UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended ~~September~~March 3031, ~~2017~~2018

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

For transition period from __________ to __________

Commission file number: 000-27648

MAGICJACK VOCALTEC LTD.

(Exact name or Registrant as specified in its charter)

STATE OF ISRAEL

(State or Other Jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

12 HAOMANUT STREET, 2ND FLOOR

POLEG INDUSTRIAL ZONE, NETANYA, ISRAEL ~~42504~~4250445

(Address of principal executive offices, including zip code)

(561) 749-2255

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ⌧☒ No ☐

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

Yes ⌧☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ (Do not check if smaller reporting company) Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ ☐ No ⌧☒

There were 16,~~115~~205,~~383~~426 ordinary shares with no par value outstanding at ~~October~~April 3130, ~~2017~~2018.

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	3
		Condensed Consolidated Balance Sheets (Unaudited)	3
		Condensed Consolidated Statements of Operations (Unaudited)	4
		Condensed Consolidated Statement of Capital Equity (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3332
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	4640
	ITEM 4.	Controls and Procedures	4640
PART II		OTHER INFORMATION
	ITEM 1.	Legal Proceedings	4741
	ITEM 1A.	Risk Factors	4741
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4741
	ITEM 3.	Defaults Upon Senior Securities	4741
	ITEM 4.	Mine Safety Disclosures	4741
	ITEM 5.	Other Information	4741
	ITEM 6.	Exhibits	4842

DEFINITIONS

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

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

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

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

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

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30,			December 31,
	March 31,			December 31,
	2017			2016
	2018			2017
ASSETS	(Unaudited)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5153,~~254~~850		$	52,~~394~~638
Investments, at fair value		369			~~447~~369
Accounts receivable, net of allowance for doubtful accounts and billing adjustments
Accounts receivable, net of allowance for doubtful accounts and
of $264 and $402, respectively		2,521			3,171
billing adjustments of $213 and $234, respectively		2,037			2,428
Inventories		21,~~047~~700			41,~~441~~880
Deferred costs		~~1,933~~-			21,~~319~~936
Prepaid income taxes		2,374			527
Contract costs, current portion		258			-
Receivable from earnout escrow		-			2,000
Prepaid income taxes		1,328			2,016
Deposits and other current assets		1,~~267~~840			1,~~970~~874
Total current assets		61,~~765~~382			6763,~~269~~141
Property and equipment, net		32,~~074~~521			32,~~805~~772
Intangible assets, net		109,~~877~~371			2810,~~854~~190
Goodwill		32,304			4732,~~185~~304
Deferred tax assets		3431,~~478~~496			2631,~~568~~726
Deposits and other non-current assets		866			836
Contract costs, net of current portion		523			-
Total assets	$	143,364		$	174,517
Deposits and other non-current assets		825			909
Total assets	$	138,422		$	141,042
LIABILITIES AND CAPITAL EQUITY
Current liabilities:
Accounts payable	$	31,~~201~~426		$	23,~~790~~199
Income tax payable		-			1,527
Accrued expenses and other current liabilities		4,722			6,454
Accrued expenses and other current liabilities		6,049			8,426
Deferred revenue, current portion		-			42,243
Deferred revenue, current portion		42,972			48,507
Contract liabilities, current portion		39,957			-
Total current liabilities		5246,~~222~~105			6151,~~250~~896
Deferred revenue, net of current portion		~~40,071~~-			4438,~~201~~797
Other non-current liabilities		12,529			10,866
Contract liabilities, net of current portion		37,915			-
Total liabilities		104,822			116,317
Other non-current liabilities		14,164			13,787
Commitments and contingencies (Note 10)
Total liabilities		98,184			104,480
Commitments and contingencies (Note 9)
Capital equity
Ordinary shares, No par value; 100,000 shares authorized; 25,055 and 25,039 shares
Ordinary shares, No par value; 100,000 shares authorized; 25,072
issued at September 30, 2017 and December 31, 2016, respectively		111,783			111,783
shares issued at March 31, 2018 and December 31, 2017		112,038			112,038
Additional paid-in capital		14,~~566~~672			13,~~567~~848
Treasury stock (8,940 and 8,988 shares at September 30, 2017
Treasury stock (8,866 and 8,882 shares at March 31, 2018
and December 31, 2016, respectively)		(119,381	)		(120,300	)
and December 31, 2017, respectively)		(117,930	)		(118,146	)
Retained earnings		31,~~574~~458			5328,~~785~~822
Total magicJack VocalTec, Ltd. shareholders's equity		38,542			58,835
Total capital equity		40,238			36,562
Noncontrolling interest		-			(635	)
Total liabilities and capital equity	$	138,422		$	141,042
Total capital equity		38,542			58,200
Total liabilities and capital equity	$	143,364		$	174,517

See accompanying notes to condensed consolidated financial statements.

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share information)

	For the Three Months Ended						~~For the Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2017			2016			2017			2016
	2018			2017
Net revenues	$	21,657		$	24,572		$	67,235		$	73,572
Revenues	$	20,015		$	23,197
Cost of revenues		7,~~830~~163			9,~~509~~451			~~25,447~~			~~27,556~~
Gross profit		1312,~~827~~852			1513,~~063~~746			~~41,788~~			~~46,016~~
Operating expenses:
Marketing		1,~~933~~192			2,~~680~~407			~~6,460~~			~~5,659~~
General and administrative		7,~~330~~502			712,~~143~~825			~~29,699~~			~~24,330~~
Impairment of intangible assets and goodwill		-131			~~498~~31,527			~~31,527~~			~~498~~
Research and development		1,~~477~~457			1,~~314~~499			~~4,438~~			~~3,661~~
Gain on mark-to-market		(894	)		(2,000	)		(894	)		(2,000	)
Total operating expenses		10,282			48,258
Total operating expenses		9,846			9,635			71,230			32,148
Operating income (loss)		2,570			(34,512	)
Operating income (loss)		3,981			5,428			(29,442	)		13,868
Other income (expense):
Other income (expense):
Interest and dividend income		93			6
Interest and dividend income		42			5			65			21
Other expense, net		(2	)		(17	)
Other income (expense), net		2			(6	)		(28	)		(11	)
Total other income (expense)		91			(11	)
Total other income (expense)		44			(1	)		37			10
Income (loss) before income taxes		2,661			(34,523	)
Income (loss) before income taxes		4,025			5,427			(29,405	)		13,878
Income tax expense (benefit)		695			(11,355	)
Income tax expense (benefit)		1,574			2,205			(7,194	)		7,407
Net income (loss)		1,966			(23,168	)
Net (loss) income		2,451			3,222			(22,211	)		6,471
Net loss attributable to noncontrolling interest		-			67
Net income attributable to noncontrolling interest		-			177			-			481
Net income (loss) attributable to magicJack
Net (loss) income attributable to magicJack VocalTec Ltd. common shareholders	$	2,451		$	3,399		$	(22,211	)	$	6,952
VocalTec Ltd. common shareholders	$	1,966		$	(23,101	)
(Loss) income per share attributable to magicJack VocalTec Ltd. common shareholders:
Income (loss) per share attributable to magicJack
Basic	$	0.15		$	0.21		$	(1.38	)	$	0.44
VocalTec Ltd. common shareholders:
Diluted	$	0.15		$	0.21		$	(1.38	)	$	0.44
Basic	$	0.12		$	(1.44	)
Weighted average common shares outstanding:
Diluted	$	0.12		$	(1.44	)
Basic		16,114			15,857			16,076			15,786
Weighted average common shares outstanding:
Diluted		16,114			15,865			16,076			15,935
Basic		16,192			16,034
Diluted		16,211			16,034

See accompanying notes to condensed consolidated financial statements.

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CAPITAL EQUITY

(in thousands)

	Common Stock				Additional Paid-in Capital			Treasury Stock						~~Retained Earnings~~			~~Noncontrolling~~Total ~~Interest~~Capital Equity			~~Total Capital Equity~~
	Number		Amount					Number			Amount			Retained Earnings
Balance, January 1, 2017		25,039	$	111,783	$	13,567			(8,988	)	$	(120,300	)	$	53,785		$	(635	)	$	58,200
Balance at December 31, 2017,
Share-based compensation		-		-		2,053			-			-			-			-			2,053
as previously reported		25,072	$	112,038	$	13,848			(8,882	)	$	(118,146	)	$	28,822		$	36,562
Issuance of ordinary shares		-		-		(1,054	)		85			1,054			-			-			-
Impact of change in accounting
Reclassification of shares *		16		-		-			(16	)		-			-			-			-
policy*		-		-		-			-			-			670			670
Purchase of treasury stock		-		-		-			(21	)		(135	)		-			-			(135	)
Adjusted balance at January 1, 2018		25,072	$	112,038	$	13,848			(8,882	)	$	(118,146	)	$	29,492		$	37,232
Deconsolidation of subsidiary		-		-		-			-			-			-			635			635
Share-based compensation		-		-		1,093			-			-			-			1,093
Net loss		-		-		-			-			-			(22,211	)		-			(22,211	)
Issuance of ordinary shares		-		-		(269	)		22			269			-			-
Balance, September 30, 2017 (unaudited)		25,055	$	111,783	$	14,566			(8,940	)	$	(119,381	)	$	31,574		$	-		$	38,542
Purchase of treasury stock		-		-					(6	)		(53	)		-			(53	)
Net income		-		-		-			-			-			1,966			1,966
Balance at March 31, 2018 (unaudited)		25,072	$	112,038	$	14,672			(8,866	)	$	(117,930	)	$	31,458		$	40,238

* ~~represents~~The ~~shares~~net ~~previously~~impact ~~recorded~~of aschanges ~~treasury~~in ~~stock~~accounting ~~that~~policy were ~~reclassified~~comprised asof ~~they~~(i) ~~were~~$1.300 ~~issued~~million ascumulative ~~new~~effect ~~ordinary~~of ~~shares~~initial application of Topic 606, “Revenue from Contracts with Customers,” (ASC 606) to beginning balance of retained earnings, (ii) ($0.407 million) tax impact of initial application of ASC 606, and (iii) ($0.223 million) tax impact of adoption of ASU 2016-16, “Intra-Entity Transfers of Assets Other than Inventory” (ASU 2016-16).

See accompanying notes to condensed consolidated financial statements.

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Nine Months Ended
	For the Three Months Ended
	September 30,
	March 31,
	2017			2016
	2018			2017
Cash flows from operating activities:
Net (loss) income	$	(22,211	)	$	6,471
Net income (loss)	$	1,966		$	(23,168	)
Adjustments to reconcile net (loss) income to net cash
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
provided by (used in) operating activities:
Provision for doubtful accounts and billing adjustments		81			~~210~~54
Share-based compensation		21,~~053~~093			~~3,169~~736
Depreciation and amortization		~~3,397~~959			31,~~510~~525
Gain on mark-to-market		-			(2,000	)
Impairment of goodwill and intangible assets		131			31,527
Impairment of goodwill and intangible assets		31,527			498
Increase of uncertain tax positions		112			1,427
Loss on sale of assets		115			-
Deferred income tax provision		79			(10,911	)
Increase of uncertain tax positions		1,789			1,548
Deferred income tax (benefit) provision		(7,910	)		626
Change in operating assets and liabilities
Accounts receivable		~~635~~390			~~656~~430
Inventories		~~2,289~~180			1,~~562~~134
Deferred costs		303			(219	)
Deferred costs/Contract costs		(95	)		100
Prepaid income taxes		~~(2,507~~465	)		2(4,~~237~~896	)
Deposits and other current assets		~~673~~34			~~(187~~239	)
Other non-current assets		~~249~~84			28(54	)
Receivable from earnout escrow		2,000			-
Accounts payable		(1,779	)		(44	)
Accounts payable		648			1,495
Income taxes payable		-			38
Income taxes payable		38			1,764
Accrued expenses and other current liabilities		(1,732	)		265
Accrued expenses and other current liabilities		(2,377	)		(237	)
Deferred revenue/Contract liabilities		(618	)		(2,103	)
Deferred revenue		(9,391	)		(7,737	)
Other non-current liabilities		9			(110	)
Other non-current liabilities		(993	)		(110	)
Net cash provided by (used in) operating activities		1,279			(3,811	)
Net cash provided by operating activities		335			13,284
Cash flows from investing activities:
Purchase of investments		-			(80	)
Purchases of property and equipment		(14	)		(225	)
Purchases of property and equipment		(510	)		(256	)
Acquisition of intangible assets		-			(48	)
Proceeds from sale of investment		245			-
Net cash used in investing activities		(14	)		(273	)
Proceeds from sale of property and equipment		15			-
Acquisition of Broadsmart		-			(40,019	)
Acquisition of intangible assets		(1,090	)		-
Net cash used in investing activities		(1,340	)		(40,355	)
Cash flows from financing activities:
Purchase of treasury stock		(135	)		-
Repurchase of shares to settle withholding liability		(53	)		-
Proceeds from exercise of ordinary share options		-			8
Net cash used in financing activities		(53	)		-
Net cash (used by) provided by financing activities		(135	)		8
Net increase (decrease) in cash and cash equivalents		1,212			(4,084	)
Net (decrease) in cash and cash equivalents		(1,140	)		(27,063	)
Cash and cash equivalents, beginning of period		52,638			52,394
Cash and cash equivalents, beginning of period		52,394			78,589
Cash and cash equivalents, end of period	$	53,850		$	48,310
Cash and cash equivalents, end of period	$	51,254		$	51,526

See accompanying notes to condensed consolidated financial statements.

MAGICJACK VOCALTEC LTD. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

	For the Three Months Ended March 31,
	2018		2017

Supplemental disclosures:
Income taxes paid	$	47	$	3,153

(in thousands)

	For the Nine Months Ended September 30,
	2017		2016
Supplemental disclosures:
Income taxes paid	$	3,313	$	1,304
Non-cash investing and financing activities:
Ordinary shares issued for acquisition of Broadsmart	$	-	$	1,676

See accompanying notes to condensed consolidated financial statements.

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

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

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

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

~~The~~On November 9, 2017, the Company ~~was~~entered ~~incorporated~~into a Merger Agreement with B. Riley Financial, Inc. (“B. Riley”), in which B. Riley has agreed to acquire all of the ~~State~~outstanding shares of ~~Israel~~the inCompany ~~1989~~for ~~and~~$8.71 isper ~~domiciled~~share in(“The ~~Netanya~~Transaction”). The purchase price represents a premium of approximately (i) 18.5% over the closing price of the Company’s ordinary shares on the NASDAQ Global Select Market on March 14, ~~Israel~~2017, ~~with~~the ~~executive~~last ~~and~~completed ~~administrative~~trading ~~offices,~~day aprior ~~warehouse~~to ~~and~~the adate ~~customer~~that ~~care~~the ~~call~~Company ~~center~~announced inthat ~~West~~it ~~Palm~~had ~~Beach~~received unsolicited indications of interest and would be considering its strategic alternatives, ~~Florida~~(ii) 23.6% Inover ~~addition~~the 90-day average closing price of the Company’s ~~has~~ordinary ~~offices~~shares for ~~technology~~the ~~management~~period inended ~~Franklin~~November 7, ~~Tennessee~~2017, ~~research~~ and ~~development~~(iii) in54.2% ~~Plano~~over the closing price of the Company’s ordinary shares on November 8, ~~Texas~~2017, the last completed trading day prior to the Company’s announcement that it entered into the Merger Agreement. The Transaction is subject to various closing conditions, including Company shareholder approval and ~~Sunnyvale~~regulatory approvals. On March 19, ~~California~~2018, the shareholders voted to approve the Transaction. Furthermore, the Company has received all required consents and approvals from the ~~UCaaS~~state ~~provider~~public service commissions and is waiting for approval from the Federal Communications Commission. The Company expects the Transaction to close in ~~Fort~~the ~~Lauderdale,~~next ~~Florida~~three months.

On May 8, 2018, the Company and B. Riley executed an amendment to the Merger Agreement documenting B. Riley’s intent to reorganize the Company’s structure as soon as practicable after the closing date of the Transaction to transfer ownership of YMax Corporation and subsidiaries to a US subsidiary of B. Riley.

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

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements are prepared in conformity with United States ~~Generally~~generally ~~Accepted~~accepted ~~Accounting~~accounting ~~Principles~~principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the Company’s unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that ~~were~~are included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. The balance sheet at December 31, ~~2016~~2017 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The Company’s unaudited condensed consolidated financial statements are the basis for the discussion and analysis of the Company’s results of operations, liquidity and capital resources. References to authoritative accounting literature in this report, where applicable, are based on the Accounting Standards Codification (“ASC”). The Company’s functional and reporting currency is the United States Dollar (“U.S. Dollar”), which is the currency of the primary economic environment in which its consolidated operations are conducted. Transactions and balances originally denominated in U.S. Dollars are presented at their original amounts. Transactions and balances in currencies other than U.S. Dollars, including New Israeli Shekels (“NIS”) and Polish ~~Zloty~~Zlotny (“PLN”), are re-measured in dollars and any gains or losses are recognized in the Company's unaudited condensed consolidated statement of operations in the period they occur. Approximately 85% and 86% of the Company’s consolidated revenues in the three months ended March 31, 2018 and 2017, respectively, were from sales to customers located in the United States.

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

~~Approximately~~Adoption ~~85% and 86%~~ of ~~the~~ASC ~~Company’s~~606 ~~consolidated~~“Contracts ~~revenues~~with in the three and nine months ended September 30, 2017, respectively, were from sales to customers located in the United States. Approximately 90% of the Company’s consolidated revenues in the three and nine months ended September 30, 2016 were from sales to customers located in the United States.Customers”

~~The~~On ~~majority~~January of1, ~~Core~~2018, ~~Consumer~~the ~~segment~~Company ~~revenues~~adopted ~~were~~Topic ~~generated~~606, “Revenue from ~~sales~~Contracts ofwith ~~the~~Customers,” ~~magicJack~~(“ASC ~~product~~606”) ~~line~~for ~~and~~revenue ~~accompanying~~recognition. The ~~software~~new ~~access~~standard ~~rights,~~requires ~~which~~entities ~~were~~to ~~$16.8~~recognize ~~million~~revenue ~~and~~through ~~$19.2~~the ~~million~~application ~~for~~of ~~the~~a ~~three~~five-step ~~months~~model, ~~ended~~which ~~September~~includes ~~30,~~identification ~~2017~~of ~~and~~the ~~2016~~contract, ~~respectively~~identification of the performance obligations, ~~and~~determination ~~$52.0~~of ~~million~~the ~~and~~transaction ~~$58.8~~price, ~~million~~allocation ~~for~~of the ~~nine~~transaction ~~months~~price ~~ended~~to ~~September~~the 30performance obligations, ~~2017~~ and ~~2016,~~recognition ~~respectively.~~of ~~The~~revenue ~~Core~~as ~~Consumer~~the ~~segment~~entity ~~also~~satisfies ~~provides~~the ~~its~~performance ~~customers~~obligations. The ~~with~~Company adopted the ~~ability~~requirements toof ~~make~~ASC ~~prepaid~~606 ~~international~~using ~~calls~~the bymodified ~~purchasing~~retrospective ~~prepaid~~transition ~~minutes~~method ~~for~~under ~~use~~which ~~with~~the standard was applied only to the ~~magicJack~~most ~~devices~~current period presented and ~~mobile~~the ~~apps.~~cumulative ~~Revenues~~effect ~~generated~~of ~~from~~applying the ~~usage~~new standard was recognized at the date of ~~prepaid~~initial ~~minutes~~application ~~were~~as ~~$1.1~~a ~~million~~cumulative ~~and~~adjustment $1to retained earnings.4 The ~~million~~Company ~~for~~applied the ~~three~~guidance ~~months~~to ~~ended~~contracts ~~September~~that ~~30,~~were ~~2017~~not ~~and~~completed ~~2016,~~at ~~respectively,~~the ~~and~~date $3of initial application.5 Therefore, ~~million~~the ~~and~~comparative ~~$4.6~~information ~~million~~has ~~for~~not ~~the~~been ~~nine~~adjusted ~~months~~and ~~ended~~continues ~~September~~to ~~30,~~be ~~2017~~reported ~~and~~under ~~2016,~~ASC ~~respectively~~Topic 605. ~~Revenues~~The ~~generated~~cumulative ~~from~~effect ~~access~~of ~~and~~initially ~~wholesale~~applying ~~charges~~ASC ~~were~~606 ~~$0.9~~on ~~million~~January ~~and~~1, 2018 increased retained earnings by approximately $1.23 million, ~~for~~with ~~the~~offsetting ~~three~~adjustments ~~months~~to ~~ended~~deferred ~~September~~revenue 30and deferred costs, ~~2017~~not ~~and~~including ~~2016,~~the ~~respectively,~~tax ~~and~~impact of $20.94 million ~~and~~as ~~$3.9~~an ~~million~~adjustment ~~for~~to the ~~nine~~opening ~~months~~balance ~~ended~~of ~~September~~equity ~~30,~~at ~~2017~~January ~~and 2016~~1, ~~respectively.~~2018 as follows:

The Enterprise segment was launched with the acquisition of Broadsmart on March 16, 2016. The majority of Enterprise segment revenues were generated from Broadsmart hosted UCaaS services and sales of hardware and equipment which were $2.6 million and $2.8 million for the three months ended September 30, 2017 and 2016, respectively, and $8.3 million and $6.2 million for the nine months ended September 30, 2017 and 2016, respectively.

Adjustments for the initial application of ASC 606
Deferred costs/Contract costs	$	(1,246	)
Deferred revenue/Contract liabilities		2,634
Other		(88	)
Total adjustment	$	1,300

~~The~~A ~~SMB~~summary ~~segment~~of ~~did~~the ~~not generate~~ significant ~~revenue~~changes ~~for the three~~ and ~~nine~~quantitative ~~months~~impact ~~ended~~of ~~September 30, 2016, or~~ the ~~three~~changes ~~months~~are ~~ended~~set ~~March~~out ~~31, 2017.~~below:

Products and services		Changes to accounting policies
magicJack device revenue		Under ASC 605, the device and initial access right were accounted for as a combined unit of accounting and recognized ratably over the service term. Under ASC 606, the transaction price for magicJack device sales is now allocated between equipment and service based on stand-alone selling prices. Revenues allocated to equipment are recognized when control transfers to the customer, and service revenue is recognized ratably over the service term.
		Direct sales of devices include shipping charges and a 30-day free trial, during which customers can return the device and cancel the service, before payment. Prior to 2018, the Company did not recognize revenue until the 30-day trial period had expired and a customer’s credit card had been charged, at which point revenues for hardware, service and shipping were recognized ratably over the remaining service term. As of January 1, 2018, the Company no longer delays revenue recognition for devices sold with a right of return and instead estimates the returns as part of the transaction price using a six month rolling average of historical returns. Revenues for hardware and shipping are recognized at the time of delivery and revenues for service are recognized ratably over the service term.
		For retail sales of devices, there is a delay between shipment to the retailer and the ultimate sale to a customer (end-user). Prior to 2018, the Company deferred revenue recognition on retail sales for the delay period, after which revenue for both hardware and service were recognized ratably over the remaining initial access right period. As of January 1, 2018, the Company recognizes revenue for hardware based on delivery terms to the retailer and revenue for service is deferred for the delay period and recognized ratably over the remaining initial access right period.
magicJack device cost		Prior to 2018, direct costs of producing magicJack devices were deferred on shipment and charged to cost of sales ratably over the initial access right period. As of January 1, 2018, direct costs of producing magicJack devices are charged to cost of sales when control transfers, consistent with the hardware revenue recognition.
Access right renewal costs		Prior to 2018, sales commissions associated with our multi-year service renewal plans were expensed as incurred at the time of sale. Under ASC 606, these are considered incremental costs to obtain a customer contract, which are deferred and amortized to cost of sales over the respective periods of expected benefit. The Company utilizes the practical expedient permitting expensing of these costs when the expected amortization period is one year or less.
UCaaS costs		Under ASC 606, certain incentive commissions to partners are considered incremental costs to obtain a customer contract, which are deferred and amortized to cost of sales ratably over the contract term.

Refer to Note 2, “Summary of Accounting Policies”, Note 7, “Deferred Costs/Contract Costs and Deferred Revenue/Contract Liabilities” and Note 11, “Revenue” for further details.

Adoption of ASU 2016-16 “Intra-Entity Transfers of Assets Other than Inventory”

On January 1, 2018, the Company adopted ASU 2016-16, “Intra-Entity Transfers of Assets Other than Inventory” (“ASU 2016-16”) which requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The ASU was applied retrospectively as an adjustment to retained earnings, for a decrease of approximately $0.2 million, with an offsetting adjustment to prepaid taxes.

Segments

In the three months ended March 31, 2017, the Company reported results of its operations in three separate reportable segments – “Core Consumer”, “Enterprise” and “SMB”. During the first quarter of 2017, management restructured the Company to absorb within the Core Consumer segment, all of operations and functions of the SMB Segment which was based on the activities of magicJack SMB, Inc. (“SMB”). Accordingly, this segment does not show activity for periods after March 31, 2017.

The majority of the Company’s Core Consumer segment revenues recognized were generated from sales of the magicJack product line and from the software access right that accompanies these products, which were $15.5 million and $18.1 million for the three months ended March 31, 2018 and 2017, respectively. The Company’s Core Consumer segment also provides its customers with the ability to make prepaid calls using the magicJack devices and mobile apps by purchasing prepaid minutes. Revenues generated from the usage of prepaid minutes were $1.0 million and $1.2 million for the three months ended March 31, 2018 and 2017, respectively.

The Company’s Enterprise segment was launched with the acquisition of North American Telecommunications Corporation d/b/a Broadsmart (“Broadsmart”) on March 16, 2016. The majority of the Company’s Enterprise segment revenues recognized were generated from Broadsmart hosted UCaaS services and sales of hardware and equipment which were $2.6 million and $2.7 million for the three months ended March 31, 2018 and 2017, respectively.

The Company’s SMB segment did not generate significant revenue for the three months ended March 31, 2017. Refer to Note 16, “Segment Reporting” for further details.

Basis of Consolidation

The Company’s unaudited condensed consolidated financial statements include the accounts of magicJack VocalTec and its wholly owned subsidiaries. ~~The results of Broadsmart Global, Inc. have been included since March 17, 2016. The results of SMB have been included since the first quarter of 2016.~~ All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications may have been made to prior period financial statement amounts to conform to the current presentation. The results for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~2018 may not be indicative of the results for the entire year ending December 31, ~~2017~~2018. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 filed on March 16, ~~2017~~2018.

Noncontrolling Interest

During the year ended December 31, 2016, the Company formed a new subsidiary and entered into a joint venture with an unrelated third party which resulted in the Company having a 60% controlling interest in the joint venture which ~~began~~sold ~~selling a line of~~ high-technology residential consumer products ~~in the fourth quarter of fiscal year 2016~~. On March 31, 2017, this interest was reduced to 36% and on June 30, 2017 the Company sold its remaining interest to the unrelated third party. Based on the difference between the sales price from the agreement and the carrying value of the asset, the Company recognized an impairment loss of $0.4 million in general and administrative expense in the Core Consumer segment of the ~~unaudited condensed~~ consolidated statement of operations for the ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2017.

The operations of the joint venture for the three ~~and nine~~ months ended ~~September~~March 3031, 2017 ~~and 2016~~ were not significant to the Company’s financial statements. The Company’s consolidated financial statements for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017, include ~~adjustments~~an adjustment to income attributable to magicJack VocalTec Ltd. common shareholders of $~~0.2~~67 ~~million and $0.5 million~~thousand, ~~respectively,~~ to recognize the impact of the noncontrolling interest. The Company’s consolidated financial statements did not include any adjustments to income attributable to magicJack VocalTec Ltd. common shareholders for the three and nine months ended September 30, 2017. The Company has determined that the joint venture ~~did~~does not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a separate reportable segment. As such, it ~~was~~is included in the “Other” category of the Company’s segment reconciliation. Refer to Note 16, “Segment Reporting,” for further details.

910

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

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

Use of Estimates

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

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

Fair Value

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

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

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

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

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

When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. Fair value includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or the Company) will not be fulfilled. For the Company's financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. The Company’s assets and liabilities measured on a recurring basis at fair value may include marketable securities and time deposits. As of ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017, all of them were Level 1 instruments. The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses are expected to approximate fair value because of their immediate availability, near term maturities or potential interest payments at settlement.

Cash and Cash Equivalents

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

~~Investments~~11

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

Allowance for Doubtful Accounts and Billing Adjustments

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

Certain Risks and Concentrations

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

The Company places its cash and cash equivalents in high quality financial institutions and management believes that the Company is not exposed to any significant risk on its cash accounts. The Company maintains accounts with various banks and brokerage organizations and constantly monitors the creditworthiness of these institutions. Cash accounts at each U.S. bank are insured by the Federal Deposit Insurance Corporation (“or FDIC”) up to $250 thousand in the aggregate and may exceed federally insured limits. Cash accounts at Israeli or Polish banks are not insured. The Company has never experienced any losses related to these balances. At ~~September~~March 3031, ~~2017~~2018, the Company had cash and cash equivalents totaling $5153.39 million, which included (i) $5052.49 million in U.S. financial institutions, and (ii) $0.9 million in foreign financial institutions.

The Company’s non-interest bearing cash balances in U.S. banks, which included $1.87 million in one individual financial institution, were fully insured, except for $~~106~~77 thousand that exceeded insurance limits at ~~September~~March 3031, ~~2017~~2018. The Company had money market accounts with financial institutions with balances totaling approximately $4851.52 million at ~~September~~March 3031, ~~2017~~2018.

For the Core Consumer segment, no telecommunication carrier accounted for more than 10% of ~~the segment’s~~ gross accounts receivable at ~~September~~March ~~30, 2017 and December~~ 31, ~~2016.~~2018 ~~One U.S. retail customer accounted for approximately 13% of the segment’s gross accounts receivable at September 30, 2017~~ and ~~three retail customers accounted for approximately 34% of the segment’s gross accounts receivable at~~ December 31, ~~2016~~2017. For the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, no telecommunications carrier ~~or retailer~~ accounted for more than 10% of the segment’s total operating revenues.

For the ~~Enterprise~~Core Consumer segment, ~~two~~one U.S. retail ~~customers~~customer accounted for approximately 3617% of gross accounts receivable at ~~September~~March 3031, ~~2017~~2018. NoOne retail customer accounted for ~~more~~approximately ~~than 10~~11% of the segment’s gross accounts receivable at December 31, ~~2016. For the three months ended September 30,~~ 2017 ~~and 2016, two customers accounted for approximately 27% and 30% of the segment’s total operating revenues, respectively~~. For the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, ~~two~~no ~~customers~~retailer accounted for ~~approximately~~more ~~30%~~than ~~and 28~~10% of the segment’s total operating revenues~~, respectively~~.

For the ~~SMB~~Enterprise segment, ~~accounts~~one ~~receivable~~U.S. ~~were~~retail ~~not~~customer ~~significant~~accounted atfor ~~December~~approximately 31,% ~~2016.~~of ~~The~~gross ~~segment’s~~accounts ~~operating~~receivable ~~revenues~~at ~~were~~March ~~not~~31, ~~significant~~2018. Two customers accounted for ~~the~~approximately ~~three~~55% ~~and~~of ~~nine~~gross ~~months~~accounts ~~ended~~receivable ~~September~~at 30December 31, ~~2016~~2017. For or the three months ended March 31, 2018 and 2017, one customer accounted for approximately 20% and two customers accounted for approximately 30% of the segment’s total operating revenues, respectively.

Investments

Investments consist of interest bearing time deposits with maturity dates of greater than 90 days totaling $369 thousand at March 31, 2018 and December 31, 2017.

The fair value of time deposits at March 31, 2018 and December 31, 2017 was determined based on face value, which approximates fair value and is a Level 1 input. There was no realized gain or loss on investments for the three months ended March 31, 2018 and 2017.

Allowance for Doubtful Accounts and Billing Adjustments

Inventories

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

~~Receivable~~Deferred ~~from~~Costs/Contract ~~Earnout Escrow~~Costs

~~The~~Prior ~~2016~~to ~~acquisition of Broadsmart~~2018, ~~described~~deferred incosts ~~the Company’s Annual Report on Form 10-K~~ for the ~~year~~Core ~~ended~~Consumer ~~December~~segment ~~31,~~primarily ~~2016,~~consisted ~~included a contingent earnout payment~~ of ~~$2.0~~costs ~~million in cash, if the acquired assets generated 2016 revenues~~ of atproducing ~~least~~magicJack ~~$15.6~~devices ~~million.~~which ~~The~~were ~~$2.0~~amortized ~~million~~to ~~was~~cost ~~paid into escrow at the time~~ of ~~closing.~~sales ~~Revenues~~ratably ~~for~~over the ~~year~~initial ~~ended~~access ~~December~~right ~~31,~~period. ~~2016~~With ~~did not reach~~ the ~~target~~adoption ~~and~~of ~~the~~ASC ~~Company~~606 ~~recorded the funds~~ on ~~the~~January ~~accompanying~~1, ~~unaudited~~2018, ~~condensed~~these ~~consolidated~~costs ~~balance~~are ~~sheets~~no aslonger aamortized ~~receivable~~but ~~from~~are ~~earnout~~expensed ~~escrow. These~~upon ~~funds were received during the nine months ended September 30, 2017~~sale.

1112

ASC 606 requires that contract costs related to obtaining contracts be expensed over the life of the contract. A practical expedient is allowed for all contracts with lives that are less than one year. Upon adoption, as of January 1, 2018, contract costs for the Core Consumer segment consist primarily of sales commissions associated with our multi-year service renewal plans which are amortized to cost of sales over the respective periods of expected benefit. The Company is using the practical expedient to recognize the cost of sales commissions associated with one year or less service renewal plans immediately.

For the Enterprise segment, deferred costs/contract costs consist of hardware or equipment purchased but not yet delivered and put into service and third party service charges not yet billed to customers. These costs are recognized in the period they are billed to the customer. As of January 1, 2018, certain incentive commissions are considered incremental costs to obtain a customer contract, which are deferred and amortized to cost of sales ratably over the contract term.

There were no deferred costs/contract costs for the SMB segment as of March 31, 2017.

Deferred costs/contract costs to be recognized over the next twelve months are classified as current and included in deferred costs/contract costs, 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 costs/contract costs, net of current portion. There was no impairment of contract costs for the three months ended March 31, 2018.

Property, Equipment and Depreciation Expense

Property and equipment are accounted for under ASC 360, “Property, Plant and Equipment” and consist primarily of servers, computer hardware, furniture, and leasehold improvements. Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, which range from three to fifteen years. Leasehold improvements are depreciated over the shorter of the term of the lease or useful life of the assets. The cost of substantial improvements is capitalized while the cost of maintenance and repairs are charged to operating expenses as incurred. Refer to Note 54, “Property and Equipment” for further details.

The Company reviews property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. Property and equipment to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Management believes there was no impairment of the Company’s property or equipment at ~~September~~March 3031, ~~2017~~2018.

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

Intangible Assets

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

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

The Company recognized impairment charges of $~~16.6 million and $~~0.51 million on intangible assets during the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 ~~and~~on ~~2016,~~an ~~respectively~~intangible that the Company has determined will no longer be used in the future. ~~Refer~~The toCompany ~~Note~~recognized 3,impairment ~~“Impairment~~charges of ~~Intangible~~$16.6 ~~Assets~~million on intangible assets during the three months ended March 31, ~~Including~~2017. ~~Goodwill”~~Refer ~~and~~to Note 65, “Intangible Assets” for further details.

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

Goodwill

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

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

~~With~~The ~~the~~Company ~~acquisition~~may ofutilize ~~Broadsmart~~a ~~and~~qualitative assessment to determine if it is "more-likely-than-not" that the ~~founding~~fair value of ~~SMB~~the inreporting ~~2016~~unit is less than its carrying value. If so, ~~management~~an ~~began~~impairment ~~evaluating~~test ~~each~~must ofbe ~~these~~performed. ~~new~~If ~~business~~not, ~~lines~~no ~~separately~~further ~~and~~testing ~~has~~is ~~allocated~~required ~~goodwill~~and ~~between~~the Company documents the ~~three~~relevant ~~reporting~~qualitative ~~units~~factors that ~~correspond~~support its fair value. Qualitative factors may include, but are not limited to: ~~the~~macroeconomic ~~reportable~~conditions, ~~segments~~industry –and ~~“Core~~market ~~Consumer~~considerations,” ~~“Enterprise”~~cost factors that may have a negative effect on earnings, overall financial performance, and ~~“SMB”~~other relevant entity-specific events. In ~~Refer~~the tofirst ~~Note~~quarter 7of 2017, ~~“Goodwill”~~the ~~and~~Company ~~Note~~adopted 16ASU 2017-04, “~~Segment~~Intangibles ~~Reporting~~– Goodwill and Other” ~~for~~which ~~further~~eliminated ~~details~~step two of the goodwill impairment test.

12In 2017, goodwill was allocated between two reporting units, “Core Consumer” and “Enterprise” which were consistent with the reportable segments and evaluated separately. The Company recognized impairment charges of $14.9 million on goodwill for the Enterprise reporting unit, the full value of its goodwill, during the three months ended March 31, 2017. There was no change in goodwill during the three months ended March 31, 2018. Refer to Note 6, “Goodwill” and Note 16, “Segment Reporting” for further details.

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

InDeferred ~~prior~~revenues/contract ~~years~~liabilities for the Core Consumer segment consist primarily of billings and payments for magicJack devices access rights renewals and prepaid international minutes billed and collected in advance of revenue recognition. Prior to adoption of ASC 606, the ~~Company~~revenue ~~used~~related to the ~~two-step~~sale ~~goodwill~~of ~~impairment~~magicJack ~~test~~devices, including a period of service, was recognized as revenue over the period of service. InAfter ~~January~~the ~~2017~~adoption, the ~~Financial~~revenue ~~Accounting~~from ~~Standards~~the ~~Board~~sale ~~(“FASB”)~~of ~~issued~~magicJack ~~Accounting~~devices ~~Standards~~is ~~Update~~allocated ~~(“ASU”)~~between ~~2017-04,~~the ~~“Intangibles~~revenue –from ~~Goodwill~~the sale of the device and ~~Other”~~the ~~which~~sale ~~eliminated~~of ~~step~~service ~~two~~included based on stand-alone selling prices. The revenue allocated to the sale of the ~~goodwill~~device ~~impairment~~is ~~test.~~recognized ~~The~~immediately ~~Company~~and ~~adopted~~the ~~ASU~~revenue ~~2017-04~~from onthe asale ~~prospective~~of ~~basis~~the inservice included with the ~~first~~device ~~quarter~~is recognized over the period of ~~2017~~service.

~~The~~For ~~Company recognized impairment charges of $14.9 million on goodwill for~~ the Enterprise ~~reporting unit~~segment, ~~the~~deferred ~~full~~revenues/contract ~~balance~~liabilities ~~for~~consist ~~that~~of ~~unit,~~hardware ~~during~~or ~~the~~equipment ~~nine~~purchased ~~months~~but ~~ended~~not ~~September~~yet ~~30, 2017~~delivered. There ~~was~~were no ~~impairment~~deferred ofrevenues/contract ~~goodwill~~liabilities ~~during~~for the ~~nine~~Enterprise ~~months~~segment ~~ended~~as ~~September~~of 30March 31, ~~2016~~2018. Deferred ~~Refer~~revenues/contract toliabilities ~~Note~~for 3,the ~~“Impairment~~Enterprise ofsegment ~~Intangible~~were ~~Assets,~~not ~~Including~~significant ~~Goodwill”~~as ~~and~~of ~~Note~~March 731, ~~“Goodwill” for further details.~~2017

~~Deferred~~There ~~Revenues~~were no deferred revenues/contract liabilities for the SMB segment as of March 31, 2017.

Deferred revenues/contract ~~for~~liabilities ~~the~~to ~~Core~~be ~~Consumer~~recognized ~~segment~~as ~~consist~~revenue ~~primarily~~over ofthe ~~billings~~next ~~and~~twelve ~~payments~~months ~~for~~are ~~magicJack~~classified ~~devices~~as current and ~~access~~included ~~rights renewals received~~ in ~~advance~~deferred of revenue/contract ~~recognition.~~liabilities, ~~The~~current ~~Company~~portion ~~bills and collects~~ in ~~advance~~the ~~for~~Company’s ~~magicJack~~consolidated ~~devices,~~balance ~~which~~sheets. ~~include~~The anremaining ~~initial~~amounts ~~access~~are ~~right~~classified ~~period,~~as ~~and~~non-current ~~access~~in ~~right~~the ~~renewals. The~~consolidated ~~Company~~balance ~~recognizes~~sheets ~~revenue from device sales~~ and ~~access~~included ~~right~~in ~~renewals~~deferred ~~ratably~~revenue/contract ~~over the access right period~~liabilities, asnet ~~described~~of ~~above~~current portion.

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

~~Deferred~~Revenues ~~revenues~~consist of revenue from sales of magicJack devices to beretailers, ~~recognized~~wholesalers ~~over~~or ~~the~~directly ~~next~~to ~~twelve~~customers, ~~months~~access ~~are~~right ~~classified~~renewal asfees, ~~current~~fees oncharged ~~the~~for ~~consolidated~~shipping ~~balance~~magicJack ~~sheets~~devices, ~~with~~usage of domestic and international prepaid minutes, access charges to other carriers, recurring sales of the ~~remainder~~Company’s ~~classified~~hosted asUCaaS voice services, non-~~current~~recurring sales of equipment related to its UCaaS services and other miscellaneous charges. The Company typically enters into multi-year agreements, typically with durations of three to five years, to provide the hosted voice and other services. The Company earns revenue from the sale of the hardware and network equipment necessary to operate its UCaaS services directly to its customers. All revenue is recorded net of any taxes collected from customers. All revenue is from contracts with customers.

Net Revenues

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

Revenue Recognition

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

On January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers,” for revenue recognition.

Core Consumer Segment

magicJack Devices

Prior to 2018, magicJack devices, which include an initial access right, ~~which~~service ~~qualify~~period, aswere multiple deliverables per ASC 605-25. Since the device and initial access right ~~are~~were ~~interdependent and~~ not previously sold separately, they ~~are~~were accounted for as a combined unit of accounting. ~~Direct~~Under ~~sales~~ASC of605, ~~devices include shipping charges and 30 days to return~~ the device and ~~cancel~~initial ~~the~~access ~~service. For~~right ~~retail~~were ~~sales~~accounted offor ~~devices,~~as ~~there is~~ a ~~delay~~combined ~~between~~unit ~~shipment to the retailer and the ultimate sale to a customer (end-user). Based on sales and inventory data provided by retail partners, the Company’s estimate~~ of ~~the~~accounting ~~delay was 30 days~~ and 90recognized days for the three and nine months ended September 30, 2017 and 2016, respectively. The Company defers revenue recognition on direct sales for the 30 day return period and on retail sales for the delay period, after which the Company recognizes the revenue from device sales ratably over the ~~remaining~~service ~~initial access right period~~term.

13Under ASC 606, the sale of the device and the initial access right service are considered as two distinct performance obligations. The transaction price for magicJack device sales is now allocated between equipment and service based on the relative stand-alone selling prices of separate sales which occur at consistent prices. Revenues allocated to the device are recognized when control transfers to the customer, and service revenue is recognized ratably over the service term.

Direct sales of devices include shipping charges and a 30-day free trial period, during which customers can return the device and cancel the service, before payment. Prior to 2018, the Company did not recognize revenue until the 30-day trial period had expired and a customer’s credit card had been charged, at which point revenues for hardware, service and shipping were recognized ratably over the remaining service term. Under ASC 606, control is considered to transfer to the customer for direct sales when the item has been delivered to the customer. As a result, the Company no longer delays revenue recognition for devices sold with a right of return and instead estimates the returns as part of the return allowance. Revenues for hardware and shipping are recognized at the time of delivery and revenues for service are recognized ratably over the service term.

For retail sales of devices, there is a delay between shipment to the retailer and the ultimate sale to a customer (end-user). Based on sales and inventory data provided by retail partners, the Company’s estimate of the delay for the three months ended March 31, 2018 and 2017 was 30 days. Prior to 2018, the Company deferred revenue recognition on retail sales for the delay period, after which revenue for both hardware and service were recognized ratably over the remaining initial access right period. As of January 1, 2018, the Company recognizes revenue for hardware based on delivery terms to the retailer and revenue for service is deferred for the delay period and recognized ratably over the remaining initial access right period.

Returns from retailers are accepted on an authorized basis for devices deemed defective. The Company estimates all potential returns of devices using a six month rolling average of historical returns and reviews the actual returns against the allowance on a quarterly basis. For the three months ended March 31, 2018 and 2017, the Company’s estimates of returns and actual returns have not been materially different.

Access Right Renewals and Mobile Apps

Customers may renew access rights for periods ranging from one month to five years. All ~~The~~payments are due upon purchase of a renewal term and are not considered to include a financing component since the payment terms are primarily not for financing purposes. Under both ASC 605 and ASC 606, the revenue associated with access right renewals is deferred and recognized ratably as time elapses over the extended access right period purchased. ~~Revenue~~Revenues from the ~~sale~~sales of magicApp, magicJack Connect and magicJack Spark mobile ~~apps~~app isaccess rights are recognized ratably over the access right period.

Other magicJack-Related Products

The Company offers customers other optional products related to their magicJack devices and services, such as ~~insurance,~~ custom or vanity phone numbers, Canadian phone numbers, and the ability to either change their existing phone numbers or port them to a magicJack device~~, and battery powerbanks for mobile devices~~. These revenues are recognized atwhen the ~~time~~performance ofobligation ~~sale,~~has ~~with~~been ~~the~~satisfied. ~~exception~~In of2017, ~~sales~~the ofCompany ~~the~~also offered battery ~~powerbank~~powerbanks for mobile devices for which ~~are~~revenue was recognized when shipped.

Prepaid Minutes and Access and Wholesale Charges

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

~~Sales Return Policy~~15

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

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

Enterprise Segment

UCaaS services and equipment sales related to the Broadsmart subsidiary ~~qualify~~can asbe ~~multiple deliverables per ASC 605-25. Since the equipment and services are~~ sold separately and ~~can be~~ used with other products and services. As such, they ~~are~~qualified as multiple deliverables accounted for as separate units of accounting. under ASC 605-25 and qualify as two distinct performance obligations under ASC 606. The Company recognizes revenues from sales of its hosted services in the period the services are provided over the term of the respective customer agreements. Customers are billed monthly in advance for these recurring services and in arrears for one time service ~~charges~~ and ~~other~~equipment ~~certain~~charges and usage charges. Revenues from sales of hardware and network equipment are recognized in the period that the equipment is delivered. ~~Revenues~~Revenue from the sale of equipment purchased but not yet delivered ~~are~~is deferred and recognized in the period that the hardware or equipment is delivered and put into service. Revenues from one time service and usage are recognized in the period incurred.

SMB Segment

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

Cost of Revenues

Core Consumer Segment

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

~~Costs~~Prior ~~incurred~~to ~~for~~2018, ~~shipping~~direct ~~and~~costs ~~handling and credit card charges are included in cost~~ of ~~revenues~~producing ~~and~~magicJack ~~are~~devices ~~expensed~~were asdeferred ~~incurred.~~on ~~Costs~~shipment ~~for shipping~~ and ~~handling~~charged ~~and~~to ~~credit~~cost ~~card~~of ~~charges~~sales ~~were~~ratably ~~$0.7~~over ~~million and $0.9 million for~~ the ~~three~~initial ~~months~~access ~~ended~~right ~~September~~period. ~~30,~~As ~~2017~~of ~~and~~January ~~2016~~1, ~~respectively~~2018, ~~and~~direct ~~$2.4~~costs ~~million~~of ~~and~~producing ~~$2.7~~magicJack ~~million~~devices ~~for~~are ~~the~~charged ~~nine~~to ~~months~~cost ~~ended~~of ~~September~~sales ~~30,~~at ~~2017 and 2016, respectively. Starting in~~ the ~~second~~time ~~quarter~~ of ~~2017~~sale, ~~these~~to ~~amounts~~match ~~include~~recognition ~~SMB~~of hardware revenue.

Costs for the Core Consumer segment include sales commissions associated with our multi-year service renewal plans. Prior to 2018, these costs were expensed as incurred. Under ASC 606, these are considered incremental costs to obtain a customer contract, which are deferred and amortized to cost of sales over the respective periods of expected benefit. The Company utilizes the practical expedient permitting expensing of these costs when the expected amortization period is one year or less.

Costs incurred for shipping and handling and credit card charges are included in cost of revenues and are expensed as incurred. Costs for shipping and handling and credit card charges were $0.6 million and $0.9 million for the three months ended March 31, 2018 and 2017, respectively.

Enterprise Segment

Cost of revenues related to the Company’s UCaaS services include direct costs of providing the services, which are expensed as incurred. These costs include charges for access to the public switched telephone network, internet service for its customers, maintenance costs for its software, commissions, credit card charges, contract labor for installation and depreciation and amortization. The Company also incurs costs for hardware and equipment sold to customers, ~~along~~and ~~with~~third ~~related~~party ~~delivery~~service costs, which are deferred and recognized in the period they are ~~delivered~~billed to the customer. Under ASC 606, certain incentive commissions to partners are considered incremental costs to obtain a customer contract, which are deferred and ~~put~~amortized ~~into~~to ~~service~~cost of sales ratably over the contract term.

SMB Segment

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

Marketing Expenses

Marketing expenses ~~consist~~of $1.2 million and $2.4 million for the three months ended March 31, 2018 and 2017, respectively, consisted primarily of advertising media buys for television commercials, internet and print advertising, marketing related personnel costs and other marketing projects including sponsorships. Marketing costs are expensed when incurred. ~~A break-down of marketing expense by category is as follows (in thousands):~~

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

A break-down of marketing expense by category is as follows (in thousands):

	For the Three Months Ended
	March 31,
	2018		2017

Advertising media buys	$	187	$	1,255
Marketing personnel related		560		809
Other marketing projects		445		343
Total marketing expenses	$	1,192	$	2,407

Research and Development Expenses

The Company’s research and development activities consist primarily of the design and development of its proprietary software used in the magicJack devices, mobile apps and servers, as well as the development of new products and applications for use in its ~~VoIP~~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 $1.5 million for the three months ended March 31, 2018 and 2017.

Share-based Compensation

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

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates. Any changes in enacted tax rates or tax laws are included in the provision for income taxes in the period of enactment. The Company’s net deferred tax assets consist primarily of foreign net operating loss carry-forwards, timing differences between recognition of income for book and tax purposes, and the tax benefit related to the impairment of intangible assets, including goodwill, in the Enterprise segment. The Company records a valuation allowance to reduce the net deferred tax assets to the amount that it estimates is more-likely-than-not to be realized. The Company periodically reviews the composition of its deferred tax assets and related valuation allowances and will make adjustments if available evidence indicates that it is more likely than not a change in the carrying amounts is required. The Company increased the valuation allowance by $1511 thousand ~~and $44 thousand~~ during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017, respectively~~2018. The Company increased the valuation allowance by $0.37 million ~~and decreased the valuation allowance by $0.2 million~~ during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016, respectively~~2017.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions that ~~are~~the Company estimates where it is not more likely than not 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 decrease of $20 thousand and~~ an increase of $10.61 million in the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~2018, ~~respectively,~~ due primarily to anincreases ~~increase~~ in ~~uncertain~~previously ~~tax~~recorded ~~positions related to various state issues and the revaluation impact of certain Israeli~~ uncertain ~~tax~~ positions. The Company revised its liability for uncertain tax positions by an increase of $01.3 million ~~and $1.5 million~~ in the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017, ~~respectively,~~ due primarily to an increase in uncertain tax positions related to various state issues and the revaluation impact of certain Israeli uncertain tax positions.

The Company records its income tax expense for interim financial statements by using an estimated annual effective income tax rate based on its expected annual results after consideration of permanent nontaxable items. The tax benefits of net operating loss carry-forwards expected to be realized through 2017 and changes in other deferred tax assets and liabilities are recognized during interim periods based on an annual forecast as of the interim reporting date. At September 30, 2017, the estimated annual effective income tax rate is expected to approximate 22.0%, excluding discrete tax items, which includes federal, foreign, state and local taxes. This rate may fluctuate due to changes in jurisdictional income and to the timing of other discrete period transactions during the remainder of the year.17

~~Comprehensive~~The ~~Income~~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 2018 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 March 31, 2018, the estimated annual effective income tax rate is expected to approximate 21.4%, excluding discrete tax items, which` includes federal, foreign, state and local taxes. This rate may fluctuate due to changes in jurisdictional income and to the timing of other discrete period transactions during the remainder of the year.

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

Earnings (Loss) per Share Attributable to Common Shareholders

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

Business Combinations

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

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

Recent Accounting Pronouncements

InPronouncements ~~May~~adopted 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which is the new ASC 606. The standard requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue as the entity satisfies the performance obligations. On July 9, 2015, the FASB deferred the effective dates of the standard by one year. As a result, the standard will be effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted, but cannot precede the original effective date (annual and interim reporting periods beginning after December 15, 2016). The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period presented. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” to provide clarification regarding the application of the principal-versus-agent guidance. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” to clarify the guidance for identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB also issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides narrow scope improvements and technical expedients on assessing collectibility, presentation of sales taxes, evaluating contract modifications and completed contracts at transition and the disclosure requirement for the effect of the accounting change for the period of adoption. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606” which made minor corrections and improvements to certain narrow aspects of the guidance. The Company will adopt the requirements of the new standard in the ~~first quarter of 2018 and has preliminarily selected the modified retrospective transition method. Under this method, the standard will be applied only to the most~~ current period presented and the cumulative effect of applying the standard will be recognized at the date of initial application. The Company is also considering optional practical expedients related to applying the new standard to its costs of obtaining contracts and to its portfolios of contracts. The Company is reviewing its accounting policies, processes, and system requirements and has engaged consultants to assist with and document the analysis as well as the implementation of any required changes. The Company is also evaluating the potential impact on the Company’s financial condition, results of operations and cash flows, as well as its financial statement disclosures. The Company anticipates completing its assessment by December 31, 2017.

In ~~July~~August ~~2015~~2016, the FASB issued ASU ~~2015~~2016-1115, ~~"Simplifying~~“Classification ~~the Measurement~~ of ~~Inventory".~~Certain ~~This~~Cash ~~ASU~~Receipts ~~applies~~and toCash ~~inventory~~Payments”. ~~that~~ASU is2016-15 ~~measured~~reduces ~~using~~the ~~first-in,~~diversity ~~first-out~~of ~~("FIFO")~~how orcertain ~~average~~cash ~~cost.~~receipts ~~Under~~and ~~the~~cash ~~updated~~payments ~~guidance,~~are anpresented ~~entity~~and ~~should~~classified ~~measure~~in ~~inventory~~the ~~that~~statement isof ~~within~~cash ~~scope~~flows atunder ~~the~~Topic ~~lower~~230, Statement of ~~cost~~Cash Flows, and ~~net~~other ~~realizable~~Topics. ~~value,~~The ~~which~~standard is ~~the~~effective ~~estimated~~for ~~selling~~financial ~~prices~~statements inissued ~~the~~for ~~ordinary~~annual ~~course~~periods ofbeginning ~~business,~~after ~~less~~December ~~reasonably~~15, ~~predicable~~2017, ~~costs~~and ofinterim ~~completion,~~periods ~~disposal~~within ~~and~~those ~~transportation~~annual periods. ~~Subsequent~~Early ~~measurement~~adoption is ~~unchanged~~permitted. The ~~for~~ASU ~~inventory~~should ~~that~~be isapplied ~~measured~~retrospectively ~~using~~to ~~last-in,~~all ~~first-out~~periods ~~("LIFO")~~presented. ~~The~~There ~~Company~~was ~~adopted~~no ~~ASU~~impact ~~2015-11~~ on athe ~~prospective~~Company’s ~~basis~~financial incondition, ~~the~~results ~~first~~of ~~quarter~~operations ofand ~~2017. Prior~~cash ~~periods~~flows ~~were~~resulting ~~not~~from ~~retrospectively~~the ~~adjusted~~adoption of ASU 2016-15.

In ~~February~~October 2016, the FASB issued ASU 2016-0216, “~~Leases~~Intra-Entity Transfers of Assets Other than Inventory”. ASU 2016-0216 requires ~~that~~an ~~long~~entity to recognize the income tax consequences of intra-~~term~~entity ~~lease~~transfers ~~arrangements~~of beassets ~~recognized~~other onthan inventory when the ~~balance~~transfer ~~sheet~~occurs. The standard is effective for ~~annual~~financial ~~and~~statements ~~interim~~issued for annual periods beginning after December 15, ~~2018~~2017, and ~~early~~interim periods within those annual periods. Early adoption is permitted. The ~~Company~~ASU isshould ~~currently~~be ~~evaluating~~applied ~~the~~retrospectively ~~guidance~~as an adjustment to ~~determine~~retained ~~the~~earnings. ~~potential~~The impact onof ~~the~~adopting ~~Company’s~~ASU ~~financial~~2016-16 ~~condition~~on January 1, ~~results~~2018 was a decrease to retained earnings of ~~operations~~approximately ~~and~~$0.2 ~~cash~~million, ~~flows~~with offsetting adjustments to prepaid taxes.

In ~~March~~May ~~2016~~2017, the FASB issued ASU ~~2016~~2017-09, “Compensation - Stock Compensation: ~~Improvements~~Scope toof ~~Employee~~Modification ~~Share-Based Payment~~ Accounting”. ASU ~~2016~~2017-09 ~~changed~~provides ~~the~~guidance ~~accounting~~on ~~for~~determining ~~certain~~which ~~aspects~~changes ~~of stock options and other share-based compensation. This accounting standard requires companies~~ to ~~recognize excess tax benefits or expenses related to the vesting or settlement of employee~~ share-based awards ~~(i.e.,~~require ~~the~~modification ~~difference~~accounting ~~between~~under ~~the~~ASC ~~actual tax benefit realized and the tax benefit initially recognized for financial reporting purposes) as income tax benefits or expenses in the quarterly Financial Statements~~718. The standard ~~also~~is ~~requires~~effective ~~companies~~for toannual ~~record~~and ainterim ~~windfall~~periods ~~tax~~beginning ~~benefit~~after ~~when~~December ~~it arises~~15, ~~subject to normal valuation allowance considerations~~2017, ~~instead~~and ofearly ~~delaying~~adoption ~~recognition~~is ~~until the benefit reduces current taxes payable~~permitted. There ~~The~~was ~~Company~~no ~~adopted~~impact ~~ASU 2016-09~~ on athe ~~prospective~~Company’s ~~basis~~financial incondition, ~~the~~results ~~first~~of ~~quarter~~operations ofand ~~2017.~~cash ~~For~~flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2017,~~2018 ~~this~~resulting ~~adoption~~from ~~had no tax impact to~~ the ~~Company. The~~adoption ~~Company~~of ~~will~~ASU ~~continue to monitor this for each reporting period going forward~~2017-09.

17In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. ASU 2018-05 provides guidance on certain income tax effects of the Tax Cuts and Jobs Act. The standard is effective immediately. The Company’s financial condition, results of operations and cash flows was impacted by the new tax rates resulting in lower income tax expense.

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

In ~~October~~February 2016, the FASB issued ASU 2016-1602, “~~Intra-Entity Transfers of Assets Other than Inventory~~Leases”. ASU 2016-1602 requires anthat ~~entity to recognize the income tax consequences of intra~~long-~~entity~~term ~~transfers~~lease ofarrangements ~~assets~~be ~~other~~recognized ~~than~~on ~~inventory when~~ the ~~transfer~~balance ~~occurs~~sheet. The standard is effective for ~~annual~~interim and ~~interim~~annual periods beginning after December 15, ~~2017~~2018, and early adoption is permitted. ~~The~~ ~~ASU should be applied retrospectively as an adjustment to retained earnings.~~ The Company is currently evaluating the guidance to determine the potential impact on the Company’s financial condition, results of operations and cash flows, but the standard will result in the Company recording both assets and liabilities for leases currently classified as operating leases.

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

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

NOTE 3 – IMPAIRMENT OF INTANGIBLE ASSETS, INCLUDING GOODWILL

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

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

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

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

InNOTE 3 ~~total,~~– ~~impairment losses of $31.5 million were recognized in operating expenses of the Enterprise segment for the first quarter ended March 31, 2017. The impaired assets were (in thousands):~~INVENTORIES

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

NOTE 4 – INVENTORIES

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

	September 30, 2017		December 31, 2016
	March 31		December 31,
Raw materials	$	648	$	1,455
	2018		2017
Finished goods		1,399		2,986
Raw materials	$	717	$	746
Total	$	2,047	$	4,441
Finished goods		983		1,134
Total	$	1,700	$	1,880

The Company ~~(recovered)~~did ~~wrote-~~not write off ~~obsolete~~any inventory ofas ~~approximately~~obsolete ~~($33) thousand and $146 thousand~~ during the three months ended ~~September~~March 3031, ~~2017~~2018. ~~and~~The ~~2016,~~Company ~~respectively,~~wrote-off ~~and~~approximately $~~370~~401 thousand ~~and~~of ~~$229~~obsolete ~~thousand~~inventory during the ~~nine~~three months ended ~~September~~March 3031, 2017 ~~and September 30, 2016, respectively~~. Inventory write-offs are reflected in cost of revenues in the unaudited condensed consolidated statements of operations.

NOTE 4 5 – PROPERTY AND EQUIPMENT

Property and equipment ~~consisted~~were ofsummarized ~~the~~as ~~following~~follows (in thousands):

	Estimated	~~Estimated~~
	Useful Lives	~~Useful Lives~~	March 31			~~September 30,~~	December 31,			~~December 31,~~
	(in years)	~~(in years)~~	2018			~~2017~~	2017			~~2016~~
Switches	3 - 15		~~3 - 15~~$	6,853		$	~~9,877~~$	6,851		$	~~9,699~~
Computers	3		3	2,472			~~2,619~~	2,457			~~2,866~~
Furniture	5 - 7		~~5 - 7~~	100			~~201~~	100			~~269~~
Leasehold-improvements	*		*	615			~~847~~	615			~~893~~
Accumulated depreciation				(7,519	)		~~(10,470~~	)(7,251	)		~~(9,922~~	)
Total			$	2,521		$	~~3,074~~$	2,772		$	~~3,805~~

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

Depreciation expense for the three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017 was $0.3 million. ~~Depreciation~~Refer ~~expense~~to ~~for~~Note ~~the nine months ended September 30~~16, ~~2017~~“Segment ~~and~~Reporting” ~~2016~~for ~~was~~further $1details.~~0 million and $0.9 million, respectively.~~

NOTE 5 6 – INTANGIBLE ASSETS

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

	Estimated Useful Lives (in years)		September 30, 2017									December 31, 2016
	Estimated		March 31, 2018									December 31, 2017
			Gross Carrying		Accumulated Amortization					Weighted- Average Life		Gross Carrying		Accumulated Amortization					Weighted- Average Life
	Useful Lives		Gross Carrying		Accumulated					Weighted- Average		Gross Carrying		Accumulated					Weighted- Average
			Amount					Net				Amount					Net
	(in years)		Amount		Amortization			Net		Life		Amount		Amortization			Net		Life
Technology		3 - 17	$	32,~~110~~630	$	(2,~~944~~601	)	$	~~166~~29		40.5175	$	3,110	$	(2,~~854~~973	)	$	~~256~~137		45.7129
Intellectual property rights		3 - 17		147,~~162~~333		(115,~~671~~397	)	$	21,~~491~~936		4.4692		14,162		(1011,~~794~~996	)		32,~~368~~166		4.87
Covenants not-to-compete and not-to-sue		2 - 5		2,185		(2,129	)	$	56		1.67		2,185		(2,107	)		78		3.17
Covenants not-to-compete
Tradename		3 - 6		131		(131	)	$	-		-		131		(131	)		-		-
and not-to-sue		2 - 5		100		(61	)		39		1.17		2,185		(2,137	)		48		1.42
Customer relationships		5 - 10		4,~~900~~400		(~~766~~539	)	$	43,~~134~~861		87.4696		224,~~600~~900		(~~2,249~~900	)		204,~~351~~000		98.21
Backlog		1		800		(800	)	$	-		-		800		(800	)		-		-
Software license		2-10		2,072		(640	)		1,432		5.25		2,297		(554	)		1,743		1.46
Software license		10		2,297		(386	)	$	1,911		1.70		1,207		(80	)		1,127		8.00
Process know how		5		400		(71	)		329		4.75		400		(49	)		351		5.00
Process know how		5		400		(32	)	$	368		5.50		1,100		(87	)		1,013		6.08
Intangible assets subject to amortization			$	16,935	$	(9,309	)	$	7,626			$	27,054	$	(18,609	)	$	8,445
Other				-				$	-		-		-		-			-		-
Tradename			$	1,700	$	-		$	1,700		N/A	$	1,700	$	-		$	1,700		N/A
Intangible assets subject to amortization				27,985		(18,859	)		9,126				45,295		(19,102	)		26,193
Domain names				45		-			45		N/A		45		-			45		N/A
Tradename				1,700		-		$	1,700		N/A		2,600		-			2,600		N/A
Intangible assets not subject to amortization			$	1,745	$	-		$	1,745			$	1,745	$	-		$	1,745
Domain names				51		-		$	51		N/A		61		-			61		N/A
Total intangible assets			$	18,680	$	(9,309	)	$	9,371			$	28,799	$	(18,609	)	$	10,190
Total intangible assets			$	29,736	$	(18,859	)	$	10,877			$	47,956	$	(19,102	)	$	28,854

Amortization expense for the three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017 was $0.7 million and $1.02 million, respectively. Refer ~~Amortization~~to ~~expense~~Note ~~for the nine months ended September 30~~16, ~~2017~~“Segment ~~and~~Reporting” ~~2016~~for ~~was~~further $2details.~~4 million and $2.7 million, respectively.~~

AsDuring ~~part of~~ the ~~Company’s~~three ~~quarterly~~months ~~impairment~~ended ~~reviews~~March ~~for intangible assets with indefinite lives~~31, ~~including goodwill~~2018, ~~management determined that there were no~~ impairment ~~indicators~~losses as of ~~September~~$0.1 ~~30,~~million ~~2017;~~were ~~however,~~recognized ~~there~~in ~~were~~Operating ~~impairment~~Expenses ~~indicators~~under at the ~~Enterprise~~Consumer segment ~~as of March 31, 2017. Due to the knowable impairment indicators discussed~~ in ~~Note 3, “Impairment of Intangible Assets, Including Goodwill”,~~ the ~~Company~~statement ~~engaged an independent third party to perform a valuation~~ of ~~the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017~~operations. ~~Based~~The onimpairment ~~the~~was ~~results~~comprised of ~~the~~a ~~valuation,~~software ~~impairment~~license ~~losses~~ of $~~16.6~~131 ~~million~~thousand ~~were~~(net ~~recognized~~of onaccumulated ~~the~~amortization) ~~following~~related ~~intangible~~to ~~assets~~magicJack inConnect ~~operating~~app, ~~expenses~~which ~~under~~will ~~the~~no ~~Enterprise~~longer ~~segment~~be ~~in the unaudited condensed consolidated statements of operations for the quarter ended March 31, 2017:~~offered.

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

As part of the Company’s quarterly impairment review for intangible assets with indefinite lives, including goodwill, performed as of March 31, 2017, management determined that there were impairment indicators at the Enterprise segment. Based on the knowable impairment indicators as of March 31, 2017 discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company engaged an independent third party to perform a valuation of the Enterprise segment’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017.

~~During~~Based on the ~~three~~results ~~and~~of ~~nine~~the ~~months ended September 30~~valuation, ~~2016,~~ impairment losses of $016.56 million were recognized inon ~~General~~the ~~and~~following ~~Administrative~~intangible ~~expense~~assets in operating expenses under the ~~Consumer~~Enterprise segment in the ~~statement~~unaudited ofcondensed ~~operations.~~consolidated ~~The~~statements ~~impairments were comprised~~ of: ~~(i)~~operations afor ~~Telecom license included in~~ the ~~“Other”~~three ~~category~~months ofended ~~amortizable~~March ~~intangible assets for $249 thousand (net of accumulated amortization) deemed obsolete~~31, ~~and (ii) domain names not subject to amortization for $249 thousand that were not renewed~~2017.

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

	March 31, 2017
	Carrying		Valuation
	Amount		Amount		Impairment

Customer Relationships	$	19,572	$	4,400	$	15,172
Process Know How		974		400		574
Tradename		1,700		800		900
	$	22,246	$	5,600	$	16,646

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

Based on the carrying value of identified intangible assets recorded at March 31, 2018, the amortization expense for the future fiscal years is expected to be as follows (in thousands):

Fiscal Year	Amortization Expense

Nine months ending December 31, 2018	$	1,566
2019		1,525
2020		1,068
2021		760
2022		695
Thereafter		2,012
	$	7,626

NOTE 6 7 – GOODWILL

~~The~~There were no changes in the carrying amount of goodwill for the ~~nine~~three months ended ~~September~~March 3031, ~~2017, were as follows (in thousands):~~2018.

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

As part of the Company’s quarterly impairment review for intangible assets with indefinite lives, including goodwill, performed as of March 31, 2017, management determined that there were impairment indicators at the Enterprise segment. Based on the knowable impairment indicators as of March 31, 2017 discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company engaged an independent third party to perform a valuation of the Enterprise reporting unit’s long-lived assets and indefinite-lived intangible assets, including goodwill, as of March 31, 2017.

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

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

The changes in the carrying amount of goodwill for the three months ended March 31, 2017 were as follows (in thousands):

	Three Months Ended March 31, 2017
	Core Consumer		Enterprise			SMB		Other		Consolidated

Balance, beginning of period	$	32,304	$	14,881		$	-	$	-	$	47,185
2017 impairment		-		(14,881	)						(14,881	)
Balance, end of period	$	32,304	$	-		$	-	$	-	$	32,304

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

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

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

NOTE 7 – DEFERRED COSTS AND REVENUES/CONTRACT COSTS AND LIABILITIES

Deferred costs and revenues/contract costs and liabilities 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 cost and revenue/contract cost and liability amounts are classified as non-current in the unaudited condensed consolidated balance sheets.

~~NOTE~~Deferred 8costs/contract –costs ~~DEFERRED~~were ~~COSTS~~comprised ~~AND~~of ~~REVENUES~~the following in the periods shown (in thousands):

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

	Core Consumer									Enterprise									Consolidated
	Incremental costs to obtain contracts			Costs to fulfill contracts			Total			Incremental costs to obtain contracts			Costs to fulfill contracts			Total			Incremental costs to obtain contracts			Costs to fulfill contracts			Total
Balance at December 31, 2017	$	-		$	1,893		$	1,893		$	-		$	43		$	43		$	-		$	1,936		$	1,936
Adoption of ASC 606		647			(1,893	)		(1,246	)		-			-			-			647			(1,893	)		(1,246	)
Balance at January 1, 2018, as adjusted		647			-			647			-			43			43			647			43			690
Costs recognized from
previous contracts		(49	)		-			(49	)		-			(43	)		(43	)		(49	)		(43	)		(92	)
Additions for contracts
acquired in the period		55			-			55			58			84			142			113			84			197
Costs recognized from
new contracts		(2	)		-			(2	)		(3	)		(9	)		(12	)		(5	)		(9	)		(14	)
Balance at March 31, 2018	$	651		$	-		$	651		$	55		$	75		$	130		$	706		$	75		$	781
Current		217			-			217			19			22			41			236			22			258
Non-current		434			-			434			36			53			89			470			53			523

Deferred revenues/contract liabilities were ~~comprised~~related ofto the ~~following~~Core atConsumer ~~September~~segment ~~30,~~and ~~2017~~were ~~and~~comprised ~~December~~of ~~31,~~the ~~2016~~following in the periods shown (in thousands):

	September 30, 2017			December 31, 2016
	magicJack devices direct sales (1)			magicJack devices retail sales (1)			Access right renewals current			Prepaid minutes			Other			Total Current			Access right renewals non-current			Total
magicJack devices	$	5,801		$	7,962
Balance at December 31, 2017	$	3,056		$	2,221		$	34,607		$	2,254		$	105		$	42,243		$	38,797		$	81,040
Access right renewals		34,034			36,515
Adoption of ASC 606		(1,656	)		(978	)		-			-			-			(2,634	)		-			(2,634	)
Mobile apps		716			808
Balance at January 1, 2018, as adjusted		1,400			1,243			34,607			2,254			105			39,609			38,797			78,406
Prepaid minutes		2,301			2,851
Revenue recognized from
Other		120			371
previous contracts		(556	)		(476	)		(11,864	)		(796	)		(105	)		(13,797	)		-			(13,797	)
Deferred revenue, current		42,972			48,507
Additions for contracts
Deferred revenue, non-current*		40,071			44,201
acquired in the period		957			864			7,934			835			145			10,735			4,116			14,851
Total deferred revenue	$	83,043		$	92,708
Revenue recognized from
new contracts		(450	)		(359	)		(494	)		(166	)		(119	)		(1,588	)		-			(1,588	)
Transfer of current portion		-			-			4,998			-			-			4,998			(4,998	)		-
Balance at March 31, 2018	$	1,351		$	1,272		$	35,181		$	2,127		$	26		$	39,957		$	37,915		$	77,872

*(1) Deferred ~~revenue,~~revenues/ ~~non-current,~~contracts isliabilities ~~comprised~~from ~~entirely~~device ofsales ~~deferred~~include ~~revenues~~only ~~originating from~~ the ~~sale~~service ~~of access right renewals~~portion.

~~Costs~~Contract ~~necessary~~liabilities toas ~~fulfill~~of ~~the~~March ~~Company’s~~31, ~~obligations~~2018 towere ~~provide~~related ~~VoIP telephone service~~ to ~~new and existing customers who have purchased magicJack devices, mobile apps or renewed access rights are expensed as incurred. For~~ the Core Consumer segment, ~~such costs were approximately $2.4 million~~ and ~~$2.9~~are ~~million~~expected for the three months ended September 30, 2017 and 2016, respectively, and $7.5 million and $9.6 million for the nine months ended September 30, 2017 and 2016, respectively. For the Enterprise segment, such costs were approximately $0.6 million and $0.8 million for the three months ended September 30, 2017 and 2016, respectively, and $1.9 million and $1.7 million for the nine months ended September 30, 2017 and 2016, respectively. Costs related to ~~providing~~be ~~broadband~~recognized ~~telephone~~as ~~service~~revenue toin ~~SMB~~future ~~segment~~years ~~customers~~as ~~were~~follows ~~not~~(in ~~significant for the three and nine months ended September 30, 2016 and the three months ended March 31, 2017.~~thousands):

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

Recognition Period	Estimated Recognition of Contract Liabilities

Next 12 months	$	39,957
13-24 Months		16,460
25-36 Months		11,055
37-48 months		5,544
49-60 Months		2,347
61+ Months		2,509
	$	77,872

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

Certain 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. For the Core Consumer segment, such costs were approximately $2.1 million and $2.7 million for the three months ended March 31, 2018 and 2017, respectively. For the Enterprise segment, such costs were approximately $0.6 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively. Costs related to providing broadband telephone service to SMB segment customers were not significant for the three months ended March 31, 2017.

NOTE 9 – OTHER LIABILITIES

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

NOTE 8 10 – ~~COMMITMENTS~~OTHER ~~AND CONTINGENCIES~~LIABILITIES

As of March 31, 2018 and December 31, 2017, other non-current liabilities primarily consisted of provisions for uncertain tax positions of $13.4 million and $13.1 million, respectively.

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 ~~vigorously~~policy ~~defends~~is ~~claims~~to ~~made~~vigorously ~~against~~defend ~~it,~~any ~~and~~legal ~~management~~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.

On ~~March~~August 11, ~~2016~~2017, a ~~purported~~putative class action lawsuit ~~was~~titled ~~filed~~Freedman ~~against~~v. ~~the~~magicJack ~~Company,~~VocalTec ~~its~~Ltd. ~~then~~et ~~Chief Executive Officer~~al., ~~Gerald~~Case ~~Vento~~9-17-cv-80940, ~~and~~was ~~its~~filed ~~then~~against ~~Chief~~the ~~Financial~~Company ~~Officer,~~and ~~Jose~~its ~~Gordo~~Board ~~(together,~~of ~~“the~~Directors ~~Defendants”),~~ in the United States District Court for the Southern District of ~~New York~~Florida. ~~Thereafter, on August 18, 2016, the Plaintiff filed an Amended Complaint.~~ The ~~Amended~~complaint ~~Complaint~~alleged ~~alleges~~claims ~~that~~against the Company and ~~Mr. Gordo made false and misleading statements regarding~~ the ~~financial~~current ~~performance~~members ~~and~~of ~~guidance~~its ~~during~~Board ~~the alleged class period~~ of ~~November~~Directors ~~12,~~as ~~2013~~well toas ~~March~~two ~~12,~~former ~~2014.~~members ~~The~~for ~~Plaintiff~~violations ~~asserted~~of ~~claims~~Sections ~~that~~ 14(ia) ~~the Company~~ and ~~Mr. Gordo violated Section 10~~20(ba) of the Securities Exchange Act of 1934, asarising ~~amended~~from ~~(the~~proxy ~~“Exchange~~statements ~~Act”)~~issued ~~and~~in ~~SEC~~connection ~~Rule~~with ~~10b-5;~~the ~~and~~April ~~(ii)~~19, ~~that~~2017 ~~Mr.~~shareholders ~~Vento~~meeting and ~~Mr. Gordo violated Section 20(a) of~~ the ~~Exchange~~July ~~Act~~31, by2017 ~~virtue~~shareholders ofmeeting ~~their~~that ~~control~~allegedly ~~over~~misrepresented ~~the~~material ~~Company.~~facts ~~For~~concerning ~~himself and for~~ the ~~class,~~“true ~~the~~value” ~~Plaintiff~~of ~~seeks~~Broadsmart ~~damages~~Global, ~~attorneys'~~Inc. ~~fees~~ and ~~costs,~~its ~~and~~future ~~equitable/injunctive~~prospects ~~relief~~in ororder ~~such~~that ~~other~~the ~~relief~~individual asdefendants (the ~~court~~Board ~~deems~~members) ~~proper.~~could ~~The~~entrench ~~Defendants~~themselves ~~answered~~on the ~~Amended~~Board ~~Complaint~~and onextract ~~December~~unwarranted ~~23,~~compensation ~~2016. On~~from ~~June 23, 2017,~~ the ~~parties~~Company ~~agreed~~ in ~~principle~~connection towith atheir ~~mediated~~attempt ~~settlement~~to insell ~~which~~ the ~~Defendants~~Company. ~~would~~In ~~pay~~January $32018,~~650,000~~ tothe ~~settle~~plaintiff ~~all~~filed ~~claims,~~an ~~while~~Amended ~~denying~~Complaint. ~~all~~On ~~claims~~February ~~and~~16, ~~allegations~~2018, ~~against them by~~ the ~~Plaintiff subject~~Company toand ~~negotiation~~all of athe ~~definitive~~individual ~~Stipulation~~defendants offiled ~~Settlement,~~a ~~which~~motion ~~would then have~~ to bedismiss ~~approved by~~ the ~~Court~~Amended Complaint. The ~~parties~~plaintiff ~~thereafter~~filed ~~entered~~his ~~into~~opposition ato ~~definitive~~the ~~Stipulation~~motion ofto ~~Settlement. On~~dismiss ~~September~~on 29April 2, ~~2017~~2018, ~~the court entered an order granting preliminary approval to the settlement~~ and ~~scheduled~~defendants’ areply ~~final~~was ~~hearing~~filed on ~~approval~~April ~~of the settlement for January~~ 19, 2018. ~~The~~No ~~Company~~decision has ~~insurance~~yet ~~coverage~~been ~~applicable~~reached toon ~~this~~the ~~settlement~~motion. The ~~with~~Company acannot ~~retention~~estimate ~~amount~~the oflikelihood ~~$1.0 million. As~~ of ~~September~~liability ~~30,~~or ~~2017,~~ the ~~Company~~amount ~~has~~of ~~accrued~~potential ~~$0.3~~damages, ~~million~~if ~~of expense~~any, ~~reflecting~~that ~~anticipated~~could ~~future~~arise ~~expenditures~~from ~~for~~this ~~the remaining deductible under its insurance coverage~~matter.

On ~~August~~March 118, ~~2017~~2018, Hunter Raines, a ~~putative~~purported ~~class~~shareholder ~~action~~of ~~lawsuit~~the ~~was~~Company, filed ~~against~~a ~~the~~complaint ~~Company~~titled ~~and~~Raines ~~its~~v. ~~Board~~magicJack ofVocalTec ~~Directors~~Ltd. et al., Case 9:18-cv-80927, in the ~~United~~U.S. ~~States~~ District Court for the Southern District of Florida. ~~The~~It ~~complaint~~alleged ~~alleges~~that ~~claims~~the ~~against~~definitive proxy statement on Schedule 14A filed by the Company ~~and~~with ~~its~~the ~~Board~~SEC ofon ~~Directors~~February ~~for~~8, ~~violations~~2018 relating to the extraordinary general meeting of ~~Sections~~shareholders ~~14(a)~~to consider and ~~20(a)~~vote upon, inter alia, approval of the ~~Securities~~Agreement ~~Exchange~~and ~~Act~~Plan of ~~1934,~~Merger ~~arising~~(the ~~from~~“Merger ~~statements~~Agreement”) inby and among the ~~April~~Company, ~~2017~~B. ~~Proxy~~Riley Financial, Inc. and ~~the~~B. ~~July~~R. ~~2017~~Acquisition Ltd. (the “Definitive Proxy ~~that~~Statement”) ~~allegedly~~contained ~~misrepresented~~materially ~~material~~false ~~facts.~~and ~~The~~misleading ~~Company~~statements ~~has~~in ~~not~~violation ~~responded~~of toSection ~~the~~14(a) ~~initial~~of ~~complaint~~the ~~but~~Securities ~~plans~~Exchange toAct ~~file~~of a1934, ~~motion~~as toamended ~~dismiss~~(“Exchange Act”). The complaint named as defendants the Company ~~believes~~and ~~that~~the individual members of the ~~case~~Board isof ~~without~~Directors. It ~~merit~~also ~~and~~asserted ~~cannot~~claims ~~estimate~~against the ~~amount~~directors pursuant to Section 20(a) of ~~potential~~the ~~liability,~~Exchange ifAct ~~any,~~on the theory that ~~could~~they ~~arise~~were ~~from~~“control ~~this~~persons” ~~issue. The~~of the Company. ~~does~~The ~~not~~complaint, ~~believe~~which ~~that~~had ~~the~~been ~~case~~filed ~~will~~as ~~have~~ a ~~material~~purported ~~adverse~~class ~~effect~~action on ~~its~~behalf ~~business~~of Company shareholders, ~~operating~~sought, ~~results~~among other things, ~~financial~~damages ~~condition~~and oran ~~cash~~injunction ~~flows~~barring the shareholder vote that was scheduled for March 19, 2018.

~~Tax~~On ~~Contingencies~~March 9, 2018, two additional similar complaints were filed in the U.S. District Court for the Southern District of Florida. Plaintiff Melvyn Klein, a purported shareholder of the Company, filed a complaint titled Klein v. magicJack VocalTec, Ltd et al., Case 9:18-cv-80307, and plaintiff Morris Akerman, also a purported shareholder of the Company, filed a complaint titled Akerman v. magicJack VocalTec Ltd. et al., Case 9:18-cv-80310. Both complaints asserted that the Definitive Proxy Statement contained materially false and misleading statements in violation of Section 14(a) of the Exchange Act, both named as defendants the Company and the individual members of the Board of Directors, and both also asserted “control person” claims against the directors pursuant to Section 20(a) of the Exchange Act. Both purported to assert class action claims, and sought, among other things, damages and an injunction barring the shareholder vote.

~~The~~On ~~Company~~March ~~believes that it files all required tax returns and pays all required federal~~13, ~~state and municipal taxes (such as sales~~2018, ~~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~~issued a ~~provision~~supplement 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~~Definitive ofProxy ~~negotiations,~~Statement ~~settlements,~~in ~~rulings,~~order ~~advice of legal counsel, and other information and events pertaining~~ to amoot ~~particular~~plaintiffs’ ~~case~~claims. The Company ~~vigorously~~denies ~~defends~~the ~~its~~allegations ~~rights and tax positions. However, if a government entity were to prevail~~ in ~~any~~all ~~matter,~~three itcases ~~could have a material adverse effect on the Company’s financial condition, results of operation~~ and ~~cash~~denies ~~flows. In addition, it is at least reasonably possible~~ that athere ~~potential~~are ~~loss~~any ~~may~~material ~~exist~~misrepresentations ~~for~~or ~~tax~~omissions ~~contingencies~~ in ~~addition to~~ the ~~provisions~~Definitive ~~taken~~Proxy ~~by the Company~~Statement. All ~~For those~~three ~~potential~~complaints ~~additional~~have ~~tax~~been ~~contingencies~~dismissed ~~which~~pursuant ~~can~~to bestipulations ~~reasonably~~of ~~estimated,~~dismissal ~~that~~filed ~~additional~~with ~~potential~~the ~~liability ranges from $0 to $2~~Court.~~5 million.~~

~~The~~On ~~Company~~March is1, ~~currently~~2018, ~~under~~Flexijet ~~examination~~Technologies, Inc. (“Flexijet”) served a complaint for ~~potential~~patent ~~state~~infringement ~~tax~~against ~~liabilities~~magicJack VocalTec Ltd. OnThe ~~June~~complaint asserts that certain of the Company’s products infringe United States Patent Nos. 8,296,757; ~~2017~~8,533,352; 8,595,717; 9,043,482; and 9,116,723. While the Company ~~offered~~is continuing to ~~settle~~investigate the ~~examinations~~allegations ~~for~~made ~~payment~~in Flexijet’s complaint, it has already identified a number of $0defences that may defeat Flexijet’s claims.6 The ~~million~~Company ~~and~~disputes all of the ~~agreement~~claims toby ~~remit~~Flexijet ~~certain~~and ~~taxes~~intends onto avigorously ~~prospective~~defend ~~basis~~itself. The AsCompany’s ofanswer ~~September~~to ~~30,~~the ~~2017~~complaint is due on May 31, ~~the~~2018. The Company ~~has~~cannot ~~not~~estimate ~~reached~~the ~~agreement~~amount ~~with~~of ~~the~~potential ~~taxing~~liability, ~~authority~~if any, that could arise from this matter.

~~NOTE~~Tax ~~11 –TREASURY STOCK~~Contingencies

InThe ~~January~~Company ~~2017,~~believes ~~the~~that ~~Company~~it ~~reclassified~~files ~~16,666~~all ~~shares~~required ~~previously~~tax ~~issued~~returns ~~out~~and ofpays ~~treasury~~all ~~stock~~required asfederal, ~~they~~state ~~had~~and ~~been~~municipal ~~issued~~taxes (such as ~~new~~sales, ~~ordinary~~excise, ~~shares.~~utility, Inand ~~April~~ad ~~2017~~valorem taxes), ~~the~~fees and surcharges. The Company ~~issued~~is ~~6,996~~the subject of ~~its~~inquiries ~~ordinary~~and ~~shares~~examinations ~~held~~by asvarious ~~treasury~~states ~~shares~~and ~~with~~municipalities ain ~~cost~~the normal course of ~~$86~~business. ~~thousand,~~In oraccordance ~~$12.32~~with ~~per~~generally ~~share~~accepted accounting principles, tothe ~~Board~~Company ~~members~~makes asa provision for a ~~result~~liability for taxes when it is both probable that a liability has been incurred and the amount of ~~restricted~~the ~~stock~~liability ~~vesting~~can be reasonably estimated. InThese ~~May~~provisions ~~2017,~~are reviewed at least quarterly and adjusted to reflect the ~~Company~~impact ~~issued~~of 76negotiations,~~211~~ settlements, rulings, advice of ~~its~~legal ~~ordinary~~counsel, ~~shares~~and ~~held~~other asinformation ~~treasury~~and ~~shares~~events ~~with~~pertaining to a ~~cost~~particular ofcase. ~~$939~~The ~~thousand,~~Company orstrongly ~~$12.32~~believes ~~per~~any ~~share,~~possible toclaims anare ~~executive~~without ~~officer~~merit asand vigorously defends its rights. However, if a ~~result~~government ofentity ~~restricted~~were ~~stock~~to ~~vesting.~~prevail Inin ~~May~~any ~~2017~~matter, it could have a material adverse effect on the Company’s ~~purchased~~financial 20condition,~~844~~ results of ~~its~~operation ~~ordinary~~and ~~shares~~cash ~~at $6~~flows.50 ~~per~~In ~~share~~addition, ~~for~~it anis ~~aggregate~~at ~~purchase~~least ~~price~~reasonably ofpossible ~~approximately~~that ~~$135~~a ~~thousand,~~potential loss may exist for tax contingencies in ~~settlement~~addition ofto the ~~withholding~~provisions taken by the Company. For those potential additional tax ~~liability~~contingencies onwhich ~~the~~can ~~vesting~~be ofreasonably ~~the~~estimated, ~~restricted~~that ~~stock~~additional potential liability ranges from $0 to $2.5 million dollars.

InThe ~~August~~Company is currently under examination for potential state tax liabilities in some states and local jurisdictions. On June 8, 2017, the Company ~~issued~~offered ~~2,333~~to settle a state examination for payment of ~~its~~$0.6 ~~ordinary~~million ~~shares~~and ~~held~~the asagreement ~~treasury~~to ~~shares~~remit ~~with~~certain taxes on a ~~cost~~prospective ofbasis. ~~$29~~The ~~thousand~~taxing authority subsequently rejected the Company’s offer, orand ~~$12.32~~as ~~per~~of ~~share~~March 31, to2018, athe ~~Board~~Company ~~member~~has asnot areached ~~result~~agreements ofwith ~~restricted~~any ~~stock~~state ~~vesting~~or local taxing authorities and any examinations or administrative actions are in process.

~~NOTE~~In 12a –letter ~~SHARE-BASED~~dated ~~COMPENSATION~~April 23, 2018, the Company received notice that the Internal Revenue Service (the “IRS”) has selected our 2015 United States income tax return for examination. The Company is in the process of scheduling an initial meeting with the IRS and believes that the positions taken in its 2015 return are reasonable and appropriate, however, the Company cannot be sure of the ultimate outcome of the examination and cannot estimate the likelihood of liability or the amount of potential assessments, if any, that could arise from the examination.

~~The~~NOTE ~~Company~~10 ~~has~~– ~~granted~~TREASURY ordinary share optionsand restricted stock as an alternative or supplement to the compensation of its executives, employees, directors and outside consultants. The Company’s share-based compensation program is a long-term retention program intended to attract and reward talented executives, employees and outside consultants, and align their interests with stockholders. The Company is currently granting share-based awards under the Amended and Restated magicJack VocalTec Ltd. 2013 Stock Incentive Plan and the Amended and Restated magicJack VocalTec Ltd. 2013 Israeli Stock Incentive Plan (together, the “2013 Plans”). In July 2013, the shareholders approved the 2013 Plans at the annual general meeting of shareholders to allow grants of ordinary share options, restricted stock and ordinary shares. In April 2014 and July 2017, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of September 30, 2017, the aggregate number of shares subject to awards under the 2013 Plans, as amended, was 5,600,000. The Company had previously granted shares under the VocalTec amended Master Stock Plan (the “2003 Plan”) which expired in April 2013. The Company’s policy is to recognize compensation expense for awards with only service conditions and a graded vesting on a straight-line basis over the requisite vesting period for the entire award.STOCK

~~The~~In March 2018, the Company’s ~~share-based~~issued ~~compensation~~21,897 ~~expense~~of ~~for~~its ordinary shares held as treasury shares with a cost of $270 thousand, or $12.32 per share, ~~options~~to ~~and~~employees as a result of restricted stock vesting. In March 2018, the Company purchased 6,365 of its ordinary shares at $8.40 per share, for an aggregate purchase price of approximately $53 thousand, in settlement of the ~~three~~withholding ~~and~~tax ~~nine~~liability on the vesting of the restricted stock. During the three months ended ~~September~~March 3031, 2017, ~~and~~the ~~2016~~Company ~~was~~did not issue any treasury shares; however, 16,666 shares previously issued out of treasury stock were reclassified as ~~follows~~they ~~(in~~had ~~thousands):~~been issued as new ordinary shares.

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

NOTE 11 – REVENUE

The ~~detail~~Company’s ofrevenues ~~total~~for ~~share-based compensation recognized by classification on~~ the ~~unaudited~~three ~~condensed~~months ~~consolidated~~ended ~~statements~~March of31, ~~operations~~2018, ~~for~~disaggregated ~~the~~by ~~three~~segment and ~~nine~~timing ~~months~~of ~~ended~~revenue ~~September~~recognition ~~30,~~is ~~2017 and 2016 was~~ as follows (in thousands):

		Three Months Ended						Nine Months Ended
			Three Months Ended March 31, 2018
		September 30,						September 30,
	Trigger for recognition		Core Consumer			Enterprise			Intercompany				Consolidated
		2017			2016			2017				2016
Revenues recognized at a point in time
Cost of revenues		$	57		$	24		$	159			$	53
Sale of magicJack devices,
Marketing			50			49			64				125
hardware portion	Transfer of control		$	711		$	-		$	-			$	711
General and administrative			643			820			1,840				2,839
Shipping and handling	Transfer of control			161			-			-				161
Research and development			-			26			(10	)			152
magicJack-related products	Transfer of control			1,096			-			-				1,096
		$	750		$	919		$	2,053			$	3,169
UCaaS equipment	Transfer of control			-			127			-				127
Other	Various			140			-			-				140
Revenues recognized over time
Sale of magicJack devices,
service portion	Service period			1,201			-			-				1,201
Access right renewals	Service period			12,348			-			-				12,348
Prepaid minutes	Usage			958			-			-				958
Access and wholesale charges	Usage			780			-			-				780
UCaaS service	Service period			-			2,433			(13	)			2,420
UCaaS usage	Usage			-			73			-				73
			$	17,395		$	2,633		$	(13	)		$	20,015

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

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements for the three months ended March 31, 2018:

	As reported		Adjustments			Balances without adoption of ASC 606
ASSETS
Current assets:
Deferred costs, current portion	$	-	$	1,988		$	1,988
Contract costs, current portion		258		(258	)		-
Prepaid income taxes		1,328		(77	)		1,251
Other current assets		59,796		-			59,796
Total current assets		61,382		1,653			63,035

Deferred tax assets		31,496					31,496
Deferred costs, net of current portion		-		89			89
Contract costs, net of current portion		523		(523	)		-
Other non-current assets		45,021		-			45,021
Total assets	$	138,422	$	1,219		$	139,641

LIABILITIES AND CAPITAL EQUITY
Current liabilities:
Deferred revenue, current portion		-		42,216			42,216
Contract liabilities, current portion		39,957		(39,957	)		-
Other current liabilities		6,148		-			6,148
Total current liabilities		46,105		2,259			48,364

Deferred revenue, net of current portion		-		37,915			37,915
Contract liabilities, net of current portion		37,915		(37,915	)		-
Other non-current liabilities		14,164					14,164
Total liabilities		98,184		2,259			100,443

Capital equity
Retained earnings		31,458		(1,040	)		30,418
Other capital equity		8,780		-			8,780
Total capital equity		40,238		(1,040	)		39,198
Total liabilities and capital equity	$	138,422	$	1,219		$	139,641

	As reported		Adjustments		Balances without adoption of ASC 606

Net revenues	$	20,015	$	462	$	20,477
Cost of revenues		7,163		125		7,288
Gross profit		12,852		337		13,189

Operating expenses		10,282		-		10,282
Operating income		2,570		337		2,907

Total other income		91		-		91
Income before income taxes		2,661		337		2,998
Income tax expense		695		77		772
Net income	$	1,966	$	260	$	2,226

	As reported			Adjustments			Balances without adoption of ASC 606

Cash flows from operating activities:
Net income	$	1,966		$	260		$	2,226
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash adjustments		2,375			-			2,375
Change in operating assets and liabilities
Deferred costs/Contract costs		(95	)		(19	)		(114	)
Prepaid Income taxes		465			77			542
Deferred revenue/Contract liabilities		(618	)		(375	)		(993	)
Other changes		(2,814	)		57			(2,757	)
Net cash provided by operating activities		1,279			-			1,279
Net cash used in investing activities		(14	)		-			(14	)
Net cash used in financing activities		(53	)		-			(53	)
Net increase in cash and cash equivalents		1,212			-			1,212
Cash and cash equivalents, beginning of period		52,638						52,638
Cash and cash equivalents, end of period	$	53,850					$	53,850

The Company uses the practical expedient that allows them to recognize revenue for access and wholesale charges and certain usage charges billed in arears at the amount to which it has the right to invoice in the future. Therefore, we do not disclose the estimated revenues that were unsatisfied (or partially unsatisfied) at the end of the reporting period. Estimated revenues expected to be recognized in the future for other revenue streams related to performance obligations that were unsatisfied (or partially unsatisfied) at the end of the reporting period are discussed in Note 7, “Deferred Costs and Revenues/Contract Assets and Liabilities”.

NOTE 12 – SHARE-BASED COMPENSATION

The Company has granted ordinary share options and restricted stock as an alternative or supplement to the compensation of its executives, employees, directors and outside consultants. The Company’s share-based compensation program is a long-term retention program intended to attract and reward talented executives, employees and outside consultants, and align their interests with shareholders. The Company is currently granting share-based awards under the Amended and Restated magicJack VocalTec Ltd. 2013 Stock Incentive Plan and the Amended and Restated magicJack VocalTec Ltd. 2013 Israeli Stock Incentive Plan (together, the “2013 Plans”) which were approved by shareholders in July 2013 at the annual general meeting of shareholders to allow grants of ordinary share options, restricted stock and ordinary shares. In April 2014 and July 2017, the shareholders approved amendments to the 2013 Plans increasing the number of share based awards available for grant. As of March 31, 2018, the aggregate number of shares subject to awards under the 2013 Plans was 5,600,000. The Company’s policy is to recognize compensation expense for awards with only service conditions and a graded vesting on a straight-line basis over the requisite vesting period for the entire award.

The Company’s share-based compensation expense for ordinary share options and issued restricted stock units for the three months ended March 31, 2018 and 2017 was as follows (in thousands):

	Three Months Ended
	March 31,
	2018		2017

Ordinary share options	$	686	$	383
Restricted stock units		407		353
	$	1,093	$	736

The detail of total share-based compensation recognized by classification on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 is as follows (in thousands):

	Three Months Ended
	March 31,
	2018		2017

Cost of revenues	$	33	$	6
Marketing		80		4
General and administrative		980		736
Research and development		-		(10	)
	$	1,093	$	736

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

Ordinary Share Options

Ordinary share options granted under the 2013 Plans have a five-year life and typically vest over a period of 36 months beginning at the date of grant. The 2013 Plans, as amended, currently allow for a maximum term of five years for awards granted. The following table provides additional information regarding ordinary share options issued, outstanding and exercisable for the year ended December 31, ~~2016~~2017, and ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 (aggregate intrinsic value in thousands):

Date of Grant	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value(1)
January 1, 2016		2,527,427		$	12.98		3.61	$	-
January 1, 2017		3,488,059		$	11.13		3.11	$	-
Granted		1,107,040		$	7.09
Exercised		(2,500	)	$	3.96
Forfeited		(34,740	)	$	8.83
Expired or cancelled		(109,168	)	$	13.57
December 31, 2016		3,488,059		$	11.13		3.11	$	-
Granted		2,896,304		$	9.42
Exercised		-(181,666	)	$	-7.15
Forfeited(2)		(2,501,614	)	$	11.12
Expired or cancelled		(276,436	)	$	11.01
Outstanding at September 30, 2017 (unaudited)		3,606,313		$	9.78		3.80	$	-
December 31, 2017		3,424,647		$	9.92		3.77	$	1.47
Vested at September 30, 2017 (unaudited)		710,009		$	11.24		0.75	$	-
Granted		-			N/A
Exercised		-			N/A
Forfeited		-			N/A
Expired or cancelled		-			N/A
Outstanding at March 31, 2018 (unaudited)		3,424,647		$	9.92		3.54	$	-
Vested at March 31, 2018 (unaudited)		595,011		$	12.00		0.87	$	-

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

(2)

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

Share-based compensation expense recognized for ordinary share options was approximately $0.47 million ~~for the three months ended September 30, 2017~~ and ~~2016, and~~ $1.0 ~~million and $1~~.94 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, respectively. No ordinary share options were exercised during the ~~nine~~three months ended ~~September~~March 3031, ~~2017.~~2018 ~~The~~and ~~total intrinsic value of ordinary share options exercised during the nine months ended September 30, 2016 was $6 thousand~~2017. As of ~~September~~March 3031, ~~2017~~2018, there was approximately $53.79 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 21.4292 years.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, assumed employee exercise behaviors, risk-free interest rate and expected dividends. For purposes of valuing ordinary share options, the Company used historical volatility at the date of grant. The approximate risk-free interest rate was based on the U.S. Treasury yield for comparable periods. The Company has experienced forfeitures in the past and estimates a forfeiture rate for awards issued when deemed applicable. The expected term of the ordinary share options was calculated using the simplified method in accordance with section 10-S99 of ASC 718, "Compensation - Stock Compensation" (“ASC 718”). The Company does not expect to pay dividends on its ordinary shares in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. The Company ~~granted~~did ~~2,896,304~~not ~~ordinary~~grant ~~share~~any ~~options during the nine months ended September 30, 2017 with a weighted average fair value of $2.14. The Company granted 1,107,040~~ ordinary share options during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2018 ~~with~~and ~~a weighted average fair value of $2~~2017.~~75. The grants were measured using the following assumptions:~~

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

Restricted Stock

The Company may also award restricted stock to its executives, employees, directors and outside consultants under the 2013 Plans, which may vest based on service or a combination ofor service and other conditions, such as market share price. The compensation expense for the award will be recognized assuming that the requisite service is rendered regardless of whether the market conditions are achieved. During the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, the Company ~~granted~~did ~~276,890~~not ~~and~~grant ~~295,305~~any restricted stock ~~awards, respectively,~~ under the 2013 Plans, as amended.

The following table summarizes the Company’s restricted stock ~~award~~ activity for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018:

				Average
	Number of Shares			Fair Value
	Number of			Fair Value
				at Grant Date
	Shares			at Grant Date
December 31, 2016		482,085		$	7.70
December 31, 2017		349,555		$	7.65
Granted		~~276,890~~-		$	~~8.08~~N/A
Vested		(8521,~~543~~897	)	$	127.1702
Forfeited		~~(248,876~~-	)	$	~~7.45~~N/A
Non-vested at September 30, 2017		424,556		$	7.37
Non-vested at March 31, 2018		327,658		$	7.24

Share-based compensation expense recognized for restricted stock was approximately $0.34 million ~~and $0.5 million~~ for the three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016, respectively, and $1.0 million and $1.3 million for the nine months ended September 30,~~ 2017 ~~and 2016, respectively~~. As of ~~September~~March 3031, ~~2017~~2018, there was approximately $21.56 million in unrecognized share-based compensation costs related to restricted stock. The unrecognized share-based compensation expense is expected to be recognized over a weighted average remaining ~~vesting~~ period of 0.5786 years.

NOTE 13 – INCOME TAXES

Total income tax expense (benefit) was $10.67 million and ~~$2.2 million for the three months ended September 30, 2017 and 2016, respectively, and~~ ($711.24) million ~~and $7.4 million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, respectively. The calculation of the Company’s effective income tax rate for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017 was (in thousands):

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2017			2016			2017			2016
	2018			2017
Income before income taxes	$	4,025		$	5,427		$	(29,405	)	$	13,878
Net income (loss) before income taxes	$	2,661		$	(34,523	)
Income tax expense (benefit)		1,574			2,205			(7,194	)		7,407
Income tax (benefit) expense		695			(11,355	)
Effective income tax rate		3926.1112	%		4032.6389	%		~~24.47~~	%		~~53.37~~	%

The Company primarily operates in the U.S. and Israel, and the Company’s Israeli operations are subject to a statutory income tax rate of 24% in 2017 and 23% in 2018 which is ~~lower~~higher than the Company’s U.S. federal income tax rate of 3421% as of ~~September~~March 3031, ~~2017~~2018.

For the three months ended ~~September~~March 3031, ~~2017~~2018, the Company recorded income tax expense of $10.67 million, which is higher than the expected tax expense of $10.46 million, using the statutory ~~income tax~~ rate of 3421%, due, in part, to ~~reductions~~increases in the Company’s ~~deferred~~uncertain tax ~~assets~~positions ~~related to the forfeiture~~ of ~~options totaling~~ $0.51 million ~~and other smaller discrete items~~. ~~The~~Additionally, ~~discrete~~the ~~items~~effective ~~noted~~tax ~~above~~rate ~~were~~was ~~partially~~impacted ~~offset~~ by the ~~lower~~higher jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

For the nine months ended September 30, 2017, the Company recorded an income tax benefit of ($7.2) million, which is lower than the expected tax benefit of ($10.0) million, using the statutory rate of 34%, due, in part, to revaluations of the Israel net operating loss carryforwards of ($0.8) million, increases to uncertain tax positions of $1.8 million, and a reduction to deferred tax assets related to surrender of stock options and option forfeitures of $2.8 million. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

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

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

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

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	Three Months Ended March 31,
	2017		2016			2017			2016
	2018		2017
Numerator:
Net income (loss) attributable to common shareholders	$	21,~~451~~966	$	3(23,~~399~~101	)	$	~~(22,211~~	)	$	~~6,952~~
Denominator:
Denominator for basic net income per share -
Denominator for basic net (loss) income per share -
weighted average ordinary shares outstanding		16,114		15,857			16,076			15,786
weighted average common shares outstanding		16,192		16,034
Effect of dilutive share-based awards outstanding		-		6			-			141
Effect of dilutive optionsand/or restricted stock units
Effect of dilutive share-based awards vested,
to purchase common shares		-		-
exercised or expired during the period		-		2			-			8
Effect of dilutive optionsand/or restricted stock units
Denominator for diluted net income per share -
exercised or expired during the period		19		-
weighted average ordinary shares outstanding		16,114		15,865			16,076			15,935
Denominator for diluted net income per share -
Net income (loss) per common share attributable to
weighted average common shares outstanding*		16,211		16,034
common shareholders:
Net income (loss) per share attributable to common
Basic	$	0.15	$	0.21		$	(1.38	)	$	0.44
shareholders
Diluted	$	0.15	$	0.21		$	(1.38	)	$	0.44
Basic	$	0.12	$	(1.44	)
Anti-dilutive share-based awards not included above		4,030,869		3,835,350			4,030,869			2,836,850
Diluted	$	0.12	$	(1.44	)
*Anti-dilutive share-based awards not included above		3,752		2,901

NOTE 15 – BROADSMART ACQUISITION

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

At(i) ~~the time of closing,~~ $338.0 million ~~of the cash consideration was paid into escrow to cover indemnification claims by the Company against the sellers. No asset or liability is included~~ in ~~the accompanying unaudited condensed consolidated balance sheets for this item.~~cash,

~~The~~(ii) ~~acquired assets and liabilities were recorded at their estimated fair values on the balance sheet for the Enterprise segment on March 17~~233,402 ~~2016.~~shares ~~The results~~ of ~~operations of~~ the ~~Broadsmart business have been included in the~~ Company’'s ~~consolidated~~ordinary ~~financial~~shares ~~statements,~~issued ~~under~~from ~~the~~treasury ~~Enterprise~~stock ~~segment,~~with ~~since~~a ~~that~~fair ~~date.~~value ~~During the year ended December 31, 2016, the Company recognized an impairment loss~~ of $01.57 million onbased ~~one of the Broadsmart intangible assets. During the first quarter ended March 31, 2017, the Company recognized impairment charges of $31.5 million~~ on ~~Broadsmart~~closing ~~intangible~~market ~~assets,~~price ~~including~~per ~~goodwill. The~~share ~~carrying~~as ~~value~~ of the ~~Broadsmart~~date ~~business~~of ~~after~~ the ~~impairment was $18.5 million at March 31~~acquisition, ~~2017. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets”~~ and ~~Note 7, “Goodwill” for further details.~~

~~Neither~~(iii) ofadditional ~~the~~ contingent cash payments ~~had been made as~~ of September 30, 2017. The $0.2 million is included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets. The $2.0 million was paid into escrow at the time of closing. Revenues for the year ended December 31, 2016 did not reach the target and the Company recorded a $2.0 million receivable from earnout escrow and a gain on mark-to-market in the accompanying unaudited condensed consolidated balance sheets and statements of operations.

27(a) up to $0.2 million, if two certain individuals ($0.1 million for each) previously employed by Broadsmart did not accept the Company's employment offer, and

On(b) ~~June 23, 2017, the founders of Broadsmart left the Company. On August 4, 2017, the Company reached a mutual agreement with the founders that included release to the Company of~~ $~~1.0 million of the $3.0 million held in escrow to cover indemnification claims and the $~~2.0 million ~~earn-out amount. The remaining $2.0 million will remain in escrow until March 2019~~, ~~pursuant~~if to the ~~provisions~~acquired ofassets ~~the~~generated ~~purchase~~2016 ~~agreement,~~revenues toof ~~cover~~at ~~potential~~least ~~claims by the Company for telecommunications taxes. During the nine months ended September 30, 2017, the Company collected both escrow amounts. The~~ $115.06 million ~~was recorded as a gain on mark-to-market, less amounts due from the founders and the $2~~.~~0 million receivable from earnout escrow was removed.~~

~~The~~At ~~agreement~~the ~~also~~time ~~provided~~of ~~that~~closing, $3.0 million of the ~~Company~~cash ~~will~~consideration ~~execute~~was anpaid ~~agreement~~into escrow to ~~acquire~~cover ~~certain~~indemnification ~~assets~~claims by the Company against the sellers. No asset or liability is included in the accompanying unaudited condensed consolidated balance sheets for this item. The $0.2 million contingent payment discussed in (iii)(a) above was made during the three months ended March 31, 2018. This payment had not been made as of ~~North~~December ~~American~~31, ~~Telecommunications~~2017 ~~Inc~~and was included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheet. The $2.0 million contingent payment discussed in (~~“NATC”~~iii)(b) above was paid into escrow at the time of closing, but was not earned, as revenues for the year ended December 31, 2016 did not reach the target. The Company recorded a $102.0 ~~thousand~~million receivable from earnout escrow in the unaudited condensed consolidated balance sheet as of December 31, ~~subject~~2016 and a $1.7 million consideration adjustment/gain on mark-to-market ~~any~~reducing ~~required~~operating ~~regulatory~~expenses ~~approvals~~for the year ended December 31, 2016.

~~Pro~~During ~~Forma~~the ~~Financial~~first ~~Information~~quarter ended March 31, 2017, the Company recognized impairment charges of $31.5 million on Broadsmart intangible assets, including goodwill. The carrying value of the Broadsmart business after the impairment was $18.5 million at March 31, 2017. Refer to Note 5, “Intangible Assets” and Note 6, “Goodwill” for further details.

~~The~~On ~~following~~June ~~table~~23, ~~presents~~2017, the ~~unaudited~~founders ~~pro~~of ~~forma~~Broadsmart ~~combined~~left ~~results~~the ofCompany. On ~~operations~~August of4, 2017, the Company ~~and~~reached ~~Broadsmart~~a ~~for~~mutual agreement with the ~~nine~~founders ~~months~~that ~~ended~~included ~~September~~release ~~30,~~to ~~2016,~~the asCompany ifof ~~the~~$1.0 ~~acquisition~~million of ~~Broadsmart~~the ~~had~~$3.0 ~~occurred~~million onheld ~~January~~in 1,escrow ~~2016~~to cover indemnification claims and the $2.0 million earnout amount. The ~~pro~~remaining ~~forma~~$2.0 ~~financial~~million ~~information~~escrow isto ~~presented~~cover ~~for~~indemnification ~~informational~~claims ~~purposes~~will ~~only~~remain ~~and~~in isescrow ~~not~~until ~~necessarily~~March ~~indicative~~2019, ofpursuant to the ~~results~~provisions of ~~operations~~the ~~that~~purchase ~~would~~agreement, ~~have~~to ~~been~~cover ~~achieved~~potential ifclaims by the ~~acquisition~~Company ~~had~~for ~~taken~~telecommunications ~~place~~taxes. During atthe year ended December 31, 2017, the ~~beginning~~Company ofcollected ~~2016~~both escrow amounts. The $1.0 million was recorded as a consideration adjustment/gain on mark-to-market, less amounts due from the founders and the $2.0 million receivable from earnout escrow was removed.

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

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

NOTE 16 – SEGMENT REPORTING

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

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

The Company measures and evaluates its reportable segments based on revenues and gross profit margins. The Company’s segments and their principal activities consist of the following:

Core Consumer

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

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

Enterprise

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

SMB

Through this segment, ~~started during 2016,~~ the Company provided VoIP services to small to medium sized businesses. During the first quarter of 2017, management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment. The expenses of this restructuring included severance for the majority of the employees in the segment and future rent payments for the Alpharetta, GAGeorgia office.

Other

This segment included the Company’s 60% controlling interest in a joint venture which ~~began~~sold ~~selling a line of high-technology~~ residential consumer products ~~in the fourth quarter of fiscal year 2016~~. On March 31, 2017, this interest was reduced to 36% and on June 30, 2017, the Company sold its remaining interest to ~~the~~an unrelated third party. The Company has determined that the joint venture did not meet either the aggregation criteria to be combined with the existing Core Consumer segment or the quantitative thresholds to be treated as a reportable segment. As such, it was included in the “Other” segment.

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

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

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

	September 30, 2017
	Previous Core Consumer		SMB		Revised Core Consumer		Enterprise		Other		Intercompany			Consolidated
Balance Sheet Data:
Goodwill	$	32,304		-	$	32,304		-		-		-		$	32,304
Total assets	$	123,257		-	$	123,257		20,140		-		(33	)	$	143,364

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

Selected information is presented by reportable segment below (in thousands):

	For the Nine Months Ended September 30, 2016
	For the Three Months Ended March 31, 2018
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
	Core Consumer			Enterprise			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	6717,~~299~~395			192,633		$	~~67,318~~(13	)	$	620,~~309~~015			11			~~(66~~	)	$	~~73,572~~
Cost of revenues		225,~~469~~386			461,777			~~22,515~~-			47,~~993~~163			48			-			~~27,556~~
Gross profit (loss)		4412,~~830~~009			~~(27~~856	)		~~44,803~~(13	)		112,~~316~~852			~~(37~~	)		~~(66~~	)		~~46,016~~
Marketing		~~3,762~~814			~~1,400~~378			~~5,162~~-			~~144~~1,192			~~353~~			-			~~5,659~~
General and
General and administrative		6,715			800			(13	)		7,502
administrative		16,834			4,584			21,418			2,168			810			(66	)		24,330
Impairment of intangible assets		131			-			-			131
Impairment of goodwill
Research and development		1,457			-			-			1,457
and intangible assets		498			-			498			-			-			-			498
Operating expenses		9,117			1,178			(13	)		10,282
Research and
Operating income (loss)		2,892			(322	)		-			2,570
development		2,890			766			3,656			-			5			-			3,661
Interest and dividend income		92			1			-			93
Gain on mark-to-market		(2,000	)		-			(2,000	)		-			-			-			(2,000	)
Other expenses, net		(2	)		-			-			(2	)
Operating expenses		21,984			6,750			28,734			2,312			1,168			(66	)		32,148
Income (loss) before income taxes	$	2,982		$	(321	)	$	-		$	2,661
Operating income (loss)		22,846			(6,777	)		16,069			(996	)		(1,205	)		-			13,868
Other Data:
Other Data:
Depreciation expense	$	223			48			-		$	271
Depreciation expense	$	725			20		$	745			114			-			-		$	859
Amortization expense	$	491			197			-		$	688
Amortization expense	$	1,267			-		$	1,267			1,384			-			-		$	2,651

December 31, 2016

As of March 31, 2018

Previous Core Consumer

SMB

Restated Core Consumer

Enterprise

Other

Intercompany

Consolidated

Core Consumer

Enterprise

Intercompany

Consolidated

Balance Sheet Data:

Goodwill

32,304

~~32,304~~-

1432,~~881~~304

~~47,185~~

Total assets

~~142~~124,~~870~~395

(914,~~447~~687

)

~~133,423~~(660

)

40138,~~839~~422

~~255~~

~~174,517~~

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

	For the Three Months Ended March 31, 2017
	Previous Core Consumer			SMB			Restated Core Consumer			Enterprise			Other			Intercompany			Consolidated
Statement of Operations:
Net revenues	$	20,430			116		$	20,546			2,683			1			(33	)	$	23,197
Cost of revenues		7,157			131			7,288			2,144			19			-			9,451
Gross profit (loss)		13,273			(15	)		13,258			539			(18	)		(33	)		13,746

Marketing		1,078			1,089			2,167			229			11			-			2,407
General and administrative		10,308			1,056			11,364			1,357			137			(33	)		12,825
Impairment of goodwill and
intangible assets		-			-			-			31,527			-			-			31,527
Research and development		902			596			1,498			1			-			-			1,499
Operating expenses		12,288			2,741			15,029			33,114			148			(33	)		48,258

Operating income (loss)		985			(2,756	)		(1,771	)		(32,575	)		(166	)		-			(34,512	)

Interest and dividend income		6			-			6			-			-			-			6
Other expenses, net		(17	)		-			(17	)		-			-			-			(17	)
Income (loss) before income taxes	$	974		$	(2,756	)	$	(1,782	)	$	(32,575	)	$	(166	)	$	-		$	(34,523	)

Other Data:
Depreciation expense	$	264			21		$	285			47			2			-		$	334
Amortization expense	$	343			-		$	343			848			-			-		$	1,191

							As of December 31, 2017
							Core Consumer			Enterprise			Other			Intercompany			Consolidated
Balance Sheet Data:
Goodwill							$	32,304			-			-			-		$	32,304
Total assets							$	125,537			15,601			-			(96	)	$	141,042

NOTE 17 – SUBSEQUENT EVENTS

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

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements as of ~~September~~March 3031, ~~2017~~2018 and for the three ~~and nine~~ month ~~periods~~period ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, as well as our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, the accuracy of which involves risk and uncertainties. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “estimates,” “projects,” and similar expressions to identify forward-looking statements. Readers should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the section titled “Risk Factors” of our Form 10-K for the year ended December 31, ~~2016~~2017 filed on March 16, ~~2017~~2018.

Overview

magicJack VocalTec Ltd. and its ~~Subsidiaries~~subsidiaries (the “Company”) is the cloud communications leader that invented the magicJack device ~~and~~as well as other ~~magicJack~~telecommunication products and services. ~~magicJack~~The ~~devices~~Company ~~weigh~~is ~~about~~a ~~one~~vertically ~~ounce~~integrated ~~and~~group ~~plug~~of ~~into~~companies, ~~the~~with ~~USB~~capabilities ~~port~~including onVoice-over-Internet-Protocol a(“VoIP”) ~~computer~~services ~~or into a power adapter~~ and ~~high~~related ~~speed~~equipment ~~Internet source~~sales, ~~providing~~micro-processor ~~users~~chip ~~with~~design ~~complete~~and ~~phone~~development ~~service~~of ~~for~~the ~~home, business and travel~~magicJack device. ~~magicJack~~In ~~devices~~addition ~~come with the right~~ to ~~access~~residential ~~our servers (“access right”)~~consumers, ~~which provides our customers~~ the ~~ability~~Company toprovides ~~obtain~~VoIP ~~free~~services ~~telephone~~and ~~services.~~related ~~Customers~~equipment ~~may~~to ~~renew~~small ~~access~~to ~~rights.~~medium Wesized ~~currently~~businesses, ~~offer~~wholesales ~~the~~telephone ~~magicJack~~service ~~GO,~~to ~~which~~VoIP ~~has~~providers ~~its~~and ~~own~~telecommunication ~~CPU~~carriers and ~~can~~provides ~~connect~~hosted aUnified ~~regular~~Communication ~~phone~~as ~~directly~~a toService ~~the~~(“UCaaS”) ~~user’s~~and ~~broadband~~related ~~modem/router~~hardware and ~~function~~network asequipment aprimarily ~~standalone~~to ~~phone~~medium-to-large, ~~without~~multi-location ~~using~~enterprise ~~a computer~~customers.

WeThe ~~also~~Company ~~offer~~was ~~magicJack~~incorporated ~~mobile~~in ~~apps,~~the ~~which~~State ~~are~~of ~~applications~~Israel ~~that~~in ~~allow~~1989 ~~users to make~~ and ~~receive~~is ~~telephone~~domiciled ~~calls~~in ~~through~~Netanya, ~~their smart phones or devices. We currently offer the magicApp~~Israel, ~~magicJack~~with ~~Connect~~executive and ~~magicJack~~administrative ~~Spark.~~offices, ~~The magicApp~~ and ~~magicJack~~a ~~Connect~~customer ~~are~~care ~~mobile~~call ~~apps~~center ~~available~~in ~~for~~West ~~both~~Palm ~~iOS~~Beach, ~~and Android~~Florida. In ~~July~~addition ~~2017,~~the weCompany ~~launched~~has ~~magicJack~~offices ~~Spark~~for ontechnology ~~iOS~~management ~~devices. The~~in ~~mobile~~Franklin, ~~apps~~Tennessee, ~~allow~~research ~~customers to place~~ and ~~receive~~development ~~telephone calls~~ in ~~the~~Plano, ~~U.S.~~Texas, orAlpharetta, ~~Canada~~Georgia, onSunnyvale, ~~their~~California ~~mobile~~and ~~devices~~Warsaw, ~~through~~Poland ~~either~~and ~~an existing or new magicJack account. The mobile apps also give users~~ the ~~ability~~UCaaS toprovider ~~add~~in aWest ~~second~~Palm ~~phone~~Beach ~~number~~and toFort ~~their~~Lauderdale, ~~smart phone for a monthly or annual fee~~Florida. ~~Customers may purchase international minutes to place telephone calls through the magicJack device or mobile apps to locations outside of the U.S. and Canada.~~

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

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

Basis of Presentation

Our unaudited condensed consolidated financial statements are prepared in conformity with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements that are included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017. The balance sheet at December 31, ~~2016~~2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included.

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

33In the three months ended March 31, 2017, the Company reported results of its operations in three separate reportable segments – “Core Consumer”, “Enterprise” and “SMB”. During the first quarter of 2017, management restructured the Company to absorb within the Core Consumer segment, all of operations and functions of the SMB Segment which was based on the activities of magicJack SMB, Inc. (“SMB”). Accordingly, this segment does not show activity for periods after March 31, 2017. Refer to Note 16, “Segment Reporting,” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

~~Prior~~Approximately to85% ~~2016,~~and we86% ~~prepared~~of our consolidated ~~financial~~revenues ~~statements on the basis of being a single reporting entity. Beginning~~ in the ~~first~~three ~~quarter~~months ofended ~~2016,~~March ~~with the acquisition of Broadsmart and the internal development of SMB~~31, we2018 ~~have reported the results of operations in separate reportable segments – “Core Consumer,” “Enterprise”~~ and ~~“SMB”. During the first quarter of~~ 2017, ~~management restructured the Company to absorb all operations and functions of the SMB segment within the Core Consumer segment~~respectively, sowere ~~this~~derived ~~segment~~from ~~will~~sales ~~not show activity for periods after March 31, 2017. Refer~~ to ~~Note~~customers ~~16,~~located ~~“Segment Reporting,”~~ in the ~~Notes~~United ~~to our unaudited condensed consolidated financial statements included in Item 1 herein for further details~~States.

Approximately 85% and 86% of our consolidated revenues in the three and nine months ended September 30, 2017, respectively, were from sales to customers located in the United States. Approximately 90% of our consolidated revenues in the three and nine months ended September 30, 2016, were from sales to customers located in the United States.

Basis of Consolidation

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

The results for the nine months ended September 30, 2017 may not be indicative of the results for the entire year ending December 31, 2017. The interim unaudited condensed consolidated financial statements should be read in conjunction with our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2016 filed on March 16, 2017.32

The results for the three months ended March 31, 2018 may not be indicative of the results for the entire year ending December 31, 2018. 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, 2017 filed on March 16, 2018.

Use of Estimates

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

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

CRITICAL ACCOUNTING POLICIES

We have identified below ~~any~~our critical accounting policies. ~~that~~These ~~have~~policies ~~changed~~are ~~since~~both the most important to the portrayal of our ~~Annual~~financial ~~Report~~condition onand ~~Form~~results ~~10-K~~of ~~for~~operations ~~the~~and ~~year~~require ~~ended~~our ~~December~~management’s 31most difficult, ~~2016~~subjective ~~filed~~and oncomplex ~~March~~judgments ~~16,~~and ~~2017~~estimates. Actual results may differ from these estimates under different assumptions or conditions.

~~INTANGIBLE~~REVENUE ~~ASSETS, INCLUDING GOODWILL~~RECOGNITION

~~Goodwill~~Prior ~~represents~~to ~~the~~2018, ~~excess~~we ofrecognized ~~the~~revenue ~~purchase~~in ~~price~~accordance ~~over the fair value of the identifiable net assets acquired. Intangible assets~~ with ~~indefinite~~ASC ~~lives~~605, ~~including~~"Revenue ~~goodwill~~Recognition", ~~are~~which ~~not~~provides ~~amortized~~authoritative toguidance ~~operations,~~on ~~but~~revenue ~~are~~recognition. ~~instead~~For ~~reviewed~~arrangements ~~for~~that ~~impairment~~included atmore ~~least~~than ~~annually,~~one product or ~~more~~service ~~frequently~~(“deliverables”), ifwe ~~there~~applied isSection an25 ~~indicator~~ of ~~impairment.~~ASC ~~Indicators include~~605, ~~but~~“Multiple-Element ~~are~~Arrangements”. ~~not~~ASC ~~limited~~605-25 ~~to:~~establishes ~~sustained~~criteria ~~operating~~for ~~losses~~separating ordeliverables ainto ~~trend~~different units of ~~poor~~accounting ~~operating performance~~ and aallocating ~~decrease~~consideration into ~~our~~those ~~market~~units ~~capitalization~~of ~~below its book value~~accounting.

~~The~~On ~~valuation~~January ~~methodology~~1, 2018, we ~~use~~adopted ASC 606, “Revenue from Contracts with Customers,” for ~~assessing~~revenue ~~potential~~recognition. The ~~impairment~~new standard requires ~~management~~entities to ~~make~~recognize ~~judgments~~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 ~~assumptions~~recognition ~~based~~of revenue as the entity satisfies the performance obligations. We adopted the requirements of ASC 606 using the modified retrospective transition method under which the standard was applied only to the most current period presented and the cumulative effect of applying the new standard was recognized at the date of initial application as a cumulative adjustment to retained earnings. We applied the guidance to contracts that were not completed at the date of initial application. The cumulative effect of initially applying ASC 606 on ~~historical~~January ~~experience~~1, 2018 increased retained earnings by approximately $1.3 million, with offsetting adjustments to deferred revenue and ~~projections~~deferred costs, not including the tax impact of ~~future~~$0.4 ~~operating~~million ~~performance~~as an adjustment to the opening balance of equity at January 1, 2018. Refer Ifto ~~these~~Note ~~assumptions~~1, ~~differ~~“Description ~~materially~~of ~~from~~Business ~~actual~~and ~~future~~Basis ~~results~~of Presentation”, weNote ~~may~~2, ~~record~~“Summary ~~impairment~~of ~~charges~~Accounting Policies”, Note 7, “Deferred Costs and Revenues/Contract Costs and Liabiliies” and Note 11, “Revenue” in the ~~future~~Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

34INCOME TAXES

InWe ~~prior~~recognize ~~years,~~deferred wetax ~~used~~assets and liabilities for the ~~two-step~~expected ~~goodwill~~tax ~~impairment~~consequences ~~test~~of temporary differences between the tax basis of assets and liabilities and their book basis using enacted tax rates. In ~~January~~Any ~~2017,~~changes in enacted rates or tax laws are included in the ~~Financial~~provision ~~Accounting~~for ~~Standards~~income ~~Board~~taxes ~~(“FASB”)~~in ~~issued~~the ~~Accounting~~year ~~Standards~~of ~~Update~~enactment. ~~(“ASU”)~~Our ~~2017~~net deferred tax assets consist primarily of foreign net operating loss carry-~~04,~~forwards ~~“Intangibles~~and –timing ~~Goodwill~~differences between recognition of income for book and ~~Other”~~tax ~~which~~purposes. ~~eliminated~~We ~~step~~record ~~two~~a ofvaluation allowance to reduce the ~~goodwill~~net ~~impairment~~deferred ~~test.~~tax ~~The~~assets ~~Company~~to ~~adopted~~the ~~ASU~~amount ~~2017~~that we estimate is more-04likely-than-not onto abe ~~prospective~~realized. ~~basis~~We periodically review the composition of our net deferred tax assets and related valuation allowances and make adjustments if available evidence indicates that it is more-likely-than-not a change in the ~~first~~carrying ~~quarter~~amounts ofis required. We increased the valuation allowance by $11 thousand and $0.7 million during the three months ended March 31, 2018, and March 31, 2017, respectively.

As part of our quarterly impairment review for intangible assets with indefinite lives, including goodwill, we determined there were no impairment indicators as of September 30, 2017; however, there were impairment indicators at the Enterprise segment as of March 31, 2017.33

AsWe ~~was~~assess ~~previously disclosed in~~ our ~~Form~~income ~~10-K~~tax ~~filed~~positions onand ~~March~~record ~~16,~~tax ~~2017,~~benefits ~~the~~for ~~Broadsmart~~all ~~business~~years ~~which~~subject ~~comprises~~to ~~the~~examination ~~Enterprise~~based ~~segment~~upon ~~was~~our ~~underperforming~~evaluation ~~and~~of ~~steps~~the ~~were~~facts, ~~being~~circumstances ~~taken~~and toinformation ~~improve~~available ~~operating~~at ~~results including~~ the ~~hiring~~reporting ofdate. aFor ~~new~~those ~~Chief~~tax ~~Operating~~positions ~~Officer~~where ~~for~~it ~~the~~is ~~segment~~more ~~and~~likely ~~additional~~than ~~sales~~not ~~and~~that ~~marketing~~a ~~personnel~~tax ~~dedicated~~benefit towill ~~obtaining~~be ~~new~~sustained, ~~business. The~~we ~~new~~have ~~Chief~~recorded ~~Operating Officer for~~ the ~~Enterprise~~largest ~~segment~~amount ~~and~~of ~~our~~tax ~~new~~benefit ~~Executive~~that ~~Management~~may ~~team~~potentially ~~recently~~be ~~completed~~realized aupon ~~comprehensive~~ultimate ~~review~~settlement ofwith ~~the~~a ~~Enterprise~~taxing ~~segment’s~~authority ~~business~~that ~~prospects~~has ~~and,~~full ~~through~~knowledge ~~this~~of ~~process,~~all ~~revised~~relevant ~~the projections~~information. ~~Additionally,~~ ~~Broadsmart~~For ~~received~~those ~~notification~~income intax ~~early~~positions ~~April 2017~~ that aare ~~major customer would~~ not bemore ~~renewing~~likely ~~its~~than ~~contract~~not, ~~and~~no ~~management~~tax ~~anticipates~~benefit ~~the~~has ~~loss~~been ofrecognized ~~another~~in ~~one of~~ the ~~Enterprise~~financial ~~segment’s significant customers~~statements. ~~Combined,~~ ~~these~~We ~~customers~~revised ~~accounted~~our liability for ~~approximately~~uncertain ~~29%~~tax ofpositions ~~the~~by ~~Enterprise~~an ~~segment’s~~increase ~~revenue~~of ~~in 2016~~$0. We1 ~~considered~~million during the ~~revised~~three ~~projections~~months ~~and~~ended ~~customer~~March ~~losses~~31, ~~to be indicators of potential impairment~~2018, ~~and~~due ~~accordingly~~primarily ~~performed~~to ~~impairment~~accrued ~~testing~~interest ofon ~~the~~previously ~~segment’s~~booked ~~long-lived~~uncertain ~~assets~~tax positions and ~~indefinite-lived~~the ~~intangible~~revaluation ~~assets,~~impact ~~including goodwill, as~~ of ~~March~~previously ~~31,~~recorded ~~2017~~Israeli ~~utilizing~~uncertain ~~the~~tax ~~revised projections~~positions.

~~Based~~We onrecord ~~the~~our ~~impairment~~income ~~indicators~~tax asexpense offor ~~March~~interim ~~31,~~financial ~~2017~~statements ~~discussed~~by ~~above,~~using wean ~~engaged~~estimated anannual ~~independent~~effective ~~third~~income ~~party~~tax torate ~~perform~~based aon ~~valuation~~our ofexpected ~~the~~annual ~~Enterprise~~results ~~reporting~~after ~~unit’s~~elimination ~~long-lived~~of ~~assets~~nontaxable ~~and~~items. ~~indefinite-lived~~The ~~intangible~~tax ~~assets,~~benefits ~~including~~of ~~goodwill~~net asoperating ofloss ~~March~~carry-forwards ~~31,~~expected ~~2017.~~to ~~The~~be ~~valuation~~realized ~~estimated~~through ~~the~~2018 ~~fair~~and ~~value~~changes ofin ~~Broadsmart’s~~other ~~identified~~deferred ~~intangible~~tax assets ~~not~~and ~~subject~~liabilities toare ~~amortization~~recognized during interim periods based on annual forecasts as of the ~~relief~~interim ~~from~~reporting ~~royalty~~date. ~~method,~~At ~~which~~March ~~requires~~31, an2018, ~~estimate~~the ofestimated aannual ~~reasonable~~effective ~~royalty~~income tax rate is expected to approximate 21.4%, ~~identification~~excluding ofdiscrete ~~relevant~~tax ~~projected~~items, ~~revenues~~which ~~and~~includes ~~expenses~~federal, foreign, and ~~selection~~state ofand anlocal ~~appropriate~~taxes. ~~discount~~This rate. Wemay ~~recognized~~fluctuate andue ~~impairment~~to ~~charge~~changes ofin ~~$0.9~~our ~~million~~jurisdictional ~~for~~income ~~the~~and ~~carrying~~due ~~value~~to inthe ~~excess~~timing of other discrete period transactions during the ~~fair~~remainder ~~value~~of the year.

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

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

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

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

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

SIGNIFICANT CHANGES IN FINANCIAL POSITION

The following table presents significant changes in our unaudited condensed consolidated balance sheets for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 (in thousands).

	September 30,		December 31,
	March31,		December 31,
	2017		2016		Change
	2018		2017		Change
	(Unaudited)
Cash and cash equivalents	$	5153,~~254~~850	$	52,~~394~~638	$	(1,~~140~~212	)	~~(2.2~~	)%
Inventories	$	2,047	$	4,441	$	(2,394	)	(53.9	)
Total deferred costs/contract costs	$	781	$	1,936	$	(1,155	)
Prepaid income taxes	$	2,374	$	527	$	1,847		350.5
Accounts payable	$	1,426	$	3,199	$	(1,773	)
Receivable from earnout escrow	$	-	$	2,000	$	(2,000	)	(100.0	)
Accrued expenses and other current liabilities	$	4,722	$	6,454	$	(1,732	)
Intangible assets, net	$	10,877	$	28,854	$	(17,977	)	(62.3	)
Total deferred revenue/contract liabilities	$	77,872	$	81,040	$	(3,168	)
Goodwill	$	32,304	$	47,185	$	(14,881	)	(31.5	)
Deferred tax asset	$	34,478	$	26,568	$	7,910		29.8
Income tax payable	$	-	$	1,527	$	(1,527	)	(100.0	)
Accrued expenses and other current liabilities	$	6,049	$	8,426	$	(2,377	)	(28.2	)
Total deferred revenue	$	83,043	$	92,708	$	(9,665	)	(10.4	)
Other non-current liabilities	$	12,529	$	10,866	$	1,663		15.3

During the ~~nine~~three months ended ~~September~~March 3031, 2017, cash and cash equivalents decreased $1.1 million, primarily reflecting estimated tax payments for fiscal 2016, personnel related disbursements including payment of 2016 accrued bonus, and severance payments related to the restructuring of the SMB business, costs associated with changes to our customer service team and the change in executive management team, investment in the SMB business, and legal fees and other costs associated with our response to activist shareholder initiatives, the strategic process and other ongoing litigation matters. These decreases were partially offset by the receipt of the $2.0 million receivable from the earn-out escrow and an additional $1.0 million in escrow funds related to the Broadsmart acquisition. Refer to Note 15, “Broadsmart Acquisition” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details. A detailed discussion of this change is provided in “Liquidity and Capital Resources”.2018:

~~During~~· ~~the~~cash ~~nine~~and ~~months~~cash ~~ended~~equivalents ~~September~~increased ~~30, 2017, inventories decreased~~ $21.42 million, primarily reflecting acash ~~$0.4~~generated ~~million~~from ~~write-down~~ongoing ofoperations. ~~obsolete~~A ~~inventory~~detailed ~~components~~discussion ~~and~~of ~~reduced~~this ~~purchases~~change ofis ~~magicJack~~provided ~~devices~~in ~~reflecting~~“Liquidity ~~lower~~and ~~year-over-year~~Capital ~~sales volumes~~Resources”.

~~During~~· ~~the~~total ~~nine~~deferred ~~months~~costs/contract ~~ended~~costs ~~September~~decreased ~~30, 2017, prepaid income taxes increased~~ $1.82 million ~~primarily~~ due primarily to ~~a $3.0 million estimated federal tax payment made during~~ the ~~first~~impact ~~quarter~~of ~~which was partially offset by~~ the ~~receipt~~initial adoption of aASC $0606.~~9 million state tax refund.~~

~~During~~· ~~the~~accounts ~~nine~~payable ~~months ended September 30, 2017, receivable from earnout escrow~~ decreased $21.08 million due primarily to ~~collection~~timing of ~~the~~payments ~~escrow~~on ~~funds~~trade payables.

~~During~~· ~~the~~accrued ~~nine~~expenses ~~months~~and ~~ended~~other ~~September~~current ~~30,~~liabilities ~~2017, intangible assets~~ decreased $181.07 million. ~~The~~due ~~decrease in intangible assets is~~ primarily ~~attributable~~ to ~~the~~payment ~~$16.6 million impairment~~ of ~~intangible~~2017 ~~assets for the Enterprise reporting unit, and $2~~bonuses.4 million in amortization expense, partially offset by $1.1 million in acquisitions. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill” and Note 6, “Intangible Assets,” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

~~During~~· ~~the~~total ~~nine~~deferred ~~months~~revenue ~~ended September 30, 2017, goodwill~~ decreased $143.92 million due primarily to the ~~impairment~~impact of ~~goodwill for~~ the ~~Enterprise~~initial ~~reporting~~adoption ~~unit. Refer to Note 3, “Impairment~~ of ~~Intangible~~ASC ~~Assets, Including Goodwill” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details~~606.

During the nine months ended September 30, 2017, deferred tax asset increased $7.9 million due primarily to the $31.5 million impairment of intangible assets, including goodwill, for the Enterprise reporting unit. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets,” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details. This increase was partially offset by the surrender of stock options from two former executive officers and forfeitures of options by other executives. Refer to Note 12, “Share-based Compensation” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.34

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

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

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

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

RESULTS OF OPERATIONS

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

	Three Months Ended September 30,						2017 Compared to					Nine Months Ended September 30,						2017 Compared to
	Three Months Ended March 31,						2018 Compared to
	2017			2016			2016					2017			2016			2016
	2018			2017			2017
Net Revenues
Revenues
Sale of magicJack devices	$	21,~~608~~912		$	2,~~849~~843		$	(~~241~~931	)	(832.57	)%	$	~~7,954~~		$	~~9,641~~		$	~~(1,687~~	)	~~(17.5~~	)
Access right renewals		12,~~778~~348			1413,~~456~~512			(1,~~678~~164	)	(118.6	)		~~39,328~~			~~44,464~~			~~(5,136~~	)	~~(11.6~~	)
Shipping and handling		~~297~~161			~~228~~320			69(159	)	30(49.37	)		~~1,012~~			~~609~~			~~403~~		~~66.2~~
magicJack-related products		1,~~126~~096			1,~~638~~445			(~~512~~349	)	(3124.32	)		~~3,723~~			~~4,082~~			~~(359~~	)	~~(8.8~~	)
Prepaid minutes		~~1,111~~958			1,~~390~~221			(~~279~~263	)	(2021.15	)		~~3,490~~			~~4,606~~			~~(1,116~~	)	~~(24.2~~	)
Access and wholesale charges		~~897~~780			1,~~158~~090			(~~261~~310	)	(2228.54	)		~~2,944~~			~~3,898~~			~~(954~~	)	~~(24.5~~	)
UCaaS		2,~~646~~620			2,~~830~~649			(~~184~~29	)	(61.51	)		~~8,344~~			~~6,243~~			~~2,101~~		~~33.7~~
Other		~~194~~140			23117			~~171~~23		*19.7			~~440~~			29			~~411~~		*
Total Net Revenue		21,657			24,572			(2,915	)	(11.9	)		67,235			73,572			(6,337	)	(8.6	)
Total Revenues		20,015			23,197			(3,182	)	(13.7	)
Cost of Revenues
Cost of devices and related
Cost of devices and related products		1,306			2,541			(1,235	)	(48.6	)
products		1,701			2,325			(624	)	(26.8	)		6,285			6,450			(165	)	(2.6	)
Shipping and handling		155			461			(306	)	(66.4	)
Shipping and handling		273			481			(208	)	(43.2	)		1,094			1,310			(216	)	(16.5	)
Credit card processing fees		443			476			(33	)	(6.9	)
Credit card processing fees		396			441			(45	)	(10.2	)		1,273			1,405			(132	)	(9.4	)
Network and carrier charges		2,134			2,685			(551	)	(20.5	)
Network and carrier charges		2,436			2,866			(430	)	(15.0	)		7,510			9,601			(2,091	)	(21.8	)
UCaaS		1,777			2,144			(367	)	(17.1	)
UCaaS		1,731			2,264			(533	)	(23.5	)		5,875			4,993			882		17.7
Other		1,348			1,144			204		17.8
Other		1,293			1,132			161		14.2			3,410			3,797			(387	)	(10.2	)
Total Cost of Revenues		7,163			9,451			(2,288	)	(24.2	)
Total Cost of Revenues		7,830			9,509			(1,679	)	(17.7	)		25,447			27,556			(2,109	)	(7.7	)
Gross Profit		12,852			13,746			(894	)	(6.5	)
Gross Profit		13,827			15,063			(1,236	)	(8.2	)		41,788			46,016			(4,228	)	(9.2	)
Operating expenses:
Operating expenses:
Marketing		1,192			2,407			(1,215	)	(50.5	)
Marketing		1,933			2,680			(747	)	(27.9	)		6,460			5,659			801		14.2
General and administrative		7,502			12,825			(5,323	)	(41.5	)
General and administrative		7,330			7,143			187		2.6			29,699			24,330			5,369		22.1
Impairment of goodwill and intangible assets		131			31,527			(31,396	)	(99.6	)
Impairment of goodwill and
Research and development		1,457			1,499			(42	)	(2.8	)
intangible assets		-			498			(498	)	(100.0	)		31,527			498			31,029		*
Total operating expenses		10,282			48,258			(37,976	)	(78.7	)
Research and development		1,477			1,314			163		12.4			4,438			3,661			777		21.2
Operating income (loss)		2,570			(34,512	)		37,082		107.4
Gain on mark-to-market		(894	)		(2,000	)		1,106		55.3			(894	)		(2,000	)		1,106		55.3
Other income (expense):
Total operating expenses		9,846			9,635			211		2.2			71,230			32,148			39,082		121.6
Interest and dividend income		93			6			87		*
Operating income		3,981			5,428			(1,447	)	(26.7	)		(29,442	)		13,868			(43,310	)	(312.3	)
Other income (expense), net		(2	)		(17	)		15		*
Other income (expense):
Total other income (expense)		91			(11	)		102		*
Interest and dividend income		42			5			37		*			65			21			44		*
Income (loss) before income taxes		2,661			(34,523	)		37,184		107.7
Interest expense		-			-			-		*			-			-			-		*
Income tax expense (benefit)		695			(11,355	)		12,050		106.1
Other income (expense), net		2			(6	)		8		*			(28	)		(11	)		(17	)	*
Net income (loss)	$	1,966		$	(23,168	)	$	25,134		108.5
Total other income (expense)		44			(1	)		45		*			37			10			27		*
(Loss) income before
income taxes		4,025			5,427			(1,402	)	(25.8	)		(29,405	)		13,878			(43,283	)	(311.9	)
Income tax (benefit) expense		1,574			2,205			(631	)	(28.6	)		(7,194	)		7,407			(14,601	)	(197.1	)
Net (loss) income	$	2,451		$	3,222		$	(771	)	(23.9	)	$	(22,211	)	$	6,471		$	(28,682	)	(443.2	)

* - Not meaningful.

3835

Core Consumer Segment

	Three Months Ended September 30,						2017 Compared to					Nine Months Ended September 30,						2017 Compared to
	Three Months Ended March 31,						2018 Compared to
	2017			2016			2016					2017			2016			2016
	2018			2017			2017
Net Revenues	$	19,010		$	21,771		$	(2,761	)	(12.7	)%	$	58,890		$	67,318		$	(8,296	)	(12.3	)
Revenues	$	17,395		$	20,546		$	(3,151	)	(15.3	)%
Cost of revenues		65,~~100~~386			7,~~206~~288			(1,~~106~~902	)	(1526.31	)		~~19,573~~			~~22,515~~			~~(2,942~~	)	~~(13.1~~	)
Gross Profit		12,~~910~~009			1413,~~565~~258			(1,~~655~~249	)	(119.4	)		~~39,317~~			~~44,803~~			~~(5,354~~	)	~~(12.0~~	)
Operating expenses:
Marketing		~~1,563~~814			2,~~467~~167			(~~904~~1,353	)	(3662.64	)		~~5,614~~			~~5,162~~			~~452~~		~~8.8~~
General and administrative		6,~~656~~715			611,~~148~~364			~~508~~(4,649	)	8(40.39	)		~~26,986~~			~~21,418~~			~~5,700~~		~~26.8~~
Impairment of goodwill and																			-
Impairment of intangible assets		131			-			131		100.0
intangible assets		-			498			(498	)	(100.0	)		-			498			(498	)	(100.0	)
Research and development		1,457			1,498			(41	)	(2.7	)
Research and development		1,472			1,314			158		12.0			4,432			3,656			776		21.2
Total operating expenses		9,117			15,029			(5,912	)	(39.3	)
Gain on mark-to-market		(894	)		(2,000	)		1,106		55.3			(894	)		(2,000	)		1,106		55.3
Operating income (loss)		2,892			(1,771	)		4,663		263.3
Total operating expenses		8,797			8,427			370		4.4			36,138			28,734			7,536		26.3
Operating income		4,113			6,138			(2,025	)	(33.0	)		3,179			16,069			(12,890	)	(80.2	)

Enterprise Segment

	Three Months Ended September 30,						2017 Compared to					Nine Months Ended September 30,						2017 Compared to
	Three Months Ended March 31,						2018 Compared to
	2017			2016			2016					2017			2016			2016
	2018			2017			2017
Net Revenues	$	2,691		$	2,862		$	(171	)	(6.0	)%	$	8,462		$	6,309		$	2,153		34.1
Revenues	$	2,633		$	2,683		$	(50	)	(1.9	)%
Cost of revenues		1,~~731~~777			2,~~264~~144			(~~533~~367	)	(2317.51	)		~~5,875~~			~~4,993~~			~~882~~		~~17.7~~
Gross Profit		~~960~~856			~~598~~539			~~362~~317		6058.58			~~2,587~~			~~1,316~~			~~1,271~~		~~96.6~~
Operating expenses:
Marketing		~~370~~378			67229			~~303~~149		~~452~~65.21			~~846~~			~~144~~			~~702~~		~~487.5~~
General and administrative		~~718~~800			~~795~~1,357			(77557	)	(941.70	)		~~2,830~~			~~2,168~~			~~662~~		~~30.5~~
Impairment of goodwill and
intangible assets		-			-31,527			-(31,527	)	-(100.0	)		~~31,527~~			-			~~31,527~~		~~100.0~~
Research and development		5-			-1			5(1	)	(100.0	)		6			-			6		~~100.0~~
Total operating expenses		1,~~093~~178			~~862~~33,114			~~231~~(31,936	)	26(96.84	)		~~35,209~~			~~2,312~~			~~32,897~~		*
Operating income		(133	)		(264	)		131		49.6			(32,622	)		(996	)		(31,626	)	*
Operating income (loss)		(322	)		(32,575	)		32,253		99.0

~~Other~~THREE ~~Segment~~MONTHS ENDED MARCH 31, 2018 COMPARED TO THREE MONTHS ENDED MARCH 31, 2017

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

Revenues

39Total revenues were $20.0 million and $23.2 million for the three months ended March 31, 2018 and 2017, respectively, representing a decrease of $3.2 million, or 13.7%. The decrease in the components of revenues was primarily attributable to the following:

~~Components~~· $0.9 million decrease in revenues from the sale of ~~Net~~magicJack ~~Revenues~~devices primarily reflecting lower sales volume and the adoption of ASC 606. Refer to Note 11, “Revenue” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details;

~~Our~~· ~~net~~$1.2 ~~revenues~~million ~~are~~decrease ~~comprised~~in ofaccess ~~the~~right ~~following~~renewal ~~sources:~~revenues reflecting customer churn;

· ~~Sale~~$0.3 ofmillion ~~magicJack~~decrease ~~devices~~in ~~and access rights – represent~~ revenues ~~recognized~~ from ~~sales of the~~ magicJack-related ~~devices~~products toprimarily ~~retailers,~~due ~~wholesalers, or direct~~ to ~~customers,~~lower ~~net of returns, over the period associated with the access right period. These revenues are recorded net of~~ sales ~~allowance, chargebacks, retailer discounts and advertising allowances~~volume;

· ~~Access~~$0.3 ~~right~~million ~~renewals~~decrease ~~and~~in ~~mobile apps – represent~~ revenues from ~~customers~~prepaid ~~purchasing~~minutes ~~rights~~resulting ~~to access our servers beyond the access right period included with a magicJack device or magicJack service. The extended access right ranges~~ from ~~one~~lower tousage ~~five~~levels; ~~years. These fees charged to customers are initially deferred~~ and recognized as revenue ratably over the extended access right period: Represent revenues from access rights granted to users of the magicApp, magicJack Connect App and magicJack Spark which are recognized ratably over the access right period;

· ~~Shipping and handling – represent charges for shipping and handling fees for magicJack devices shipped directly to customers~~$0.3 ~~The~~million ~~fees~~decrease ~~are~~in ~~initially deferred and recognized as~~ revenues ~~over~~from ~~the~~ access ~~right~~and ~~period~~wholesale ~~associated~~charges ~~with~~due ~~the~~to ~~magicJack~~lower ~~device;~~network traffic.

·For ~~magicJack-related~~the ~~products~~three –months ~~represent~~ended ~~revenues~~March ~~recognized~~31, ~~from~~2018 ~~sale~~and of2017, ~~other~~sales ~~items~~of ~~related to~~ the magicJack devices ~~and~~through ~~access~~retail ~~right~~outlets ~~renewals~~represented weapproximately ~~offer~~62% ~~our~~and ~~customers~~43%, ~~including:~~respectively, ~~(i)~~of ~~porting~~sales ~~fees~~of ~~charged~~all tomagicJack ~~customers~~devices tosold. ~~port~~For ~~their~~the ~~existing~~same ~~phone number to a magicJack device or service~~periods, ~~(ii)~~direct ~~fees~~sales ~~charged~~represented ~~for~~approximately ~~customers~~38% toand ~~select a custom~~57%, ~~vanity or Canadian phone number~~respectively, ~~(iii)~~of ~~fees~~magicJack ~~charged~~devices tosold. ~~customers~~For ~~to change their existing number, (iv) insurance covering~~ the ~~replacement~~three ofmonths aended ~~damaged~~March ~~or lost device~~31, 2018 and ~~(v)~~2017, ~~sale~~no ofretailer ~~battery~~accounted ~~powerbanks.~~for ~~These~~more ~~revenues~~than ~~are~~10% ~~recognized at the time~~ of ~~sale, with~~ the ~~exception~~Company’s oftotal ~~sales of the battery powerbank which are recognized when shipped;~~revenue.

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

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

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

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

Components of Cost of Revenues

Our cost of revenues is comprised of the following components:

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

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

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

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

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

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

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

Net Revenues

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

· $1.7 million decrease in access right renewal revenues due to customer churn, promotional offers and the number of long-term renewals in the customer base that are at lower average annual revenues;

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

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

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

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

Cost of Revenues

Total cost of revenues was $7.82 million and $9.5 million for the three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, respectively, representing a decrease of approximately $12.73 million, or 1724.72%. This decrease in cost of revenues was primarily attributable to: (i) a $1.2 million decrease in the cost of devices and related products primarily reflecting lower sales volumes (ii) a $0.3 million decrease in shipping and handling costs due to lower direct sales volume and reduction in costs following the outsourcing of the fulfuillment function in the fourth quarter of 2017, (iii) a $0.6 million decrease in network and carrier charges primarily as a result of lower usage, and (iv) a $0.4 million decrease in UCaaS costs primarily attributable to the successful transition of the customer base to the Company’s Core network for customer call termination and lower amortization expense related to impaired assets.

· This decrease in cost of revenues was primarily attributable to: (i) a $0.6 million decrease in cost of devices and related products reflecting lower sales, (ii) a $0.4 million decrease in network and carrier charges primarily as a result of lower traffic substantially resulting from the elimination of free app users at the end of the second quarter of 2016, and (iii) $0.5 million decrease in UCaaS related cost of goods sold, reflecting lower amortization expense due to the write-off of intangible assets in the first quarter of 2017 and cost savings associated with the ongoing integration of the UCaaS business with the Company’s network infrastructure.36

Operating Expenses

Total operating expenses were $910.83 million and $948.63 million for three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, respectively, representing ana ~~increase~~decrease of $038.20 million, or 278.27%. This change in operating expenses is primarily attributable to:

· a $1.12 million decrease in ~~unusual~~marketing ~~gains~~expense, onprimarily ~~mark-to-market~~ related to ~~Broadsmart,~~reduced ~~Refer~~media tobuys ~~Note~~for ~~15, “Broadsmart Acquisition” in~~ the ~~Notes~~Core toConsumer ~~our unaudited condensed consolidated financial statements included in Item 1 herein for further details.~~segment,

· ~~offset~~a by$5.3 million decrease in General and Administrative (“G&A”) expense due to several factors including:

i. a $04.76 million decrease in ~~marketing~~costs related to the Core Consumer segment, primarily composed of: a $2.2 million decrease in personnel related expenses primarily reflecting 2017 severance and new executive officer compensation accruals including accruals for anticipated sign-on bonuses, $0.6 million decrease in professional fees related to ~~marketing~~cost ~~spend~~incurred related to shareholder litigation in ~~the~~2017 ~~SMB~~not ~~business~~incurred ofin 2018, $10.4 million decrease in chat services primarily attributable to the restructuring of our customer service function, $0.3 million ~~during~~in ~~2016~~legal ~~that~~expense, ~~was~~$0.2 ~~non-recuring~~million in ~~2017~~rent and facility related costs reflecting cost savings initiatives, approximately $0.4 million related to costs associated with terminated initiatives and $0.4 million asset impairment related to our 2017 exit from our joint venture in the home consumer product market; and

ii. a $0.56 million ~~impairment~~decrease ~~charge~~ in ~~the~~costs ~~Core~~related ~~Consumer~~to the Enterprise segment, reflecting approximately $0.4 million in ~~2016~~lower ~~that~~compensation ~~was~~costs, ~~non~~including stock-~~recuring~~based compensation expense, related to the departure of the Broadsmart founders, and approximately $0.2 million in ~~2017~~lower bad debt expense and lower facility related costs.

41· a $31.5 million impairment of intangible assets, including goodwill, related to the Enterprise segment in 2017 compared to a $0.1 million impairment of intangible assets in 2018. Refer to Note 5, “Intangible Assets” and Note 6, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

Income Taxes

Total income tax expense (benefit) was $10.67 million and ($211.24) million for the three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017, respectively. The calculation of our effective income tax rate for the three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017 was (in thousands):

	Three Months Ended
	September 30,
	March 31,
	2017			2016
	2018			2017
Income before income taxes	$	4,025		$	5,427
Net income (loss) before income taxes	$	2,661		$	(34,523	)
Income tax expense		1,574			2,205
Income tax (benefit) expense		695			(11,355	)
Effective income tax rate		3926.1112	%		4032.6389	%

We primarily operate in the U.S. and Israel, and our Israeli operations ~~are~~were subject to a statutory income tax rate of 24% in 2017, which isdeclined ~~set~~ to ~~decline to~~ 23% in 2018, that is ~~lower~~higher than our U.S. federal income tax rate anticipated to be 3421% as of ~~September~~March 3031, ~~2017~~2018.

For the three months ended ~~September~~March 3031, ~~2017~~2018, we recorded income tax expense of $10.67 million, which is higher than the expected tax expense of $10.46 million, using the statutory income tax rate of 3421% due ~~primarily to reductions~~ in ~~our~~part, ~~deferred~~to ~~tax~~increases ~~assets related~~ to ~~the~~uncertain ~~forfeiture~~tax positions of ~~options totaling~~ $0.41 million,. ~~and~~The ~~other~~effective ~~smaller~~tax ~~discrete~~rate ~~items.~~was ~~The~~also ~~discrete~~impacted ~~items~~by ~~noted~~state ~~above~~taxes ~~were~~in ~~partially~~the ~~offset~~United byStates and the ~~lower~~higher jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

The ~~2017~~2018 estimated annual effective tax rate is expected to approximate 2221.04%, excluding discrete tax items, but may fluctuate during the year due to changes in our jurisdictional income and due to the timing of other discrete period transactions.

Net Income (Loss) Attributable to Common Shareholders

As a result of the foregoing items, net income attributable to common shareholders ~~decreased~~increased to $2.50 million in the three months ended ~~September~~March 3031, ~~2017~~2018, as compared to a net ~~income~~loss ~~attributable to common shareholders~~ of ($323.41) million in the three months ended ~~September~~March 3031, ~~2016~~2017. Net income attributable to common shareholders per diluted ordinary share was $0.1512 for the three months ended ~~September~~March 3031, ~~2017~~2018, as compared to ~~net income attributable to common shareholders of~~ ($01.2144) ~~per~~for ~~diluted~~the ~~ordinary~~three ~~share~~months inended ~~the~~March ~~prior~~31, ~~year~~2017. The change was primarily due to ~~declining~~the ~~revenue~~impairment of the Enterprise segment intangible assets and high ~~lower~~operating ~~gains~~expenses onrelated ~~mark-~~to~~-market~~ ~~related~~response to ~~Broadsmart~~activist ~~included~~shareholders, management change and investments made in ~~operating~~the ~~expenses~~SMB segment incurred in 2017.

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2016~~37

Net Revenues

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

· $1.7 million decrease in revenues from the sale of magicJack devices primarily reflecting lower retail sales volume, lower average revenue per unit sold due to promotional offers and a proposed consumer telecommunications tax settlement;

· $5.1 million decrease in access right renewal revenues due to customer churn, promotional offers and the number of long-term renewals in the customer base that are at lower average annual revenues;

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

· $1.0 million decrease in revenues from access and wholesale charges resulting from lower network traffic.

These decreases in components of net revenue were partially offset by i) an increase of $2.1 million in revenues from UCaaS reflecting a full nine months of revenue in the current year, ii) an increase of $0.4 million in shipping and handling and iii) an increase of $0.4 million in other revenues.

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

Cost of Revenues

Total cost of revenues was $25.4 million and $27.6 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of approximately $2.1 million, or 7.7%. The primary changes in cost of revenues were: (i) a $2.1 million decrease in network and carrier charges primarily as a result of lower traffic substantially resulting from the elimination of free app users at the end of the second quarter of 2016, and (ii) $0.4 million decrease in other cost of revenues primarily attributable to a decrease in personnel related costs; partially offset by: i) a $0.9 million increase in UCaaS related cost of goods sold, reflecting a full nine months of operations.

Operating Expenses

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

· A $31.0 increase in impairment of intangible assets consisting of a $31.5 million impairment of intangible assets, including goodwill, related to the Enterprise segment in 2017 compared to $0.5 million impairment of domain names and other intangibles in 2016. Refer to Note 3, “Impairment of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets” and Note 7, “Goodwill” in the Notes to our unaudited condensed consolidated financial statements included in Item 1 herein for further details.

· a $0.8 million increase in marketing expense, primarily related to increased advertising research in the Core Consumer segment and a shift from marketing the magicJack device to marketing magicJack Spark,

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

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

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

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

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

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

Income Taxes

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

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

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

For the nine months ended September 30, 2017, we recorded an income tax benefit of ($7.2) million, which is lower than the expected tax benefit of ($10.0) million, using the statutory income tax rate of 34% due, in part, to increases to uncertain tax positions of $1.8 million, and a reduction to our deferred tax assets related to the surrender of options by certain former executive officers and the forfeiture of options totaling $2.8 million, partially offset by revaluations of our Israel net operating loss carryforwards of ($0.8) million and other smaller discrete items. The discrete items noted above were partially offset by the lower jurisdictional tax rate charged on the operating income of the Company’s Israeli operations.

The 2017 estimated annual effective tax rate is expected to approximate 22.0%, excluding discrete tax items, but may fluctuate during the year due to changes in our jurisdictional income and due to the timing of other discrete period transactions.

Net (Loss) Income Attributable to Common Shareholders

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

BUSINESS TRENDS

~~Revenues~~Though revenues in our Core Consumer segment continued to decline during the ~~nine~~three months ended ~~September~~March 3031, ~~2017.~~2018, we were able to control costs and generate positive operating cash flows and net income. We remain encouraged by the loyalty of our existing customer base and we continue to undertake efforts to improve retention, invest in new product development and innovation, capitalize on our strong retail distribution, and optimize the marketing of our magicJack products. During the ~~three~~first ~~months~~quarter ~~ended~~of ~~September~~2018, 30we refocused on our magicJack for Business (“mJB”) product offerings for small businesses, ~~2017~~making improvements to our web-site buy-flow and integration with our internal provisioning systems, weto ~~implemented~~enable ~~initiatives~~new small business customers to ~~optimize~~buy ~~auto~~our product directly from our web-~~renewal~~site, and ~~reduce~~have ~~breakage.~~their Wepurchased ~~remain~~products ~~encouraged~~and atservices configured and shipped without the ~~progress~~need wefor ~~have~~any ~~made~~agent contact. We also continued to improve our mJB mobile app, offering improved HD voice quality and user account management. We also ~~believe~~continue ~~that~~to ~~because~~focus ofon customer care and satisfaction, introducing new free feature enhancements based on user feedback, such as functionality to allow our ~~brand~~customers ~~awareness~~to screen out incoming calls from automated dialers (“robo-caller”), and functionality to enable our ~~existing~~customers ~~investment~~to ininstantly ~~mobile~~renew ~~apps~~their service plans. During the quarter our Better Business Bureau rating improved to A+. We believe that because of our brand awareness, and our vertically integrated operations and Competitive Local Exchange Carrier (“CLEC”) network with significant excess capacity, we can effectively compete infor ~~the~~residential ~~fast-growing mobile second line market~~ and ~~build~~small ~~new~~business ~~revenue streams for the future~~customers. We believe that there will continue to be solid demand for our low priced, unlimited phone service, whether through our magicJack devices, our mobile ~~Apps~~apps, our small business offerings or a combination of all ~~both~~three.

~~During~~In ~~the~~our ~~nine~~Enterprise ~~months~~segment, during the quarter ended ~~September~~March 3031, ~~2017~~2018, we continued ~~steps~~efforts to improve the operating results and bolster integration efforts ~~for the Enterprise segment~~. We ~~continue~~continued to focus on improving customer churn and expanding Broadsmart sales channels~~. In~~ ~~the~~and ~~first~~sales ~~quarter~~for ~~of 2017, following a thorough review of~~ the ~~operations,~~Enterprise ~~sales~~segment. ~~pipeline,~~UCaaS business ~~practices~~was ~~and~~down ~~the~~approximately ~~current~~1.1% ~~customer~~from ~~base, management re-evaluated~~ the ~~segment’s~~prior ~~projections~~year ~~and~~due ~~made significant adjustments~~ to ~~future~~the ~~revenue~~loss ~~growth assumptions. Because~~ of ~~the~~Broadsmart’s ~~continued~~second ~~underperformance~~largest ~~compared to projections and the anticipated~~ customer ~~churn,~~ during the ~~quarter~~second ~~ended~~half ~~March~~of ~~31,~~ 2017, wepartially ~~recognized~~offset aby ~~$31.5~~revenues ~~million~~from ~~impairment~~new ~~on the intangible assets, including goodwill, of the Enterprise reporting unit~~customers. Our ~~Refer~~ability to ~~Note~~limit 3,customer ~~“Impairment~~churn ~~of Intangible Assets, Including Goodwill”, Note 6, “Intangible Assets”~~ and ~~Note~~continue ~~7, “Goodwill” in the Notes~~ to expand our ~~unaudited~~sales ~~condensed~~channels ~~consolidated~~are ~~financial~~critical ~~statements~~to ~~included~~the infuture ~~Item~~success 1of ~~herein~~the ~~for~~Enterprise ~~further details~~segment.

Across all segments we have continued our work to consolidate operations, control costs and to eliminate redundant functions across our business lines.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations, cash on hand and investments. As of ~~September~~March 3031, ~~2017~~2018, we had cash and cash equivalents of $5153.39 million, investments of $0.4 million and net accounts receivable of $2.50 million. Our accounts payable at ~~September~~March 3031, ~~2017~~2018 were $31.24 million.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018, we generated operating cash flows of $01.3 million, as compared to negative operating cash flows of $~~13.~~3.8 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017. The $135.01 million ~~decrease~~improvement ~~was~~reflects savings in marketing and general and administrative expenses, primarily ~~due~~related to the investments in the SMB and Enterprise segments, and costs associated with executive management turn-over and management’s response to activist shareholder initiatives. Additionally, we made a payment of $3.31 million infor estimated income taxes, ~~declining sales~~ in the ~~core~~first ~~magicJack~~quarter ~~business~~of ~~during~~2017 ~~the~~and ~~nine~~did ~~months~~not ~~ended~~have ~~September~~a ~~30,~~similar ~~2017,~~payment ~~and~~during ~~higher~~the ~~general~~comparative ~~and~~quarter ~~administrative~~in ~~expenses,~~2018. These ~~primarily~~cost ~~reflecting~~savings ~~costs~~were ~~associated~~partially ~~with~~offset ~~executive~~by ~~management~~lower ~~changes,~~sales ~~management’s~~in ~~response~~the toCore ~~activist~~Consumer ~~shareholder~~magicJack ~~initiatives~~business ~~and~~during the ~~strategic~~three ~~process.~~months ~~The~~ended ~~net~~March ~~loss~~31, ~~was ($22~~2018.2) ~~million~~Net income for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 was $2.0 million as compared to a net ~~income~~loss of ($623.52) million for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017.

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

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

Cash Flow – Operating Activities

Net cash provided by operating activities was $01.3 million ~~and~~for the three months ended March 31, 2018. Net cash used by operating activities was $133.08 million for the ~~nine~~three months ended ~~September~~March 3031, 2017 ~~and 2016, respectively~~.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018, net cash provided by operating activities was primarily attributable to:

· ($~~22.~~2).0 million of net ~~loss~~income, which included $312.04 million in non-cash items, consisting primarily of (i) $311.50 million ~~impairment loss on intangible assets, including goodwill,~~ of ~~the Enterprise reporting unit, (ii) $3.4 million of~~ depreciation and amortization expense, and (~~iii~~ii) $21.1 million of stock-based compensation expense~~, and (iv) a $1.8 million increase in uncertain tax positions, partially offset by a $7.9 million deferred income tax benefit~~; and

· Changes in operating assets and liabilities of (i) a $21.58 ~~million~~decrease ~~increase~~ in ~~prepaid~~accounts ~~income taxes~~payable, (ii) a $01.7 million ~~increase in deposits and other current assets, (iii) a $9.4 million~~ decrease in ~~deferred revenue, (iv) a $2.4 million decrease in~~ accrued expenses and other current liabilities., and (viii) a $1.0.6 million decrease in ~~other~~deferred ~~non-current~~revenue/contract liabilities. These items were partially offset by (i) a $0.65 million decrease in ~~accounts~~prepaid ~~receivable,~~income ~~ii)~~taxes ~~a $2.3 million decrease in inventory levels, iii) a $2.0 million decrease in receivable from earnout escrow~~ and iv(ii) a $0.64 million ~~increase~~decrease in accounts ~~payable~~receivable.

~~During the nine months ended September 30, 2016, net cash provided by operating activities was primarily attributable to:~~38

·During ~~$6.5~~the ~~million~~three ofmonths ~~net~~ended ~~income~~March ~~which included $7.6 million in non-cash items consisting primarily of (i) $3.2 million of stock-based compensation expense~~31, ~~(ii) $3.5 million of depreciation and amortization expense~~2017, ~~(iii)~~net acash ~~$0.5~~used ~~million impairment of intangible assets, (iv) a $1.5 million increase~~ in ~~uncertain~~operating ~~tax~~activities ~~positions,~~was ~~and~~primarily ~~(v)~~attributable ~~a $0.6 million increase in deferred income tax provision, partially offset by a $2.0 million gain on mark-~~to~~-market related to the Broadsmart Earnout Payment;~~:

· ~~Changes in operating assets and liabilities of~~ (~~i) a~~ $023.72) million ~~decrease~~of innet ~~accounts~~loss, ~~receivable;~~which ~~(ii)~~included a $124.64 million ~~decrease~~ in ~~inventory~~non-cash ~~levels;~~items, ~~(iii)~~consisting aprimarily ~~$2.2~~of ~~million decrease in prepaid income taxes;~~ (ivi) a $131.5 million ~~increase~~impairment inloss ~~accounts~~on ~~payable~~intangible assets, ~~and~~including ~~(v)~~goodwill, aof ~~$1.8~~the ~~million~~Enterprise ~~increase~~reporting inunit, ~~income taxes payable. These items were partially offset by:~~ (~~i) a $7.8 million decrease in deferred revenue; (~~ii) a $01.25 million ~~decrease~~of indepreciation ~~accrued expenses~~ and ~~other~~amortization ~~current~~expense, ~~liabilities;~~ (iii) a $0.27 million ~~increase~~of instock-based ~~deposits~~compensation expense, and ~~other current assets;~~ (iv) a $0.1.4 million ~~decrease~~increase in ~~other~~uncertain ~~non-current~~tax ~~liabilities~~positions, ~~and~~partially ~~(v)~~offset by a $010.29 million ~~increase~~deferred inincome ~~deferred~~tax ~~costs.~~benefit; and

Changes in operating assets and liabilities of (i) a $4.9 million increase in prepaid income taxes, and (ii) a $2.1 million decrease in deferred revenue. These items were partially offset by (i) a $0.4 million decrease in accounts receivable, and (ii) a $1.1 million decrease in inventory levels.

Cash Flow – Investing Activities

~~Net~~No significant cash was used in ~~investing~~or ~~activities~~provided ~~was~~by ~~$1.3~~financing ~~million~~activities ~~and $40.4 million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2017, and 2016, respectively~~2018. Net cash used in investing activities ~~during the nine months ended September 30, 2017~~ was ~~primarily attributable to the acquisition of software licenses~~$0.3 ~~Net~~million ~~cash~~for ~~used in investing activities during~~ the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, ~~was~~ primarily ~~attributable~~related to ~~the~~purchases ~~acquisition~~ of ~~Broadsmart~~property and equipment.

Cash Flow –Financing Activities

No significant cash was (used in) or provided by financing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of ~~September~~March 3031, ~~2017~~2018.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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

Exposure to Interest Rates

The primary objective of our investment activities is to preserve our capital until it is required to fund operations while at the same time maximizing the income we receive from our investments without incurring investment market volatility risk. Our investment income is sensitive to the general level of United States interest rates. In this regard, changes in the United States interest rates affect the interest earned on our cash and cash equivalents. Due to the short-term nature of our cash and cash equivalent holdings, a 10% movement in market interest rates would not materially impact the total fair value of our portfolio as of ~~September~~March 3031, ~~2017~~2018.

Exposure to Exchange Rates

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

Exposure to Equity and Derivative Prices

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

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

During the quarter ended ~~September~~March 3031, ~~2017~~2018, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) ~~in the Core business~~ that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the quarter ended September 30, 2017, as part of the process of further integrating and consolidating the back-office function of the Enterprise segment with the Core business, the Company began the process of implementing changes to the accounts receivable and billing functions that it believes will ultimately result in improvements to processes and procedures. The Company does not believe that these changes will materially affect our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

~~Legal~~We ~~Proceedings~~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.

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

ITEM 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017.

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

~~Not~~In ~~applicable~~March 2018, the Company purchased 6,365 of its ordinary shares at $8.40 per share, for an aggregate purchase price of approximately $53 thousand, in settlement of the withholding tax liability on vesting of restricted stock.

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)
January 1, 2018 - January 31, 2018		0	$	-		0	$	-
February 1, 2018 - February 28, 2018		0	$	-		0	$	-
March 1, 2018 - March 31, 2018		6,365	$	8.40		0	$	-
Total		6,365				0

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

Not applicable.

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ITEM 6. Exhibits

Exhibit No.	Description
3.1	Amended and Restated Articles of Association (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on April 2, 2013)
10.1*	Second Amendment to Executive Employment Agreement, effective as of December 31, 2016, by and between magicJack VocalTec Ltd. and Gerald Vento (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 5, 2017)
10.1	Amendment No. 1 to Agreement and Plan of Merger
10.2	Settlement Agreement, dated January 31, 2017, entered into between the Company, David L. Kanen and Kanen Wealth Management LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 2, 2017)
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.

10.3*	Employment Agreement between the Company and Don Carlos Bell III, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2017, Commission File No. 000-27648)**
10.4*	Stock Option Agreement between the Company and Don Carlos Bell III, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2017, Commission File No. 000-27648)
10.5*	Restricted Stock Agreement between the Company and Don Carlos Bell III, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 6, 2017, Commission File No. 000-27648)
10.6*	Employment Agreement between the Company and Thomas Fuller, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017)**
10.7*	Stock Option Agreement between the Company and Thomas Fuller, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017)
10.8*	Restricted Stock Agreement between the Company and Thomas Fuller, dated May 8, 2017 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017)
10.9*	Amended and Restated magicJack VocalTec Ltd. 2013 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2017, Commission File No. 000-27648)
10.10*	Amended and Restated magicJack VocalTec Ltd. 2013 Israeli Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2017, Commission File No. 000-27648)
10.11*	Amendments to Independent Contractor and Stock Option Agreements and Releases of Claims between the Company and Gerald Vento, dated June 17, 2017 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2017)
31.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
32.2	Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.

______________________

* Denotes management contract or compensatory plan or arrangement.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	magicJack VocalTec Ltd. (Registrant)
Dated: November 9, 2017	By: /s/ Don C. Bell, III Don C. Bell. III President and Chief Executive Officer
Dated: May 10, 2018	By: /s/ Don C. Bell, III Don C. Bell. III President and Chief Executive Officer
Dated: November 9, 2017	By: /s/ Thomas Fuller Thomas Fuller Executive Vice President and Chief Financial Officer
Dated: May 10, 2018	By: /s/ Thomas Fuller Thomas Fuller Executive Vice President and Chief Financial Officer

4943

Exhibit Index

31.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.
10.1	Amendment No. 1 to Agreement and Plan of Merger
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.
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.
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.
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.
32.2	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.
32.1	Certification of CEO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
32.2	Certification of CFO of magicJack VocalTec Ltd. required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.

50 44

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