on mark-to-market
Operating expenses	1,093	862	35,209	2,312
Operating income (loss)	(133)	(264)	(32,622)	(996)
Depreciation expense	67	50	175	114
Amortization expense	184	633	1,215	1,384
Goodwill					14,881
Total assets	20,140		20,140		40,839
Other [Member]
Net revenues		5		11
Cost of revenues		39		48
Gross profit (loss)		(34)		(37)
Marketing		146		353
General and administrative		266		810
Impairment of goodwill and intangible assets
Research and development				5
Gain on mark-to-market
Operating expenses		412		1,168
Operating income (loss)		(446)		(1,205)
Depreciation expense
Amortization expense
Goodwill
Total assets					255
Intercompany [Member]
Net revenues	(44)	(66)	(117)	(66)
Cost of revenues
Gross profit (loss)	(44)	(66)	(117)	(66)
Marketing
General and administrative	(44)	(66)	(117)	(66)
Impairment of goodwill and intangible assets
Research and development
Gain on mark-to-market
Operating expenses	(44)	(66)	(117)	(66)
Operating income (loss)
Depreciation expense
Amortization expense
Goodwill
Total assets	$ (33)		$ (33)

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SUBSEQUENT EVENTS (Details)	Nov. 30, 2017 $ / shares
Subsequent Event [Member] | XYZ [Member]
Subsequent Event [Line Items]
Share price	$ 8.71