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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification Number) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Trading
symbol: |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐
As of June 6, 2022, the registrant had the following shares outstanding:
| Class A common stock, $.01 par value: | shares outstanding (excluding 1,698,000 treasury shares) |
| Class B common stock, $.01 par value: | shares outstanding (excluding 3,058,071 treasury shares) |
IDT CORPORATION
TABLE OF CONTENTS
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
IDT CORPORATION
CONSOLIDATED BALANCE SHEETS
April 30, | July 31, | |||||||
| (Unaudited) | (Note 1) | |||||||
| (in thousands) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Debt securities | ||||||||
| Equity investments | ||||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Disbursement prefunding | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangibles, net | ||||||||
| Equity investments | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deferred income tax assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and equity | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Customer deposits | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Redeemable noncontrolling interest | ||||||||
| Equity: | ||||||||
| IDT Corporation stockholders’ equity: | ||||||||
| Preferred stock, $ par value; authorized shares—; shares issued | ||||||||
| Class A common stock, $ par value; authorized shares—; shares issued and shares outstanding at April 30, 2022 and July 31, 2021 | ||||||||
| Class B common stock, $ par value; authorized shares—; and shares issued and and shares outstanding at April 30, 2022 and July 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost, consisting of and shares of Class A common stock and and shares of Class B common stock at April 30, 2022 and July 31, 2021, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total IDT Corporation stockholders’ equity | ||||||||
| Noncontrolling interests | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 3 |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Direct cost of revenues (exclusive of depreciation and amortization) | ||||||||||||||||
| Selling, general and administrative (i) | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Severance | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Other operating (expense) gain, net (see Note 11) | ( | ) | ( | ) | ||||||||||||
| Income from operations | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Other (expense) income, net | ( | ) | ( | ) | ||||||||||||
| Income before income taxes | ||||||||||||||||
| (Provision for) benefit from income taxes | ( | ) | ( | ) | ||||||||||||
| Net income | ||||||||||||||||
| Net (income) attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income attributable to IDT Corporation | $ | $ | $ | $ | ||||||||||||
| Earnings per share attributable to IDT Corporation common stockholders: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted-average number of shares used in calculation of earnings per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| (i) Stock-based compensation included in selling, general and administrative expenses | $ | $ | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
| 4 |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Change in unrealized loss on available-for-sale securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income | ||||||||||||||||
| Comprehensive (income) attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive income attributable to IDT Corporation | $ | $ | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
| 5 |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
| Three Months Ended April 30, 2022 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JANUARY 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Exercise of stock options by Howard S. Jonas | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Business acquisition | ||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| BALANCE AT APRIL 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Nine Months Ended April 30, 2022 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JULY 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Exercise of stock options by Howard S. Jonas | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Restricted Class B common stock purchased from employees | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Business acquisition | ||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| BALANCE AT APRIL 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| 6 |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)—Continued
| Three Months Ended April 30, 2021 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JANUARY 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Business acquisition | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| BALANCE AT APRIL 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Nine Months Ended April 30, 2021 (in thousands) | ||||||||||||||||||||||||||||||||
| IDT Corporation Stockholders | ||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
| BALANCE AT JULY 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Repurchases of Class B common stock through repurchase program | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Restricted Class B common stock purchased from employees | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Grant of restricted equity in subsidiary | ( | ) | ||||||||||||||||||||||||||||||
| Business acquisition | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| BALANCE AT APRIL 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 7 |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended | ||||||||
2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Provision for doubtful accounts receivable | ||||||||
| Net unrealized loss (gain) from marketable securities | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Other | ( | ) | ||||||
| Change in assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ||||||
| Disbursement prefunding, prepaid expenses, other current assets, and other assets | ( | ) | ( | ) | ||||
| Trade accounts payable, accrued expenses, other current liabilities, and other liabilities | ( | ) | ( | ) | ||||
| Customer deposits at IDT Financial Services Limited (Gibraltar-based bank) | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Purchase of convertible preferred stock in equity method investment | ( | ) | ( | ) | ||||
| Payments for acquisitions, net of cash acquired | ( | ) | ( | ) | ||||
| Purchase of Rafael Holdings, Inc. Class B common stock and warrant | ( | ) | ||||||
| Exercise of warrant to purchase shares of Rafael Holdings, Inc. Class B common stock | ( | ) | ||||||
| Purchases of debt securities and equity investments | ( | ) | ( | ) | ||||
| Proceeds from maturities and sales of debt securities and redemptions of equity investments | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||
| Proceeds from other liabilities | ||||||||
| Repayment of other liabilities. | ( | ) | ( | ) | ||||
| Proceeds from borrowings under revolving credit facility | ||||||||
| Repayment of borrowings under revolving credit facility. | ( | ) | ||||||
| Proceeds from sale of redeemable equity in subsidiary | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Repurchases of Class B common stock | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents | ( | ) | ||||||
| Net decrease in cash, cash equivalents, and restricted cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities | ||||||||
| Liabilities incurred for acquisitions | $ | $ | ||||||
| Shares of the Company’s Class B common stock issued for acquisition | $ | $ | ||||||
| Cashless exercise of stock options in exchange for shares of the Company’s Class B common stock | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 8 |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
The accompanying unaudited consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended April 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2022. The balance sheet at July 31, 2021 has been derived from the Company’s audited financial statements at that date but does not include all of the information and notes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2022 refers to the fiscal year ending July 31, 2022).
Note 2—Business Segment Information
The
Company has
The Fintech segment is comprised of National Retail Solutions (“NRS”), an operator of a nationwide point of sale (“POS”) network providing payment processing, digital advertising, transaction data, and ancillary services, and BOSS Money, a provider of international money remittance and related value/payment transfer services.
The net2phone-UCaaS segment is comprised of net2phone’s cloud communications offerings.
The Traditional Communications segment includes Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging, and data to international and domestic mobile accounts, BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States and Canada, and IDT Global (formerly known as Carrier Services), a wholesale provider of international voice and SMS termination and outsourced traffic management solutions to telecoms worldwide. Traditional Communications also includes other smaller businesses, some of which are in harvest mode.
Corporate costs include compensation, consulting fees, treasury, tax and accounting services, human resources, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, charitable contributions, travel, and other corporate-related general and administrative expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
Operating results for the business segments of the Company were as follows:
| (in thousands) | Fintech | net2phone- UCaaS | Traditional Communications | Corporate | Total | |||||||||||||||
| Three Months Ended April 30, 2022 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||||||
| Three Months Ended April 30, 2021 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Nine Months Ended April 30, 2022 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Nine Months Ended April 30, 2021 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||||||
| 9 |
Note 3—Revenue Recognition
The Company earns revenue from contracts with customers, primarily through the provision of retail telecommunications and payment offerings as well as wholesale international voice and SMS termination. BOSS Money, NRS, and net2phone-UCaaS are technology-driven, synergistic businesses that leverage the Company’s core assets, and revenue is primarily recognized at a point in time, and in some cases (mainly with respect to net2phone-UCaaS) is recognized over time. Traditional Communications are mostly minute-based, paid-voice communications services, and revenue is primarily recognized at a point in time. The Company’s most significant revenue streams are from Mobile Top-Up, BOSS Revolution Calling, and IDT Global. Mobile Top-Up and BOSS Revolution Calling are sold direct-to-consumers and through distributors and retailers.
Disaggregated Revenues
The following table shows the Company’s revenues disaggregated by business segment and service offered to customers:
Three
Months Ended | Nine
Months Ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| BOSS Money | $ | $ | $ | $ | ||||||||||||
| National Retail Solutions | ||||||||||||||||
| Total Fintech | ||||||||||||||||
| net2phone-UCaaS | ||||||||||||||||
| Mobile Top-Up | ||||||||||||||||
| BOSS Revolution Calling | ||||||||||||||||
| IDT Global | ||||||||||||||||
| Other | ||||||||||||||||
| Total Traditional Communications | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table shows the Company’s revenues disaggregated by geographic region, which is determined based on selling location. On February 1, 2021, the Company changed the geographic sourcing of certain revenues from the United States to the United Kingdom.
| (in thousands) | Fintech | net2phone- UCaaS | Traditional Communications | Total | ||||||||||||
| Three Months Ended April 30, 2022 | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Outside the United States: | ||||||||||||||||
| United Kingdom | ||||||||||||||||
| Other | ||||||||||||||||
| Total outside the United States | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 10 |
| (in thousands) | Fintech | net2phone- UCaaS | Traditional Communications | Total | ||||||||||||
| Three Months Ended April 30, 2021 | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Outside the United States: | ||||||||||||||||
| United Kingdom | ||||||||||||||||
| Other | ||||||||||||||||
| Total outside the United States | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| (in thousands) | Fintech | net2phone- UCaaS | Traditional Communications | Total | ||||||||||||
| Nine Months Ended April 30, 2022 | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Outside the United States: | ||||||||||||||||
| United Kingdom | ||||||||||||||||
| Other | ||||||||||||||||
| Total outside the United States | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| (in thousands) | Fintech | net2phone- UCaaS | Traditional Communications | Total | ||||||||||||
| Nine Months Ended April 30, 2021 | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Outside the United States: | ||||||||||||||||
| United Kingdom | ||||||||||||||||
| Other | ||||||||||||||||
| Total outside the United States | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Remaining Performance Obligations
The Company does not have any significant revenue from performance obligations satisfied or partially satisfied in previous reporting periods. The Company’s remaining performance obligations as of April 30, 2022 and July 31, 2021 had an original expected duration of one year or less.
Accounts Receivable and Contract Balances
The timing of revenue recognition may differ from the time of billing to the Company’s customers. Trade accounts receivable in the Company’s consolidated balance sheets represent unconditional rights to consideration. The Company would record a contract asset when revenue is recognized in advance of its right to bill and receive consideration. The Company has not identified any contract assets.
Contract liabilities arise when the Company receives consideration or bills its customers prior to providing the goods or services promised in the contract. The Company’s contract liability balance is primarily payments received for prepaid BOSS Revolution Calling. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in the Company’s consolidated balance sheets as “Deferred revenue”.
The following table presents information about the Company’s contract liability balance:
Three Months Ended | Nine Months Ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue recognized in the period from amounts included in the contract liability balance at the beginning of the period | $ | $ | $ | $ | ||||||||||||
| 11 |
Deferred Customer Contract Acquisition and Fulfillment Costs
The Company recognizes its incremental costs of obtaining a contract with a customer that it expects to recover as an asset. The Company’s incremental costs of obtaining a contract with a customer are sales commissions paid to employees and third parties on sales to end users. If the amortization period would be one year or less for the asset that would be recognized from deferring these costs, the Company applies the practical expedient whereby the Company charges these costs to expense when incurred. For net2phone-UCaaS sales, the Company defers these costs and amortizes them over the expected customer relationship period when it is expected to exceed one year.
The Company’s costs to fulfill its contracts do not meet the criteria to be recognized as an asset, therefore these costs are charged to expense as incurred.
The Company’s deferred customer contract acquisition costs were as follows:
April
30, | July
31, | |||||||
| (in thousands) | ||||||||
| Deferred customer contract acquisition costs included in “Other current assets” | $ | $ | ||||||
| Deferred customer contract acquisition costs included in “Other assets” | ||||||||
| Total | $ | $ | ||||||
The Company’s amortization of deferred customer contract acquisition costs during the periods were as follows:
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Amortization of deferred customer contract acquisition costs | $ | $ | $ | $ | ||||||||||||
Note 4—Leases
The
Company’s leases primarily consist of operating leases for office space. These leases have remaining terms from less than
net2phone-UCaaS is the lessee in equipment leases that are classified as finance leases. The assets and liabilities related to these finance leases are not material to the Company’s consolidated balance sheets.
The
Company leases office and parking space in a building and parking garage located at 520 Broad Street, Newark, New Jersey that is owned
by the Company’s former subsidiary, Rafael Holdings, Inc. (“Rafael”). The Company also leases office space in Israel
from Rafael. Howard S. Jonas, the Chairman of the Company’s Board of Directors, is also the Chairman of the Board of Directors
of Rafael.
Supplemental disclosures related to the Company’s operating leases were as follows:
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Short-term lease cost | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| 12 |
| April
30, 2022 | July
31, 2021 | |||||||
| Weighted-average remaining lease term-operating leases | ||||||||
| Weighted-average discount rate-operating leases | % | % | ||||||
In
the nine months ended April 30, 2022, the Company entered into new office leases with an aggregate operating lease liability of $
| April
30, 2022 | July
31, 2021 | |||||||
| (in thousands) | ||||||||
| Operating lease liabilities included in “Other current liabilities” | $ | $ | ||||||
| Operating lease liabilities included in noncurrent liabilities | ||||||||
| Total | $ | $ | ||||||
Future minimum maturities of operating lease liabilities were as follows (in thousands):
| Twelve-month period ending April 30: | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total operating lease liabilities | $ |
Note 5—Cash, Cash Equivalents, and Restricted Cash and Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported in the consolidated balance sheets that equals the total of the same amounts reported in the consolidated statements of cash flows:
| April
30, 2022 | July
31, 2021 | |||||||
| (in thousands) | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash and cash equivalents | ||||||||
| Total cash, cash equivalents, and restricted cash and cash equivalents | $ | $ | ||||||
At
April 30, 2022 and July 31, 2021, restricted cash and cash equivalents included $
Company Restricted Cash and Cash Equivalents
The
Company treats unrestricted cash and cash equivalents held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC, which
provide the Company’s international money transfer services in the United States, as substantially restricted and unavailable for
other purposes. At April 30, 2022 and July 31, 2021, “Cash and cash equivalents” in the Company’s consolidated balance
sheets included an aggregate of $
| 13 |
Note 6—Debt Securities
The following is a summary of available-for-sale debt securities:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| April 30, 2022: | ||||||||||||||||
| Certificates of deposit* | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. Treasury bills and notes | ( | ) | ||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Municipal bonds | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| July 31, 2021: | ||||||||||||||||
| Certificates of deposit* | $ | $ | $ | $ | ||||||||||||
| U.S. Treasury bills and notes | ( | ) | ||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Municipal bonds | ||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| * |
Proceeds
from maturities and sales of debt securities and redemptions of equity investments were $
The contractual maturities of the Company’s available-for-sale debt securities at April 30, 2022 were as follows:
| Fair Value | ||||
| (in thousands) | ||||
| Within one year | $ | |||
| After one year through five years | ||||
| After five years through ten years | ||||
| After ten years | ||||
| Total | $ | |||
The following available-for-sale debt securities were in an unrealized loss position for which other-than-temporary impairments were not recognized:
| Unrealized Losses | Fair Value | |||||||
| (in thousands) | ||||||||
| April 30, 2022: | ||||||||
| Certificates of deposit | $ | $ | ||||||
| U.S. Treasury bills and notes | ||||||||
| Corporate bonds | ||||||||
| Municipal bonds | ||||||||
| Total | $ | $ | ||||||
| July 31, 2021: | ||||||||
| U.S. Treasury bills and notes | $ | $ | ||||||
| Corporate bonds | ||||||||
| Total | $ | $ | ||||||
| 14 |
At July 31, 2021, there were no securities in a continuous unrealized loss position for 12 months or longer. At April 30, 2022, the following available-for-sale debt securities included in the table above were in a continuous unrealized loss position for 12 months or longer:
| Unrealized Losses | Fair Value | |||||||
| (in thousands) | ||||||||
| U.S. Treasury bills and notes | $ | $ | ||||||
| Corporate bonds | ||||||||
| Total | $ | $ | ||||||
At April 30, 2022, the Company did not intend to sell any of the debt securities included in the table above, and it is not more likely than not that the Company will be required to sell any of these securities before recovery of the unrealized losses, which may be at maturity.
Note 7—Equity Investments
Equity investments consist of the following:
| April
30, 2022 | July
31, 2021 | |||||||
| (in thousands) | ||||||||
| Zedge, Inc. Class B common stock, shares at April 30, 2022 and July 31, 2021 | $ | $ | ||||||
| Rafael Holdings, Inc. Class B common stock, and shares at April 30, 2022 and July 31, 2021, respectively | ||||||||
| Rafael Holdings, Inc. restricted Class B common stock, and shares at April 30, 2022 and July 31, 2021, respectively | ||||||||
| Other marketable equity securities | ||||||||
| Fixed income mutual funds | ||||||||
| Current equity investments | $ | $ | ||||||
| Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”) | $ | $ | ||||||
| Series B and Series C convertible preferred stock—equity method investment | ||||||||
| Hedge funds | ||||||||
| Other | ||||||||
| Noncurrent equity investments | $ | $ | ||||||
The Company received the shares of Zedge, Inc. (“Zedge”) Class B common stock and of the shares of Rafael Class B common stock set forth in the table above in connection with the lapsing of restrictions on Zedge and Rafael restricted stock held by certain of the Company’s employees and the Company’s payment of taxes related thereto. The Company purchased shares of Rafael Class B common stock in fiscal 2021, including shares that were not available for sale, assignment, or transfer until the restrictions lapsed in September 2021. Howard S. Jonas is the Vice-Chairman of the Board of Directors of Zedge.
The changes in the carrying value of the Company’s equity investments without readily determinable fair values for which the Company elected the measurement alternative was as follows:
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Redemption for Visa mandatory release assessment | ( | ) | ||||||||||||||
| Adjustment for observable transactions involving a similar investment from the same issuer | ( | ) | ( | ) | ||||||||||||
| Redemptions | ( | ) | ( | ) | ||||||||||||
| Impairments | ||||||||||||||||
| Balance, end of the period | $ | $ | $ | $ | ||||||||||||
The
Company decreased the carrying value of the shares of Visa Series C Preferred it held by $
| 15 |
Unrealized gains and losses for all equity investments included the following:
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net (losses) gains recognized during the period on equity investments | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Less: net gains recognized during the period on equity investments sold during the period | ||||||||||||||||
| Unrealized (losses) gains recognized during the period on equity investments still held at the reporting date | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
The
net losses on investments in the three and nine months ended April 30, 2022 included unrealized losses of $
Equity Method Investment
On
February 2, 2021, the Company paid $
The Company accounts for this investment using the equity method since the series B and series C convertible preferred stock are in-substance common stock, and the Company can exercise significant influence over the operating and financial policies of the EMI.
The
Company determined that on the dates of the acquisitions, there were differences of $
On
February 10, 2022, the Company received a secured promissory note from the EMI in exchange for a loan of $
The following table summarizes the change in the balance of the Company’s equity method investment:
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Purchase of convertible preferred stock | ||||||||||||||||
| Equity in the net loss of investee | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of equity method basis difference | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance, end of the period | $ | $ | $ | $ | ||||||||||||
| 16 |
Summarized financial information of the EMI was as follows (fiscal 2021 financial information is for the period from February 2, 2021 to April 30, 2021):
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Direct cost of revenues | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Note 8—Fair Value Measurements
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis:
| Level 1 (1) | Level 2 (2) | Level 3 (3) | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| April 30, 2022 | ||||||||||||||||
| Debt securities | $ | $ | $ | $ | ||||||||||||
| Equity investments included in current assets | ||||||||||||||||
| Equity investments included in noncurrent assets | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Acquisition consideration included in: | ||||||||||||||||
| Other current liabilities | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Other noncurrent liabilities | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| July 31, 2021 | ||||||||||||||||
| Debt securities | $ | $ | $ | $ | ||||||||||||
| Equity investments included in current assets | ||||||||||||||||
| Equity investments included in noncurrent assets | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Acquisition consideration included in: | ||||||||||||||||
| Other current liabilities | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Other noncurrent liabilities | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| (1) |
| (2) |
| (3) |
At
April 30, 2022 and July 31, 2021, the Company had $
| 17 |
The following table summarizes the change in the balance of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Purchase of Rafael Holdings, Inc. warrant | ||||||||||||||||
| Exercise of Rafael Holdings, Inc. warrant | ( | ) | ( | ) | ||||||||||||
| Redemption for Visa mandatory release assessment | ( | ) | ||||||||||||||
| Total (losses) gains recognized in “Other (expense) income, net” | ( | ) | ( | ) | ||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the period | $ | $ | $ | $ | ||||||||||||
The following table summarizes the change in the balance of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
| Three
Months Ended April 30, | Nine
Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Transfer into Level 3 from acquisitions | ||||||||||||||||
| Total (gain) loss included in: | ||||||||||||||||
| “Other operating (expense) gain, net” | ( | ) | ||||||||||||||
| “Foreign currency translation adjustment” | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
| Change in unrealized gains or losses for the period included in earnings for liabilities held at the end of the period | $ | $ | $ | $ | ||||||||||||
Fair Value of Other Financial Instruments
The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
Cash and cash equivalents, restricted cash and cash equivalents, other current assets, customer deposits, and other current liabilities. At April 30, 2022 and July 31, 2021, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash, cash equivalents, and restricted cash and cash equivalents were classified as Level 1 and other current assets, customer deposits, and other current liabilities were classified as Level 2 of the fair value hierarchy.
Other assets and other liabilities. At April 30, 2022 and July 31, 2021, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.
Note 9—Acquisitions
Integra CCS
On
March 3, 2022, the Company’s subsidiary, net2phone 2.0, Inc. (“net2phone 2.0”), which owns and operates the net2phone-UCaaS
segment, purchased all of the outstanding shares of Onwaba S.R.L. and Gem S.R.L. for an aggregate purchase price of up to $
The operating results of the acquired companies from the date of acquisition, which were not significant, are included in the Company’s consolidated financial statements.
The
purchase price consisted of: (a) cash of $
| 18 |
The acquisition date fair value of the consideration consisted of the following (in thousands):
| Cash paid | $ | |||
| Cash acquired | ( | ) | ||
| Cash paid, net of cash acquired | ||||
| Shares of the Company’s Class B common stock | ||||
| Future payments subject to holdback | ||||
| Contingent consideration | ||||
| Total fair value of consideration, net of cash acquired | $ |
The acquisition-date fair value of the contingent consideration was estimated using discounted cash flow models. This fair value measurement was based on significant inputs not observable in the market and therefore represents a Level 3 measurement. There was no change in the estimated fair value of the contingent consideration in the period from the acquisition date to April 30, 2022.
The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet was as follows (in thousands):
| Trade accounts receivable | $ | |||
| Prepaid expenses | ||||
| Other current assets | ||||
| Property, plant and equipment | ||||
| Goodwill | ||||
| Customer relationships ( | ||||
| Tradename ( | ||||
| Non-compete agreements ( | ||||
| Operating lease right-of-use asset | ||||
| Other assets | ||||
| Accrued expenses | ( | ) | ||
| Operating lease liability current portion | ( | ) | ||
| Operating lease liability noncurrent portion | ( | ) | ||
| Net assets excluding cash acquired | $ |
The goodwill was assigned to the net2phone-UCaaS segment and was attributable primarily to the assembled workforce and the expected synergies from the business combination. The goodwill is not expected to be deductible for income tax purposes.
Leaf Global Fintech Corporation
On
March 1, 2022, the Company’s subsidiary, IDT International Telecom, Inc., purchased all of the outstanding shares of Leaf Global
Fintech Corporation (“Leaf”) for up to $
Leaf’s operating results from the date of acquisition, which were not significant, are included in the Company’s consolidated financial statements.
The
purchase price is comprised of (a) $
The acquisition date fair value of the consideration consisted of the following (in thousands):
| Cash paid | $ | |||
| Cash acquired | ( | ) | ||
| Cash paid, net of cash acquired | ||||
| Contingent consideration | ||||
| Total fair value of consideration, net of cash acquired | $ |
| 19 |
The acquisition-date fair value of the contingent consideration was estimated using discounted cash flow models. This fair value measurement was based on significant inputs not observable in the market and therefore represents a Level 3 measurement. There was no change in the estimated fair value of the contingent consideration in the period from the acquisition date to April 30, 2022.
The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet was as follows (in thousands):
| Current assets | $ | |||
| Property, plant and equipment | ||||
| Goodwill | ||||
| Tradename ( | ||||
| Net assets excluding cash acquired | $ |
The goodwill was assigned to the Fintech segment and was attributable primarily to the assembled workforce and the expected synergies from the business combination. The goodwill is not expected to be deductible for income tax purposes.
Pro Forma Disclosures
The Company’s pro forma results of operations as if the Integra and Leaf acquisitions occurred as of August 1, 2020 were not materially different from the actual results of operations.
Note 10—Variable Interest Entity
As of May 31, 2021, the Company entered into a Warrant Purchase Agreement with the shareholders of an entity (the variable interest entity, or “VIE”) that operates money transfer businesses. The Company determined that, effective May 31, 2021, it had the power to direct the activities of the VIE that most significantly impact its economic performance, and the Company has the obligation to absorb losses of and the right to receive benefits from the VIE that could potentially be significant to it. The Company therefore determined that it is the primary beneficiary of the VIE, and as a result, the Company consolidates the VIE. The Company does not currently own any interest in the VIE and thus the net income incurred by the VIE was attributed to noncontrolling interests in the accompanying consolidated statements of income.
The VIE’s net income and aggregate funding from (repaid to) the Company were as follows:
Three
Months Ended | Nine
Months Ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net income of the VIE | $ | $ | $ | $ | ||||||||||||
| Aggregate funding from (repaid to) the Company, net | $ | $ | $ | ( | ) | $ | ||||||||||
| 20 |
The VIE’s summarized consolidated balance sheet amounts are as follows:
April
30, | July
31, | |||||||
| (in thousands) | ||||||||
| Assets: | ||||||||
| Cash and equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Due from the Company | ||||||||
| Property, plant, and equipment, net | ||||||||
| Other intangibles, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and noncontrolling interests: | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other current liabilities | ||||||||
| Due to the Company | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Noncontrolling interests | ||||||||
| Total liabilities and noncontrolling interests | $ | $ | ||||||
The VIE’s assets may only be used to settle the VIE’s obligations and may not be used for other consolidated entities. The VIE’s liabilities are non-recourse to the general credit of the Company’s other consolidated entities.
Note 11—Other Operating (Expense) Gain, Net
The following table summarizes the other operating (expense) gain, net by business segment:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Corporate—Straight Path Communications Inc. class action legal fees | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Corporate—Straight Path Communications Inc. class action insurance claims | ||||||||||||||||
| Fintech—other | ||||||||||||||||
| net2phone-UCaaS—write-off of contingent consideration liability | ||||||||||||||||
| net2phone-UCaaS—other | ( | ) | ( | ) | ||||||||||||
| Traditional Communications—gain from sale of rights under class action lawsuit | ||||||||||||||||
| Traditional Communications—net2phone indemnification claim | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Traditional Communications—IDT Global settlement | ( | ) | ||||||||||||||
| Traditional Communications—other | ( | ) | ( | ) | ||||||||||||
| Total other operating (expense) gain, net | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Straight Path Communications Inc. Class Action
As discussed in Note 17, the Company (as well as other defendants) has been named in a pending putative class action on behalf of the stockholders of the Company’s former subsidiary, Straight Path Communications Inc. (“Straight Path”), and a derivative complaint. The Company incurred legal fees and recorded offsetting gains from insurance claims related to this action in the three and nine months ended April 30, 2022 and 2021.
Write-off of Contingent Consideration
In the nine months ended April 30, 2022, the Company determined that the requirements for a contingent consideration payment related to an acquisition consummated in December 2019 would not be met before the expiration date for such contingency. The Company recognized a gain on the write-off of the contingent consideration payment obligation.
| 21 |
Gain from Sale of Rights under Class Action Lawsuit
On
December 21, 2020, the Company received $
Indemnification Claim
Beginning in June 2019, as part of a commercial resolution, the Company indemnified a net2phone cable telephony customer related to patent infringement claims brought against the customer.
Note 12—Revolving Credit Facility
The
Company’s subsidiary, IDT Telecom, Inc. (“IDT Telecom”), entered into a credit agreement, dated as of May 17, 2021,
with TD Bank, N.A. for a revolving credit facility for up to a maximum principal amount of $
Note 13—Equity
Deferred Stock Units Equity Incentive Program
The Company had an existing equity incentive program in the form of deferred stock units (“DSUs”) that, upon vesting, entitled the grantees to receive shares of the Company’s Class B common stock. On January 5, 2022, the third and final vesting date under the program, the Company issued shares of its Class B common stock in respect of DSUs that vested on that date. On January 5, 2021, the Company issued shares of its Class B common stock in respect of vested DSUs under the program.
Stock Repurchases
The
Company has an existing stock repurchase program authorized by its Board of Directors for the repurchase of shares of the Company’s
Class B common stock. The Board of Directors authorized the repurchase of up to million shares in the aggregate. There were repurchases under the program in the nine months
ended April 30, 2022. In the nine months ended April 30, 2021, the Company repurchased shares of Class B common stock for an aggregate
purchase price of $
In
the nine months ended April 30, 2022 and 2021, the Company paid $
2015 Stock Option and Incentive Plan
In
the nine months ended April 30, 2022 and 2021, the Company received proceeds from the exercise of stock options of $
On December 15, 2021, the Company’s stockholders approved an amendment to the Company’s 2015 Stock Option and Incentive Plan to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional shares.
NRS Restricted Stock Grants
In
February 2022, restricted shares of NRS’ Class B common stock representing
| 22 |
Note 14—Redeemable Noncontrolling Interest
On
September 29, 2021, NRS sold shares of its Class B common stock representing
The shares of NRS’ Class B common stock sold to Alta Fox have been classified as mezzanine equity in the accompanying consolidated balance sheet because they may be redeemed at the option of Alta Fox, although the shares are not mandatorily redeemable. The carrying amount of the shares includes the noncontrolling interest in the net income of NRS.
Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.
Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Basic weighted-average number of shares | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options | ||||||||||||||||
| Non-vested restricted Class B common stock | ||||||||||||||||
| Diluted weighted-average number of shares | ||||||||||||||||
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Stock options | ||||||||||||||||
| Non-vested restricted Class B common stock | ||||||||||||||||
| Shares excluded from the calculation of diluted earnings per share | ||||||||||||||||
Stock options with an exercise price that was greater than the average market price of the Company’s common stock in the nine months ended April 30, 2021 were excluded from the calculation of diluted earnings per share.
Note 16—Accumulated Other Comprehensive Loss
The accumulated balances for each classification of other comprehensive loss were as follows:
Unrealized Loss on Available-for-Sale Securities | Foreign Currency Translation | Accumulated Other Comprehensive Loss | ||||||||||
| (in thousands) | ||||||||||||
| Balance, July 31, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive loss attributable to IDT Corporation | ( | ) | ( | ) | ( | ) | ||||||
| Balance, April 30, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| 23 |
Note 17—Commitments and Contingencies
Coronavirus Disease (COVID-19)
The Company continues to monitor and respond to the impacts of the COVID-19 pandemic on all aspects of its business, including its customers, employees, suppliers, vendors, and business partners.
Operationally, the Company’s employees transitioned to work-from-home during the third quarter of fiscal 2020 and, to a large degree, continue to work-from-home. Beginning in the fourth quarter of fiscal 2021, certain of the Company’s employees returned to work in the Company’s offices on a part-time basis. The Company’s salespeople, customer service employees, technicians, and delivery employees continue to serve its independent retailers, channel partners, and customers with minimal interruption.
COVID-19 had mixed financial impacts on the Company beginning in the third quarter of fiscal 2020 and continuing through the third quarter of fiscal 2022.
Legal Proceedings
On January 22, 2019, Jose Rosales filed a putative class action against IDT America, IDT Domestic Telecom and IDT International in California state court alleging certain violations of employment law. Plaintiff alleges that these companies failed to compensate members of the putative class in accordance with California law. In August 2019, the Company filed a cross complaint against Rosales alleging trade secret and other violations. On February 2, 2022, the court approved a settlement agreement between the parties. The settlement did not have a material effect on the Company’s results of operations, cash flows or financial condition.
On April 24, 2018, Sprint Communications Company L.P. filed a patent infringement claim against the Company and certain of its affiliates in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent Nos. 6,298,064; 6,330,224; 6,343,084; 6,452,932; 6,463,052; 6,473,429; 6,563,918; 6,633,561; 6,697,340; 6,999,463; 7,286,561; 7,324,534; 7,327,728; 7,505,454; and 7,693,131. Plaintiff was seeking damages and injunctive relief. On June 28, 2018, Sprint dismissed the complaint without prejudice. The Company is evaluating the underlying claim, and at this stage, is unable to estimate its potential liability, if any. The Company intends to vigorously defend any claim of infringement of the listed patents.
On July 5, 2017, plaintiff JDS1, LLC, on behalf of itself and all other similarly situated stockholders of Straight Path, and derivatively on behalf of Straight Path as nominal defendant, filed a putative class action and derivative complaint in the Court of Chancery of the State of Delaware against the Company, The Patrick Henry Trust (a trust formed by Howard S. Jonas that held record and beneficial ownership of certain shares of Straight Path he formerly held), Howard S. Jonas, and each of Straight Path’s directors. The complaint alleges that the Company aided and abetted Straight Path Chairman of the Board and Chief Executive Officer Davidi Jonas, and Howard S. Jonas in his capacity as controlling stockholder of Straight Path, in breaching their fiduciary duties to Straight Path in connection with the settlement of claims between Straight Path and the Company related to potential indemnification claims concerning Straight Path’s obligations under the Consent Decree it entered into with the Federal Communications Commission (“FCC”), as well as the sale of Straight Path’s subsidiary Straight Path IP Group, Inc. to the Company in connection with that settlement. That action was consolidated with a similar action that was initiated by The Arbitrage Fund. The Plaintiffs are seeking, among other things, (i) a declaration that the action may be maintained as a class action or in the alternative, that demand on the Straight Path Board is excused; (ii) that the term sheet is invalid; (iii) awarding damages for the unfair price stockholders received in the merger between Straight Path and Verizon Communications Inc. for their shares of Straight Path’s Class B common stock; and (iv) ordering Howard S. Jonas, Davidi Jonas, and the Company to disgorge any profits for the benefit of the class Plaintiffs. On August 28, 2017, the Plaintiffs filed an amended complaint. On September 24, 2017, the Company filed a motion to dismiss the amended complaint, which was ultimately denied, and which denial was affirmed by the Delaware Supreme Court. On February 17, 2022, the court denied the Company’s motion for summary judgment. On March 10, 2022, JDS1, LLC withdrew its application to serve as class representative and lead plaintiff. On May 16, 2022, the court denied The Arbitrage Fund’s motion to serve as class representative and lead plaintiff, and approved intervenor Ardell Howard’s motion to serve as class representative. The trial is currently scheduled to begin on August 29, 2022. The Company intends to vigorously defend this matter (see Note 11). At this stage, the Company is unable to estimate its potential liability, if any.
In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, the Company believes that none of the other legal proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.
Sales Tax Contingency
On June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. The Company has evaluated its state tax filings with respect to the Wayfair decision and is in the process of reviewing its remittance practices. It is possible that one or more jurisdictions may assert that the Company has liability for periods for which it has not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could materially and adversely affect the Company’s business, financial position, and operating results. One or more jurisdictions may change their laws or policies to apply their sales, use or other similar taxes to the Company’s operations, and if such changes were made it could materially and adversely affect the Company’s business, financial position, and operating results.
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Regulatory Fees Audit
The Company’s 2017 FCC Form 499-A, which reports its calendar year 2016 revenue, is currently under audit by the Universal Service
Administrative Company (“USAC”). The Internal Audit Division of USAC issued preliminary audit findings and the Company has,
in accordance with audit procedures, appealed certain of the findings. The Company awaits a final decision by USAC on the preliminary
audit findings. Depending on the findings contained in the final decision, the Company may further appeal to the FCC. Although a final
decision remains pending, the Company has been invoiced $
Purchase Commitments
At
April 30, 2022, the Company had purchase commitments of $
Performance Bonds
The
Company has performance bonds issued through third parties for the benefit of various states in order to comply with the states’
financial requirements for money remittance licenses and telecommunications resellers. At April 30, 2022, the Company had aggregate performance
bonds of $
FCC Investigation of Straight Path Spectrum LLC
On September 20, 2016, the Company received a letter of inquiry from the Enforcement Bureau of the FCC requesting certain information and materials related to an investigation of potential violations by Straight Path Spectrum LLC (formerly a subsidiary of the Company and Straight Path) in connection with licenses to operate on the 28 GHz and 39 GHz bands of the Fixed Microwave Services. The Company has cooperated with the FCC in this matter and has responded to the letter of inquiry. If the FCC were to pursue separate action against the Company, the FCC could seek to fine or impose regulatory penalties or civil liability on the Company related to activities during the period of ownership by the Company.
Note 18—Other (Expense) Income, Net
Other (expense) income, net consists of the following:
| Three Months Ended April 30, | Nine Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Foreign currency transaction (losses) gains | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Equity in net loss of investee | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Losses) gains on investments (see Note 7) | ( | ) | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (expense) income, net | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Note 19—Income Taxes
In the three and nine months ended April 30, 2021, the Company released $
Note 20—Recently Issued Accounting Standard Not Yet Adopted
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking current expected credit loss model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators, and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. The Company will adopt the new standard on August 1, 2023. The Company is evaluating the impact that the new standard will have on its consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the accompanying consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021, as filed with the U.S. Securities and Exchange Commission (or SEC).
As used below, unless the context otherwise requires, the terms “the Company,” “IDT,” “we,” “us,” and “our” refer to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation, and their subsidiaries, collectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks, and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part II “Risk Factors” in this Quarterly Report and under Item 1A to Part I “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.
Recently Issued Accounting Standard Not Yet Adopted
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking current expected credit loss model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators, and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. We will adopt the new standard on August 1, 2023. We are evaluating the impact that the new standard will have on our consolidated financial statements.
Results of Operations
We evaluate the performance of our business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.
Coronavirus Disease (COVID-19)
We continue to monitor and respond to the impacts of the COVID-19 pandemic on all aspects of our business, including our customers, employees, suppliers, vendors, and business partners.
Operationally, our employees transitioned to work-from-home during the third quarter of fiscal 2020 and, to a large degree, continue to work-from-home. Beginning in the fourth quarter of fiscal 2021, certain of our employees returned to work in our offices on a part-time basis. Our salespeople, customer service employees, technicians, and delivery employees continue to serve our independent retailers, channel partners, and customers with minimal interruption.
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COVID-19 has had mixed financial impacts on our businesses beginning in the third quarter of fiscal 2020 and continuing through the third quarter of fiscal 2022. It drove increases in demand for our consumer offerings, principally BOSS Money, BOSS Revolution Calling and Mobile Top-Up, through our digital channels beginning in the latter half of March 2020. Subsequently, digital transaction levels have continued to increase relative to retailer originated transactions. Correspondingly, sales of consumer offerings originating through retailers and channel partners slowed modestly in late March and April 2020 before stabilizing in the fourth quarter of fiscal 2020. COVID-19-related demand slowed the rate of decline in BOSS Revolution Calling revenue that we had experienced in prior periods, however, that impact was less significant beginning in the first quarter of fiscal 2022 compared to the similar periods in fiscal 2021. The surge in demand for voice calls that began with the onset of the COVID-19 pandemic had eroded by the third quarter of fiscal 2022. National Retail Solutions, or NRS, was immaterially impacted by the closure of some of its retailers in the third quarter of fiscal 2020, but most re-opened quickly and many attracted increased foot traffic following the onset of COVID-19 as local retailers are typically more accessible to pedestrian traffic than big box retailers. The resilience of local retailers has enabled NRS to continue to expand sales of terminals, payment processing, and advertising services. IDT Global’s (formerly known as Carrier Services) revenue, which had been declining as communications globally transition away from traditional international long-distance voice, declined more rapidly following the onset of COVID-19 as business communications shifted from calling to video conferencing and other collaboration platforms.
At the onset of the COVID-19 pandemic, the transition from offices to a more flexible workforce increased the demand for net2phone-UCaaS’ offerings. Customers transitioned from their on-premises phone system to net2phone-UCaaS’ cloud solution, ported their phone numbers, and quickly set-up their employees to work remotely. In April 2020, the release of Huddle, net2phone-UCaaS’ integrated video conferencing solution, significantly improved net2phone-UCaaS’ functionality for remote work, which also increased the demand for its services. COVID-19 had mixed financial impacts on net2phone-UCaaS’ business beginning in the third quarter of fiscal 2020. Its customer base growth slowed somewhat in the second half of fiscal 2020 in certain Latin American markets due to decreased levels of economic activity in those markets. However, Latin American sales rebounded in the first quarter of fiscal 2021 and sales have remained strong in its United States and Canadian markets.
As of the date of this Quarterly Report, including the impact of COVID-19, we expect that our cash from operations and the balance of cash, cash equivalents, debt securities, and current equity investments that we held on April 30, 2022 will be sufficient to meet our anticipated working capital and capital expenditure requirements during the twelve month period ending April 30, 2023. However, the situation remains fluid and we cannot predict with certainty the potential impact of COVID-19 on our business, results of operations, financial condition, and cash flows.
Explanation of Performance Metrics
Our results of operations discussion include the following performance metrics: active point of sale, or POS, terminals, payment processing accounts, recurring revenue, subscriber seats, subscription revenue, and minutes of use.
NRS uses two metrics, among others, to measure the size of its customer base: active POS terminals and payment processing accounts. Active POS terminals are the number of POS terminals that have completed at least one transaction in the calendar month. It excludes POS terminals that are being installed. Payment processing accounts are NRS PAY accounts that can generate revenue. It excludes accounts that have been approved but not activated. NRS’ recurring revenue is NRS’ revenue in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, excluding its revenue from POS terminal sales.
net2phone-UCaaS’ cloud communications offerings are priced on a per-seat basis, with customers paying based on the number of users in their organization. net2phone-UCaaS’ subscription revenue is its revenue in accordance with U.S. GAAP excluding its equipment revenue and revenue generated by a legacy SIP trunking offering in Brazil.
The trends and comparisons between periods for the number of active POS terminals, NRS PAY accounts, seats served, recurring revenue, and subscription revenue are used in the analysis of NRS’ or net2phone-UCaaS’ revenues and direct cost of revenues and are strong indications of the top-line growth and performance of the business.
Minutes of use is a nonfinancial metric that measures aggregate customer usage during a reporting period. Minutes of use is an important factor in BOSS Revolution Calling’s and IDT Global’s revenue recognition since satisfaction of our performance obligation occurs when the customer uses our service. Minutes of use trends and comparisons between periods are used in the analysis of revenues and direct cost of revenues.
Three and Nine Months Ended April 30, 2022 Compared to Three and Nine Months Ended April 30, 2021
Fintech Segment
Fintech, which represented 8.2% and 4.4% of our total revenues in the three months ended April 30, 2022 and 2021, respectively, and 7.0% and 5.2% of our total revenues in the nine months ended April 30, 2022 and 2021, respectively, is comprised of BOSS Money, a provider of international money remittance and related value/payment transfer services, and NRS, an operator of a nationwide POS network providing payment processing, digital advertising, transaction data, and ancillary services.
| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||
| BOSS Money | $ | 15.5 | $ | 10.2 | $ | 5.3 | 51.5 | % | $ | 40.5 | $ | 38.7 | $ | 1.8 | 4.7 | % | ||||||||||||||||
| National Retail Solutions | 11.4 | 6.4 | 5.0 | 78.3 | 32.1 | 16.5 | 15.6 | 94.0 | ||||||||||||||||||||||||
| Total revenues | 26.9 | 16.6 | 10.3 | 61.8 | 72.6 | 55.2 | 17.4 | 31.4 | ||||||||||||||||||||||||
| Direct cost of revenues | (8.2 | ) | (6.0 | ) | 2.2 | 35.7 | (22.8 | ) | (18.7 | ) | 4.1 | 21.6 | ||||||||||||||||||||
| Selling, general and administrative | (17.9 | ) | (11.6 | ) | 6.3 | 54.6 | (48.1 | ) | (33.8 | ) | 14.3 | 42.2 | ||||||||||||||||||||
| Depreciation and amortization | (0.7 | ) | (0.5 | ) | 0.2 | 42.5 | (1.9 | ) | (1.3 | ) | 0.6 | 42.7 | ||||||||||||||||||||
| Other operating gain | 0.1 | 0.1 | — | (71.9 | ) | 0.1 | 0.1 | — | (71.9 | ) | ||||||||||||||||||||||
| Income (loss) from operations | $ | 0.2 | $ | (1.4 | ) | $ | 1.6 | 111.2 | % | $ | (0.1 | ) | $ | 1.5 | $ | (1.6 | ) | (104.2 | )% | |||||||||||||
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Revenues. Revenues from BOSS Money increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily because of increased transaction volume in BOSS Money’s direct-to-consumer digital and retail channels. The revenue increase in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021was partially offset by the lack of revenue from transient foreign exchange market conditions that materially improved BOSS Money’s revenues in the nine months ended April 30, 2021 but ceased by April 30, 2021. BOSS Money continues to benefit from its integration into the BOSS Revolution Calling app in October 2021, as well as the continued expansion of its disbursement networks, particularly in Africa and the Caribbean.
Revenues from NRS increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 driven primarily by the expansion of its POS network, and revenue growth from its payment processing services and digital out-of-home advertising. NRS’ recurring revenue increased 101.9% to $10.0 million in the three months ended April 30, 2022 from $4.9 million in the three months ended April 30, 2021, and increased 114.4% to $27.6 million in the nine months ended April 30, 2022 from $12.9 million in the nine months ended April 30, 2021. Active POS terminals increased 37% to 17,900 at April 30, 2022 from 13,100 at April 30, 2021. Payment processing accounts increased 89% to 9,200 at April 30, 2022 from 4,900 at April 30, 2021.
Direct Cost of Revenues. BOSS Money’s direct cost of revenues increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily due to increased direct cost of revenues in its retail channel, which reflected the increase in BOSS Money’s retail channel’s revenue. NRS’ direct cost of revenues increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily due to the increase in its revenues.
Selling, General and Administrative. Selling, general and administrative expense increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily due to increases in employee compensation, sales commissions, stock-based compensation, and debit and credit card processing charges. The increase in card processing charges was the result of increased credit and debit card transactions through our BOSS Money app and other digital channels. As a percentage of Fintech’s revenue, Fintech’s selling, general and administrative expense decreased to 66.5% from 69.6% in the three months ended April 30, 2022 and 2021, respectively, and increased to 66.2% from 61.2% in the nine months ended April 30, 2022 and 2021, respectively.
Depreciation and Amortization. Depreciation and amortization expense increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily due to increased depreciation of capitalized costs of consultants and employees developing internal use software and increased depreciation of NRS’ POS equipment.
Other Operating Gain. Other operating gain in the three and nine months ended April 30, 2022 was due to grant income related to the money transfer business. Other operating gain in the three and nine months ended April 30, 2021 was due to the settlement of a claim related to the money transfer business.
net2phone-UCaaS Segment
The net2phone-UCaaS segment, which represented 4.7% and 3.1% of our total revenues in the three months ended April 30, 2022 and 2021, respectively, and 4.1% and 3.0% of our total revenues in the nine months ended April 30, 2022 and 2021, respectively, is comprised of net2phone’s cloud communications offerings.
| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Revenues | $ | 15.6 | $ | 11.4 | $ | 4.2 | 35.9 | % | $ | 42.0 | $ | 32.0 | $ | 10.0 | 31.2 | % | ||||||||||||||||
| Direct cost of revenues | (2.7 | ) | (2.2 | ) | 0.5 | 21.7 | (7.5 | ) | (6.3 | ) | 1.2 | 19.7 | ||||||||||||||||||||
| Selling, general and administrative | (13.8 | ) | (11.8 | ) | 2.0 | 16.8 | (40.2 | ) | (33.4 | ) | 6.8 | 20.1 | ||||||||||||||||||||
| Depreciation and amortization | (1.4 | ) | (1.4 | ) | — | (4.2 | ) | (3.9 | ) | (3.7 | ) | 0.2 | 6.6 | |||||||||||||||||||
| Other operating gain (expense), net | — | — | — | — | 0.3 | (0.1 | ) | 0.4 | 393.2 | |||||||||||||||||||||||
| Loss from operations | $ | (2.3 | ) | $ | (4.0 | ) | $ | 1.7 | 43.1 | % | $ | (9.3 | ) | $ | (11.5 | ) | $ | 2.2 | 19.0 | % | ||||||||||||
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Revenues. net2phone-UCaaS’ revenues increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 driven primarily by growth in the United States, although revenue increased in all net2phone-UCaaS regions. Seats served increased 33% to 279,000 at April 30, 2022 from 210,000 at April 30, 2021, including approximately 7,000 seats as a result of our acquisition of Integra CCS, or Integra, in March 2022. Integra provides cloud-based contact-center-as-a-service in the Americas and Europe including omnichannel support, social media integrations, chat-bot communications, workflow management, development tools for tailored contact center solutions and numerous third-party software integrations. Subscription revenue increased 42% to $14.2 million in the three months ended April 30, 2022 from $10.0 million in the three months ended April 30, 2021, and increased 38% to $38.5 million in the nine months ended April 30, 2022 from $27.8 million in the nine months ended April 30, 2021, led by growth in both the South American and North American regions. In the first quarter of fiscal 2022, net2phone-UCaaS launched a HIPAA compliant program for certain of its communications and collaboration solutions and introduced net2phone Phone App for Teams. The app enables Microsoft Teams users to add voice capabilities into Teams environments without additional licenses.
Direct Cost of Revenues. Direct cost of revenues increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily due to the increases in revenues, with the largest increase in Latin America. net2phone-UCaaS’ focus on mid-sized businesses, multi-channel strategies, and localized offerings generated revenue growth that exceeded the increase in direct cost of revenues.
Selling, General and Administrative. Selling, general and administrative expense increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily due to increases in sales commissions, employee compensation, and expenses related to the proposed spin-off of our net2phone cloud communications business. As a percentage of net2phone-UCaaS’ revenues, net2phone-UCaaS’ selling, general and administrative expenses decreased to 88.8% from 103.4% in the three months ended April 30, 2022 and 2021, respectively, and decreased to 95.6% from 104.5% in the nine months ended April 30, 2022 and 2021, respectively.
net2phone-UCaaS derives a significant portion of its revenues from existing customers. Attracting new customers usually involves additional costs compared to retention of existing customers. If existing customers’ subscriptions and related usage decrease or are terminated, net2phone-UCaaS will need to spend more money to acquire new customers and still may not be able to maintain its existing level of revenues or profitability. In addition, net2phone-UCaaS needs to acquire new customers to increase its revenues. net2phone-UCaaS incurs significant sales and marketing expenses to acquire new customers. It is therefore expected that selling, general and administrative expenses will remain a significant percentage of net2phone-UCaaS’ revenues for the foreseeable future.
Depreciation and Amortization. Depreciation and amortization expense was substantially unchanged in the three months ended April 30, 2022 compared to the similar period in fiscal 2021 The increases in depreciation and amortization expense in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021 was due to increased depreciation of net2phone-UCaaS’ telephone equipment leased to customers and increased depreciation of capitalized costs of consultants and employees developing internal use software.
Other Operating Gain (Expense), net. In the nine months ended April 30, 2022, we determined that the requirements for a contingent consideration payment related to an acquisition consummated in December 2019 would not be met before the expiration date for such contingency. net2phone-UCaaS recognized a gain of $0.3 million on the write-off of the contingent consideration payment obligation. Other operating expense, net of $0.1 million in the nine months ended April 30, 2021 was due to the settlement of a legal matter.
Traditional Communications Segment
The Traditional Communications segment, which represented 87.1% and 92.5% of our total revenues in the three months ended April 30, 2022 and 2021, respectively, and 88.9% and 91.8% of our total revenues in the nine months ended April 30, 2022 and 2021, respectively, includes Mobile Top-Up, which enables customers to transfer airtime and bundles of airtime, messaging, and data to international and domestic mobile accounts, BOSS Revolution Calling, an international long-distance calling service marketed primarily to immigrant communities in the United States and Canada, and IDT Global, a wholesale provider of international voice and SMS termination and outsourced traffic management solutions to telecoms worldwide. Traditional Communications also includes other smaller businesses, some of which are in harvest mode.
Traditional Communications’ most significant revenue streams are from Mobile Top-Up, BOSS Revolution Calling, and IDT Global. Mobile Top-Up and BOSS Revolution Calling are sold direct-to-consumers and through distributors and retailers. We receive payments for BOSS Revolution Calling, traditional calling cards, and Mobile Top-Up prior to providing the services. We recognize the revenue when services are provided to the customer. Traditional Communications’ revenues tend to be somewhat seasonal, with the second fiscal quarter (which contains Christmas and New Year’s Day) and the fourth fiscal quarter (which contains Mother’s Day and Father’s Day) typically showing higher minute volumes.
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| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $/# | % | 2022 | 2021 | $/# | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||
| Mobile Top-Up | $ | 115.9 | $ | 132.6 | $ | (16.7 | ) | (12.6 | )% | $ | 360.6 | $ | 325.0 | $ | 35.6 | 11.0 | % | |||||||||||||||
| BOSS Revolution Calling | 91.8 | 111.4 | (19.6 | ) | (17.6 | ) | 297.7 | 342.7 | (45.0 | ) | (13.1 | ) | ||||||||||||||||||||
| IDT Global | 67.1 | 88.6 | (21.5 | ) | (24.3 | ) | 229.4 | 263.6 | (34.2 | ) | (13.0 | ) | ||||||||||||||||||||
| Other | 11.1 | 13.1 | (2.0 | ) | (14.8 | ) | 33.2 | 38.5 | (5.3 | ) | (13.8 | ) | ||||||||||||||||||||
| Total revenues | 285.9 | 345.7 | (59.8 | ) | (17.3 | ) | 920.9 | 969.8 | (48.9 | ) | (5.0 | ) | ||||||||||||||||||||
| Direct cost of revenues | (236.7 | ) | (292.6 | ) | (55.9 | ) | (19.1 | ) | (766.3 | ) | (818.2 | ) | (51.9 | ) | (6.3 | ) | ||||||||||||||||
| Selling, general and administrative | (29.3 | ) | (30.0 | ) | (0.7 | ) | (2.6 | ) | (89.6 | ) | (88.5 | ) | 1.1 | 1.3 | ||||||||||||||||||
| Depreciation and amortization | (2.5 | ) | (2.5 | ) | — | (2.4 | ) | (7.5 | ) | (8.4 | ) | (0.9 | ) | (10.2 | ) | |||||||||||||||||
| Severance | — | (0.2 | ) | (0.2 | ) | (100.0 | ) | (0.1 | ) | (0.4 | ) | (0.3 | ) | (84.7 | ) | |||||||||||||||||
| Other operating (expense) gain, net | — | — | — | (40.4 | ) | — | 1.0 | (1.0 | ) | (107.2 | ) | |||||||||||||||||||||
| Income from operations | $ | 17.4 | $ | 20.4 | $ | (3.0 | ) | (14.6 | )% | $ | 57.4 | $ | 55.3 | $ | 2.1 | 3.7 | % | |||||||||||||||
| Minutes of use: | ||||||||||||||||||||||||||||||||
| BOSS Revolution Calling | 690 | 876 | (186 | ) | (21.2 | ) | 2,252 | 2,701 | (449 | ) | (16.6 | ) | ||||||||||||||||||||
| IDT Global | 1,864 | 2,460 | (596 | ) | (24.2 | ) | 5,882 | 8,185 | (2,303 | ) | (28.1 | ) | ||||||||||||||||||||
Revenues. Revenues from Mobile Top-Up decreased in the three months ended April 30, 2022 compared to the similar period in fiscal 2021 primarily from a decrease in revenue from the business-to-business wholesale channel, partially offset by an increase in revenues from the direct-to-consumer channel. Business-to-business wholesale revenues were increasing from an opportunity that began in the third quarter of fiscal 2021 but has since narrowed considerably. Revenues from Mobile Top-Up increased in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021 primarily from continued product expansion and growth in the business-to-business wholesale channel, although business-to-business wholesale revenues have narrowed considerably. Revenues from the direct-to-consumer channel increased in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021, partially offset by a decrease in retail channel revenues. In addition, our acquisition, in December 2020, of Sochitel UK Ltd., a global hub and digital distribution platform for mobile top-up, electronic vouchers, and other value transfer services primarily in Africa, contributed to our increased penetration into the market in Africa.
Revenues and minutes of use from BOSS Revolution Calling decreased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021. In fiscal 2021, COVID-19-related demand slowed the rate of decline in BOSS Revolution Calling revenue that we had experienced in prior periods, however, that impact was less significant in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021. The surge in demand for voice calls that began with the onset of the COVID-19 pandemic had eroded by the third quarter of fiscal 2022. BOSS Revolution Calling continues to be impacted by persistent, market-wide trends, including the proliferation of unlimited calling plans offered by wireless carriers and mobile virtual network operators, and the increasing penetration of free and paid over-the-top voice, video conferencing, and messaging services.
Revenues and minutes of use from IDT Global decreased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 as communications globally continued to transition away from international voice calling. This trend was accelerated by the impact of COVID-19 as business communications shifted from calling to video conferencing and other collaboration platforms. We expect that IDT Global will continue to be adversely impacted by these trends, and minutes of use and revenues will likely continue to decline from quarter-to-quarter, as we seek to maximize economics rather than necessarily sustain minutes of use or revenues.
Direct Cost of Revenues. Direct cost of revenues decreased in the three months ended April 30, 2022 compared to the similar period in fiscal 2021 primarily due to the decreases in revenues. Direct cost of revenues decreased in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021 primarily due to decreases in BOSS Revolution Calling’s and IDT Global’s direct cost of revenues in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021, partially offset by an increase in Mobile Top-Up’s direct cost of revenues in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021 as a result of the increase in Mobile Top-Up’s revenues. The continued migration of customers to our digital, direct-to-consumer channels is expected to continue, which is expected to contribute to future reductions in the rate of growth of Mobile Top-Up and BOSS Revolution Calling’s direct cost of revenues when compared to prior periods.
Selling, General and Administrative. Selling, general and administrative expense decreased in the three months ended April 30, 2022 compared to the similar period in fiscal 2021 primarily due to decreases in employee compensation, sales commissions, and debit and credit card processing charges, partially offset by an increase in stock-based compensation. Selling, general and administrative expense increased in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021 primarily due to increases in employee compensation, debit and credit card processing charges, and consulting expense, partially offset by a decrease in sales commissions. As a percentage of Traditional Communications’ revenue, Traditional Communications’ selling, general and administrative expense increased to 10.2% from 8.7% in the three months ended April 30, 2022 and 2021, respectively, and to 9.7% from 9.1% in the nine months ended April 30, 2022 and 2021, respectively.
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Depreciation and Amortization. Depreciation and amortization expense was substantially unchanged in the three months ended April 30, 2022 compared to the similar period in fiscal 2021. Depreciation and amortization expense decreased in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021 as more of our property, plant, and equipment became fully depreciated, partially offset by depreciation of equipment added to our telecommunications network and capitalized costs of consultants and employees developing internal use software.
Severance Expense. In the three months ended April 30, 2022 and 2021, Traditional Communications incurred severance expense of nil and $0.2 million, respectively, and in the nine months ended April 30, 2022 and 2021, Traditional Communications incurred severance expense of $0.1 million and $0.4 million, respectively.
Other Operating (Expense) Gain, net. Other operating (expense) gain, net included expense for the indemnification of a net2phone cable telephony customer related to patent infringement claims brought against the customer of $33,000 and $55,000 in the three months ended April 30, 2022 and 2021, respectively, and $68,000 and $0.4 million in the nine months ended April 30, 2022 and 2021, respectively. Other operating (expense) gain, net in the nine months ended April 30, 2021 included a gain related to the receipt of $2.0 million from the sale to a third party of all our rights under the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation. The lawsuit is about claims that merchants paid excessive fees to accept Visa and Mastercard cards between January 1, 2004 and January 25, 2019 because Visa and Mastercard, individually, and together with their respective member banks, violated the antitrust laws. Other operating (expense) gain, net in the nine months ended April 30, 2021 also included expense for an IDT Global settlement of a claim for $0.6 million.
Corporate
| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| General and administrative | $ | (1.8 | ) | $ | (1.7 | ) | $ | 0.1 | 4.8 | % | $ | (6.1 | ) | $ | (5.8 | ) | $ | 0.3 | 4.4 | % | ||||||||||||
| Depreciation and amortization | — | — | — | — | (0.1 | ) | (0.1 | ) | — | 4.0 | ||||||||||||||||||||||
| Other operating expense (gain), net | (0.2 | ) | 0.6 | (0.8 | ) | (126.2 | ) | (0.9 | ) | 0.6 | (1.5 | ) | (256.7 | ) | ||||||||||||||||||
| Loss from operations | $ | (2.0 | ) | $ | (1.1 | ) | $ | (0.9 | ) | (75.8 | )% | $ | (7.1 | ) | $ | (5.3 | ) | $ | (1.8 | ) | (34.2 | )% | ||||||||||
Corporate costs include compensation, consulting fees, treasury, tax and accounting services, human resources, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, charitable contributions, travel, and other corporate-related general and administrative expenses. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
General and Administrative. Corporate general and administrative expense increased in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 primarily because of increases in employee compensation. As a percentage of our consolidated revenues, Corporate general and administrative expense was 0.5% in both the three months ended April 30, 2022 and 2021, and 0.6% in both the nine months ended April 30, 2022 and 2021.
Other Operating (Expense) Gain, net. As discussed in Note 17 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report, we (as well as other defendants) have been named in a pending putative class action on behalf of the stockholders of our former subsidiary, Straight Path Communications Inc., or Straight Path, and a derivative complaint. We incurred legal fees of $1.4 million and $0.3 million in the three months ended April 30, 2022 and 2021, respectively, and $5.0 million and $2.0 million in the nine months ended April 30, 2022 and 2021, respectively, related to this action. Also, we recorded offsetting gains from insurance claims for this matter of $1.2 million and $0.9 million in the three months ended April 30, 2022 and 2021, respectively, and $4.1 million and $2.6 million in the nine months ended April 30, 2022 and 2021, respectively.
Consolidated
The following is a discussion of certain of our consolidated expenses, and our consolidated income and expense line items below income from operations.
Related Party Lease Costs. We lease office and parking space in a building and parking garage located at 520 Broad Street, Newark, New Jersey that is owned by our former subsidiary, Rafael Holdings, Inc., or Rafael. We also lease office space in Israel from Rafael. The Newark lease expires in April 2025 and the Israel lease expires in July 2025. We incurred lease costs of $0.5 million in each of the three months ended April 30, 2022 and 2021, and $1.4 million in each of the nine months ended April 30, 2022 and 2021, in connection with the Rafael leases, which is included in consolidated selling, general and administrative expense.
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Stock-Based Compensation Expense. Stock-based compensation expense included in consolidated selling, general and administrative expense was $1.2 million and $0.3 million in the three months ended April 30, 2022 and 2021, respectively, and $1.8 million and $1.2 million in the nine months ended April 30, 2022 and 2021, respectively. The increase in stock-based compensation expense in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021 was primarily due to expense related to the grant in February 2022 of restricted shares of NRS’ Class B common stock to certain of our employees for which we recorded stock-based compensation expense of $1.2 million, partially offset by reductions in expense for deferred stock units granted in June 2019. At April 30, 2022, unrecognized compensation cost related to non-vested stock-based compensation was an aggregate of $0.2 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting periods that end in fiscal 2025.
| Three months ended April 30, | Change | Nine months ended April 30, | Change | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Income from operations | $ | 13.3 | $ | 13.9 | $ | (0.6 | ) | (3.9 | )% | $ | 40.9 | $ | 40.0 | $ | 0.9 | 2.2 | % | |||||||||||||||
| Interest income, net | 0.1 | 0.1 | — | (32.0 | ) | 0.2 | 0.2 | — | (2.7 | ) | ||||||||||||||||||||||
| Other (expense) income, net | (5.1 | ) | 3.8 | (8.9 | ) | (232.8 | ) | (24.2 | ) | 5.6 | (29.8 | ) | (532.1 | ) | ||||||||||||||||||
| (Provision for) benefit from income taxes | (3.2 | ) | 18.6 | (21.8 | ) | (117.4 | ) | (5.9 | ) | 12.2 | (18.1 | ) | (148.5 | ) | ||||||||||||||||||
| Net income | 5.1 | 36.4 | (31.3 | ) | (86.0 | ) | 11.0 | 58.0 | (47.0 | ) | (81.0 | ) | ||||||||||||||||||||
| Net (income) attributable to noncontrolling interests | (0.3 | ) | (0.1 | ) | (0.2 | ) | (570.0 | ) | (1.2 | ) | (0.3 | ) | (0.9 | ) | (349.3 | ) | ||||||||||||||||
| Net income attributable to IDT Corporation | $ | 4.8 | $ | 36.3 | $ | (31.5 | ) | (86.9 | )% | $ | 9.8 | $ | 57.7 | $ | (47.9 | ) | (83.1 | )% | ||||||||||||||
Other (Expense) Income, net. Other (expense) income, net consists of the following:
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in millions) | ||||||||||||||||
| Foreign currency transaction (losses) gains | $ | (0.9 | ) | $ | (1.1 | ) | $ | (0.2 | ) | $ | 0.4 | |||||
| Equity in the net loss of investee | (0.8 | ) | (0.5 | ) | (2.2 | ) | (0.5 | ) | ||||||||
| (Losses) gains on investments | (3.4 | ) | 5.4 | (20.9 | ) | 5.8 | ||||||||||
| Other | — | — | (0.9 | ) | (0.1 | ) | ||||||||||
| Total other (expense) income, net | $ | (5.1 | ) | $ | 3.8 | $ | (24.2 | ) | $ | 5.6 | ||||||
On February 2, 2021, we paid $4.0 million to purchase shares of series B convertible preferred stock of a communications company (the equity method investee, or EMI), and on August 10, 2021, we paid $1.1 million to purchase shares of the EMI’s series C convertible preferred stock and additional shares of the EMI’s series B convertible preferred stock. The initial shares purchased represented 23.95% of the outstanding shares of the EMI on an as converted basis. The subsequent purchases increased our ownership to 26.57% on an as converted basis. We account for this investment using the equity method since the series B and series C convertible preferred stock are in-substance common stock, and we can exercise significant influence over the operating and financial policies of the EMI. We determined that on the dates of the acquisitions, there were differences of $3.4 million and $1.0 million between our investment in the EMI and our proportional interest in the equity of the EMI, which represented the share of the EMI’s customer list on the dates of the acquisitions attributed to our interest in the EMI. These basis differences are being amortized over the 6-year estimated life of the customer list.
The net losses on investments in the three and nine months ended April 30, 2022 included unrealized losses of $0.6 million and $14.1 million, respectively, on shares of Rafael Class B common stock. The net gains on investments in the three and nine months ended April 30, 2021 included unrealized gains of $4.8 million and $5.6 million, respectively, on shares of Rafael Class B common stock.
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(Provision for) Benefit from Income Taxes. In the three and nine months ended April 30, 2021, we released $24.0 million of our valuation allowance on the portion of our deferred income tax assets that we are more likely than not going to utilize. We used the framework of Accounting Standards Codification Income Taxes (Topic 740) to determine whether the valuation allowance should be maintained or reversed. We considered the scheduled expiration of our net operating losses included in our deferred tax assets, projected future taxable income, and tax planning strategies in our assessment of the valuation allowance. The primary factors that resulted in the valuation allowance release were the three consecutive years of profitability in the United States and expected future profitability in both the United States and the United Kingdom that will utilize a portion of the net operating losses. Our tax planning strategies were not a significant factor in the analysis. The decrease in income tax expense in the three and nine months ended April 30, 2022 compared to the similar periods in fiscal 2021, excluding the benefit from the valuation allowance released in fiscal 2021, was primarily due to differences in the amount of taxable income earned in the various taxing jurisdictions.
Net Income Attributable to Noncontrolling Interests. The change in the net income attributable to noncontrolling interests in the three months ended April 30, 2022 compared to the similar period in fiscal 2021 was due to increases in the net income of NRS and our variable interest entity, or VIE, as well as a reduction in the net loss of net2phone 2.0, Inc., or net2phone 2.0, which owns and operates our net2phone-UCaaS segment. The change in the net income attributable to noncontrolling interests in the nine months ended April 30, 2022 compared to the similar period in fiscal 2021 was due to increases in the net income of NRS and our VIE, partially offset by an increase in the net loss of net2phone 2.0. As of May 31, 2021, we began consolidating a VIE because we determined that we are the primary beneficiary of the VIE since we have the power to direct the activities of the VIE that most significantly impact its economic performance, and we have the obligation to absorb losses of and the right to receive benefits from the VIE that could potentially be significant to it. We do not currently own any interest in the VIE and thus the net income incurred by the VIE was attributed to noncontrolling interests.
Liquidity and Capital Resources
General
As of the date of this Quarterly Report, including the impact of COVID-19, we expect our cash from operations and the balance of cash, cash equivalents, debt securities, and current equity investments that we held on April 30, 2022 will be sufficient to meet our currently anticipated working capital and capital expenditure requirements during the twelve-month period ending April 30, 2023.
At April 30, 2022, we had cash, cash equivalents, debt securities, and current equity investments of $136.0 million and working capital (current assets in excess of current liabilities) of $55.7 million.
We treat unrestricted cash and cash equivalents held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC as substantially restricted and unavailable for other purposes. At April 30, 2022, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of $10.5 million held by IDT Payment Services, Inc. and IDT Payment Services of New York, LLC that was unavailable for other purposes.
| Nine months ended April 30, | ||||||||
| 2022 | 2021 | |||||||
| (in millions) | ||||||||
| Cash flows provided by (used in): | ||||||||
| Operating activities | $ | 13.3 | $ | 38.1 | ||||
| Investing activities | (25.9 | ) | (46.8 | ) | ||||
| Financing activities | (2.1 | ) | (4.2 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents | (14.1 | ) | 6.7 | |||||
| Decrease in cash, cash equivalents, and restricted cash and cash equivalents | $ | (28.8 | ) | $ | (6.2 | ) | ||
Operating Activities
Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable.
Gross trade accounts receivable increased to $57.9 million at April 30, 2022 from $51.1 million at July 31, 2021 primarily due to amounts billed in the nine months ended April 30, 2022 that were greater than collections during the period.
Deferred revenue arises from sales of prepaid products and varies from period to period depending on the mix and the timing of revenues. Deferred revenue decreased to $39.1 million at April 30, 2022 from $42.3 million at July 31, 2021 due to decreases in the BOSS Revolution Calling and Mobile Top-Up deferred revenue balances.
Customer deposit liabilities at IDT Financial Services Limited, our Gibraltar-based bank, decreased to $95.1 million at April 30, 2022 from $115.5 million at July 31, 2021. Our restricted cash and cash equivalents included $96.0 million and $115.8 million at April 30, 2022 and July 31, 2021, respectively, held by the bank.
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On June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. We have evaluated our state tax filings with respect to the Wayfair decision and are in the process of reviewing our remittance practices. It is possible that one or more jurisdictions may assert that we have liability for periods for which we have not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could materially and adversely affect our business, financial position, and operating results. One or more jurisdictions may change their laws or policies to apply their sales, use or other similar taxes to our operations, and if such changes were made it could materially and adversely affect our business, financial position, and operating results.
Investing Activities
Our capital expenditures were $13.8 million and $13.5 million in the nine months ended April 30, 2022 and 2021, respectively. We currently anticipate that total capital expenditures in the twelve-month period ending April 30, 2023 will be $18 million to $20 million. We expect to fund our capital expenditures with our net cash provided by operating activities and cash, cash equivalents, debt securities, and current equity investments on hand.
On February 2, 2021, we paid $4.0 million to purchase shares of the EMI’s series B convertible preferred stock, and on August 10, 2021, we paid $1.1 million to purchase shares of the EMI’s series C convertible preferred stock and additional shares of the EMI’s series B convertible preferred stock. The initial shares purchased represented 23.95% of the outstanding shares of the EMI on an as converted basis. The subsequent purchases increased our ownership to 26.57% on an as converted basis.
On March 3, 2022, net2phone 2.0 purchased all of the outstanding shares of Onwaba S.R.L. and Gem S.R.L. for cash of $7.1 million, net of cash acquired. We also recorded an aggregate of $4.5 million for the estimated fair value of future payments subject to holdback and contingent consideration. Onwaba S.R.L. and Gem S.R.L. are located in Uruguay and use the trade name Integra CCS. The purchase price also included 27,765 shares of our Class B common stock with a value of $1.0 million that were issued at closing. The potential future payments are an aggregate of up to $3.3 million, half of which will be paid at the end of 12 months after closing and the remainder will be paid at the end of 24 months after closing, subject to holdback for the settlement of claims against the sellers, if any. The contingent consideration is an aggregate of up to $3.5 million based on annual cumulative incremental recurring seat revenue over a four-year period, payable in cash and/or equity at net2phone 2.0’s discretion.
On March 1, 2022, our subsidiary, IDT International Telecom, Inc., purchased all of the outstanding shares of Leaf Global Fintech Corporation, or Leaf, for cash of $0.3 million, net of cash acquired. We also recorded $3.3 million for the estimated fair value of contingent consideration. Leaf is a provider of digital wallet services in emerging markets currently serving unbanked customers in Rwanda, Uganda, and Kenya. The Leaf wallet is a mobile platform available on both smartphones and non-smartphones through an app or by utilizing a USSD interface accessed via a short code. The Leaf digital wallet enables customers to store, send, receive, and exchange currencies on their phones domestically and across borders. The Leaf platform leverages the Stellar network for storing and disseminating transaction data while maintaining value with stablecoins. Stellar is an open-source, decentralized blockchain network that connects global financial infrastructure, optimized for payments and specifically to support cross-border transactions. The contingent consideration is an aggregate of up to $5.5 million based on annual gross profit over a five-year period.
On December 3, 2020, we acquired 51% of the issued shares of Sochitel UK Ltd., or Sochitel. The purchase price was $2.4 million, net of cash acquired. Also, pursuant to a Put/Call Option Agreement related to the 5% of the issued shares of Sochitel that the seller did not initially sell to us, or the Option Shares, the seller exercised its option and on March 22, 2021, we purchased the Option Shares for $0.3 million.
On December 7, 2020, we purchased from Rafael 218,245 newly issued shares of Rafael’s Class B common stock and a warrant to purchase up to 43,649 shares of Rafael’s Class B common stock at an exercise price of $22.91 at any time on or after December 7, 2020 and on or prior to June 6, 2022. The aggregate purchase price was $5.0 million. The purchase price was based on a per share price of $22.91, which was the closing price of Rafael’s Class B common stock on the New York Stock Exchange on the trading day immediately preceding the purchase date. On March 15, 2021, we exercised the warrant in full and purchased 43,649 shares of Rafael’s Class B common stock for cash of $1.0 million.
Purchases of debt securities and equity investments were $11.3 million and $39.3 million in the nine months ended April 30, 2022 and 2021, respectively. Proceeds from maturities and sales of debt securities and redemptions of equity investments were $7.8 million and $18.7 million in the nine months ended April 30, 2022 and 2021, respectively.
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Financing Activities
We distributed cash of $0.4 million and $0.6 million in the nine months ended April 30, 2022 and 2021, respectively, to the noncontrolling interests in certain of our subsidiaries.
In the nine months ended April 30, 2022 and 2021, we received proceeds from financing-related other liabilities of $2.3 million and nil, respectively.
In the nine months ended April 30, 2022 and 2021, we repaid financing-related other liabilities of $1.3 million and $0.1 million, respectively.
Our subsidiary, IDT Telecom, Inc., or IDT Telecom, entered into a credit agreement, dated as of May 17, 2021, with TD Bank, N.A. for a revolving credit facility for up to a maximum principal amount of $25.0 million. IDT Telecom may use the proceeds to finance working capital requirements and for certain closing costs of the facility. At April 30, 2022 and July 31, 2021, there were no amounts outstanding under this facility. In the nine months ended April 30, 2022, IDT Telecom borrowed and repaid an aggregate of $2.6 million under the facility. The revolving credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum at the Intercontinental Exchange Benchmark Administration Ltd. LIBOR multiplied by the Regulation D maximum reserve requirement plus 125 to 175 basis points, depending upon IDT Telecom’s leverage ratio as computed for the most recent fiscal quarter. Interest is payable monthly, and all outstanding principal and any accrued and unpaid interest is due on May 16, 2024. IDT Telecom pays a quarterly unused commitment fee on the average daily balance of the unused portion of the $25.0 million commitment of 30 to 85 basis points, depending upon IDT Telecom’s leverage ratio as computed for the most recent fiscal quarter. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain targets based on financial ratios during the term of the revolving credit facility. As of April 30, 2022, IDT Telecom was in compliance with all of the covenants.
On September 29, 2021, NRS sold shares of its Class B common stock representing 2.5% of its outstanding capital stock on a fully diluted basis, to Alta Fox Opportunities Fund LP, or Alta Fox, for cash of $10 million. Alta Fox has the right to request that NRS redeem all or any portion of the NRS common shares that it purchased at the per share purchase price during a period of 182 days following the fifth anniversary of this transaction. The redemption right shall terminate upon the consummation of (i) a sale of NRS or its assets for cash or securities that are listed on a national securities exchange, (ii) a public offering of NRS’ securities, or (iii) a distribution of NRS’ capital stock following which NRS’ common shares are listed on a national securities exchange.
In the nine months ended April 30, 2022 and 2021, we received cash from the exercise of stock options of $0.1 million and $0.7 million, respectively, for which we issued 10,000 and 81,041 shares, respectively, of our Class B common stock. In addition, in April 2022, Howard S. Jonas, the Chairman of our Board of Directors, exercised stock options for 1.0 million shares of our Class B common stock that were granted on May 2, 2017. The exercise price of these options was $14.93 per share and the expiration date was May 1, 2022. Mr. Jonas used 528,635 shares of our Class B common stock with a value of $14.9 million to pay the aggregate exercise price of the options.
We have an existing stock repurchase program authorized by our Board of Directors for the repurchase of shares of our Class B common stock. The Board of Directors authorized the repurchase of up to 8.0 million shares in the aggregate. There were no repurchases under the program in the nine months ended April 30, 2022. In the nine months ended April 30, 2021, we repurchased 463,792 shares of Class B common stock for an aggregate purchase price of $2.8 million. At April 30, 2022, 5.8 million shares remained available for repurchase under the stock repurchase program.
In the nine months ended April 30, 2022 and 2021, we paid $9.0 million and $1.3 million, respectively, to repurchase 200,438 and 109,381 shares, respectively, of our Class B common stock that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the vesting of deferred stock units and lapsing of restrictions on restricted stock. In addition, in April 2022, Mr. Jonas tendered 137,364 shares of our Class B common stock with a value of $3.9 million to satisfy a portion of his tax obligations in connection with his stock option exercises. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.
Other Sources and Uses of Resources
We are considering spin-offs and other potential dispositions of certain of our subsidiaries. Some of the transactions under consideration are in early stages and others are more advanced. A spin-off may include the contribution of a significant amount of cash, cash equivalents, debt securities, and/or equity securities to the subsidiary prior to the spin-off, which would reduce our capital resources. In fiscal 2021, we announced that our Board of Directors had directed us to prepare for the potential spin-off of our net2phone cloud communications business. On May 5, 2022, we announced that in light of market conditions, our Board of Directors postponed the spin-off, which we had been preparing to spin-off on or before July 31, 2022. A spin-off would be subject to authorization by our Board of Directors. There is no assurance at this time that any of these transactions will be completed.
We intend to, where appropriate, make strategic investments and acquisitions to complement, expand, and/or enter into new businesses. In considering acquisitions and investments, we search for opportunities to profitably grow our existing businesses and/or to add qualitatively to the range and diversification of businesses in our portfolio. At this time, we cannot guarantee that we will be presented with acquisition opportunities that meet our return-on-investment criteria, or that our efforts to make acquisitions that meet our criteria will be successful.
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Contractual Obligations and Other Commercial Commitments
The following table quantifies our future contractual obligations and other commercial commitments at April 30, 2022:
Payments Due by Period (in millions) | Total | Less than 1 year | 1–3 years | 4–5 years | After 5 years | |||||||||||||||
| Purchase commitments | $ | 5.0 | $ | 5.0 | $ | — | $ | — | $ | — | ||||||||||
| Connectivity obligations under service agreements | 0.6 | 0.5 | 0.1 | — | — | |||||||||||||||
| Operating leases including short-term leases | 9.0 | 3.5 | 5.0 | 0.4 | 0.1 | |||||||||||||||
| Total contractual obligations (1) | $ | 14.6 | $ | 9.0 | $ | 5.1 | $ | 0.4 | $ | 0.1 | ||||||||||
| (1) | The above table does not include up to $10 million for the potential redemption of shares of NRS’ Class B common stock, an aggregate of $22.0 million in performance bonds, and $14.0 million for other potential payments, due to the uncertainty of the amount and/or timing of any such payments. |
Off-Balance Sheet Arrangements
We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources, other than the following.
In connection with our spin-off of Straight Path in July 2013, we and Straight Path entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Straight Path after the spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Straight Path with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, we indemnify Straight Path and Straight Path indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, we indemnify Straight Path from all liability for taxes of Straight Path or any of its subsidiaries or relating to the Straight Path business with respect to taxable periods ending on or before the spin-off, from all liability for taxes of ours, other than Straight Path and its subsidiaries, for any taxable period, and from all liability for taxes due to the spin-off. (See Note 17 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report).
We have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers. At April 30, 2022, we had aggregate performance bonds of $22.0 million outstanding.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Foreign Currency Risk
Revenues from our international operations were 29% and 29% of our consolidated revenues in the three months ended April 30, 2022 and 2021, respectively, and 28% and 20% of our consolidated revenues in the nine months ended April 30, 2022 and 2021, respectively. On February 1, 2021, we changed the geographic sourcing of certain revenues from the United States to the United Kingdom. A significant portion of our revenues is in currencies other than the U.S. Dollar. Our foreign currency exchange risk is somewhat mitigated by our ability to offset a portion of these non-U.S. Dollar-denominated revenues with operating expenses that are paid in the same currencies. While the impact from fluctuations in foreign exchange rates affects our revenues and expenses denominated in foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period is generally not material.
Investment Risk
We hold a portion of our assets in debt and equity securities, including hedge funds, for strategic and speculative purposes. At April 30, 2022, the value of our debt and equity securities was an aggregate of $46.2 million, which represented 9.2% of our total assets. Investments in debt and equity securities carry a degree of risk and depend to a great extent on correct assessments of the future course of price movements of securities and other instruments. There can be no assurance that our investment managers will be able to accurately predict these price movements. The securities markets have in recent years been characterized by great volatility and unpredictability. Accordingly, the value of our investments may go down as well as up and we may not receive the amounts originally invested upon redemption.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of April 30, 2022.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings in which we are involved are described in Note 17 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report.
Item 1A. Risk Factors
There are no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021, except for the following:
Our research and development (“RD”) may be adversely affected by ongoing developments in Belarus and Ukraine.
We have a significant number of RD personnel in Belarus. Belarus shares borders with both Russia and Ukraine. In February 2022, in connection with escalating tensions involving Russia and Ukraine, Russian military personnel stationed in Belarus were part of an invasion force by Russian forces into Ukraine. In response to the support and facilitation by Belarus for the invasion, the United States, the European Union, or E.U., and various other nations imposed sanctions against multiple individuals and entities in Belarus. Other potential retaliatory measures could be taken by the United States and other countries, particularly if Belarus were to take a more active role in the conflict. While we continue to monitor the situation in Belarus closely, any prolonged or expanded unrest, military activities, or sanctions could have an adverse effect on our future product roadmap and RD. We cannot predict whether additional sanctions or other measures will be imposed, or the nature of severity of those measures, and whether they will directly or indirectly impact our RD in Belarus or elsewhere.
Further, our Belarussian RD personnel could be impacted by retaliatory actions taken by third parties related to actual or perceived Belarussian actions in support of the invasion, including cyberattacks.
Should the military conflict expand to Belarus, our operations there could likely be impacted, including due to availability of personnel, electrical outages, cyber-attacks and actual battles in areas where we have personnel.
Any of the foregoing could have an adverse impact on our ability to research and develop new technology, including corrections or enhancements of existing platforms supporting our current products and services or development of new or complementary offerings.
Our U.K.-based businesses and business between the United Kingdom and other countries face risks related to the United Kingdom leaving the European Union (“Brexit”).
We operate our business worldwide, including meaningful operations in the United Kingdom. Accordingly, we are subjected to risks from changes in the regulatory environment in various countries. On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the E.U. (commonly referred to as “Brexit”). The United Kingdom formally left the E.U. on April 30, 2020 and had entered a transition period until December 31, 2020. The E.U. and the United Kingdom concluded the EU-UK Trade and Cooperation Agreement (the “TCA”) on December 24, 2020, which took effect provisionally on January 1, 2021, and became formally applicable on May 1, 2021. The TCA sets out the arrangements between the United Kingdom and E.U. on trade in certain areas (e.g., goods and some services, energy, fisheries, social security coordination), however there is still uncertainty over how its terms will play out in practice and there are key aspects of the United Kingdom’s relationship with the E.U. which are not covered by the TCA, such as in respect of financial services. We expect that uncertainty over the terms of the TCA and other future agreements between the United Kingdom and E.U. will continue to cause political and economic uncertainty, which could harm our business and financial results. The withdrawal will, among other outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the E.U., and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. Until there is greater understanding on how the terms of the TCA will play out in practice, and until the terms of other potential agreements that the United Kingdom may eventually enter into with the E.U. are known, it is not possible to determine the extent of the impact that the United Kingdom’s departure from the E.U. and/or any related matters may have on us; however, any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations, financial condition, and cash flows. Likewise, similar actions taken by European and other countries in which we operate could have a similar or even more profound impact.
Further, Brexit could adversely affect European and worldwide economic or market conditions and could contribute to instability in global financial markets, and the value of the Pound Sterling currency or other currencies, including the Euro. We are exposed to the economic, market, and fiscal conditions in the United Kingdom and the E.U. and to changes in any of these conditions.
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IDT Financial Services Limited, or IDTFS, our Gibraltar-based bank, currently operates under a license from the Gibraltar Financial Services Commission. As an overseas British Territory, following the expiration of the Brexit transition period, the passporting rights previously enjoyed by IDTFS under E.U. law ceased to be in effect. IDTFS made alternative arrangements with third parties to service customers in E.U. countries. Our inability to service these customers will lead to a reduction in the revenues previously earned from them.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases by us of our shares during the third quarter of fiscal 2022:
| Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||||||||||
| February 1-28, 2022 | — | $ | — | — | 5,768,497 | |||||||||||
| March 1–31, 2022 | — | $ | — | — | 5,768,497 | |||||||||||
| April 1–30, 2022 | — | $ | — | — | 5,768,497 | |||||||||||
| Total | — | $ | — | — | ||||||||||||
| (1) | On January 22, 2016, our Board of Directors approved a stock repurchase program to purchase up to 8.0 million shares of our Class B common stock. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
| * Filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IDT CORPORATION | ||
| June 9, 2022 | By: | /s/ SHMUEL JONAS |
Shmuel Jonas Chief Executive Officer | ||
| June 9, 2022 | By: | /s/ MARCELO FISCHER |
Marcelo Fischer Chief Financial Officer | ||
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