Equity Investments

12 Months Ended

Jul. 31, 2021

Equity Investments

Equity Investments

Note 8—Equity Investments

Equity investments consist of the following:

July 31 (dollars in thousands)	2021		2020
Zedge, Inc. Class B common stock, 42,282 shares at July 31, 2021 and 2020	$	649	$	59
Rafael Holdings, Inc. Class B common stock, 246,565 and 27,806 shares at July 31, 2021 and 2020, respectively		12,479		389
Rafael Holdings, Inc. restricted Class B common stock, 43,649 and nil shares at July 31, 2021 and 2020, respectively		2,209		—
Other marketable equity securities		3,630		—
Fixed income mutual funds		23,467		5,516
Current equity investments	$	42,434	$	5,964
Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”)	$	2,465	$	3,825
Series B convertible preferred stock—equity method investment		2,901		—
Hedge funds		3,563		4,783
Other		2,725		225
Noncurrent equity investments	$	11,654	$	8,833

The Company received the Zedge Inc. (“Zedge”) Class B common shares and 28,320 of the unrestricted Rafael Class B common shares 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. Howard S. Jonas is the Vice-Chairman of the Board of Directors of Zedge.

On December 7, 2020, the Company 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 of $5.0 million was allocated $4.6 million to the shares and $0.4 million to the warrant based on their relative purchase date fair values. The fair value of the warrant on the acquisition date was estimated using a Black-Scholes valuation model that represented a Level 3 measurement. 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, the Company exercised the warrant in full and purchased 43,649 shares of Rafael’s Class B common stock for cash of $1.0 million. The aggregate 261,894 shares of Rafael’s Class B common stock were not available for sale, assignment, or transfer. These restrictions lapsed in June 2021 for 218,245 shares and September 2021 for 43,649 shares.

In June 2016, upon the acquisition of Visa Europe Limited by Visa, Inc. (“Visa”), IDT Financial Services Limited received 1,830 shares of Visa Series C Preferred among other consideration. At July 31, 2020, each share of Visa Series C Preferred was convertible into 13.722 shares of Visa Class A common stock (the “Conversion Adjustment), subject to certain conditions, and will be convertible at the holder’s option beginning in June 2028. On September 24, 2020, in connection with Visa’s first mandatory release assessment, the Company received 125 shares of Visa Inc. Series A Convertible Participating Preferred Stock (“Visa Series A Preferred”) and the Conversion Adjustment for Visa Series C Preferred was reduced to 6.861. In June 2021, the 125 shares of Visa Series A Preferred were converted into 12,500 shares of Visa Class A common stock, which the Company sold for $2.9 million.

IDT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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:

Year ended July 31 (in thousands)	2021			2020
Balance, beginning of period	$	4,109		$	3,919
Redemption for Visa mandatory release assessment		(1,870	)		—
Adjustment for observable transactions involving a similar investment from the same issuer		510			206
Upward adjustments		—			3
Redemptions		(6	)		(19	)
Impairments		—			—
BALANCE, END OF PERIOD	$	2,743		$	4,109

The Company increased the carrying value of the shares of Visa Series C Preferred it held by $0.5 million and $0.2 million in fiscal 2021 and fiscal 2020, respectively, based on the fair value of Visa Class A common stock and a discount for lack of current marketability.

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

Year ended July 31 (in thousands)	2021		2020
Net gains (losses) recognized during the period on equity investments	$	8,830	$	(336	)
Less: net gains recognized during the period on equity investments redeemed during the period		1,090		—
Unrealized gains (losses) recognized during the period on equity investments still held at the reporting date	$	7,740	$	(336	)

Equity Method Investment

On February 2, 2021, the Company paid $4.0 million to purchase shares of series B convertible preferred stock of a communications company (the equity method investee, or “EMI”). The shares purchased represent 23.95% of the outstanding shares of the EMI on an as converted basis. The Company accounts for this investment using the equity method since the series B convertible preferred stock is in-substance common stock, and the Company can exercise significant influence over the operating and financial policies of the EMI.

The following table summarizes the change in the balance of the Company’s equity method investment:

Year ended July 31 (in thousands)	2021			2020
Balance, beginning of period	$	—		$	—
Purchase of series B convertible preferred stock		4,000			—
Equity in the net loss of investee		(816	)		—
Amortization of equity method basis difference		(283	)		—
BALANCE, END OF PERIOD	$	2,901		$	—

The Company determined that on the date of the acquisition, there was a difference of $3.4 million between its investment in the EMI and its proportional interest in the equity of the EMI, which represented the Company’s share of the EMI’s customer list on the date of acquisition. This basis difference is being amortized over the 6-year estimated life of the customer list. In the accompanying consolidated statements of income, amortization of equity method basis difference is included in the equity in the net loss of investee, which is recorded in “Other income (expense), net” (see Note 17).

IDT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information of the EMI was as follows:

July 31, 2021 (in thousands)
Current assets	$	1,467
Noncurrent assets	$	2,549
Current liabilities	$	(4,041	)
Noncurrent liabilities	$	(50	)

From the date of acquisition to July 31, 2021 (in thousands)
REVENUES	$	1,898
COSTS AND EXPENSES:
Direct cost of revenues		1,937
Selling, general and administrative		3,388
TOTAL COSTS AND EXPENSES		5,325
LOSS FROM OPERATIONS		(3,427	)
Other income, net		101
NET LOSS	$	(3,326	)

On August 10, 2021, the Company paid $1.1 million to purchase shares of the EMI’s series C convertible preferred stock and additional shares of the EMI’s series B convertible preferred stock. These purchases increased the Company’s ownership of the outstanding shares of the EMI to 26.57% on an as converted basis.