UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended June 30, 2015

OR

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

For transition period from __________ to __________

Commission file number: 000-27648

MAGICJACK VOCALTEC LTD.
(Exact name or Registrant as specified in its charter)

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

12 BENNY GAON STREET, BUILDING 2B
POLEG INDUSTRIAL AREA, NETANYA, ISRAEL 42504
 (Address of principal executive offices, including zip code)

(561) 749-2255
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer ¨         Accelerated filer x  
     
Non-accelerated filer ¨    
( do not check if a smaller
 reporting compan y)
Smaller reporting company   ¨  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

There were 16,701,001 ordinary shares with no par value outstanding at July 31, 2015.
 
 
 
 
 
TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
       
   
   
3
   
4
   
5
   
6
   
7
   
9
       
 
23
 
33
 
33
       
PART II
OTHER INFORMATION
 
       
 
34
 
34
 
34
 
34
 
34
 
35
 
35

 
 
 
 
DEFINITIONS

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

 
·
references to “magicJack VocalTec,” the “Company,” “we,” “us” or “our” are to magicJack VocalTec Ltd., a company organized under the laws of the State of Israel (the “Registrant”), and its subsidiaries;
 
 
·
references to “ordinary shares”, “our shares” and similar expressions refer to the Registrant’s Ordinary Shares, no par value;
 
 
·
references to “$” or “dollars” are to U.S. dollars and all references to “NIS” are to New Israeli Shekels. Except as otherwise indicated, financial statements of, and information regarding, magicJack VocalTec are presented in U.S. dollars; and
 
 
·
references to the “magicJack devices” are to the original magicJack ® , the magicJack PLUS TM ,  the New magicJack PLUS TM ,  the magicJackGO and the magicJackEXPRESS TM .
 
 
2
 
 
PART I – FINANCIAL INFORMATION

ITEM 1.     Financial Statements

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)

   
June 30,
   
December 31,
 
   
2015
   
2014
 
ASSETS
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
  $ 82,327     $ 75,945  
Investments, at fair value
    367       367  
Accounts receivable, net of allowance for doubtful accounts and billing adjustments
               
of $528 and $1,171, respectively
    2,271       3,903  
Inventories
    6,771       5,635  
Deferred costs
    2,166       2,765  
Prepaid income taxes
    581       12,513  
Deferred tax assets, current
    13,341       13,341  
Deposits and other current assets
    1,550       1,170  
Total current assets
    109,374       115,639  
                 
Property and equipment, net
    3,704       3,564  
Intangible assets, net
    7,846       9,473  
Goodwill
    32,304       32,304  
Deferred tax assets, non-current
    29,511       32,510  
Deposits and other non-current assets
    756       743  
Total assets
  $ 183,495     $ 194,233  
LIABILITIES AND CAPITAL EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,272     $ 2,879  
Income tax payable
    2,504       9,197  
Accrued expenses and other current liabilities
    5,007       8,406  
Deferred revenue, current portion
    56,033       56,445  
Total current liabilities
    64,816       76,927  
                 
Deferred revenue, net of current portion
    52,599       54,782  
Other non-current liabilities
    11,279       13,438  
Total liabilities
    128,694       145,147  
                 
Commitments and contingencies (Note 9)
               
Capital equity
               
Ordinary shares, No par value; 100,000 shares authorized; 25,032 shares
               
issued at June 30, 2015 and December 31, 2014, respectively
    111,771       111,771  
Additional paid-in capital
    12,663       10,414  
Treasury stock (7,786 and 7,164 shares at June 30, 2015
               
and December 31, 2014, respectively)
    (112,477 )     (107,683 )
Retained earnings
    42,844       34,584  
Total capital equity
    54,801       49,086  
Total liabilities and capital equity
  $ 183,495     $ 194,233  

See accompanying notes to condensed consolidated financial statements.
 
 
3
 
 
MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share information)
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Net revenues
  $ 25,410     $ 29,480     $ 50,922     $ 64,793  
Cost of revenues
    8,669       11,392       18,136       24,414  
Gross profit
    16,741       18,088       32,786       40,379  
                                 
Operating expenses:
                               
Marketing
    1,833       4,690       4,583       8,986  
General and administrative
    7,311       8,669       15,011       17,319  
Research and development
    1,168       1,375       2,330       3,119  
Total operating expenses
    10,312       14,734       21,924       29,424  
Operating income
    6,429       3,354       10,862       10,955  
                                 
Other income (expense):
                               
Gains on investments
    -       37       -       37  
Interest and dividend income
    6       49       17       95  
Interest expense
    (23 )     (55 )     (57 )     (120 )
Other (expense) income, net
    (6 )     2       (6 )     3  
Total other income (expense)
    (23 )     33       (46 )     15  
Income before income taxes
    6,406       3,387       10,816       10,970  
Income tax (benefit) expense
    (546 )     1,118       2,556       3,382  
Net income
  $ 6,952     $ 2,269     $ 8,260     $ 7,588  
                                 
Net Income per ordinary share:
                               
Basic
  $ 0.39     $ 0.13     $ 0.46     $ 0.43  
Diluted
  $ 0.39     $ 0.13     $ 0.46     $ 0.43  
                                 
Weighted average ordinary shares outstanding:
                               
Basic
    17,694       17,832       17,781       17,830  
Diluted
    17,721       17,835       17,816       17,833  
 
See accompanying notes to condensed consolidated financial statements.
 
 
4
 
 
MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Net income
  $ 6,952     $ 2,269     $ 8,260     $ 7,588  
Other comprehensive income (loss):
                               
Reclassification of unrealized loss on marketable
                               
securities to gains on investments
    -       1,006       -       642  
Comprehensive income
  $ 6,952     $ 3,275     $ 8,260     $ 8,230  
 
See accompanying notes to condensed consolidated financial statements.
 
 
5
 
 
MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CAPITAL EQUITY
(in thousands)
 
   
Ordinary Shares
   
Additional
Paid-in
Capital
   
Treasury Stock
   
Retained Earnings
   
Total
Capital
Equity
 
   
Number
   
Amount
       
Number
   
Amount
         
Balance, January 1, 2015
    25,032     $ 111,771     $ 10,414       (7,164 )   $ (107,683 )   $ 34,584     $ 49,086  
                                                         
Share-based compensation
    -       -       2,700       -       -       -       2,700  
Issuance of ordinary shares
    -       -       (451 )     36       451       -       -  
Purchase of treasury stock
    -       -       -       (658 )     (5,245 )     -       (5,245 )
Net income
    -       -       -       -       -       8,260       8,260  
Balance, June 30, 2015 (unaudited)
    25,032     $ 111,771     $ 12,663       (7,786 )   $ (112,477 )   $ 42,844     $ 54,801  
 
See accompanying notes to condensed consolidated financial statements.
 
 
6
 

 
MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
For the Six Months Ended
 
   
June 30,
 
   
2015
   
2014
 
             
Cash flows from operating activities:
           
Net income
  $ 8,260     $ 7,588  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Provision for doubtful accounts and billing adjustments
    71       298  
Share-based compensation
    2,700       4,252  
Depreciation and amortization
    2,024       2,830  
Release of uncertain tax positions
    (294 )     -  
Deferred income tax provision (benefit)
    2,999       (1,342 )
Interest expense - non-cash
    57       120  
Gains on investments
    -       (37 )
Change in operating assets and liabilities
               
Accounts receivable
    1,561       (936 )
Inventories
    (1,136 )     956  
Deferred costs
    599       2,897  
Deposits and other current assets
    5,724       289  
Other non-current assets
    (13 )     (64 )
Accounts payable
    (1,596 )     500  
Income taxes payable
    (559 )     2,064  
Accrued expenses and other current liabilities
    (1,956 )     (197 )
Deferred revenue
    (2,595 )     78  
Other non-current liabilities
    (2,171 )     782  
Net cash provided by operating activities
    13,675       20,078  
                 
Cash flows from investing activities:
               
Proceeds from sales of investments
    -       9,094  
Purchases of property and equipment
    (548 )     (1,667 )
Net cash (used in) provided by investing activities
    (548 )     7,427  
                 
Cash flows from financing activities:
               
Purchase of treasury stock
    (5,151 )     -  
Repurchase of ordinary shares to settle withholding liability
    (94 )     -  
Payment of other non-current liabilities
    (1,500 )     (1,500 )
Proceeds from exercise of ordinary share options
    -       27  
Net cash used in financing activities
    (6,745 )     (1,473 )
Net increase in cash and cash equivalents
    6,382       26,032  
Cash and cash equivalents, beginning of period
    75,945       45,997  
Cash and cash equivalents, end of period
  $ 82,327     $ 72,029  
 
See accompanying notes to condensed consolidated financial statements.
 
 
7
 

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands )
 
   
For the Six Months Ended
June 30,
 
   
2015
   
2014
 
             
Supplemental disclosures:
           
Interest paid
  $ -     $ -  
Income taxes paid
  $ 3,200     $ 165  
Non-cash investing and financing activities:
               
Property and equipment (acquired but not paid)
  $ -     $ 59  
 
See accompanying notes to condensed consolidated financial statements.
 
 
8
 

 
NOTE 1 –DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

magicJack VocalTec Ltd. and its subsidiaries (the “Company”) is a cloud communications leader that is the inventor of the magicJack devices and other magicJack products and services. magicJacks weigh about one ounce and plug into the USB port on a computer or into a power adapter and high speed Internet source, provides users with complete phone service for home, enterprise and while traveling. The Company charges customers for the right (the "access right") to access its servers, and the Company's customers then continue to have the ability to obtain free telephone services. The Company also provides additional products and services, which include voice apps on smart phones, as well as the magicJack PLUS, magicJack GO and magicJack EXPRESS, which are updated magicJack devices that have their own CPU and can connect a regular phone directly to the user’s broadband modem/router and function as a standalone phone without using a computer. The Company's products and services allow users to make and/or receive free telephone calls to and from anywhere in the world where the customer has broadband access to the Internet, and allow customers to make free calls back to the United States and Canada from anywhere legally permitted in the world.

magicJack VocalTec is a vertically integrated group of companies. The Company owns a micro-processor chip design company, an app server and session border controller company, a wholesale provider of voice-over-Internet-Protocol (“VoIP”) services, a softphone company, and the developer and provider of the magicJack   product line. The Company also wholesales telephone service to VoIP providers and telecommunication carriers.

The Company was incorporated in the State of Israel in 1989 and is domiciled in Netanya, Israel, with offices in West Palm Beach, Florida.

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements are prepared in conformity with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the Company’s unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included.  The balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

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

The Company prepares its unaudited condensed consolidated financial statements on the basis of being a single reporting entity. Approximately 90% of the Company’s revenues in the three and six months ended June 30, 2015 and 2014 were from sales to customers located in the United States. The majority of the Company’s revenues recognized were generated from sales of the magicJack product line and from the software access right that accompanies these products, which were $21.9 million and $25.2 million for the three months ended June 30, 2015 and 2014, respectively, and $43.7 million and $56.0 million for the six months ended June 30, 2015 and 2014, respectively. The Company also provides its customers with the ability to make prepaid calls using the magicJack devices and magicJack APP by purchasing prepaid minutes. Revenues generated from the usage of prepaid minutes were $2.1 million and $2.7 million for the three months ended June 30, 2015 and 2014, respectively, and $4.4 million and $5.5 million for the six months ended June 30, 2015 and 2014, respectively.
 
 
9
 

Basis of Consolidation

The Company’s unaudited condensed consolidated financial statements include the accounts of magicJack VocalTec and its wholly-owned subsidiaries, YMax Corporation, YMax Communications Corp., magicJack Holdings Corporation, magicJack, LP, SJ Labs, Inc., Tiger Jet Network, Inc., VocalTec Communications, LLC (“VocalTec US”, formerly Stratus Telecommunications, LLC), and Predictive Marketing, LLC and B Kruse and Associates, LLC (collectively, “Dialmaxx”). All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications may have been made to prior period financial statement amounts to conform to the current presentation. The results for the three and six months ended June 30, 2015 may not be indicative of the results for the entire year ending December 31, 2015. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 16, 2015.

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

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

Use of Estimates

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

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

Net Revenues

Net revenues consists of revenue from sales of magicJack devices   to retailers, wholesalers or directly to customers, access right renewal fees, fees charged for shipping magicJacks, usage of domestic and international prepaid minutes, access charges to other carriers and other miscellaneous charges. Revenue is recorded net of sales returns and allowances.

Revenue Recognition

magicJack Devices and Renewal Access Revenue

The Company recognizes revenues from sales and shipping of direct sales of the magicJack devices over the period associated with the initial access right period. Customers may purchase access rights for continued use of its software to access the Company’s servers for additional years either when the original purchase is made, or at any time thereafter. The revenue associated with the access right for additional years is deferred and recognized ratably over the extended access right period. Revenue from the sales of magicAPP Premium access rights is recognized ratably over the access right period.

Sales Return Policy

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

Returns from retailers are accepted on an authorized basis for devices deemed defective. The Company may offer certain retailers the limited right to return any unsold merchandise from their initial stocking orders. The Company estimates potential returns under these arrangements at point of sale and re-estimates potential returns on a quarterly basis. For the three and six months ended June 30, 2015 and 2014, the Company’s estimates of returns and actual returns from initial stocking orders have not been materially different.
 
 
10
 

Prepaid Minutes and Access and Wholesale Charges

Revenue from prepaid minutes and access and wholesale charges are recognized as minutes are used. These revenues are generated from the usage of prepaid minutes, fees for origination of calls to 800-numbers and access fees charged to other telecommunication carriers on a per-minute basis for Interexchange Carriers (“IXC”) calls terminated on the Company’s servers. Revenues from access fee charges to other telecommunication carriers are recorded based on rates set forth in the respective state and federal tariffs, less a provision for billing adjustments of $1 thousand and $18 thousand for the three months ended June 30, 2015 and 2014, respectively, and $1 thousand and $37 thousand for the six months ended June 30, 2015 and 2014, respectively.

Deferred Revenues

Deferred revenues consist primarily of billings and payments for magicJack devices and sales of access rights received in advance of revenue recognition. The Company bills and collects in advance for magicJack devices, which include the access right for the software to access its servers for an initial access right period in order to obtain free domestic local and long distance broadband telephone service. Deferred revenues to be recognized over the next twelve months are classified as current and included in deferred revenue, current portion in the Company’s consolidated balance sheets. The remaining amounts are classified as non-current in the consolidated balance sheets and included in deferred revenue, net of current portion.

Cost of Revenues

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

Costs incurred for shipping and handling and credit card charges are included in cost of revenues and are expensed as incurred. Costs for shipping and handling and credit card charges were $900 thousand and $1.2 million for the three months ended June 30, 2015 and 2014, respectively, and $1.8 million and $2.4 million for the six months ended June 30, 2015 and 2014, respectively.

Marketing Expenses

Marketing expenses of $1.8 million and $4.7 million for the three months ended June 30, 2015 and 2014, respectively, and $4.6 million and $9.0 million for the six months ended June 30, 2015 and 2014, respectively, consist primarily of advertising media buys for television commercials, Internet advertising and print advertising, as well as marketing related personnel costs and other marketing projects including sponsorships. Marketing costs are expensed when incurred. A break-down of marketing expense by category is as follows (in thousands):
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Advertising media buys
  $ 1,206     $ 3,101     $ 3,163     $ 5,498  
Marketing personnel related
    387       616       925       1,580  
Other marketing projects
    240       973       495       1,908  
Total Marketing Expense
  $ 1,833     $ 4,690     $ 4,583     $ 8,986  
 
 
11
 

Research and Development Expenses

The Company’s research and development activities consist primarily of the design and development of its proprietary software used in the magicJack devices, magicJack APP and its servers, as well as the development of new products and applications for use in its broadband service offerings. The Company accounts for research and development costs in accordance with applicable accounting pronouncements. These pronouncements specify that costs incurred internally in researching and developing a product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all costs should be capitalized until the product is available for general release to customers. The Company has determined that technological feasibility for its products is reached after all high-risk development issues have been resolved through internal and customer base testing. Generally, new products offered to customers and improvements to the Company’s servers are placed in service on attainment of technological feasibility. The Company has not capitalized any of its research and development activities and related costs. Research and development expenses were $1.2 million and $1.4 million for the three months ended June 30, 2015 and 2014, respectively, and $2.3 million and $3.1 million for the six months ended June 30, 2015 and 2014, respectively.

Earnings per Ordinary Share

Net income per share attributable to the Company’s shareholders – basic, is calculated by dividing net income by the weighted average number of ordinary shares outstanding during each period, including redeemable ordinary shares (if applicable). Net income per share attributable to the Company’s shareholders – diluted, is computed using the weighted average number of ordinary and potentially dilutive ordinary share equivalents outstanding during the period, including redeemable ordinary shares (if applicable). Potentially dilutive ordinary share equivalents consist of shares issuable upon the exercise or settlement of options to purchase ordinary shares or restricted stock units.

Cash and Cash Equivalents

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

Allowance for Doubtful Accounts and Billing Adjustments

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

Marketable Securities and Other Investments

Marketable securities are considered available-for-sale. Available-for-sale securities are recorded at fair value with any unrealized gains and losses reported in other comprehensive income (loss) and as a separate component of capital equity in the unaudited condensed consolidated balance sheets. Gains and losses are recorded based on specific identification by asset. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.

Certain Risks and Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. Cash equivalents generally consist of money market instruments and U.S. government notes. Marketable securities generally consist of equity and debt securities as well as a variety of mutual funds which primarily invest in government securities, debt, preferred stocks and equity securities.

The Company places its cash and cash equivalents in high quality financial institutions and management believes that the Company is not exposed to any significant risk on its cash accounts. The Company maintains accounts with various banks and brokerage organizations and constantly monitors the creditworthiness of these institutions. Cash accounts at each U.S. bank are insured by the Federal Deposit Insurance Corporation or FDIC up to $250 thousand in the aggregate and may exceed federally insured limits. Cash accounts at each Israeli bank are not insured. The Company has never experienced any losses related to these balances. At June 30, 2015, the Company had cash and cash equivalents totaling $82.3 million, which included (i) $81.8 million in U.S. financial institutions, and (ii) $0.5 million in an Israeli financial institution.
 
 
12
 

The Company’s non-interest bearing cash balances in U.S. banks, which included $1.5 million in one individual financial institution, were fully insured. The Company had money market accounts with a financial institution with balances totaling approximately $80.3 million.

No telecommunication carrier accounted for more than 10% of gross accounts receivable at June 30, 2015. One telecommunication carrier accounted for approximately 15% of gross accounts receivable at December 31, 2014. For the three and six months ended June 30, 2015 and 2014, no telecommunications carrier accounted for more than 10% of the Company’s total net revenues.

One U.S. retail customer accounted for approximately 20% and 17% of gross accounts receivable at June 30, 2015 and December 31, 2014, respectively. For the three and six months ended June 30, 2015 and 2014, no retailer accounted for more than 10% of the Company’s total net revenues.

Fair Value

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

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

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

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

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

When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. Fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or the Company) will not be fulfilled. For the Company's financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. The Company’s assets and liabilities measured on a recurring basis at fair value may include marketable securities and time deposits. As of June 30, 2015 and December 31, 2014, all of them are Level 1 instruments. The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses are expected to approximate fair value because of their immediate availability, near term maturities or potential interest payments at settlement.

In connection with the Company’s purchase of certain intangible assets during June 2011, the Company made payments of $1.5 million in May 2011, May 2012, May 2013 and May 2014, respectively. The Company made a final non-interest bearing annual payment of $1.5 million in May 2015. The liability for such payments had been discounted at a rate of 10% to a total fair value of $1.4 million included in accrued expenses and other current liabilities at December 31, 2014.

Inventories

Inventories are stated at the lower of cost or market, with cost primarily determined using the first-in first-out cost method. Inventory is written off at the point it is determined to be obsolete.
 
 
13
 
 
Property, Equipment and Depreciation Expense

Property and equipment consist primarily of servers, computer hardware, furniture, and leasehold improvements. Fixed assets, other than leasehold improvements, are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to fifteen years. Leasehold improvements are stated at cost and amortized over the shorter of the term of the lease or useful life of the assets. The cost of substantial improvements is capitalized while the cost of maintenance and repairs are charged to operating expenses as incurred.

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

Long-lived assets, such as property, plant and equipment, and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management believes there is no impairment at June 30, 2015.
 
Intangible Assets

Identifiable intangible assets are stated at cost. Amortization is computed on identified intangibles subject to amortization using the accelerated and straight-line methods over the estimated useful lives of such assets, which range from one to seventeen years. The costs of developing the Company’s intellectual property rights, intellectual property right applications and technology are charged to research and development expense.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill and other intangible assets with indefinite lives are not amortized to operations, but instead are reviewed for impairment at least annually, or more frequently if there is an indicator of impairment. Indicators include, but are not limited to: sustained operating losses or a trend of poor operating performance and a decrease in the Company’s market capitalization below its book value. The Company’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairment charges in the future. The Company currently has one reporting unit.

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

If the two-step goodwill impairment test is required to be performed, under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, the Company proceeds to step two of the goodwill impairment test. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. An impairment loss shall be recognized to the extent that the carrying amount of goodwill exceeds its implied fair value.

In connection with the Company’s annual goodwill impairment analysis, as of October 1, 2014, the annual measurement date, the Company’s analysis did not indicate any impairment of goodwill has occurred. Management believes there is no impairment at June 30, 2015.

Share-based Compensation

Share-based compensation generally consists of option grants or ordinary share and restricted stock units awards to directors, officers, employees or consultants that are measured at grant date, based on the fair value of the award, and are recognized as an expense over the requisite service period.
 
 
14
 

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates. Any changes to enacted tax rates or tax laws are included in the provision for income taxes in the period of enactment. The Company’s net deferred tax assets consist primarily of foreign net operating loss carry-forwards and timing differences between recognition of income for book and tax purposes. The Company records a valuation allowance to reduce the net deferred tax assets to the amount that it estimates is more-likely-than-not to be realized. The Company periodically reviews the composition of its’ net deferred tax assets and related valuation allowances and will make adjustments if available evidence indicates that it is more likely than not a change in the carrying amounts is required. The Company increased the valuation allowance by $0.7 million and $0.5 million during the three and six months ended June 30, 2015, respectively. No adjustments were made to the valuation allowance during the three and six months ended June 30, 2014.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions that the Company estimates there is a 50% or less likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.  The Company revised its liability for uncertain tax positions by a net decrease of $8.4 million in the six months ended June 30, 2015, due primarily to the effective settlement of various positions taken in connection with U.S. federal income tax years 2010 through 2013 which were examined by the Internal Revenue Service (“IRS”).

The Company records its income tax expense for interim financial statements by using an estimated annual effective income tax rate based on its expected annual results after consideration of permanent nontaxable items. The tax benefits of net operating loss carry-forwards expected to be realized through 2015 and changes in other deferred tax assets and liabilities are recognized during interim periods based on an annual forecast as of the interim reporting date. At June 30, 2015, the estimated annual effective income tax rate is expected to approximate 30.8%, excluding discrete tax items, which includes federal, foreign, state and local taxes. This rate may fluctuate due to changes in jurisdictional income and to the timing of other discrete period transactions during the remainder of the year.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The standard requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. The standard will become effective for the Company with the annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows, and financial statement disclosures.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.”  The standard requires entities to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.
 
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out ("LILO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim and annual reporting period. The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows.
 
 
 
15
 

NOTE 3 – INVESTMENTS

Investments consists of time deposits with maturity dates of greater than 90 days totaling $367 thousand at June 30, 2015, and December 31, 2014.

The fair value of time deposits at June 30, 2015 and December 31, 2014 was determined based on its face value, which approximates its fair value and is a Level 1 input.

There were no realized gain or loss on investments for the three and six months ended June 30, 2015. Gains on investments for the three months ended June 30, 2014 was $37 thousand and included reclassification of unrealized loss on marketable securities from other comprehensive losses on investments of $1.0 million. Gains on investments for the six months ended June 30, 2014 was $37 thousand and included reclassification of unrealized loss on marketable securities from other comprehensive loss to gains on investments of $0.6 million. During the three months ended June 30, 2014, the Company sold investments in marketable equity securities for approximately $9.1 million realizing a gain on the sale of approximately $37 thousand over the cost basis of the investment which was determined based on specific identification.

NOTE 4 – INVENTORIES

Inventories are comprised of the following (in thousands):
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Raw materials
  $ 2,496     $ 2,793  
Finished goods
    4,275       2,842  
Total
  $ 6,771     $ 5,635  
 
Raw materials represent components used in the manufacturing of the magicJack devices, held by the Company or by a Chinese manufacturer on consignment. Finished goods are comprised primarily of magicJack devices on hand or in transit to the Company’s distribution center in the United States. The Company wrote-off approximately $82 thousand of obsolete inventory during the three months ended June 30, 2015. The Company wrote-off approximately $102 thousand of obsolete inventory during the six months ended June 30, 2015. There were no write-downs of obsolete inventory for the three and six months ended June 30, 2014.

NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):
 
   
Estimated
             
   
Useful Lives
   
June 30,
   
December 31,
 
   
(in years)
   
2015
   
2014
 
                   
Switches
    3 - 15     $ 8,943     $ 8,436  
Computers
    3       2,707       2,707  
Furniture
    5       257       257  
Leasehold-improvements
    *       702       681  
Accumulated depreciation
                       
and amortization
            (8,905 )     (8,517 )
Total
          $ 3,704     $ 3,564  

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

Depreciation and amortization expense for the three months ended June 30, 2015 and 2014 was $0.2 million and $0.2 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2015 and 2014 was $0.4 million and $0.3 million, respectively.
 
 
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NOTE 6 – INTANGIBLES ASSETS

As of June 30, 2015 and December 31, 2014, the Company had intangible assets with carrying values of $7.9 million and $9.5 million, respectively. Identified intangible assets not subject to amortization consisted of tradename and domain names with combined carrying value of $1.2 million as of June 30, 2015 and December 31, 2014. Identified intangible assets with finite lives subject to amortization consist of the following (in thousands):

   
Estimated
   
June 30, 2015
   
December 31, 2014
 
   
Useful
Lives
   
Gross
Carrying
   
Accumulated
         
Weighted-
   
Gross
Carrying
   
Accumulated
         
Weighted-
 
   
(in years)
   
Amount
   
Amortization
   
Net
   
Average Life
   
Amount
   
Amortization
   
Net
   
Average Life
 
                                                       
Technology
    3 - 17     $ 4,930     $ (4,380 )   $ 550       5.05     $ 5,221     $ (4,554 )   $ 667       5.37  
Intellectual property rights
    3 - 17       14,161       (8,915 )     5,246       5.58       14,161       (7,713 )     6,448       6.70  
Covenants not-to-compete
                                                                       
and not-to-sue
    2 - 5       2,085       (1,703 )     382       0.92       2,085       (1,494 )     591       1.42  
Tradename
    3 - 6       321       (309 )     12       0.50       321       (297 )     24       1.00  
Customer relationships
    5 - 7       500       (442 )     58       2.08       750       (660 )     90       2.58  
Backlog
    1       800       (800 )     -       -       800       (800 )     -       -  
Other
            470       (83 )     387       3.5       470       (28 )     442       4.00  
Total
          $ 23,267     $ (16,632 )   $ 6,635             $ 23,808     $ (15,546 )   $ 8,262          
 
Amortization expense for the three months ended June 30, 2015 and 2014 was $0.8 million and $1.3 million, respectively. Amortization expense for the six months ended June 30, 2015 and 2014 was $1.6 million and $2.5 million, respectively. Based on the carrying value of identified intangible assets recorded at June 30, 2015, and assuming no subsequent impairment of the underlying assets, the amortization expense for the future fiscal years is expected to be as follows (in thousands):
 
Fiscal Year
 
Amortization
Expense
 
       
Six months ending December 31, 2015
  $ 1,106  
2016
    1,675  
2017
    1,441  
2018
    964  
2019
    558  
Thereafter
    891  
    $ 6,635  

NOTE 7 – DEFERRED COSTS AND REVENUES

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

Deferred revenues are comprised of the following at June 30, 2015 and December 31, 2014 (in thousands):
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
magicJack devices
  $ 10,209     $ 10,619  
Access right renewals
    43,361       43,231  
Prepaid minutes
    2,463       2,595  
Deferred revenue, current
    56,033       56,445  
                 
Deferred revenue, non-current*
    52,599       54,782  
Total deferred revenues
  $ 108,632     $ 111,227  
 
* Deferred revenues, non-current, is comprised entirely of deferred revenues originating from the sale of access right renewals.
 
 
17
 

Costs necessary to fulfill the Company’s obligations to provide broadband telephone service to new and existing customers who have purchased magicJack devices or access rights to access the Company’s servers are expensed as incurred. Such costs were approximately $3.8 million and $5.0 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $8.2 million and $10.6 million for the six months ended June 30, 2015 and 2014, respectively.

NOTE 8 – OTHER LIABILITIES

As of December 31, 2014, the Company had outstanding indebtedness in connection with an agreement entered during June 2011 for the purchase of certain intangible assets, and secured only by such intangible assets. The Company made a final non-interest bearing annual payment of $1.5 million in May 2015. The liability for such payments had been discounted at a rate of 10% to a total net present value of $1.4 million at December 31, 2014, which was included in accrued expenses and other current liabilities at December 31, 2014.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

In April 2015, the Company engaged in mediation to settle a dispute for legal fees incurred in relation to the hiring of an employee whose employment by the Company was alleged to have violated confidentiality obligations of the employee. The Company paid approximately $0.7 million to settle the dispute in June 2015.

The Company believes that it files all required tax returns and pays all required state and municipal taxes (such as sales, excise, utility, and ad valorem taxes), fees and surcharges. The Company is the subject of inquiries and examinations by various states and municipalities in the normal course of business. In accordance with generally accepted accounting principles, the Company makes a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. The Company strongly believes any possible claims are without merit and vigorously defends its rights. However, if a state or municipality were to prevail in any matter, it could have a material adverse effect on the Company’s financial condition, results of operation and cash flows. In addition, it is at least reasonably possible that a potential loss may exist for tax contingencies in addition to the provisions taken by the Company. For those potential additional tax contingencies which can be reasonably estimated, that additional potential liability ranges from $0 to $2.5 million dollars.
 
 
18
 


NOTE 10 –TREASURY STOCK

During the first quarter of 2015, the Company's Board of Directors authorized a stock repurchase program to enable the Company to purchase its ordinary shares at such times as management deems appropriate up to a maximum cumulative repurchase authority of $20 million. The primary objective of the Company’s stock repurchase program is to improve stockholders’ returns. The Company expended $5.2 million under its repurchase program through June 30, 2015 and there was $14.8 million remaining authorized to purchase ordinary shares pursuant to the stock repurchase program. All shares purchased and not yet retired, are recorded as treasury stock. The Company repurchased 645,919 ordinary shares under this program through June 30, 2015.

The Company issued 36,595 of its ordinary shares held as treasury stock with a cost of $451 thousand, or $12.32 per share, to officers, directors and consultants as a result of restricted stock units that were granted in fiscal 2013 and 2014, which vested during the six months ended June 30, 2015. Refer to Note 11, “Share-Based Compensation” for further details. As part of the stock issuance to a former executive in June 2015, the Company repurchased 12,161 ordinary shares from a former executive to satisfy the former executive’s tax withholding obligation upon the vesting of the restricted stock.

The changes in treasury stock during the six months ended June 30, 2015 are as follows (in thousands, except for number of shares):
 
   
Six Months Ended
 
   
June 30, 2015
 
   
Number
   
Amount
 
             
Balance, beginning of period
    7,164,260     $ 107,683  
Ordinary shares purchased through
               
the stock repurchase program
    645,919     $ 5,151  
Ordinary shares purchased to settle
               
withholding liability
    12,161     $ 94  
Ordinary shares issued due to
               
vesting of restricted stock units
    (36,595 )     (451 )
Balance, end of period
    7,785,745     $ 112,477  

NOTE 11 – SHARE-BASED COMPENSATION

The Company has granted ordinary share options, issued restricted stock units and ordinary shares as an alternative or supplement to the compensation of its executives, employees, directors and outside consultants. The Company’s share-based compensation program is a long-term retention program intended to attract and reward talented executives, employees and outside consultants, and align their interests with stockholders. The Company is currently granting share-based awards under the magicJack Vocaltec Ltd. 2013 Stock Incentive Plan and the magicJack Vocaltec Ltd. 2013 Israeli Stock Incentive Plan (together, the “2013 Plans”). In July 2013, the shareholders approved the 2013 Plans at the annual general meeting of shareholders to allow grants of ordinary share options, restricted stock units and ordinary shares. In April 2014, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of June 30, 2015, the aggregate number of shares subject to awards under the 2013 Plans, as amended, is 3,600,000. The Company had previously granted shares under the VocalTec amended Master Stock Plan (the “2003 Plan”) which expired in April 2013. Share -based awards are generally exercisable or issuable upon vesting. The Company’s policy is to recognize compensation expense for awards with only service conditions and a graded vesting on a straight-line basis over the requisite vesting period for the entire award.

The Company’s share-based compensation expense for ordinary share options, issued restricted stock units and ordinary shares for the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Ordinary share options
  $ 1,143     $ 1,268     $ 2,140     $ 3,706  
Restricted stock units
    274       315       560       546  
Ordinary shares
    -       -       -       -  
    $ 1,417     $ 1,583     $ 2,700     $ 4,252  
 
 
19
 
 
The detail of total stock-based compensation recognized by classification on the unaudited condensed consolidated statements of operations is as follows (in thousands):
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Cost of revenues
  $ (16 )   $ 127     $ 16     $ 352  
Marketing
    148       323       341       1,035  
General and administrative
    1,204       966       2,056       2,437  
Research and development
    81       167       287       428  
    $ 1,417     $ 1,583     $ 2,700     $ 4,252  
 
The decrease in share based compensation for the three and six months ended June 30, 2015, is due in part to the favorable impact of forfeitures on the calculation of stock based compensation expense which resulted in the reversal of $0.5 million in previously recognized expense associated with non-vested ordinary share options and restricted stock units that were forfeited during the six months ended June 30, 2015.

Ordinary Share Options

Ordinary share options granted under the 2013 Plans have a five-year life and vest over a period of 24 to 36 months beginning at the date of grant. The 2013 Plans, as amended, currently allow for a maximum term of five years for awards granted. The following table provides additional information regarding ordinary share options issued, outstanding and exercisable for the year ended December 31, 2014, and six months ended June 30, 2015 (aggregate intrinsic value in thousands):
 
               
Weighted
       
               
Average
       
         
Weighted
   
Remaining
       
         
Average
   
Contractual
   
Aggregate
 
   
Number of
   
Exercise
   
Term
   
Intrinsic
 
Date of Grant
 
Options
   
Price
   
(in years)
   
Value *
 
January 1, 2014
    1,285,207     $ 14.95       4.41     $ -  
Granted
    762,500     $ 14.71                  
Exercised
    (3,820 )   $ 7.33                  
Expired or cancelled
    (30 )   $ 147.55                  
December 31, 2014
    2,043,857     $ 14.87       3.80     $ -  
Granted
    -     $ -                  
Exercised
    -     $ -                  
Forfeited
    (247,257 )   $ 14.42                  
Expired or cancelled
    -     $ -                  
Outstanding at June 30, 2015 (unaudited)
    1,796,600     $ 14.93       2.73     $ -  
Vested at  June 30, 2015 (unaudited)
    1,142,000     $ 14.75       2.39     $ -  
 
* The aggregate intrinsic value is the amount by which the market value for the Company's common stock exceeds the weighted average exercise price of the outstanding stock options on the measurement date.
 
Share-based compensation expense recognized for ordinary share options was approximately $1.1 million and $1.3 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $2.1 million and $3.7 million for the six months ended June 30, 2015 and 2014, respectively. The total intrinsic value of ordinary share options exercised during the six months ended June 30, 2015 and 2014 was $0 and $42 thousand, respectively. As of June 30, 2015, there was approximately $2.9 million of unrecognized share-based compensation expense related to unvested ordinary share options, which is expected to be recognized over a weighted average remaining period of 1.09 years.
 
 
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The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, assumed employee exercise behaviors, risk-free interest rate and expected dividends. For purposes of valuing ordinary share options, the Company used historical volatility at the date of grant. The approximate risk-free interest rate was based on the U.S. Treasury yield for comparable periods. As the Company does not have historical data available regarding employee exercise patterns, it did not anticipate any forfeiture of the ordinary share options granted and the expected term of the ordinary share options was calculated using the simplified method in accordance with SAB No. 107, “ Share Based Payment .” The Company does not expect to pay dividends on its ordinary shares in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. There were no ordinary share options granted during the six months ended June 30, 2015. The weighted average fair value of ordinary share options granted during the six months ended June 30, 2014 was $5.48, and was measured at the date of grant using the following assumptions:
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
Expected term (in years)
    -       3.2 - 3.5  
Dividend yield
    -       0.00 %
Expected volatility
    -    
57.2% to 58.8%
 
Risk free interest rate
    -    
1.08% to 1.64%
 
Forfeiture rate
    -       0.00 %

Restricted Stock Units

The Company may also award non-vested restricted stock units to its executives, employees, directors and outside consultants under the 2013 Plans, which may vest based on service or a combination or service and other conditions, such as market share price . The compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. Each non-vested stock unit, upon vesting, represents the right to receive one ordinary share of the Company. During the six months ended June 30, 2015, the Company did not grant any restricted stock units under the 2013 Plans, as amended.   During the six months ended June 30, 2014, the Company granted 30,500 restricted stock units under the 2013 Plans.

The following table summarizes the Company’s restricted stock unit activity for the six months ended June 30, 2015:
 
         
Average
 
   
Number of
   
Fair Value
 
   
Shares
   
at Grant Date
 
December 31, 2014
    147,264     $ 15.05  
Granted
    -     $ -  
Vested
    (36,595 )   $ 11.25  
Forfeited
    -     $ -  
Non-vested at June 30, 2015
    110,669     $ 15.29  
 
Share-based compensation expense recognized for restricted stock units was approximately $0.3 million and $0.3 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $0.6 million and $0.5 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was $0.8 million in unrecognized share-based compensation costs related to restricted stock units. The unrecognized share-based compensation expense is expected to be recognized over a weighted average remaining period of 0.70 years.

NOTE 12 – INCOME TAXES

Total income tax (benefit) / expense was ($0.5) million and $1.1 million for the three months ended June 30, 2015 and 2014, respectively, and $2.6 million and $3.4 million for the six months ended June 30, 2015 and 2014, respectively. The principal components of our income taxes for the three and six months ended June 30, 2015 and 2014 are the following (in thousands):
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Income before income taxes
  $ 6,406     $ 3,387     $ 10,816     $ 10,970  
Income tax expense
    (546 )     1,118       2,556       3,382  
Effective income tax rate
    (8.52 )%     33.01 %     23.63 %     30.83 %

The Company primarily operates in the U.S. and Israel, and the Company’s Israeli operations are subject to a statutory income tax rate of 26.5% that is lower than the Company’s U.S. federal income tax rate which is 35% as of June 30, 2015.
 
 
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For the six months ended June 30, 2015, the Company recorded income tax expense of $2.6 million, which is lower than the expected tax provision of $3.8 million, using the statutory rate of 35%, due, in part to the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations, and in part, to the net impact of decreases resulting from the changes in the exchange rate on the Company’s net deferred tax assets associated with the Israeli operations with a tax effect of ($1.3) million, and the tax effect of various other discrete tax items totaling $0.1 million. Excluding the impact of the discrete tax items noted, the Company’s effective tax rate would have been 31.0% and 30.8% for the three and six months ended June 30, 2015, respectively.

The Company revised its liability for uncertain tax positions by a net decrease of $8.4 million in the six months ended June 30, 2015, due primarily to the effective settlement of various positions taken in connection with the U.S. federal income tax years 2010 through 2013 which were examined by the IRS totaling $6.8 million and to a reduction in the accrual for intercompany interest of approximately $1.7 million. These reductions were partially offset by increases from other discrete tax items totaling $0.1 million.

During the three months ended June 30, 2015, the Company received notification from the IRS that its examination of the 2010 through 2013 tax years had been finalized.  The examination resulted in an amount due of $2.6 million which the Company paid in May 2015 and utilization of tax benefits of $4.2 million. As part of finalizing the examination, the Company utilized $5.8 million of its prepaid tax assets to satisfy $5.8 million of income tax payable related to the examination. The Company does not intend to appeal or litigate any aspect of the tax positions included in the completed examination.  Additionally, the Company believes that it is remote that the IRS would reexamine any aspect of the Company’s tax position included in the completed examination.

NOTE 13 – INCOME PER SHARE

Net Income per share – basic, is calculated by dividing net income by the weighted average number of ordinary shares outstanding during each period. Net income per share – diluted, is computed by dividing net income attributable to shareholders by the weighted average number of ordinary and potentially dilutive ordinary share equivalents outstanding during the period. Potentially dilutive ordinary share equivalents consist of shares issuable upon the exercise or settlement of options to purchase ordinary shares, restricted stock unit grants and outstanding put option contracts on the Company’s own stock (if applicable).

Potentially dilutive securities, using the treasury stock method are set forth in the following table, which presents the computation of basic and diluted net income per ordinary share attributable to shareholders (in thousands, except for per share information):

    Three Months Ended June 30,     Six Months Ended June 30,  
   
2015
   
2014
   
2015
   
2014
 
Numerator:
 
(in thousands)
             
Net income
  $ 6,952     $ 2,269     $ 8,260     $ 7,588  
                                 
Denominator:
                               
Denominator for basic net income per share - weighted
                               
average ordinary shares outstanding
    17,694       17,832       17,781       17,830  
Effect of dilutive options to purchase ordinary shares
    7       3       7       3  
Effect of dilutive options or restricted stock units vesting,
                               
exercised or expired during the period
    20       -       28       -  
Denominator for diluted net income per share - weighted
                               
average ordinary shares outstanding
    17,721       17,835       17,816       17,833  
                                 
Net income per ordinary share attributable to shareholders
                               
Basic
  $ 0.39     $ 0.13     $ 0.46     $ 0.43  
Diluted
  $ 0.39     $ 0.13     $ 0.46     $ 0.43  
 
For the three months ended June 30, 2015 and 2014, 1,900,519 and 128,000 outstanding ordinary share options and restricted stock units, respectively, were excluded from the earnings per share calculation because they would be anti-dilutive. For the six months ended June 30, 2015 and 2014, 1,900,519 and 1,855,134 outstanding ordinary share options and restricted stock units, respectively, were excluded from the earnings per share calculation because they would be anti-dilutive.

 
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This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements as of June 30, 2015 and for the three and six month periods ended June 30, 2015 and 2014, as well as our Annual Report on Form 10-K for the year ended December 31, 2014. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, the accuracy of which involves risk and uncertainties. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “estimates,” “projects,” and similar expressions to identify forward-looking statements. Readers should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Factors that might cause or contribute to such differences include, but are not limited to those discussed under the section titled “Risk Factors” of our Form 10-K for the year ended December 31, 2014 filed on March 16, 2015.

Overview

magicJack VocalTec Ltd. and its subsidiaries (the “Company”) is a cloud communications leader that is the inventor of the magicJack devices and other magicJack products and services. magicJack devices weigh about one ounce and plug into the USB port on a computer or into a power adapter and high speed Internet source and provide users with complete phone service for home, enterprise and while traveling. We charge our customers highly competitive rates for the right (the “access right”) to access our servers, and our customers then continue to have the ability to obtain free telephone services. We also provide additional products and services, which include voice apps on smart phones, as well as the magicJack PLUS, magicJack GO and magicJack EXPRESS, which are updated versions of the magicJack device that have their own CPU and can connect a regular phone directly to the user’s broadband modem/router and function as a standalone phone without using a computer. Our products and services allow users to make and/or receive free telephone calls to and from anywhere in the world where the customer has broadband access to the Internet, and allow customers to make free calls back to the United States and Canada from anywhere legally permitted in the world.

magicJack VocalTec is a vertically integrated group of companies. We own a micro-processor chip design company, an appserver and session border controller company, a wholesale provider of VoIP services, a softphone company, and the developer and provider of the magicJack   product line. We also wholesale telephone services to VoIP providers and telecommunications carriers.

Our strategy since 2007 has been to vertically integrate our technology, design and suppliers, and we have completed four acquisitions between 2007 and 2010, including a merger with the company that invented VoIP, in order to implement this strategy.

During September 2011, we began promoting the magicJack APP that can be used to make or receive telephone calls between two computers or between the customer’s computer and a public switch telephone network. The customer can use a headphone or a computer’s speakers and microphone to make and receive telephone calls. In September 2011, the magicJack APP   also became available for the iPhone, iPad and iPod Touch. In August 2012, the magicJack APP became available for Android phones. In June 2013, we introduced the New magicJack PLUS. This new device has superior voice quality, expanded memory and enhanced processing power. The New magicJack PLUS includes a six-month right to access our servers in order to make and receive telephone calls for free. In July 2014, we introduced the magicJack GO which includes a twelve month right to access our servers. In April 2015, we released the magicAPP Premium to iOS customers and in July 2015 the magicAPP Premium was made available to Android users. magicAPP Premium offers a US number, unlimited local and long distance calling to the US, Canada, Puerto Rico and the US Virgin Islands, and unlimited text messaging to any US mobile number.  The magicAPP Premium offers access to our servers on a monthly or annual basis. In May 2015, we introduced the magicJack EXPRESS which includes a three month right to access our servers.

Basis of Presentation

Our unaudited condensed consolidated financial statements are prepared in conformity with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2014. The balance sheet at December 31, 2014 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included.

Our unaudited condensed consolidated financial statements are the basis for the discussion and analysis of our results of operations, liquidity and capital resources. References to authoritative accounting literature in this report, where applicable, are based on the Accounting Standards Codification (“ASC”). Our functional and reporting currency is the United States Dollar (“U.S. Dollar”), which is the currency of the primary economic environment in which our consolidated operations are conducted. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in currencies other than U.S. dollars, including Israeli New Shekel (“NIS”), are re-measured in U.S. dollars and any gains or losses are recognized in our consolidated financial statements in the period they occur.
 
 
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We prepare our consolidated financial statements on the basis of being a single reporting entity. Approximately 90% of our revenues in the three and six months ended June 30, 2015 and 2014 were derived from sales to customers located in the United States.

Basis of Consolidation

Our consolidated financial statements include the accounts of magicJack VocalTec and its wholly-owned subsidiaries, YMax Corporation, YMax Communications Corp., magicJack Holdings Corporation, magicJack, LP, SJ Labs, Inc., Tiger Jet Network, Inc., VocalTec Communications LLC (“VocalTec US”, formerly Stratus Telecommunications, LLC), and Predictive Marketing, LLC and B Kruse and Associates, LLC (collectively, “Dialmaxx”). All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications may have been made to prior period financial statement amounts to conform to the current presentation. The results for the three and six months ended June 30, 2015 may not be indicative of the results for the entire year ending December 31, 2015. The interim unaudited condensed consolidated financial statements should be read in conjunction with our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 16, 2015.

Use of Estimates

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

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

CRITICAL ACCOUNTING POLICIES

We have identified below our critical accounting policies. These policies are both the most important to the portrayal of our financial condition and results of operations and require our management’s most difficult, subjective and complex judgments and estimates. Actual results may differ from these estimates under different assumptions or conditions.

REVENUE RECOGNITION

Net revenues consists of revenue from sales of the magicJack devices to retailers, wholesalers or directly to customers, access rights fees, fees charged for shipping the magicJack devices, usage of prepaid minutes, access charges to other carriers and other miscellaneous charges for telecommunication usage. Revenue is recorded net of sales returns and allowances.
 
magicJack Devices and Renewal Access Revenue

We recognize revenues from sales and shipping of direct sales of the magicJack devices over the period associated with the initial access right period. Customers may purchase access rights for continued use of our software to access our servers for additional years either when the original purchase is made, or at any time thereafter. The revenue associated with the access right for additional years is deferred and recognized ratably over the extended access right period. Revenue from the sales of magicAPP Premium access rights is recognized ratably over the access right period.

Sales Return Policy
 
We offer some of our direct sales customers a 30-day free trial before they have to pay for their magicJack device. We do not record or recognize revenue until the 30-day trial period has expired and a customer’s credit card has been charged.
 
 
24
 

Returns from retailers are accepted on an authorized basis for devices deemed defective. We may offer certain retailers the limited right to return any unsold merchandise from their initial stocking orders. We estimate potential returns under these arrangements at point of sale and re-estimate potential returns on a quarterly basis. For the three and six months ended June 30, 2015 and 2014, our estimates of returns and actual returns from initial stocking orders have not been materially different.

Prepaid Minutes and Access and Wholesale Charges

Revenue from prepaid minutes and access and wholesale charges are recognized as minutes are used. These revenues are generated from the usage of prepaid minutes, fees charged to telecommunications carriers or providers for origination of their calls to 800-numbers and access fees charged to other telecommunications carriers or providers on a per-minute basis for Interexchange Carriers (“IXC”) calls terminated to our end-users. Revenues from access fee charges to other telecommunications carriers are recorded based on rates set forth in the respective state and federal tariffs or negotiated contract rates, less a provision for billing adjustments.

INCOME TAXES

We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates. Any changes in enacted rates or tax laws are included in the provision for income taxes in the year of enactment. Our net deferred tax assets consist of primarily foreign net operating loss carry-forwards and timing differences between recognition of income for book and tax purposes. We record a valuation allowance to reduce the net deferred tax assets to the amount that we estimate is more-likely-than-not to be realized. We evaluated the valuation allowance as of December 31, 2014, which resulted in adjustments of $1.2 million to bring the allowance to $16.2 million, an amount which reduces the net deferred tax assets to the amount that will more-likely-than-not be realized. We periodically review the composition of our net deferred tax assets and related valuation allowances and will make adjustments if available evidence indicates that it is more-likely-than-not a change in the carrying amounts is required. We increased the valuation allowance by $0.5 million during the six months ended June 30, 2015.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions that we estimate there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions that we estimate there is a 50% or less likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We revised our liability for uncertain tax positions by a net decrease of $8.4 million in the six months ended June 30, 2015, due primarily in part to the effective settlement of various positions taken in connection with U.S. federal income tax years 2010 through 2013 which were examined by the IRS.

We record our income tax expense for interim financial statements by using an estimated annual effective income tax rate based on our expected annual results after elimination of nontaxable items. The tax benefits of net operating loss carry-forwards expected to be realized through 2015 and certain other deferred tax assets were recognized for financial reporting purposes at December 31, 2014. At June 30, 2015, the estimated annual effective income tax rate is expected to approximate 30.8%, excluding discrete tax items, which includes federal, foreign, and state and local taxes. This rate may fluctuate due to changes in our jurisdictional income and due to the timing of other discrete period transactions during the remainder of the year.

SHARE-BASED COMPENSATION

Share-based compensation generally consists of option grants or ordinary share and restricted stock units awards to directors, officers, employees or consultants. We account for share-based compensation in accordance with ASC Topic 718, "Compensation - Stock Compensation" (“ASC 718”). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our unaudited condensed consolidated statements of operations.
 
 
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RESULTS OF OPERATIONS

The following table presents our unaudited condensed consolidated results of operations for the periods indicated (in thousands). The unaudited condensed consolidated statements of operations below have been expanded to show the composition of our net revenues and cost of revenues items to enable a more meaningful discussion of our operations.
 
   
Three Months Ended
June 30,
   
2015
Compared to
   
Six Months Ended
June 30,
   
2015
Compared to
 
   
2015
   
2014
   
2014
   
2015
   
2014
   
2014
 
Net Revenues
                                               
Sale of magicJack devices
  $ 4,237     $ 6,497     $ (2,260 )     (34.8 )%   $ 7,621     $ 18,479     $ (10,858 )     (58.8 )%
Access right renewals
    16,540       16,138       402       2.5       33,615       31,544       2,071       6.6  
Shipping and handling
    232       638       (406 )     (63.6 )     420       1,512       (1,092 )     (72.2 )
magicJack-related products
    910       1,931       (1,021 )     (52.9 )     2,127       4,428       (2,301 )     (52.0 )
Prepaid minutes
    2,140       2,648       (508 )     (19.2 )     4,374       5,476       (1,102 )     (20.1 )
Access and wholesale charges
    1,348       1,625       (277 )     (17.0 )     2,758       3,347       (589 )     (17.6 )
Other
    3       3       -       -       7       7       -       -  
Total Net Revenue
    25,410       29,480       (4,070 )     (13.8 )     50,922       64,793       (13,871 )     (21.4 )
                                                                 
Cost of Revenues
                                                               
Cost of magicJack devices
    2,013       3,189       (1,176 )     (36.9 )     4,160       7,648       (3,488 )     (45.6 )
Shipping and handling
    305       575       (270 )     (47.0 )     601       948       (347 )     (36.6 )
Credit card processing fees
    544       668       (124 )     (18.6 )     1,221       1,450       (229 )     (15.8 )
Network and carrier charges
    3,827       5,025       (1,198 )     (23.8 )     8,166       10,572       (2,406 )     (22.8 )
Other
    1,980       1,935       45       2.3       3,988       3,796       192       5.1  
Total Cost of Revenues
    8,669       11,392       (2,723 )     (23.9 )     18,136       24,414       (6,278 )     (25.7 )
                                                                 
Gross Profit
    16,741       18,088       (1,347 )     (7.4 )     32,786       40,379       (7,593 )     (18.8 )
                                                                 
Operating expenses:
                                                               
Marketing
    1,833       4,690       (2,857 )     (60.9 )     4,583       8,986       (4,403 )     (49.0 )
General and administrative
    7,311       8,669       (1,358 )     (15.7 )     15,011       17,319       (2,308 )     (13.3 )
Research and development
    1,168       1,375       (207 )     (15.1 )     2,330       3,119       (789 )     (25.3 )
Total operating expenses
    10,312       14,734       (4,422 )     (30.0 )     21,924       29,424       (7,500 )     (25.5 )
Operating income
    6,429       3,354       3,075       91.7       10,862       10,955       (93 )     (0.8 )
                                                                 
Other income (expense):
                                                               
Gains on investments
    -       37       (37 ) *           -       37       (37 ) *      
Interest and dividend income
    6       49       (43 ) *           17       95       (78 ) *      
Interest expense
    (23 )     (55 )     32   *           (57 )     (120 )     63   *      
Other (expense) income, net
    (6 )     2       (8 ) *           (6 )     3       (9 ) *      
Total other income (expense)
    (23 )     33       (56 ) *           (46 )     15       (61 ) *      
Income before income taxes
    6,406       3,387       3,019       89.1       10,816       10,970       (154 )     (1.4 )
Income tax expense
    (546 )     1,118       (1,664 ) *           2,556       3,382       (826 ) *      
Net income
  $ 6,952     $ 2,269     $ 4,683       206.4     $ 8,260     $ 7,588     $ 672       8.9  
                                                                 
* - Not meaningful.
                                                               
 
Components of Net Revenues

Our net revenues are comprised of the following sources:

 
·
Sales of the magicJack devices – represents revenues recognized from sales of the magicJack devices to retailers, wholesalers, or direct to customers, net of returns, over the period associated with the initial three, six or twelve months access right period. These revenues are recorded net of sales allowance, chargebacks, retailer discounts and advertising allowances;
 
 
·
Access right renewals – represents revenues from customers purchasing rights to access our servers beyond the initial access right period included with a magicJack device or magicJack service or the magicAPP. The extended access right ranges from one month to five years. These fees charged to customers are initially deferred and recognized as revenue ratably over the extended access right period;
 
 
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·
Shipping and handling – represents charges for shipping and handling fees for magicJack devices shipped directly to customers. The fees are initially deferred and recognized as revenues over the initial three, six or twelve months access right period associated with the magicJack device;
 
 
·
magicJack-related products – represents revenues recognized from the sale of other items related to the magicJack devices and access right renewals we offer our customers, including: (i) porting fees charged to customers to port their existing phone number to a magicJack device or service, (ii) fees charged for customers to select a custom, vanity or Canadian phone number, (iii) fees charged to customers to change their existing number, and (iv) insurance covering the replacement of a damaged or lost device;
 
 
·
Prepaid minutes – represents revenues recognized primarily from the usage and expiration of international prepaid minutes, net of chargebacks;
 
 
·
Access and wholesale charges – represents revenues generated from: (i) access fees charged to other telecommunication carriers or providers for IXC calls terminated to our end-users, and (ii) fees charged to telecommunications carriers or providers for origination of calls to their 800-numbers. These revenues are recorded based on rates set forth in the respective state and federal tariffs or negotiated contract rates, less provisions for billing adjustments; and

 
·
Other – represents primarily revenues generated by ancillary revenue sources.
 
Components of Cost of Revenues

Our cost of revenues is comprised of the following components:

 
·
Cost of magicJack devices sold – represents the costs of components and manufacturing of the magicJack devices, as well as broker commissions, production, packaging and other inventory-related costs. The cost of components and manufacturing of the magicJack devices is recognized from sales of the magicJack devices to retailers, wholesalers, or direct to customers over the period associated with the initial three, six or twelve months access right period;
 
 
·
Shipping and handling – represents freight, postage and other transportation costs related to: (i) transportation of the magicJack devices from the manufacturer to our warehouse and distribution center, and (ii) freight, shipping and handling fees incurred to ship the magicJack devices to retailers and directly to customers. These costs are expensed as incurred;
 
 
·
Credit card processing fees – represents transaction and other fees incurred as a result of accepting credit card payments for sales of magicJack devices, access right renewals, shipping and handling charges, magicJack related products and prepaid minutes sold directly to customers through our website. These fees are expensed as incurred;
 
 
·
Network and carrier charges – represents facilities charges to establish and maintain our network as well as network usage fee charges from other telecommunications carriers. These rates or charges are based upon commercial agreements or applicable state and/or federal tariffs. These charges are expensed as incurred; and
 
 
·
Other cost of revenues – represents allocation of personnel-related costs, amortization and depreciation expense related to assets employed in generating our revenues, as well as costs from discontinued revenue sources.
 
THREE MONTHS ENDED JUNE 30, 2015 COMPARED TO THREE MONTHS ENDED JUNE 30, 2014

Net Revenues

Total net revenue was $25.4 million and $29.5 million for the three months ended June 30, 2015 and 2014, respectively, representing a decrease of $4.1 million, or 13.8%. The decrease in the components of net revenues was primarily attributable to the following:

 
·
$2.3 million decrease in revenues from the sale of magicJack devices primarily reflecting lower price points and lower unit sales volumes;
 
 
·
$1.0 million decrease in magicJack related product revenue reflecting lower volumes;
 
 
·
$0.4 million decrease in shipping and handling revenue reflecting the lower sales volumes;
 
 
·
$0.5 million decrease in revenues from prepaid minutes resulting from lower usage levels; and
 
 
·
$0.3 million decrease in access and wholesale charges.
 
 
27
 

These decreases in components of net revenue were partially offset by a $0.4 million increase in access right renewal revenues reflecting higher average renewal rates and the impact of e-mail marketing to expiring customers.

For the three months ended June 30, 2015 and 2014, sales of the magicJack devices through retail outlets represented approximately   70% and 80%, respectively, of sales of all magicJack devices sold. For the same periods, direct sales represented approximately 30% and 20%, respectively, of magicJack devices sold. For the three months ended June 30, 2015 and 2014, no retailer accounted for more than 10% of the Company’s total net revenue.

Cost of Revenues

Total cost of revenues was $8.7 million and $11.4 million for the three months ended June 30, 2015 and 2014, respectively, representing a decrease of approximately $2.7 million, or 23.9%. This decrease in cost of revenues was primarily attributable to: (i) a $1.2 million decrease in the cost of magicJack devices resulting primarily from lower device sales volumes; (ii) a $1.2 million decrease in network and carrier charges primarily as a result of less charges due to less traffic and better negotiated rates with other carriers, and (iii) a $0.4 million combined decrease in shipping and handling costs and credit card processing fees as a result of lower sales volumes.

Operating Expenses

Total operating expenses were $10.3 million and $14.7 million for three months ended June 30, 2015 and 2014, respectively, representing a decrease of $4.4 million, or 30.0%. This decrease in operating expenses is attributable to: (i) a $2.8 million decrease in marketing expense reflecting reduced media buys and marketing related spends as well as lower personnel related costs; (ii) a $1.4 million decrease in General and Administrative (“G&A”) expense due to several factors including lower legal fees, consulting fees, customer care fees, travel expenses and lower amortization expense as the non-compete with the Company’s founder was impaired in July 2014 offset in part by higher personnel related costs primarily as a result of severance pay for terminated employees; and (iii) a $0.2 million decrease in R&D expenses  primarily due to lower personnel related costs.

Income Taxes

Total income tax (benefit) / expense was ($0.5) million and $1.1 million for the three months ended June 30, 2015 and 2014, respectively. The principal components of our income taxes for the three months ended June 30, 2015 and 2014 are the following (in thousands):
 
   
Three Months Ended
 
   
June 30,
 
   
2015
   
2014
 
             
Income before income taxes
  $ 6,406     $ 3,387  
Income tax (benefit) expense
    (546 )     1,118  
Effective income tax rate
    (8.52 )%     33.01 %
 
We primarily operate in the U.S. and Israel, and our Israeli operations are subject to a statutory income tax rate of 26.5% that is lower than our U.S. federal income tax rate which is 35% as of June 30, 2015.
 
For the three months ended June 30, 2015, we recorded an income tax benefit of ($0.5) million, which is lower than the expected tax provision of $2.2 million, using the statutory income tax rate of 35%, due in part to the lower jurisdictional tax rate charged on the operating income of our Israeli operations, and in part, to the net impact of decreases resulting from changes in the exchange rate on our net deferred tax assets associated with the Israeli operations with a tax effect of ($3.2) million, and the tax effect of various other items totaling $0.7 million. We revised our liability for uncertain tax positions by a net decrease of $9.7 million in the three months ended June 30, 2015 due primarily to the effective settlement of various positions taken in connection with U.S. federal income tax years 2010 through 2013 which were examined by the IRS totaling $6.8 million, to a reduction in the accrual for intercompany interest of approximately $2.1 million, and to an unrealized foreign currency exchange loss on US dollar valued Israeli assets of $0.9 million.
 
During the three months ended June 30, 2015, we received notification from the IRS that its examination of the 2010 through 2013 tax years had been finalized.  The examination resulted in an amount due of $2.6 million which was paid in May 2015 and utilization of tax benefits of $4.2 million.  We do not intend to appeal or litigate any aspect of the tax positions included in the completed examination.  Additionally, we believe that the likelihood is remote that the IRS would re-examine any aspect of our tax positions included in the completed examination.

The 2015 estimated annual effective tax rate is expected to approximate 30.8%, excluding discrete tax items, but may fluctuate during the year due to changes in our jurisdictional income and due to the timing of other discrete period transactions.

 
28
 

Net income

As a result of the foregoing items, net income increased to $7.0 million in the three months ended June 30, 2015, as compared to $2.3 million in the three months ended June 30, 2014. Net income per diluted share increased to $0.39 per ordinary share for the three months ended June 30, 2015, as compared to $0.13 per ordinary share in the prior year comparable period primarily as a result of increased profitability reflecting reductions in cost of revenues and operating expenses.

SIX MONTHS ENDED JUNE 30, 2015 COMPARED TO SIX MONTHS ENDED JUNE 30, 2014

Net Revenues

Total net revenue was $50.9 million and $64.8 million for the six months ended June 30, 2015 and 2014, respectively, representing a decrease of $13.9 million, or 21.4%. The decrease in the components of net revenues was primarily attributable to the following:

 
·
$10.9 million decrease in revenues from the sale of magicJack devices primarily reflecting lower price points and lower unit sales volumes;
 
 
·
$2.3 million decrease in magicJack related product revenue reflecting lower volumes;
 
 
·
$1.0 million decrease in shipping and handling revenue reflecting the lower sales volumes;
 
 
·
$1.1 million decrease in revenues from prepaid minutes resulting from lower usage levels; and
 
 
·
$0.6 million decrease in access and wholesale charges.
 
These decreases in components of net revenue were partially offset by a $2.0 million increase in access right renewal revenues reflecting higher average renewal rates, a higher number of devices on renewal and the impact of e-mail marketing to expiring customers.

For the six months ended June 30, 2015 and 2014, sales of the magicJack devices through retail outlets represented approximately 68% and 75%, respectively, of sales of all magicJack devices sold. For the same periods, direct sales represented approximately 32% and 25%, respectively, of magicJack devices sold. For the six months ended June 30, 2015 and 2014, no retailer accounted for more than 10% of the Company’s total net revenue.

Cost of Revenues

Total cost of revenues was $18.1 million and $24.4 million for the six months ended June 30, 2015 and 2014, respectively, representing a decrease of approximately $6.3 million, or 25.7%. This decrease in cost of revenues was primarily attributable to: (i) a $3.5 million decrease in the cost of magicJack devices resulting primarily from lower device sales volumes; (ii) a $2.4 million decrease in network and carrier charges primarily as a result of less charges due to less traffic and better negotiated rates with other carriers, and (iii) a $0.6 million combined decrease in shipping and handling costs and credit card processing fees as a result of lower sales volumes. These decreases in cost of revenues were partially offset by a $0.2 million increase in overhead allocation.

Operating Expenses

Total operating expenses were $21.9 million and $29.4 million for six months ended June 30, 2015 and 2014, respectively, representing a decrease of $7.5 million, or 25.5%. This decrease in operating expenses is attributable to: (i) a $4.4 million decrease in marketing expense reflecting reduced media buys and marketing related spends as well as lower personnel related costs; (ii) a $2.3 million decrease in G&A expense due to several factors including lower legal fees, consulting fees, customer care fees, travel expenses and lower amortization expense as the non-compete with the Company’s founder was impaired in July 2014 offset in part by higher personnel related costs primarily as a result of severance pay for terminated employees; and (iii) a $0.8 million decrease in R&D expenses related to lower costs related to R&D and lower personnel related costs.
 
 
29
 

Income Taxes

Total income tax expense was $2.6 million and $3.4 million for the six months ended June 30, 2015 and 2014, respectively. The principal components of our income taxes for the six months ended June 30, 2015 and 2014 are the following (in thousands):
 
   
Six Months Ended
 
   
June 30,
 
   
2015
   
2014
 
             
Income before income taxes
  $ 10,816     $ 10,970  
Income tax expense
    2,556       3,382  
Effective income tax rate
    23.63 %     30.83 %
 
We primarily operate in the U.S. and Israel, and our Israeli operations are subject to a statutory income tax rate of 26.5% that is lower than our U.S. federal income tax rate which is 35% as of June 30, 2015.
 
For the six months ended June 30, 2015, we recorded income tax expense of $2.6 million, which is lower than the expected tax provision of $3.8 million, using the statutory rate of 35%, due, in part to the lower jurisdictional tax rate charged on the operating income of our Israeli operations, and in part, to the net impact of decreases resulting from the changes in the exchange rate on our net deferred tax assets associated with the Israeli operations with a tax effect of ($1.3) million, and the tax effect of various other discrete tax items totaling $0.1 million.

The 2015 estimated annual effective tax rate is expected to approximate 30.8%, excluding discrete items, but may fluctuate during the year due to changes in our jurisdictional income and due to the timing of other discrete period transactions.
 
Net income

As a result of the foregoing items, net income increased to $8.3 million in the six months ended June 30, 2015, as compared to $7.6 million in the six months ended June 30, 2014. Net income per diluted share increased to $0.46 per ordinary share for the six months ended June 30, 2015, as compared to $0.43 per ordinary share in the prior year comparable period primarily as a result of favorable tax adjustments.

BUSINESS TRENDS

Renewal revenues remained strong during the six months ended June 30, 2015, increasing more than 6% over the same period in the prior year. We remain encouraged by the loyalty of our existing customer base and will continue to undertake efforts to improve our customer renewal rates. Device sales and other device related revenues declined during the six months ended June 30, 2015 reflecting continuing g radual decline in device sales in both our direct and retail channels. In our ongoing efforts to strengthen device sales to new customers, we launched the magicJack EXPRESS in May 2015 which offers customers the same dependable magicJack service at a lower entry price and includes 3 months of service with the initial purchase rather than the year that is included with the magicJackGO, we are maintaining our efforts to expand device sales to new markets, and with the launch of the magicAPP Premium to both iOS and Android customers, we are preparing to increase our efforts to reposition the device with its companion service, the magicAPP Premium. We believe that there will continue to be solid consumer demand for our low priced, unlimited phone service, whether through our magicJack device, our magicAPP, or a combination of both, in the United States and international markets.

With the release of the upgraded magicAPP Premium product to iOS customers in April 2015, we began offering monthly and annual subscription services for the magicAPP and providing our customers the ability to purchase international prepaid minutes directly from the app. We are focused on driving sales growth through monetizing the magicAPP and integrating the full range of our product offerings including the sale of international prepaid minutes. We expanded the service to Android users in late July 2015. However, there are factors that could materially adversely affect our growth strategy to integrate the device with the APP and monetize the magicAPP, including that we have not previously generated any material revenues from the magicAPP as it has been a free service prior to April 2015, and the redeveloped magicAPP will compete with other large, well-capitalized global companies in the telecom APP industry who are introducing low priced consumer offers into the marketplace on an ongoing basis. We cannot assure that the features we are offering for monetization of the magicAPP will be attractive to consumers at the price points we are offering, or at all.

Furthermore, we continue to work with Telefonica to expand distribution of our products into Latin American markets. Progress on the launch of our relationship with Telefonica has been slower than anticipated. In the meantime, the Company is beginning efforts to distribute the magicJackGO into Mexico. There can be no assurance that the launch in Mexico or any Central or South American country will be successful and the Company cannot predict what impact, if any, the arrangement with Telefonica will ultimately have on its business, results of operations, financial condition or cash flows.
 
 
30
 

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations and cash on hand and investments. As of June 30, 2015, we had cash and cash equivalents of $82.3 million, marketable securities of $0.4 million and accounts receivables of $2.3 million. Our accounts payable at June 30, 2015 was $1.3 million.

During the six months ended June 30, 2015, we generated positive operating cash flows of $13.7 million, as compared to $20.1 million for the six months ended June 30, 2014. The $6.4 million decrease was primarily due to lower sales of magicJack devices and magicJack related products in the six months ended June 30, 2015, partially offset by lower operating costs and by increased revenues from access right renewals. Net income was $8.3 million for the six months ended June 30, 2015 as compared to $7.6 million for the six months ended June 30, 2014. We currently believe that available funds and cash flows generated by operations will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. If we decide to make future acquisitions, we may require new sources of funding, including additional debt, equity financing or some combination thereof. There can be no assurances that we will be able to secure additional sources of funding or that such additional sources of funding will be available to us on acceptable terms.

Cash Flow – Operating Activities

Net cash provided by operating activities was $13.7 million and $20.1 million for the six months ended June 30, 2015 and 2014, respectively.

During the six months ended June 30, 2015, net cash provided by operating activities was primarily attributable to: (i) $8.3 million of net income, (ii) $7.6 million in non-cash items consisting primarily of $2.7 million of stock-based compensation expense, $2.0 million of depreciation and amortization expense, and a $3.0 million increase in deferred income tax provision, partially offset by a $0.3 million release of the uncertain tax positions (iii) a $0.6 million decrease in deferred costs, (iv) a $1.6 million decrease in accounts receivable, and (v) a $5.7 million decrease in prepaid income taxes and other current assets. These items were partially offset by: (i) a $2.6 million decrease in deferred revenue, (ii) a $1.1 million increase in inventory levels (iii) a $2.0 million decrease in accrued expenses, (iv) a $0.6 million decrease in income taxes payable, (v) a $1.6 million decrease in accounts payable, and (vi) a $2.2 million decrease in other non-current liabilities.

During the six months ended June 30, 2014, net cash provided by operating activities was primarily attributable to: (i) $7.6 million of net income, (ii) $6.1 million in non-cash items consisting of $4.3 million of stock-based compensation expense, $2.8 million of depreciation and amortization expense, and a $0.3 million provision for billing adjustments partially offset by a $1.3 million decrease in the deferred income tax provision, (iii) $0.3 million decrease in deposits and other current assets including prepaid income taxes, (iv) $2.9 million decrease in deferred costs, (v) a $1.0 million decrease in inventory levels, (vi) a $0.5 million increase in accounts payable, (vii) a $2.1 million increase in income taxes payable, (viii) a $0.1 million increase in deferred revenue primarily associated with access right renewals, and (ix) a $0.8 million increase in other non-current liabilities. These items were partially offset by: (i) a $0.9 million increase in accounts receivable (ii) a $0.1 million increase in other non-current assets, and (iii) a $0.2 million decrease in accrued expenses.

Cash Flow – Investing Activities

Net cash (used in) provided by investing activities was $(0.6) million and $7.4 million for the six months ended June 30, 2015, and 2014, respectively.

Net cash used in investing activities during the six months ended June 30, 2015 was attributable to purchases of equipment and leasehold improvements primarily due to upgrades to our data storage facility.

Net cash provided by investing activities during the six months ended June 30, 2014 was primarily attributable to $9.1 million proceeds from sale of investments, offset in part by $1.7 million used to purchase equipment and leasehold improvements primarily due to upgrades to our data storage facility and new warehouse and distribution center.
 
 
31
 

Cash Flow –Financing Activities

Net cash used in financing activities was $6.7 million and $1.5 million for the six months ended June 30, 2015 and 2014, respectively.

Net cash used in financing activities during the six months ended June 30, 2015 primarily consisted of $5.2 million in cash used to purchase 645,919 ordinary shares at an average price of $7.97 per share as part of our share repurchase program and $1.5 million annual payment in connection with an agreement entered into during June 2011 for the purchase of certain intangible assets.

Net cash used in financing activities during the six months ended June 30, 2014 consisted primarily of a $1.5 million annual payment in connection with an agreement entered into during June 2011 for the purchase of certain intangible assets.

Stock Repurchase Program

During the first quarter of 2015, our Board of Directors authorized a stock repurchase program to enable us to purchase our ordinary shares at such times as management deems appropriate up to a maximum cumulative repurchase authority of $20 million. The primary objective of our stock repurchase program is to improve stockholders’ returns. We expended $5.2 million under our repurchase program through June 30, 2015 and there was $14.8 million authorized to purchase ordinary shares pursuant to the stock repurchase program. All shares purchased and not yet retired, are recorded as treasury stock. We repurchased 645,919 ordinary shares under this program through June 30, 2015.

Other Liabilities

As of June 30, 2015, we no longer have an outstanding indebtedness in connection with an agreement entered into during June 2011 for the purchase of certain intangible assets, and secured only by such intangible assets. The Company made a final non-interest bearing annual payment of $1.5 million in May 2015. Refer to Note 8, “Other Liabilities,” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 for further details.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2015.
 
 
32
 

ITEM 3.                      Quantitative and Qualitative Disclosures About Market Risk

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

Exposure to Interest Rates

The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to the general level of United States interest rates. In this regard, changes in the United States interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact the total fair value of our portfolio as of June 30, 2015.

Exposure to Exchange Rates

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

Exposure to Equity and Derivative Prices
 
Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions.
 
ITEM 4.                      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2015, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
33
 

PART II – OTHER INFORMATION

ITEM 1.                      Legal Proceedings

Legal Proceedings

We are subject to various legal proceedings and claims, including intellectual property claims, contractual and commercial disputes, employment claims, state and local tax matters and other matters which arise in the ordinary course of business. Our policy is to vigorously defend any legal proceedings. Management regularly evaluates the status of legal proceedings in which we are involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred and to determine if accruals are appropriate. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our business, operating results, financial condition or cash flows. However, an unexpected adverse resolution of one or more of these matters could have a material adverse effect on our results of operations in a particular fiscal year or quarter. For additional information, refer to Note 9, “Commitments and Contingencies,” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

ITEM 1A.                   Risk Factors

There have been no material changes from the risk factors disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.

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

During the first quarter of 2015, our Board of Directors authorized a stock repurchase program to enable us to purchase our ordinary shares at such times as management deems appropriate up to a maximum cumulative repurchase authority of $20 million. The primary objective of our stock repurchase program is to improve stockholders’ returns. We expended $5.2 million under our repurchase program through June 30, 2015 and there was $14.8 million authorized to purchase ordinary shares pursuant to the stock repurchase program. All shares purchased and not yet retired, are recorded as treasury stock. We repurchased 645,919 ordinary shares under this program through June 30, 2015.
 
Period
 
(a)
Total Number
of Shares
Purchased *
   
(b)
Average
Price Paid
per Share
   
(c)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs*
   
(d)
Maximum Number
(or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Program (in thousands)
 
April 1, 2015 - April 30, 2015
    0     $ -       0     $ 20,000  
May 1, 2015 - May 31, 2015
    295,833     $ 7.98       295,833     $ 17,642  
June 1, 2015 - June 30, 2015
    350,086     $ 7.95       350,086     $ 14,849  
Total
    645,919               645,919          
 
* Shares acquired u nder the new share repurchase program during the quarter ended June 30, 2015 were acquired through open market purchases. Refer to Note 10, "Treasury Stock," in the Notes to our unaudited condensed consolidated financial statements included in item 1 herein for further details.
 
On March 16, 2015, we announced that our Board of Directors had authorized a new share repurchase program under which the Company may repurchase up to $20.0 million of its outstanding ordinary shares from time to time on the open market or in privately negotiated transactions.  The Company's prior $100 million repurchase program, pursuant to which $91.3 million of its outstanding ordinary shares was repurchased and $8.7 million remained authorized for repurchases has been terminated.
 
ITEM 3.                      Defaults Upon Senior Securities

Not applicable.

ITEM 4.                      Mine Safety Disclosures

Not applicable.
 
 
34
 

ITEM 5.                      Other Information

On July 15, 2015, the Company and Mr. Gerald T. Vento, the Company's Chief Executive Officer and President, entered into the Amendment to Executive Employment Agreement (the "Amendment") for the purpose of extending the term of Mr. Vento's employment one additional year so that it now terminates on December 31, 2016.  This Amendment implements the one year extension of the terms of service and employment of Mr. Vento under the Executive Employment Agreement, effective January 1, 2013, by and between the Company and Mr. Vento (the "Employment Agreement"), a copy of which was filed with the SEC as an attachment to a Form 8-K on April 8, 2013.  The one-year extension was previously approved by the Compensation Committee and the Board of Directors on May 26, 2015, subject to shareholder approval at the 2015 annual meeting of shareholders (the "Meeting').  The shareholders approved the one year extension to Mr. Vento's Employment Agreement at the Meeting as set forth in the Form 8-K filed on July 13, 2015.  Pursuant to the Amendment, all other terms under the Employment Agreement remain in effect.
 
On June 5, 2015, the Company and Mr. Timothy McDonald entered into a Separation Agreement and Release (the "Separation Agreement").  Pursuant to the terms of the Separation Agreement, the Company will: (i) pay Mr. McDonald a lump sum payment of $500,000, (ii) reimburse his COBRA costs for the twelve month period following the separation date, and (iii) accelerate the vesting of the remaining unvested shares of restricted stock granted to Mr. McDonald.  On June 6, 2015, the Company and Mr. Timothy McDonald entered into an Independent Contractor Agreement (the "Consulting Agreement"). Pursuant to the terms of the Consulting Agreement, Mr. McDonald has agreed to perform consulting services requested by the Company from time to time in return for a fee of $20,000 per month plus reimbursement of any reasonable travel expenses.  The Consulting Agreement may be terminated by either party on ten days' prior written notice to the other party.

ITEM 6.                      Exhibits
 
10.1
Amendment to Executive Employment Agreement, dated as of July 15, 2015, by and between the Company and Gerald T. Vento.
 
10.2
 
Separation Agreement dated as of June 5, 2015, by and between the Company and Timothy McDonald.
 
10.3
 
Consulting Agreement dated as of June 6, 2015, by and between the Company and Timothy McDonald.
31.1
Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
 
31.2
Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
 
32.1
Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
 
32.2
Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934

 
35
 

 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
magicJack VocalTec Ltd.
(Registrant)
 
Dated: August 10, 2015
By: /s/ Gerald Vento
Gerald Vento
President and Chief Executive Officer
 
Dated: August 10, 2015
By: /s/ Jose Gordo
Jose Gordo
Chief Financial Officer
 
36
Exhibit 10.1
 
AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
 
This Amendment to Executive Employment  Agreement (" Amendment ') is entered into effective as of July 15, 2015 by and between  magicJack VocalTec Ltd. (the " Company ') and Gerald  T.  Vento   (" Executive ") for  the purpose of amending  the Executive  Employment Agreement by and between  the Company  and Executive  effective as of January 1, 2013  (the ' Agreement ").

RECITALS
 
A.         On May 26, 2015,  the  Company's Compensation  Committee  and its Board of Directors approved, subject to shareholder approval at the 2015 annual meeting of the Company's shareholders (the " Meeting "), a one year extension of the terms of the Agreement; and
 
B.         The  Company's shareholders approved the one year extension to Mr. Vento's Employment Agreement at the Meeting.
 
In consideration of the foregoing, the mutual covenants and obligations of the Company and the Executive under the Agreement, and other consideration  the receipt and sufficiency  of which  is   hereby acknowledged, the Company and  the   Executive agree to amend the Agreement  as follows:
 
l.             Term .  Section 2 of the Agreement is hereby deleted and replaced with the following:
 
TERM OF AGREEMENT AND EMPLOYMENT . The term of the Executive's employment  under this Agreement shall begin on the effective date of this Agreement, and terminate on December 31,2016.
 
2.            Effect.   Other than  as   specifically amended  by this Amendment, the Agreement shall  remain   in  full   force and effect  in   accordance with  its   terms.
 
IN   WITNESS   WHEREOF,   the Company and the Executive have executed and delivered this Amendment  as   of the  date   first   above written.
 
MAGICJACK   VOCALTEC   LTD.
 
Signature: /s/ Donald A. Burns        
  Donald A. Burns        
  Chairman        
         
EXECUTIVE
       
         
Signature: /s/ Gerald T. Vento        
  Gerald T. Vento        
 
 
   
Exhibit 10.2
 
SEPARATION AGREEMENT AND RELEASE

magicJack Vocaltec Ltd. (the “ Company ”) and Timothy McDonald (“ Employee ”) have agreed that Employee’s employment will terminate effective as of 5pm EST on June 5, 2015 (the “ Separation Date ”).  Employee will receive severance in accordance with the terms of his Employment Agreement between the Company and Employee dated December 13, 2013 (the “ Employment Agreement ”).  Employee will also receive additional compensation in connection with his separation of employment to which he would not otherwise be entitled under the Employment Agreement.

In exchange for the good and valuable consideration set forth below, the sufficiency and receipt of which is hereby acknowledged, and in compliance with the terms of Section 7.A. of the Employment Agreement, Employee and the Company hereby agree as follows:

1.
Employment Agreement .  Employee and the Company acknowledge and agree that (a) the Employment Agreement is hereby terminated subject to survival of the provisions of Section 8 thereof as set forth therein, and (b) termination of the Employment Agreement shall be considered a termination by the Company without “Cause” as such term is defined in the Employment Agreement.

2.
Releases .

(a)               Employee agrees that by executing this Separation Agreement and Release (“ Release ”) he does hereby, for himself, his heirs, executors, administrators, representatives, successors and assigns, release and forever discharge the Company and its attorneys, present and former employees, agents, present and former officers, directors, parents, subsidiaries, divisions, and all affiliated or related companies, predecessors, successors, assigns or representatives, and all persons acting for, by, through, under or in concert with any of them (collectively, “ Released Parties ”), of and from any and all claims, demands, causes of action, suits, debts, accounts, claims for attorney’s fees, interest, expenses and costs, damages, judgments, and executions of any nature whatsoever, which Employee, his heirs, executors, administrators, representatives, successors, or assigns, had or now has, from the beginning of time to the date hereof, against the Company and the Released Parties, whether known or unknown, whether based in contract or tort, or on Title VII of the Civil Rights Act, the Americans With Disabilities Act, the Age Discrimination in Employment Act, including the Older Workers’ Benefit Protection Act, the Family Medical Leave Act, or any other federal or state statute, common law, rule or regulation.  Employee acknowledges that by signing this Release, Employee is waiving his rights to bring any claim of any sort related to his employment or resignation of employment with the Company.  Notwithstanding the foregoing, the Company acknowledges and agrees that the foregoing release does not apply to any of the Company’s obligations under this Release or any of the Company’s remaining severance obligations to Employee arising from the Company’s termination of the Employment Agreement.

(b)               Company agrees that, by executing this Release,  Company does hereby, for itself, its wholly owned subsidiaries and their respective successors and assigns, release and forever discharge Employee of and from any and all claims, demands, causes of action, suits, debts, accounts, claims for attorney’s fees, interest, expenses and costs, damages, judgments, and executions of any nature whatsoever, which Company, its wholly owned subsidiaries or their respective successors or assigns, had or now have, from the beginning of time to the date hereof, against Employee, whether known or unknown, whether based in contract or tort, or any federal or state statute, common law, rule or regulation.  Notwithstanding the foregoing, Employee acknowledges and agrees that the foregoing release does not apply to any of Employee’s obligations under this Release or any of the Employee’s obligations under the Employment Agreement which survive its termination.

 
Page 1 of 6
 
 
3.
Consideration. In consideration for executing this Release, and assuming that prior to the Separation Date, Employee has returned all of the Company’s property, including but not limited to any items containing the Company’s confidential information and trade secrets, the Company agrees to pay Employee a total sum of $500,000.00 in accordance with the provisions of Section 7.A. of the Employment Agreement (the “ Severance Fund ”). The Company shall pay the Severance Fund in a lump sum no later than three (3) business days after the Company’s receipt of a Confirmation of Acceptance attached to the ADEA Rider to this Release as Attachment A . Payment of the Severance Fund will be subject to applicable tax withholdings by the Company. Employee acknowledges the Severance Fund is separation pay, and not earned wages or compensation.  Employee further acknowledges and understands that no other compensation or expenses are otherwise owed to him.
 
4.
Insurance Benefits .   Beginning on the day after the Separation Date, Employee shall be entitled to participate in COBRA benefits as provided under Federal law. Employee shall be responsible for the full cost of any such continued coverage under COBRA, provided that the Company will reimburse Employee for COBRA costs paid by Employee during the twelve (12) month period following the Separation Date.  Employee shall submit his request for reimbursement to the Company’s Controller within 30 (thirty) days after each monthly payment for his COBRA benefits.  Company shall issue reimbursement to Employee within 30 (thirty) days of receipt of Employee’s reimbursement request.

5.
Equity .  Employee is party to a Stock Option Agreement (the “ Option Agreement ”) and a Restricted Stock Agreement (the “ RSA ”) with the Company each dated December 13, 2013.  Employee acknowledges and agrees that (a) Employee’s option to purchase shares under the Option Agreement is vested as to 185,544 of the covered shares listed in the Option Agreement (the “ Vested Options ”), and (b) Employee owns 24,410 of the Company’s shares issued under the Restricted Stock Agreement (the “ Restricted Share s”).  The Company agrees that all of the Restricted Shares shall become vested and no longer subject to the restrictions under the terms of the RSA immediately upon Employee’s execution of this Release.  Employee acknowledges and agrees that he has no other right or interest in any equity securities of the Company other than the Vested Options and the Restricted Shares.
 
6.
Attorneys’ Fees .  In the event any action is brought to enforce any provision of this Release, the prevailing party shall be entitled to reasonable attorney fees and costs from the other party.  The term “prevailing party” shall mean the party that recovers an award from a judgment and/or any other court-ordered relief.
 
7.
Confidentiality of Agreement . In further consideration of the covenants, agreements, and payments, Employee agrees not to disclose, divulge or discuss, either directly or indirectly, the terms or existence of this Release unless such disclosure is required by legal process, or by reason of Employee seeking to enforce the terms of this Release, except that Employee may disclose this Agreement to his spouse and/or attorney or tax advisor.  If such limited disclosures are made, Employee agrees to convey the confidentiality requirements set forth herein, and any breach by Employee’s spouse, tax advisor or attorney of these confidentiality obligations shall be considered a breach by Employee.

 
Page 2 of 6
 
8.
No Oral Modification .  This Agreement may not be changed, modified or amended except by a written amendment signed by Employee and an authorized officer of the Company. This Agreement reflects the entire agreement of the parties, and supersedes any prior oral or written agreements related to the same subject matter, except that this Agreement does not extinguish any of Employee’s or Company’s obligations under the Employment Agreement, the Option Agreement or the RSA that survive their respective terminations.

9.
No Negative Remarks .  Employee covenants that he shall not engage in any pattern of conduct that involves the making or publishing of written or oral statements or remarks which are disparaging, deleterious or damaging to the integrity, reputation or goodwill of the Released Parties.  Company covenants that neither it nor any of its wholly owned subsidiaries will engage in any pattern of conduct that involves the making or publishing of written or oral statements or remarks which are disparaging, deleterious or damaging to the integrity, reputation or goodwill of Employee.

10.
Confidential Information . Employee represents and warrants that he has not, directly or indirectly (i) disclosed, used, or allowed to be used any of the Company’s confidential information or trade secrets, or (ii) retained or copied any of the Company’s confidential information, data or documents, including but not limited to employee lists, manuals, customer lists or information, and sales, technical or financial data.  Employee further represents and warrants that, at anytime in the future, he will not disclose or use in any way confidential information or trade secrets which were learned by or disclosed to him at any time during the course of his employment with the Company.

11.
Severability .  If any provision of this Agreement is held invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions shall in no way be affected or impaired thereby.

12.
Governing Law and Forum Selection. This Agreement shall be interpreted in accordance with the substantive laws of the State of New Jersey, without regard to any conflict of laws provisions.  Any action brought to enforce any provision of this Agreement shall be brought in the federal or state courts of New Jersey.

13.
Voluntary . Employee acknowledges that he has entered into this Release freely and voluntarily.

 
Page 3 of 6
 

I HAVE READ AND UNDERSTAND AND AGREE TO BE BOUND BY THE ABOVE RELEASE.  I HAVE BEEN ADVISED TO SEEK THE ADVICE OF AN ATTORNEY OF MY CHOOSING.  I HAVE SIGNED THIS RELEASE FREELY AND VOLUNTARILY.
 
Dated:___________________     
______________________________
Timothy McDonald
 
       
Dated:___________________     
______________________________
Gerald T. Vento
Chief Executive Officer
magicJack VocalTec Ltd.
 
 
 
Page 4 of 6
 
ADEA RIDER

By the terms of this Rider, Employee acknowledges that he/she is waiving rights granted to employees over the age of 40 under the provisions of the Age Discrimination in Employment Act (“ ADEA ”).  Employee has a period of forty-five (45) days to consider signing this document.  If he enters this Agreement, he may revoke his agreement at any time within a period of seven (7) days following execution by tendering written notice of his revocation within that seven (7) day period to the Company’s Chief Executive Officer.  If he does not revoke his agreement, Employee agrees to deliver the Confirmation of Acceptance (Exhibit A) to the Company’s Chief Executive Officer immediately after the expiration of the seven (7) day reconsideration period.

By this document, the Company has advised Employee to consult with an attorney of his/her choice before signing this Release.

I HAVE READ AND UNDERSTAND AND AGREE TO BE BOUND BY THE ABOVE RELEASE.  I HAVE BEEN ADVISED TO SEEK THE ADVICE OF AN ATTORNEY OF MY CHOOSING.  I HAVE SIGNED THIS RELEASE FREELY AND VOLUNTARILY.

Dated:___________________

______________________________
Timothy McDonald

 
Page 5 of 6
 
SEVERANCE AGREEMENT AND RELEASE

EXHIBIT “A”

CONFIRMATION OF ACCEPTANCE
 
I, Timothy McDonald, acknowledge that at least seven (7) days have passed since I signed the Severance Agreement and Release between the Company and me on June 5, 2015, and I have been afforded this seven day period to reconsider my decision to enter the Severance Agreement and Release.  I confirm that I still wish to enter this Severance Agreement and Release.  I have not and do not intend to revoke my Severance Agreement and Release, including the waiver and release of my rights under the Age Discrimination in Employment Act, as amended, 29 U.S.C. § 621 et seq. , and affirm that I remain bound by all terms of the Severance Agreement and Release.

Dated:___________________
 
______________________________
Timothy McDonald
 
Page 6 of 6


Exhibit 10.3
 
Independent Contractor Agreement
For Consulting Services
 
This Independent Contractor Agreement (the “ Agreement ”) is made and entered into as of June 6, 2015 (the “ Effective Date ”) by and between magicJack Vocaltec Ltd. , a company formed under the laws of the State of Israel, and all of its direct and indirect subsidiaries (collectively, the “ Company ”), and Timothy McDonald (the “ Contractor ”).
 
WITNESSETH:
 
WHEREAS, the Company desires to retain the Contractor to perform certain professional consulting services specified herein; and
 
WHEREAS, Contractor represents he has expertise in the services required by the Company and desires to be engaged in the capacity of independent contractor in accordance with the terms and conditions set forth in this Agreement;
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
 
 
1.
Scope of Services
 
a.           Contractor agrees to perform personally the consulting services (the “ Consulting Services ”) which may be requested by the Company from time to time.
 
b.           Contractor shall maintain sole control and discretion as to when the Consulting Services are performed.  In performing the Consulting Services, the Contractor represents and warrants to Company that Contractor shall (1) use diligent efforts and professional skills and judgment; and (2) perform the Services in accordance with recognized standards of the applicable industry and profession.

c.           The Contractor shall communicate with the Company, either in person at the Company’s offices or such other locations as agreed to by the Company, or via the telephone or e-mail, regarding the status of the Consulting Services at least weekly and more often as reasonably requested by the Company from time to time.

d.           The Company will not provide the Contractor with an office or any other space from which to conduct the Consulting Services, and Contractor shall have the sole control and discretion as to where to perform the Consulting Services.

e.           The Contractor agrees to supply, at his or her own expense, any and all tools, equipment or materials necessary for the successful completion of the Consulting Services.
 
f.           Contractor represents and warrants to Company, that (1) Contractor has, and will maintain throughout the term hereof, full right, power, and authority to enter into and perform its obligations under this Agreement without conflict with the rights of or obligations to any other party, or in violation of any applicable law or regulation; and (2) none of the Consulting Services provided to Company shall contain any confidential information of any third party.
 
 
 
 
 
 
2.
Consideration
 
a.           In consideration of the Consulting Services performed by the Contractor, the Company agrees to pay Contractor a fee of Twenty Thousand Dollars ($20,000.00) per month (the “ Monthly   Fee ”) for the Consulting Services, with such fees to be pro-rated for any partial month during which Consulting Services are provided hereunder
 
b.           The Company shall pay the Monthly Fee to Contractor in arrears on the last day of each calendar month.  Contractor shall provide the Company with an invoice for each installment of the Monthly Fee.
 
c.           The Company agrees to reimburse Contractor for Contractor’s reasonable travel expenses incurred by Contractor for travel requested by the Company provided that such expenses are pre-approved in writing by the Company.  Contractor shall be responsible for all other costs and expenses associated with performance of the Consulting Services.
 
d.           The Company shall have no obligation to make any payment pursuant to this Agreement unless Contractor is in compliance with all its covenants, agreements and warranties hereunder.
 
3.       Term .  The Contractor shall commence providing services on the Effective Date and shall continue until this Agreement is terminated by either party in accordance with this Section 3 (the “ Term ”).  Either party may terminate this Agreement with or without cause on ten (10) days’ prior written notice provided to the other.
 
4.     Independent Contractor Status
 
a.           It is understood and agreed that Contractor will act solely as an independent contractor hereunder and shall conduct his operations as an independent contractor, and nothing in this Agreement shall be construed to render Contractor an employee of the Company.  The Company shall have no right to control or direct the details, manner or means by which Contractor accomplishes the results of the Consulting Services.
 
b.           Contractor understands and recognizes that it is not an agent of the Company and has no authority to and shall not bind, represent or speak for the Company for any purpose whatsoever.
 
c.           The Company will record payments to Contractor on, and provide to Contractor, an Internal Revenue Service Form 1099, and the Company will not withhold any federal, state or local employment taxes on Contractor's behalf.  Contractor agrees to pay all such taxes in a timely manner and as prescribed by law.
 
 
2
 

d.           Contractor will not be considered an employee for purposes of any Company employment policy or any employment benefit plan, and Contractor will not be entitled to any benefits under any such policy or benefit plan.
 
5.       Nondisclosure and Use of Confidential Information .  Contractor acknowledges and agrees that it entered into with the Company and is bound by a certain Non-Disclosure and Confidentiality Agreement executed by Contractor and the Company (the “ Confidentiality Agreement ”). Contractor further acknowledges and agrees that the Confidentiality Agreement applies to all Confidential Information (as defined therein) provided by the Company to Contractor regardless of the date of disclosure and that the termination of this Agreement, for any reason, shall not effect Contractor’s obligations under the Confidentiality Agreement.
 
6.       Other Work By Contractor .  During the Term, the Contractor shall be free to provide professional consulting services to entities or individuals other than the Company.
 
7.       No Conflicting Agreements .  The Contractor hereby represents and warrants that the Contractor has no commitments or obligations inconsistent with this Agreement.  The Contractor hereby agrees to indemnify and hold the Company harmless against any loss, damage, liability or expense arising from any claim based upon circumstances alleged to be inconsistent with such representation and warranty.    During the period during which the Contractor’s services are engaged by the Company, the Contractor will not enter into any Agreement (oral or written), which may be in conflict with this Agreement.
 
8.       Transfer and Assignment; Subcontracting .  This Agreement may not be assigned or transferred by Contractor.  Should such an assignment or transfer occur, this Agreement shall become null and void at the discretion of the Company upon written notice by the Company to Contractor. Contractor acknowledges that the Company is relying on the personal skill and expertise of Contractor in performing the Consulting Services.
 
9.       Return of Property .  At any time upon the Company’s request and, in any event, within five (5) calendar days of the date this Agreement terminates and regardless of the reason for the termination, return to the Company all Company property in Contractor’s possession or under Contractor’s control, in any form, including, but not limited to, products, materials, memoranda, notes, notebooks, records, reports, documents, computer hardware, software, and Confidential Information (regardless of how it is maintained) and any copies thereof.
 
10.     Remedies for Breach .  Contractor acknowledges that the restrictions contained in this agreement are reasonable and necessary to protect the legitimate interests of the Company, and are not unduly burdensome to Contractor.  Without limiting the Company’s rights to pursue any other legal and equitable remedies available to it for any breach or threatened breach (including the recovery or damages) by Contractor of the covenants, agreements and warranties contained herein, Contractor acknowledges that a breach of said covenants, agreements and warranties would cause a loss to the Company that could not reasonably or adequately be compensated in damages in any action at law, that remedies other than injunctive relief could not fully compensate the Company for a breach of said covenants, agreements and warranties and that accordingly, the Company shall be entitled to injunctive relief to prevent any breach or continuing or threatened breaches of Contractor’s covenants, agreements and warranties as set forth herein. It is the intention of the parties hereto that if, in any action before any Court empowered to enforce this Agreement, any term, restriction, covenant, agreement or promise is found to be unenforceable, then such term, restriction, covenant, agreement or promise shall be deemed modified to the extent necessary to make it enforceable by such Court.
 
 
3
 
 
11.     Waiver .  Waiver by the Company of a breach of any provision of this Agreement or failure to enforce any such provision shall not operate or be construed as a waiver of any subsequent breach of any such provision or of the Company's right to enforce any such provision.  No act or omission of the Company shall constitute a waiver of any of its rights hereunder except for a written waiver signed by the Company's President.
 
12.     Governing Law and Jury Waiver .  This Agreement shall be deemed to have been made in the State of Florida, shall take effect as an instrument under seal within the State of Florida, and the validity, interpretation and performance of this Agreement shall be governed by, and construed in accordance with, the internal law of the State of Florida, without giving effect to conflict of law principles.  Both parties further acknowledge that the last act necessary to render this Agreement enforceable is its execution by the Company in the State of Florida, and that the Agreement thereafter shall be maintained in the State of Florida.  Both parties agree that any action, demand, claim or counterclaim relating to the terms and provisions of this Agreement, or to its breach, shall be commenced in the State of Florida in a court of competent jurisdiction.  Both parties further acknowledge that venue shall exclusively lie in the State of Florida. BOTH PARTIES FURTHER AGREE THAT ANY SUCH ACTION, DEMAND, CLAIM OR COUNTERCLAIM SHALL BE RESOLVED BY A JUDGE ALONE, AND BOTH PARTIES HEREBY WAIVE AND FOREVER RENOUNCE THE RIGHT TO A TRIAL BEFORE A CIVIL JURY.
 
13.     Certification by Contractor .  Contractor certifies that all information and data provided by Contractor to the Company in order to obtain this Agreement or in response to the Company requests for information and data are accurate, complete and current as of the date of execution of this Agreement.
 
14.     Effect on Existing Agreements .  This Agreement shall have no effect on the enforceability of (a) the surviving terms of the Employment Agreement by and between the Company and Contractor dated December 13, 2013, or (b) the Separation Agreement and Release between the Company and Contractor dated June 5, 2015, each of which shall remain in full force and effect notwithstanding, and not modified by, any provision of this Agreement.

15.     Counterparts .  This Agreement may be executed in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, including counterparts delivered by electronic signature or PDF, each of which shall be treated as an original.

16.     Headings .  All section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provisions of this Agreement.
 
 
4
 

17.     Notices .  All notices, requests, consents and other communications hereunder shall be in writing, shall be addressed to the receiving party's address set forth below or to another address as a party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) made by telex, telecopy or facsimile transmission, (iii) sent by overnight courier or (iv) sent by registered or certified mail, return receipt requested, postage prepaid.
 
All notices to the Company shall be sent to: 
 
magicJack Vocaltec Ltd.
222 Lakeview Avenue, Suite 1600  
West Palm Beach, Florida 33401  
Attention: CEO
All notices to Contractor shall be sent to:
 
Timothy McDonald
191 Mine Mount Road
Bernardsville, NJ 07924
 
18.     Severability .  If any portion or provision of this Agreement shall to any extent be declared unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.
 
19.     Modifications .  No modification of this contract shall be binding upon the parties hereto, unless such is in writing and duly signed by the respective parties hereto.  This Agreement shall take effect when signed by both parties.
 
IN WITNESS WHEREOF, the respective parties have caused this Agreement to be executed as of the date first above written.
 
magicJack Vocaltec Ltd
 
By: __________________________________  
Name: Gerald T. Vento   
Title: CEO
 __________________________________
 Timothy McDonald
 
5

 
 
 
|||
 
Exhibit 31.1
 
MAGICJACK VOCALTEC LTD.

CERTIFICATIONS PURSUANT TO
RULES 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Gerald Vento, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 10, 2015

/s/ Gerald Vento                                                                 
Gerald Vento
President and Chief Executive Officer
 
 

 
Exhibit 31.2
 
MAGICJACK VOCALTEC LTD.

CERTIFICATIONS PURSUANT TO
RULES 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Jose Gordo, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 10, 2015

/s/ Jose Gordo                                                                 
Jose Gordo
Chief Financial Officer
 
 
Exhibit 32.1
 
MAGICJACK VOCALTEC LTD.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of magicJack VocalTec Ltd. (the “Company”) on Form 10-Q for the period ending June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to the best of his knowledge:

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

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

Date:  August 10, 2015

/s/ Gerald Vento                                                                 
Gerald Vento
President and Chief Executive Officer
 
 




Exhibit 32.2
 
MAGICJACK VOCALTEC LTD.

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of magicJack VocalTec Ltd. (the “Company”) on Form 10-Q for the period ending June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to the best of his knowledge:

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

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

Date:  August 10, 2015

/s/ Jose Gordo                                                                 
Jose Gordo
Chief Financial Officer