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EX-32.2 - CERTIFICATION - Straight Path Communications Inc.f10q1017ex32-2_straightpath.htm
EX-32.1 - CERTIFICATION - Straight Path Communications Inc.f10q1017ex32-1_straightpath.htm
EX-31.2 - CERTIFICATION - Straight Path Communications Inc.f10q1017ex31-2_straightpath.htm
EX-31.1 - CERTIFICATION - Straight Path Communications Inc.f10q1017ex31-1_straightpath.htm
EX-10.5 - IDT SETTLEMENT AGREEMENT AND RELEASE, DATED OCTOBER 24, 2017, RELATING TO THE SE - Straight Path Communications Inc.f10q1017ex10-5_straightpath.htm
EX-10.3 - OMNIBUS AMENDMENT AND WAIVER TO LOAN AGREEMENT BETWEEN THE REGISTRANT AND EACH L - Straight Path Communications Inc.f10q1017ex10-3_straightpath.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2017

 

or

 

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

 

Commission File Number: 1-36015

 

STRAIGHT PATH COMMUNICATIONS INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   46-2457757
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
5300 Hickory Park Drive, Suite 218, Glen Allen, Virginia   23059
(Address of principal executive offices)   (Zip Code)

 

(804) 433-1522

(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 Web site, 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   ☐

 

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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer (Do not check if a 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   ☒

 

As of December 11, 2017, the registrant had outstanding 787,163 shares of Class A common stock and 11,980,664 shares of Class B common stock. Excluded from these numbers are 39,693 shares of Class B common stock held in treasury by Straight Path Communications Inc.

 

 

 

 

 

 

Straight Path Communications Inc.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited)   1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risks 29
Item 4. Controls and Procedures 29
     
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Mine Safety Disclosures 30
Item 5. Other Information 30
Item 6. Exhibits 31
   
SIGNATURES 32

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.    Financial Statements (Unaudited)

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share data)

 

   October 31,
2017
  July 31,
2017
   (Unaudited)   
       
Assets          
Current assets:          
Cash and cash equivalents  $7,559   $8,535 
Trade accounts receivable, net of allowance for doubtful accounts of $19 and $19, respectively   25    51 
Inventory   1,588    1,588 
Assets held for sale – Straight Path IP Group   -    3 
Prepaid expenses and other current assets   402    118 
Total current assets   9,574    10,295 
Prepaid expenses – related to the sale of Straight Path IP Group   -    1,029 
Intangible assets   365    365 
Other assets   158    161 
Total assets  $10,097   $11,850 
           
Liabilities and Deficiency          
Current liabilities:          
Trade accounts payable (related party of $57 and $29, respectively)  $3,495   $3,210 
Accrued expenses (related party of $0 and $900, respectively)   12,360    3,502 
Dividend payable   3,750    - 
Liabilities held for sale – Straight Path IP Group   -    357 
FCC consent decree payable   -    3,500 
Loans payable, net of debt discount of $541 and $1,101   3,334    11,274 
Deferred revenue   174    217 
Total current liabilities   23,113    22,060 
Settlement of litigation   7,200    7,200 
Deferred revenue - long-term portion   64    75 
Total liabilities   30,377    29,335 
Commitments and contingencies          
Deficiency          
Straight Path Communications Inc. stockholders’ deficiency:          
Preferred stock, $0.01 par value; 3,000 shares authorized; no shares issued and outstanding   -    - 
Class A common stock, $0.01 par value; 2,000 shares authorized; 787 shares issued and outstanding at October 31, 2017 and July 31, 2017   8    8 
Class B common stock, $0.01 par value; 40,000 shares authorized; 12,020 and 11,989 shares issued, 11,980 and 11,949 shares outstanding as of October 31, 2017 and July 31, 2017   120    120 
Additional paid-in capital   52,719    38,377 
Accumulated deficit   (72,699)   (52,872)
Treasury stock, 40 shares at cost at October 31, 2017 and July 31, 2017   (428)   (428)
Total Straight Path Communications Inc. stockholders’ deficiency   (20,280)   (14,795)
Noncontrolling interests   -    (2,690)
Total deficiency   (20,280)   (17,485)
Total liabilities and deficiency  $10,097   $11,850 

  

See accompanying notes to consolidated financial statements.

 

 1 

 

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, except per share data)

 

   Three Months Ended 
   October 31, 
   2017   2016 
         
Revenues  $165   $159 
           
Costs and expenses:          
Direct cost of revenues   17    41 
Research and development   137    160 
Selling, general and administrative (related party of $21 and $128, respectively)   3,241    3,361 
           
Total costs and expenses   3,395    3,562 
           
Loss from operations before profit sharing settlement   (3,230)   (3,403)
           
Profit sharing settlement   10,000    - 
           
Loss from operations   (13,230)   (3,403)
           
Other income (expense):          
Interest expense including amortization of debt discounts   (836)   - 
Interest income   6    7 
Other income   -    22 
           
Total other income (expense)   (830)   29 
           
Loss from continuing operations before provision for income taxes   (14,060)   (3,374)
Provision for income taxes   (7)   (7)
           
Loss from continuing operations   (14,067)   (3,381)
           
Loss from discontinued operations:          
  Loss from discontinued operations   (1,489)   (874)
  Loss attributable to noncontrolling interests   229    124 
           
Loss from discontinued operations attributable to Straight Path Communications Inc.   (1,260)   (750)
           
Net loss attributable to Straight Path Communications Inc.  $(15,327)  $(4,131)
           
Loss per share attributable to Straight Path Communications Inc. stockholders:          
Basic and diluted – continuing operations  $(1.13)  $(0.28)
Basic and diluted – discontinued operations   (0.10)   (0.06)
Basic and diluted - total  $(1.23)  $(0.34)
           
Weighted-average number of shares used in calculation of loss per share:          
Basic and diluted   12,403    12,018 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENT OF EQUITY

Three Months Ended October 31, 2017  

(Unaudited)

(In Thousands)

 

   Class A   Class B   Additional                 
   Common Stock   Common Stock   Paid-In   Accumulated   Treasury   Noncontrolling     
   Shares   Amount   Shares   Amount   Capital   Deficit   Stock   Interests   Total 
                                     
Balance as of August 1, 2017   787   $8    11,989   $120   $38,377   $(52,872)  $(428)  $(2,690)  $(17,485)
                                              
Capital contribution related to IDT settlement agreement and release   -    -    -    -    10,000    -    -    -    10,000 
                                              
Gain on sale of Straight Path IP Group   -    -    -    -    5,195    -    -    -    5,195 
                                              
Removal of noncontrolling interests due to sale of Straight Path IP Group   -    -    -    -    (2,919)   -    -    2,919    - 
                                              
Stock-based compensation – restricted common stock   -    -    -    -    951    -    -    -    951 
                                              
Common stock issued for exercises of stock options   -    -    1    -    8    -    -    -    8 
                                              
Common stock issued for exercises of warrants   -    -    30    -    1,057    -    -    -    1,057 
                                              
Issuance of warrants with loans payable   -    -    -    -    50    -    -    -    50 
                                              
Dividend   -    -    -    -    -    (4,500)   -    -    (4,500)
                                              
Net loss   -    -    -    -    -    (15,327)   -    (229)   (15,556)
                                              
Balance as of October 31, 2017   787   $8    12,020   $120   $52,719   $(72,699)  $(428)  $-   $(20,280)

  

See accompanying notes to consolidated financial statements.

 

 3 

 

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

   Three Months Ended
October 31,
   2017  2016
       
Operating activities:          
Net loss  $(15,556)  $(4,255)
           
Adjustments to reconcile net loss to net cash  used in operating activities:          
Stock-based compensation - restricted common stock   951    2,417 
Stock-based compensation - stock options   -    97 
Amortization of debt discounts   649    - 
Changes in assets and liabilities:          
Trade accounts receivable, net   26    (7)
Inventory   -    - 
Assets held for sale - Straight Path IP Group   3    - 
Prepaid expenses and other current assets   (1,308)   (7)
Prepaid expenses - related to sale of Straight Path IP Group   1,029    - 
Other assets   3    (1)
Trade accounts payable   285    383 
Accrued expenses   9,077    (520)
Liabilities held for sale - Straight Path IP Group   (357)   - 
FCC consent decree payable   (3,500)   - 
Deferred revenue   (54)   95 
Income taxes payable   -    (2)
Net cash used in operating activities   (8,752)   (1,800)
           
Investing activities:          
Proceeds from sale of Straight Path IP Group   6,000    - 
Net cash provided by investing activities   6,000    - 
           
Financing activities:          
Capital contribution related to IDT settlement agreement and release   10,000    - 
Dividend related to IDT settlement agreement and release   (750)   - 
Payments of loans payable   (8,500)   - 
Costs related to loans payable   (39)   - 
Common stock issued upon exercise of warrants   1,057    - 
Common stock issued upon exercise of stock options   8    - 
Net cash provided by financing activities   1,776    - 
           
Net decrease in cash and cash equivalents   (976)   (1,800)
Cash and cash equivalents at beginning of period   8,535    11,361 
Cash and cash equivalents at end of period  $7,559   $9,561 
           
Supplemental schedule of noncash activities          
Gain on sale of Straight Path IP Group classified as additional paid-in capital  $5,195   $- 
Elimination of noncontrolling interests due to sale of Straight Path IP Group  $2,919   $- 
Issuance of warrants with loans payable  $50   $- 
Dvidend payable  $3,750   $- 
           
Supplemental cash flow information          
Cash paid during the period for interest  $383   $- 
Cash paid during the period for income taxes  $7   $7 

  

See accompanying notes to consolidated financial statements.

 

 4 

 

 

STRAIGHT PATH COMMUNICATIONS INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited Consolidated Financial Statements of Straight Path Communications Inc. and its subsidiaries (“Straight Path”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended October 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2018. The balance sheet at July 31, 2017 has been derived from Straight Path’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in Straight Path’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

Straight Path Communications Inc., a Delaware corporation, was incorporated in April 2013. Straight Path owns 100% of Straight Path Spectrum, Inc. (“Straight Path Spectrum”) and Straight Path Ventures, LLC (“Straight Path Ventures”), and until October 24, 2017, we owned 84.5% of Straight Path IP Group, Inc. (“Straight Path IP Group”). In these financial statements, the terms “the Company,” “Straight Path,” “we,” “us,” and “our” refer to Straight Path, Straight Path Spectrum, Straight Path Ventures, Straight Path IP Group, and their respective subsidiaries on a consolidated basis. All material intercompany balances and transactions have been eliminated in consolidation.

 

The Company was formerly a subsidiary of IDT Corporation (“IDT”). On July 31, 2013, the Company was spun-off by IDT to its stockholders and became an independent public company (the “Spin-Off”). The Company authorized the issuance of two classes of its common stock, Class A (“Class A common stock”) and Class B (“Class B common stock”).

 

On May 11, 2017, the Company entered into a merger agreement with Verizon Communications, Inc. (“Verizon”) and a Verizon subsidiary. For a further discussion, see Note 2 – Verizon Merger Agreement.

 

On January 11, 2017, the Company entered into a consent decree with the Federal Communications Commission (the “FCC”) settling the FCC’s investigation regarding Straight Path Spectrum’s spectrum licenses (the “Consent Decree”). The Company agreed to pay an initial civil penalty of $15 million (the “Initial Civil Penalty”). For further discussion, see Note 14 – Commitments and Contingencies - Regulatory Enforcement.

 

On March 7, 2017, the Company and lead plaintiff in Zacharia v. Straight Path Communications Inc. et al , No. 2:15-cv-08051-JMV-MF (D.N.J.), entered into a binding memorandum of understanding to settle the putative shareholder class action and dismiss the claims that were filed against the Defendants in that action. Under the agreed terms, the Company will provide for a $2.25 million initial payment (the “Initial Payment”) which will be fully covered by insurance policies maintained by the Company and a $7.2 million additional payment (the “Additional Payment”). For a further discussion, see Note 14 – Commitments and Contingencies - Shareholder Litigation.

 

On April 9, 2017, the Company and IDT entered into a binding term sheet (the “IDT Term Sheet”) to settle potential claims related to certain claims under agreements related to the Spin-Off, and to sell the Company’s interest in Straight Path IP Group to IDT. On October 24, 2017, the Company, IDT and other parties entered into a Settlement Agreement and Release (the “IDT Settlement Agreement”) and related agreements and consummated the settlement. For further discussion, see Note 3 – Settlement of Claims with IDT and Sale of Straight Path IP Group.

 

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., Fiscal 2018 refers to the fiscal year ending July 31, 2018).

 

Note 2—Verizon Merger Agreement

 

On April 9, 2017, we signed the Agreement and Plan of Merger with AT&T Inc. and Switchback Merger Sub Inc. (the “AT&T Merger Agreement”). Among the terms, the AT&T Merger Agreement allowed us to terminate the AT&T Merger Agreement if we received a better offer (as defined). If such an offer was accepted, we would be required to pay AT&T a termination fee of $38 million. We did receive better offers from Verizon.

 

On May 11, 2017, we entered into an Agreement and Plan of Merger (the “Verizon Merger Agreement”) with Verizon, a Delaware corporation, and Waves Merger Sub I, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Verizon (“Merger Sub”). The Verizon Merger Agreement called for Verizon to pay the $38 million to AT&T on our behalf. Such payment was made by Verizon on May 11, 2017.

 

Per Section 7.3(b) of the Verizon Merger Agreement, “Termination by the Company,” if we terminated the Verizon agreement as a result of receiving a Superior Proposal (as defined), before the Requisite Company Vote (as defined) being obtained, then we would repay Verizon the $38 million paid to AT&T. This contingency would create a liability to us only if we accepted a Superior Proposal. As of July 31, 2017, we did not receive and did not enter into an agreement for a Superior Proposal. The Requisite Company Vote occurred on August 2, 2017, as further noted below. As a result, we never owed the termination fee to Verizon.

 

 5 

 

 

Pursuant to the Verizon Merger Agreement, among other things, Merger Sub will be merged with and into the Company (the “Merger”) with the Company being the surviving corporation of the Merger.

 

At the effective time of the Merger (the “Effective Time”), each share of Class A common stock, par value $0.01 per share, of the Company and each share of Class B common stock, par value $0.01 per share, of the Company (collectively, the “Shares”) issued and outstanding immediately prior to the Effective Time (other than Shares owned by Verizon, Merger Sub or any other direct or indirect subsidiary of Verizon, and Shares owned by the Company or any direct or indirect subsidiary of the Company, and in each case not held on behalf of third parties) will be converted into the right to receive a number of validly issued, fully paid in and nonassessable shares of common stock of Verizon (“Verizon Shares”) equal to the quotient determined by dividing $184.00 by the five (5)-day volume-weighted average per share price ending on the second full trading day prior to the Effective Time, rounded to two decimal points, of Verizon Shares on the New York Stock Exchange (the “Verizon Share Value”) and rounded to the nearest ten-thousandth of a share (collectively and in the aggregate, the “Merger Consideration”). It is our intention that (i) the Merger shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the Treasury regulations promulgated thereunder, and (ii) the Verizon Merger Agreement shall constitute a plan of reorganization within the meaning of Treasury Regulation Section 1.368-2(g), as noted in the Verizon Merger Agreement.

 

Our board of directors (the “Board”) has unanimously approved the Verizon Merger Agreement and determined that the Verizon Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to, and in the best interests of, the Company and its stockholders, and has resolved to recommend that our stockholders adopt the Verizon Merger Agreement.

 

We agreed, subject to certain exceptions with respect to unsolicited proposals, not to directly or indirectly solicit competing acquisition proposals or to participate in any discussions concerning, or provide non-public information in connection with, any unsolicited acquisition proposals. However, the Board may, subject to certain conditions, change its recommendation in favor of approval of the Verizon Merger Agreement if, in connection with receipt of a superior proposal or an event occurring after the date of the Verizon Merger Agreement with respect to the Company, it determines in good faith, after consultation with its financial advisors and outside legal counsel, that the failure to take such action would be inconsistent with its fiduciary duties to the Company’s stockholders under applicable law.

 

On August 2, 2017, we held a special meeting of our stockholders to vote on a proposal to adopt the Verizon Merger Agreement. At such meeting, the proposal to adopt the Verizon Merger Agreement was approved with 89% of the votes entitled to be cast at the special meeting voting; and of the votes cast, approximately 99% of the votes cast in favor of the proposal to adopt the Verizon Merger Agreement. That approval terminated the Board’s ability to consider unsolicited acquisition proposals, change its recommendation of the Merger and terminate the Verizon Merger Agreement in connection therewith.

 

The completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including: (i) receipt of regulatory approvals, including receipt of consent to the Merger from the FCC and the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”); (ii) there being no law or injunction prohibiting consummation of the transactions contemplated under the Verizon Merger Agreement; (iii) the effectiveness of a registration statement on Form S-4 relating to the Merger; (iv) subject to specified materiality standards, the continuing accuracy of certain representations and warranties of each party; (v) continued compliance by each party in all material respects with its covenants; (vi) no event having occurred that has had, or would reasonably be likely to have, a Material Adverse Effect (as defined in the Verizon Merger Agreement) on the Company; (vii) receipt by the Company of an opinion from its tax counsel to the effect that the Merger will qualify as a “reorganization” for United States federal income tax purposes within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended; (viii) receipt of approval for listing the Verizon Shares on the New York Stock Exchange and the NASDAQ Global Select Market, subject to official notice of issuance; and (ix) the FCC consent referred to in clause (i) of this paragraph having become a Final Order (as defined in the Verizon Merger Agreement).

 

We and Verizon filed notification and report forms under the HSR Act with the Federal Trade Commission and the Antitrust Division of the Department of Justice on May 19, 2017. The HSR Act waiting period expired on June 19, 2017, and the condition for HSR Act clearance was satisfied.

 

On June 1, 2017, we and Verizon submitted applications to the FCC seeking consent to transfer control of the Company’s spectrum licenses to Verizon. For further discussion, see Note 14 – Commitments and Contingencies - Regulatory Enforcement.

 

We have made customary representations and warranties in the Verizon Merger Agreement. The Verizon Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to the conduct of our business between the date of the signing of the Verizon Merger Agreement and the closing of the transactions contemplated under the Verizon Merger Agreement. The representations and warranties made by the Company are qualified by disclosures made in its disclosure schedules and SEC filings. None of the representations and warranties in the Verizon Merger Agreement survive the closing of the transactions contemplated by the Verizon Merger Agreement

 

 6 

 

The Verizon Merger Agreement contains certain termination rights for both us and Verizon including upon (i) an uncured breach by the other party which results in the failure of a closing condition, (ii) the failure to receive the approval of the Verizon Merger Agreement by the Company’s stockholders, and (iii) the Company’s Board changing its recommendation in favor of the Verizon Merger Agreement. The Verizon Merger Agreement further provides that, upon termination of the Verizon Merger Agreement, under certain circumstances following a change in recommendation by the Company in connection with its receipt of a superior proposal or due to an Intervening Event (as defined in the Verizon Merger Agreement), the Company may be required to pay Verizon a termination fee equal to $38 million. As a result of the adoption of the Verizon Merger Agreement at the special meeting of our stockholders on August 2, 2017, we never owed the termination fee to Verizon. Either the Company or Verizon may terminate the Verizon Merger Agreement if the completion of the Merger has not occurred on or before February 12, 2018 (as it may be extended as provided below, the “Termination Date”); provided, however, that if regulatory approvals have not been obtained and all other conditions to closing have been satisfied or waived, the Termination Date will automatically be extended for an additional one hundred and eighty days. In addition, Verizon is required to pay us an aggregate amount equal to $85 million (the “Parent Termination Fee”) in the event that the Merger has not closed by the extended Termination Date, and all conditions to closing other than receipt of FCC consent or HSR approval (or expiration of the waiting period under the HSR) have been satisfied or waived. In the event that the Verizon Merger Agreement is terminated other than as a result of Verizon’s breach or under circumstances in which Verizon is required to pay the Parent Termination Fee, we will be required to pay Verizon an amount equal to the AT&T Termination Fee (as defined in the Verizon Merger Agreement) paid by Verizon on our behalf.

 

The Verizon Merger Agreement was attached as Exhibit 2.1 to the Form 8-K filed by the Company with the SEC on May 11, 2017 to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the Company, Verizon or Merger Sub, or to modify or supplement any factual disclosures about the Company or Verizon in their public reports filed with the SEC. The Verizon Merger Agreement includes representations, warranties and covenants of the Company, Verizon and Merger Sub made solely for purposes of the Verizon Merger Agreement and which may be subject to important qualifications and limitations agreed to by the Company, Verizon and Merger Sub in connection with the negotiated terms of the Verizon Merger Agreement. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to the Company’s or Verizon’s SEC filings or may have been used for purposes of allocating risk among the Company, Verizon and Merger Sub rather than establishing matters as facts.

 

The foregoing summary of the Verizon Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Verizon Merger Agreement, which was attached as Exhibit 2.1 to the Form 8-K filed by the Company with the SEC on May 11, 2017.

 

In addition, Howard Jonas, who has the right to vote a majority of the voting power of the Company’s common stock, entered into a voting agreement with Verizon concurrently with the entry into the Verizon Merger Agreement (the “Voting Agreement”). The Voting Agreement provided that Mr. Jonas (holding his Class A shares through a trust) would vote his Class A shares in the Company in favor of the Merger and the other transactions contemplated in the Verizon Merger Agreement, on the terms and subject to the conditions set forth in the Voting Agreement. The Voting Agreement would terminate automatically upon the earliest to occur of (i) the effective time of the Merger, (ii) the valid termination of the Verizon Merger Agreement pursuant to Article VII thereof, (iii) a change of recommendation by the Board in the event of a Superior Proposal or Intervening Event, (iv) any change being made to the terms of the Verizon Merger Agreement that would terminate the Trust’s or Mr. Jonas’s obligation to vote in favor of the Merger (on the terms and subject to the conditions in the Verizon Merger Agreement) or (v) February 12, 2018. We are not a party to the Voting Agreement. At the special meeting of our stockholders on August 2, 2017, Mr. Jonas voted his shares in the Company in favor of the Merger.

 

The foregoing summary of the Voting Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the form of Voting Agreement, which is attached as Exhibit A to the Verizon Merger Agreement, which was attached as Exhibit 2.1 to the Form 8-K filed by us with the SEC on May 11, 2017 and is incorporated herein by reference.

 

The Company has incurred costs totaling approximately $60,000 related to the Verizon Merger Agreement in Fiscal 2018. These costs were included in selling, general and administrative expenses.

 

If the Merger is consummated, the Company estimates that it will incur various fees and expenses, which will be paid by Verizon. These fees and expenses include but are not limited to the following:

 

  1. Payment to the FCC of 20% of the Proceeds (as defined in the FCC Consent Decree) (see Note 14 – Commitments and Contingencies - Regulatory Enforcement)
     
  2. Financial advisor and legal fees - $63.9 million
     
  3. Balance owed to PTPMS Communications, LLC (“PTPMS”) (see Note 14 – Commitments and Contingencies - PTPMS)
     
  4. Balance owed to Former Chief Executive Officer of Straight Path Spectrum (the “Former SPSI CEO”) - $3.0 million (see Note 14 – Commitments and Contingencies - Other Commitments and Contingencies)
     
  5. The following severance and retention payments to certain members of management:

 

In connection with its entry into the AT&T Merger Agreement and then the Verizon Merger Agreement, the Company approved severance arrangements for Davidi Jonas (“Jonas”), the Company’s Chief Executive Officer and President, Jonathan Rand (“Rand”), the Company’s Chief Financial Officer and treasurer, Zhouyue (Jerry) Pi (“Pi”), the Company’s Chief Technology Officer, and David Breau (“Breau”), the Company’s General Counsel (each an “Executive”, and collectively, the “Executives”). The severance arrangements provide that if, within two years following the consummation of the Merger, the Company terminates an Executive’s employment without “Cause” or an Executive resigns for “Good Reason” (each such term to be defined in the severance agreements to be entered into prior to the consummation of the Merger), the Executive shall be entitled to receive a lump sum payment equal to one and one-half times (1.5x) (two and one-half times (2.5x) for Jonas) the sum of the Executive’s annual base salary and target bonus, subject to the execution of a release of claims.

 7 

 

The Company also approved retention bonus payments for Jonas, Rand and Breau in the amounts of $1,800,000, $1,000,000 and $1,000,000, respectively. Subject to continued employment through the consummation of the Merger, such individuals shall be entitled to receive their retention bonus payment in a lump sum within thirty days following the consummation of the Merger.

 

Note 3—Settlement of Claims with IDT and Sale of Straight Path IP Group 

 

On April 9, 2017, the Company and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of potential indemnification claims asserted by each of the Company and IDT in connection with liabilities that may exist or arise relating to the subject matter of the investigation by (including but not limited to fines, fees or penalties imposed by) the FCC (the “Mutual Release”). On October 24, 2017, the Company, IDT and other parties entered into a Settlement Agreement and Release (the “IDT Settlement Agreement”) and related agreements, and consummated the settlement.

 

Pursuant to the IDT Settlement Agreement, in exchange for the Mutual Release, the parties effected the following actions:

 

1.IDT paid the Company $10 million and the right to receive 22% of the net proceeds of the Straight Path IP Group patent portfolio (as described in more detail below) in settlement of various claims. Such payment was deemed to be a tax-free contribution to capital by IDT effective prior to the Spinoff;
   
2.IDT paid the Company $6 million for the Company’s ownership interest in Straight Path IP Group; and
   
3.

The Company created a trust (the beneficial interests in which will be owned by Class B common stockholders of the Company) that will be entitled to receive 22 percent of the net proceeds, if any, received by Straight Path IP Group from any license, and certain transfers or assignments of any of the patent rights held, or any settlement, award or judgment involving any of the patent rights (including any net proceeds received after the closing of the Merger). The Company agreed to contribute $4,500,000 to the trust. Such contribution has been classified as a dividend. As of October 31, 2017 and to the date of the filing of this report, the Company contributed $750,000. The trust agreement provides that the Company will pay the remaining $3.75 million at the earlier of (i) the closing date under the Verizon Merger Agreement or (ii) August 11, 2018.

 

As discussed above, we sold our interest in Straight Path IP Group and the Company recognized a gain of $2,276,000 net of noncontrolling interests. Such gain was classified as an increase to additional paid-in capital due to the voting interests Howard Jonas has in each entity.

 

The Company incurred costs totaling approximately $1,029,000 related to the negotiation and execution of the IDT Settlement Agreement. These costs were included in calculating the gain recognized by the Company.

 

As a result of the sale, the operations of Straight Path IP Group are classified as discontinued operations in the consolidated statements of operations. The statement of operations for Fiscal 2017 have been restated to conform to the current presentation. The discontinued operations of Straight Path IP Group for Fiscal 2018 and Fiscal 2017 are summarized below: 

   Three Months Ended 
   October 31, 
   2017   2016 
   (in thousands) 
         
Revenues  $-   $- 
           
Costs and expenses:          
Selling, general and administrative   1,294    875 
           
Total costs and expenses   1,294    875 
           
Loss from operations   (1,294)   (875)
           
Other income (expense):          
Interest expense including amortization of debt discounts   (195)   - 
Interest income   -    2 
           
Total other income (expense)   (195)   2 
           
Loss provision for income taxes   (1,489)   (873)
Provision for income taxes   -    (1)
           
Net loss   (1,489)   (874)
           
Loss attributable to noncontrolling interests   229    124 
           
Net loss from discontinued operations attributable to Straight Path Communications Inc.  $(1,260)  $(750)

 8 

 

 

Note 4—Summary of Significant Accounting Policies and Recent Pronouncements

 

The Company’s significant accounting policies are described in Note 1 to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended July 31, 2017.

 

In May 2014, ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) was issued. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to obtain or fulfill a contract, such as sales commissions, be capitalized as an asset and amortized as revenue is recognized. Adoption of the new rules could affect the timing of both revenue recognition and the incurrence of contract costs for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards.

 

ASU 2014-09 was scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date” (“ASU 2015-14”) which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods after December 15, 2017 including interim periods within that reporting period.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will adopt the new standard effective August 1, 2018. The Company is currently evaluating the impact of adoption and the implementation approach to be used but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements as of the date of the filing of this report.

 

Effective February 1, 2017, the Company adopted ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”) as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards, which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The adoption of ASU 2015-03 did not have a material impact on the Company’s consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments also require an entity to present separately, in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. This guidance is effective for fiscal years beginning after December 15, 2017 (quarter ending October 31, 2018 for the Company), including interim periods within those fiscal years. The Company will evaluate the effects of adopting ASU 2016-01 if and when it is deemed to be applicable.

 

 9 

 

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) which supersedes existing guidance on accounting for leases in “Leases (Topic 840).” The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for annual reporting periods beginning after December 15, 2018 (quarter ending October 31, 2019 for the Company) and interim periods within those fiscal years. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the effects of adopting ASU 2016-02 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements as of the date of the filing of this report.

 

Effective August 1, 2017, the Company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 affects entities that issue share-based payment awards to their employees. ASU 2016-09 is designed to simplify several aspects of accounting for share-based payment award transactions which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The Company will continue to estimate forfeitures at each reporting period, rather than electing an accounting policy change to record the impact of such forfeitures as they occur. The adoption of ASU 2016-09 did not have a significant impact on the Company’s consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”) related to identifying performance obligations and licensing. ASU 2016-10 is meant to clarify the guidance in FASB ASU 2014-09, “Revenue from Contracts with Customers.” Specifically, ASU 2016-10 addresses an entity’s identification of its performance obligations in a contract, as well as an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. The pronouncement has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact of ASU 2016-10 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements as of the date of the filing of this report.

 

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients” (“ASU 2016-12”). The amendments in ASU 2016-12 affect the guidance in ASU 2014-09 by clarifying certain specific aspects of the guidance, including assessment of collectability, treatment of sales taxes and contract modifications, and providing certain technical corrections. ASU 2016-12 will have the same effective date and transition requirements as the ASU 2014-09. The Company is currently evaluating the impact of ASU 2016-12 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements as of the date of the filing of this report.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 (quarter ending October 31, 2018 for the Company). The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements as of the date of the filing of this report.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017 (quarter ending October 31, 2018 for the Company). Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2017-09 on its consolidated financial statements but the adoption is not expected to have a significant impact as of the filing of this report.

 

The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

 

 10 

 

Note 5—Fair Value Measures

 

At October 31, 2017 and July 31, 2017, the Company did not have any assets or liabilities measured at fair value on a recurring basis. 

 

At October 31, 2017 and July 31, 2017, the carrying amounts of the financial instruments included in cash and cash equivalents, trade accounts receivable, prepaid expenses and other current assets, trade accounts payable, and accrued expenses approximated fair value due to their short-term nature. The carrying value of the loans payable approximated its fair value as of October 31, 2017 and July 31, 2017 as the interest rate approximated market. 

 

Note 6—Inventory

Inventory, consisting solely of finished goods, is valued at the lower of cost or market. 

Note 7—Loan Payable 

On February 6, 2017, the Company entered into a loan agreement (“Original Loan Agreement”) with a syndicate of investors (the “Lenders”) pursuant to which the Company borrowed $17.5 million (the “Loan Amount”). The loan was scheduled to mature on December 29, 2017. Interest accrued at a rate of 5% per annum until June 30, 2017 and then increased to a rate of 10% per annum. Other significant terms of the Original Loan Agreement include the following: 

  1. $15 million of the Loan Amount was required to be used to pay the Initial Civil Penalty provided for in the Consent Decree in accordance with the payment requirements set forth in the Consent Decree. The remainder of the Loan Amount is being used for general corporate purposes and working capital needs.

 

  2. Upon funding the Loan Amount, the Lenders received warrants to purchase 252,161 shares of the Company’s Class B common stock with an aggregate exercise price equal to $7.5 million based on an exercise price of $34.70 per share. The exercise price was based on the weighted average trading price for the Class B common stock for the five trading days preceding the funding date. The warrants expire at the earlier of December 31, 2018 or a liquidation event (as defined). Warrants to purchase 147,682 shares of Class B common stock were exercised by the holders in the third quarter of Fiscal 2017 (see Note 8 – Equity).

 

  3.

From and after June 30, 2017, the Lenders were entitled to receive additional warrants on a monthly basis with an aggregate value equal to 10% of the then outstanding Loan Amount for the months of July 2017 and August 2017 and then 7.5% of the then outstanding Loan Amount for the months of August 2017 through December 2017. The exercise price for such warrants was based on the weighted average trading price for the Class B common stock for the ten trading days preceding the warrant issue date. Under this provision, the Lenders received the following warrants:

 

a.    On July 3, 2017, the Lenders received warrants to purchase 6,899 shares of the Company’s Class B common stock with an exercise price of $179.62 per share.

 

b.    On August 1, 2017, the Lenders received warrants to purchase 6,911 shares of the Company’s Class B common stock with an exercise price of $179.26 per share.

 

c.    On September 1, 2017, the Lenders received warrants to purchase 5,188 shares of the Company’s Class B common stock with an exercise price of $179.18 per share.

 

d.    On October 2, 2017, the Lenders received warrants to purchase 5,152 shares of the Company’s Class B common stock with an exercise price of $180.48 per share.

 

e.    On November 1, 2017, the Lenders received warrants to purchase 1,610 shares of the Company’s Class B common stock with an exercise price of $181.29 per share.

 

f.    On December 1, 2017, the Lenders received warrants to purchase 1,605 shares of the Company’s Class B common stock with an exercise price of $182.02 per share.

 

  4. If the warrants are held by a Lender at the time of exercise, the exercise price will be paid by the reduction of the outstanding Loan Amount to the extent of such outstanding amounts. As of October 31, 2017, the Loan Amount was reduced by $5,125,000 as the result of the exercise of 147,682 warrants received by the Lenders upon making the loan (see Note 8 – Equity).

 

  5. The Original Loan Agreement is secured by a first priority security interest in primarily all of the assets of the Company.

 

On October 22, 2017, the Company entered into an omnibus amendment and waiver agreement (“Amended Loan Agreement”) with the Lenders. Significant terms of the Amended Loan Agreement include the following: 

  1. The maturity date of the loan was changed to the earlier of (i) March 31, 2018 or (ii) the consummation of the Merger.

 

  2. The Company paid the Lenders $8.5 million of the outstanding Loan Amount and a 1% prepayment premium of $85,000.

 

  3. Each warrantholder is entitled to elect, solely at the discretion of the warrantholder, to exercise any warrants held by such warrantholder (i) by cashless exercise in accordance with their terms or (ii) by paying the applicable warrant price per share (in which case such exercise will not result in any corresponding reduction of the Loan Amount and interest outstanding).

 

  4. The Company paid the Lenders an amendment fee of $38,754.

 11 

 

 

  5. The Lenders consented to the sale of Straight Path IP Group by the Company and the release of the security interest related to Straight Path IP Group.

 

  6. No additional warrants shall be issued after December 1, 2017.

 

The fair value of the warrants at the date of grants in Fiscal 2018 was estimated using the Black-Scholes option pricing model with the following assumptions:

 

Risk-free interest rate  1.01% - 1.15%
Dividend yield   0%
Volatility   5%
Expected term (in years)   1.25 - 1.42 

 

Volatility is based on the estimated future volatility of the Company’s common stock over the terms of the warrants since the Company entered into the Verizon Merger Agreement; the expected term until exercise represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company has not paid any dividends since its inception and does not anticipate paying any dividends for the foreseeable future, so the dividend yield is assumed to be zero.

 

In addition, in Fiscal 2017, the Company also incurred cash costs of $80,000 in connection with the loan.

 

The fair value of the warrants, the cash loan costs and the amendment fee paid are amortized to interest expense over the terms of the Loan Agreements. Amortization amounted to $530,000 and $0 for Fiscal 2018 and Fiscal 2017, respectively. Amortization included in discontinued operations amounted to $119,000 and $0 for Fiscal 2018 and Fiscal 2017, respectively.

 

Interest expense incurred under the Loan Agreement totaled $306,000 and $0 for Fiscal 2018 and Fiscal 2017, respectively. Interest expense included in discontinued operations amounted to $76,000 and $0 for Fiscal 2018 and Fiscal 2017, respectively.

 

At October 31, 2017, loans payable were $3,334,000, which is net of unamortized debt discounts of $541,000. At July 31, 2017, loans payable were $11,274,000, which is net of unamortized debt discounts of $1,101,000.

 

Note 8—Equity

 

Issuances of Class B Common Stock: 

 

Class B common stock activity for Fiscal 2018 was as follows:

 

  1. The Company issued 1,434 shares upon the exercise of stock options and received proceeds of $8,100.
     
  2. The Company issued 30,475 shares to various Lenders upon the exercise of warrants and received proceeds of $1,057,000 (see Note 7 – Loan Payable).

 

Class B common stock activity from November 1, 2017 to the date of the filing of this report was as follows: 

 

  1. The Company issued 50 shares upon the exercise of stock options and received proceeds of $283.

 

See Note 9 – Stock-Based Compensation below for a further discussion.

 

Issuances of Warrants:

 

As discussed in Note 7 – Loan Payable, the Company issued warrants as part of the Loan Agreement. The following table summarizes all warrant activity during Fiscal 2018. 

 

   Warrants   Weighted-
average
Exercise
Price
   Weighted-
average
Remaining
Contractual
Term
(in years)
   Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding as of August 1, 2017   111,378   $43.68    1.4   $15,118 
Granted   17,251    179.60           
Exercised   (30,475)   34.70           
Cancelled/Forfeited                  
Outstanding and exercisable as of October 31, 2017   98,154   $70.35    1.1   $10,911 

 

 12 

 

 

The following table summarizes information about warrants outstanding and exercisable at October 31, 2017:

 

   Warrants Outstanding and Exercisable 
   Number
Outstanding
   Weighted-
Average
Remaining Life
In Years
   Weighted-
Average
Exercise
Price
   Number
Exercisable
 
Exercise prices:                
$34.70   74,004    1.1   $34.70    74,004 
$  179.18 - $180.48   24,150    1.1    179.61    24,150 
    98,154    1.1   $70.35    98,154 

 

The total intrinsic value of warrants exercised during Fiscal 2018 was $4,467,330. The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $181.51 as of October 31, 2017, which would have been received by the warrant holders had all warrant holders exercised their warrants as of that date. 

 

For the period from November 1, 2017 to the date of the filing of this report, the Company issued warrants to purchase 3,215 shares of the Company’s Class B Common Stock (see Note 7 – Loan Payable). There were no warrant exercises for the period from November 1, 2017 to the date of the filing of this report.

 

Treasury Stock:

 

Treasury stock consists of shares of Class B common stock that were tendered by our employees to satisfy their tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. The cost of the shares tendered was based on the trading day immediately prior to the vesting date and the proceeds utilized to pay the withholding taxes due upon such vesting event.

 

At both October 31, 2017 and July 31, 2017, there were 39,693 shares of treasury stock at a value of $427,916.

 

Note 9—Stock-Based Compensation

 

Stock Options: 

 

Effective as of July 31, 2013, the Company adopted the 2013 Stock Option and Incentive Plan (as amended and restated to date, the “2013 Plan”). As of October 31, 2017, there are 64,033 shares of the Company’s Class B common stock available for the grant of awards under the 2013 Plan.

 

No stock options were issued in Fiscal 2018.

 

Stock-based compensation is included in selling, general and administrative and, with respect to stock options granted, amounted to approximately $0 and $78,000 for Fiscal 2018 and Fiscal 2017, respectively. Stock-based compensation with respect to stock options included in discontinued operations amounted to $0 and $19,000 for Fiscal 2018 and Fiscal 2017, respectively.

 

Common Stock: 

 

From time to time, the Company issues Class B common stock (and options to purchase Class B common stock) to non-employee directors, officers, other employees, and other service providers.

 

There were no issuances of Class B common stock in Fiscal 2018.

 

 13 

 

 

Stock-based compensation is included in selling, general and administrative expense and, with respect to common stock, amounted to approximately $819,000 and $1,966,000 for Fiscal 2018 and Fiscal 2017, respectively. Stock-based compensation with respect to common stock included in discontinued operations amounted to $132,000 and $451,000 for Fiscal 2018 and Fiscal 2017, respectively.

 

As of October 31, 2017, there were 244,000 restricted shares of Class B common stock that had not vested. As of October 31, 2017, there was approximately $6,433,000 of total unrecognized compensation cost related to issued but non-vested restricted shares. The Company expects to recognize the unrecognized compensation cost as follows: Fiscal 2018 - $2,544,000, Fiscal 2019 - $2,705,000, Fiscal 2020 - $1,121,000 and Fiscal 2021 - $63,000.

 

Note 10—Loss Per Share

 

Basic (loss) earnings per share is computed by dividing net (loss) income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase would be anti-dilutive.

 

The following table sets forth the number of Class B shares of common stock issuable upon the exercise of stock options which were excluded from the diluted per share calculation even though the exercise price was less than the average market price of the Class B common shares and non-vested restricted Class B common stock because the effect of including these potential shares was anti-dilutive due to the net loss incurred during that period:

 

   Three Months Ended
October 31,
 
   2017   2016 
   (in thousands) 
Stock options   42    3 
Warrants   60     
Non-vested restricted Class B common stock   269    118 
Shares excluded from the calculation of diluted loss per share   371    121 

  

The following table sets forth the number of stock options to purchase Class B common stock which were excluded from the diluted per share calculation because the exercise price was greater than the average market price of the Class B common shares:

 

   Three Months Ended
October 31,
 
   2017   2016 
   (in thousands) 
Warrants   5     
Stock options       88 
Shares excluded from the calculation of diluted loss per share   5    88 

 

 14 

 

 

Note 11—Related Party Transactions

 

Legal Fees  

The Company retained the services of two law firms to perform legal services. With respect to each of the firms, a non-employee director of the Company is a partner. Legal fees incurred amounted to approximately $21,000 in Fiscal 2018 and $128,000 in Fiscal 2017. At October 31, 2017 and July 31, 2017, the accounts payable balances owed to the law firms amounted to approximately $57,000 and $29,000, respectively. Accrued expenses incurred to the law firms at October 31, 2017 and July 31, 2017 totaled $0 and $900,000, respectively.

 

IDT

 

In connection with the Spin-Off, the Company and IDT entered into a Separation and Distribution Agreement and a Tax Separation Agreement to complete the separation of the Company’s businesses from IDT, to distribute the Company’s common stock to IDT’s stockholders and set forth certain understandings related to the Spin-Off. These agreements govern the relationship between the Company and IDT after the distribution and also provided for the allocation of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the distribution. These agreements reflect terms between affiliated parties established without arms-length negotiation. The Company believes that the terms of these agreements equitably reflect the benefits and costs of the Company’s ongoing relationships with IDT.

 

Pursuant to the Separation and Distribution Agreement, the Company has agreed to indemnify IDT and IDT has agreed to indemnify the Company for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. The Separation and Distribution Agreement includes, among other things, that IDT is obligated to reimburse the Company for the payment of any liabilities of the Company arising or related to the period prior to the Spin-Off. No payments were received in Fiscal 2016, Fiscal 2017 or through October 31, 2017, except as follows. On October 24, 2017, the Company and IDT entered into the IDT Settlement Agreement, providing for the settlement and mutual release of certain potential indemnification claims asserted by each of the Company and IDT, and to sell the Company’s interest in Straight Path IP Group to IDT. For further discussion, please see Note 3 – Settlement of Claims with IDT and Sale of Straight Path IP Group.

 

At the Spin-Off, the Company entered into a Transition Services Agreement (“TSA”) with IDT, pursuant to which IDT has provided certain services, including, but not limited to information and technology, human resources, payroll, tax, accounts payable, purchasing, treasury, financial systems, investor relations, legal, corporate accounting, internal audit, and facilities for an agreed period following the Spin-Off. As of January 1, 2015, all of these services are provided by other vendors. The Company and IDT extended the TSA enabling the Company to seek input from IDT on an ad hoc basis if the Company deemed it necessary. No services were provided under the TSA in Fiscal 2018 and Fiscal 2017.

 

Note 12—Income Taxes

 

The Company recorded no federal income tax expense for Fiscal 2018 and Fiscal 2017 because the estimated annual effective tax rate was zero. As of October 31, 2017, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be fully realized.

 

The provision for both Fiscal 2018 and Fiscal 2017 represents state income taxes.

 

The federal return of Straight Path for the year ended July 31, 2015 was audited by the Internal Revenue Service (“IRS”). The IRS made two adjustments which did not lead to any taxes being due or changes to the financial statements and as such the Company decided not to appeal them. The only change is to reduce our net operating loss carryforward.

 

 15 

 

Note 13—Business Segment Information 

Prior to November 1, 2015, the Company had two reportable business segments, Straight Path Spectrum, which holds, leases, and markets fixed wireless spectrum, and Straight Path IP Group, which holds intellectual property primarily related to communications over computer networks, and the licensing and other businesses related to this intellectual property. Effective November 1, 2015, a third segment, referred to as Straight Path Ventures, has been designated. Straight Path Ventures focuses on developing next generation wireless technology for 39 GHz at the Company’s Gigabit Mobility Lab in Plano, Texas. 

The Company’s reportable segments are distinguished by types of service, customers, and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. 

The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations. There are no significant asymmetrical allocations to segments. 

The Company allocates all of the corporate general and administrative expenses of Straight Path, Straight Path Spectrum, and Straight Path Ventures and prior to October 24, 2017, Straight Path IP Group based upon the relative time of management and other corporate resources expended relative to each business as well as the revenues earned by each division. For all periods through January 31, 2016, these were allocated 80% to Straight Path IP Group and 20% to Straight Path Spectrum. No expenses were allocated to Straight Path Ventures because the amount of management’s time and other resources dedicated to Straight Path Ventures were deemed to be immaterial. For the period from February 1, 2016 to October 23, 2017, these expenses were allocated 20% to Straight Path IP Group and 80% to Straight Path Spectrum, except for the following: 

  1. Expenses related to the Gigabit Mobility Lab were allocated 100% to Straight Path Ventures;
     
  2. Employment expenses of our Chief Technology Officer were allocated 20% to Straight Path IP Group, 20% to Straight Path Spectrum, and 60% to Straight Path Ventures;
     
  3. Employment expenses related to one employee were allocated 20% to Straight Path Spectrum and 80% to Straight Path Ventures;
     
  4. Employment expenses related to several other employees were allocated 100% to Straight Path Spectrum.

 

The changes in allocations were brought about by the expiration of the licensed patents held by Straight Path IP Group and the increase in activities of Straight Path Ventures. Straight Path IP Group recognized revenues over the terms of the settlements and license agreements related to such patents entered into in prior periods. With the expiration of the key patents and the increase in activities of Straight Path Ventures, the Company determined to modify the allocation, and in light of the then-anticipated level of activity in Straight Path IP Group’s enforcement activities and Straight Path Ventures’ development activities, the Company determined that a general 20% allocation to Straight Path IP Group, subject to the specific allocations listed above, represented the appropriate split in light of all factors. 

As a result of the sale of Straight Path IP Group on October 24, 2017, the Company changed its allocations again as follows:

  1. Expenses related to the Gigabit Mobility Lab are being allocated 100% to Straight Path Ventures;
     
  2. Employment expenses of our Chief Technology Officer and one other employee are being allocated 20% to Straight Path Spectrum, and 80% to Straight Path Ventures;
     
  3. All of the corporate general and administrative expenses of Straight Path are being allocated 100% to Straight Path Spectrum;
     
  4. Employment expenses related to several other employees are being allocated 100% to Straight Path Spectrum.

 

Operating results for the continuing business segments of the Company were as follows:

   Straight   Straight     
   Path   Path     
   Spectrum   Ventures   Total 
   (in thousands) 
Three Months Ended October 31, 2017            
Revenues  $165   $-   $165 
Loss from operations   (12,739)   (491)   (13,230)
                
Three Months Ended October 31, 2016               
Revenues  $159   $-   $159 
Loss from operations   (2,986)   (417)   (3,403)

 

Total assets for the continuing business segments of the Company were as follows:  

 

   Straight   Straight     
   Path   Path     
   Spectrum   Ventures   Total 
   (in thousands) 
October 31, 2017  $8,997   $1,100   $10,097 
July 31, 2017   8.740    1,100    9,840 

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None of the Company’s revenues were generated outside of the United States. The Company did not have any assets outside the United States.

 

Note 14—Commitments and Contingencies

 

Legal Proceedings

 

Regulatory Enforcement

 

On January 11, 2017, the Company entered into the Consent Decree with the FCC settling the FCC’s investigation regarding Straight Path Spectrum’s spectrum licenses on the terms specified therein. Material terms of the Consent Decree include the following:

 

  1. The FCC agreed to terminate its investigation.

 

  2. Straight Path Spectrum agreed to surrender 93 of its 828 39 GHz economic area spectrum licenses to the FCC, as well as 103 rectangular service area licenses that the Company does not believe were material assets of the Company.

 

  3. Straight Path Spectrum keeps all of its 28 GHz spectrum licenses.

 

  4. Straight Path Spectrum is barred from entering into any new leases of its spectrum.

 

  5. The Company agreed to pay the Initial Civil Penalty of $15 million in four installments as follows - $4 million on or before February 11, 2017; $4 million on or before April 11, 2017; $3.5 million on or before July 11, 2017; and $3.5 million on or before October 11, 2017.

 

  6. The Company agreed to submit to the FCC an application for approval of a sale of its remaining 39 GHz and 28 GHz spectrum licenses on or before January 11, 2018 and pay the FCC 20% of the proceeds from such the sale(s).

 

  7. If the Company does not submit to the FCC an application for approval of a sale of its remaining spectrum licenses on or before January 11, 2018, the Company will pay an additional penalty of $85 million or surrender its remaining spectrum licenses.

 

We recorded the Initial Civil Penalty of $15 million in Fiscal 2017. The associated expense was classified as “civil penalty – FCC consent decree” on the consolidated statement of operations in the third quarter of Fiscal 2017. All of the installments of the Initial Civil Penalty totaling $15 million were paid.

 

As discussed in Note 2, we entered into the Verizon Merger Agreement. If the Merger is consummated, the fee owed per Item 6 above will be paid by Verizon as part of the Merger.

 

On June 1, 2017, the Company and Verizon submitted applications to the FCC seeking consent to transfer control of the Company’s spectrum licenses to Verizon. The transfer of control applications was referenced on an FCC Public Notice on July 21, 2017, and the FCC established a pleading cycle, allowing interested parties to comment on why the transaction should be approved or denied. Petitions to deny the application were due on August 11, 2017, oppositions to those petitions due on August 18, 2017 and replies to those oppositions were due on August 25, 2017.

 

Three parties – the Competitive Carriers Association, Public Knowledge and New America’s Open Technology Institute, and U.S. Telepacific – filed petitions to deny the transaction, change its recommendation of the Merger and terminate the Verizon Merger Agreement in connection therewith. The petitioning parties argued that approval of the transaction would result in excessive spectrum aggregation in local markets, undermine competition in 5G mobile broadband by precluding others from acquiring 5G spectrum, improperly benefit Straight Path in violation of the FCC Consent Decree, and terminate existing spectrum leases. In response, the Company and Verizon argued that approval of this transaction will advance 5G leadership. We and Verizon explained that the transaction will not create any competitive issues, and, once Verizon acquires the spectrum, it will remain below the FCC’s spectrum threshold for competitive review across the vast majority of markets. We and Verizon argued that opponents of the transaction cannot use the transaction to challenge the Consent Decree, review of this transaction must be limited to the transaction, and that the terms of the Consent Decree are final and are the result of the FCC’s deliberate and sound policy choices. We and Verizon clarified that Verizon will honor our contractual obligations under existing spectrum leases with third parties. In their replies, the parties opposing the transaction maintained their prior arguments, and also argued that the FCC should auction the Company’s spectrum licenses instead of approving the transaction and that the transaction is not in the public interest.

 

On September 7, 2017, and September 21, 2017, Hammer Fiber Optics (“Hammer”) filed ex parte letters noting a number of meetings with staff from the FCC’s Wireless Telecommunications Bureau (“WTB”) and Office of Engineering and Technology, and meetings with Chairman Ajit Pai’s, Commissioner Mignon Clyburn’s, and Commissioner Brendan Carr’s legal advisors. In the letters, Hammer discussed the relevance of the transaction with respect to the service it is providing, and also stated that it did not object to Verizon’s acquisition of our LMDS spectrum.

 

On October 23, 2017, October 24, 2017 and November 9, 2017, the Competitive Carriers Association filed ex parte letters, noting meetings with staff from the WTB and Chairman Ajit Pai’s and Commissioner Brendan Carr’s legal advisors, and supplementing its prior filings in the transaction. In the letters, the Competitive Carriers Association reiterated its prior arguments regarding spectrum aggregation in local markets, 5G mobile broadband competition, and the Consent Decree.

 

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We believe that the submission to the FCC by us and Verizon of an application to transfer control of our spectrum licenses to Verizon satisfies the requirement under the Consent Decree as described in Item 6 above. However, if the Merger is not completed for any reason, there is no guarantee that the FCC would not seek to require us to pay the $85 million penalty or seek the forfeiture of the Company’s remaining spectrum licenses. If the penalty is imposed by the FCC, there is no guarantee that we will be able to obtain sufficient financing to pay the additional $85 million or repay the remaining amount due of the $17.5 million loan from the Lenders. A failure by the Company to comply with these requirements could lead to a default by the Company under the Consent Decree, loss of our remaining spectrum licenses, either of which will have a material adverse effect on our financial condition and results of operations.

 

Shareholder Litigation  

 

On July 5, 2017, JDS1 LLC, a putative Straight Path stockholder, filed a class action and derivative complaint in the Delaware Court of Chancery captioned JDS1, LLC v. IDT Corp. , C.A. No. 2017-0486-SG. The complaint named Straight Path’s board of directors, Howard Jonas, IDT, and The Patrick Henry Trust (the “Trust”) as defendants. The Company was named as a nominal defendant. Plaintiff alleged, among other things, that Straight Path’s directors, Howard Jonas, and the Trust breached their fiduciary duties in connection with the sale of certain of the Company’s IP assets and by resolving a possible claim for indemnification that the Company held against IDT (the “Settlement”) for inadequate consideration and that IDT aided and abetted that breach. Plaintiff moved for expedited proceedings. On July 11, 2017, another putative Straight Path stockholder, the Arbitrage Fund, filed a class action complaint in the same court naming Howard Jonas, IDT, and the Trust as defendants, captioned The Arbitrage Fund v. Jonas , C.A. No. 2017-0502-SG. On July 24, 2017, the Court denied Plaintiff JDS1’s motion for expedited proceedings and consolidated the two cases under the caption In re Straight Path Communications Inc. Consolidated Stockholder Litigation, C.A. No. 2017-0486-SG, with the JDS1 complaint designated as the operative pleading. Plaintiffs subsequently agreed to voluntarily dismiss defendants K. Chris Todd, William F. Weld and Fred S. Zeidman without prejudice. On August 14, 2017, defendants Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated complaint. The Company, named as a nominal defendant, filed a statement in response to the complaint. On August 29, 2017, Plaintiffs filed a consolidated amended class action and derivative complaint alleging, among other things, that Howard Jonas, the Trust, and Davidi Jonas breached their fiduciary duties in connection with the settlement and that IDT aided and abetted that breach. On September 13, 2017, defendants Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated amended complaint. On September 22, 2017, we filed a statement concerning the consolidated amended complaint. On November 2, 2017, the Delaware Court of Chancery heard oral argument on defendants’ motions to dismiss. On November 20, 2017, the court issued an opinion holding that the action was not yet ripe for adjudication and staying the action until the Merger closes or is terminated and upon motion of a party to the action.

 

On November 13, 2015, a putative shareholder class action was filed in the federal district court for the District of New Jersey against Straight Path Communications Inc., and Jonas and Rand (the “individual defendants”). The case is captioned Zacharia v. Straight Path Communications, Inc. et al. , No. 2:15-cv-08051-JMV-MF, and is purportedly brought on behalf of all those who purchased or otherwise acquired the Company’s common stock between October 29, 2013, and November 5, 2015. The complaint alleges violations of (i) Section 10(b) of the Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 of the Exchange Act against the Company for materially false and misleading statements that were designed to influence the market relating to the Company’s finances and business prospects; and (ii) Section 20(a) of the Exchange Act against the individual defendants for wrongful acts by controlling persons. The allegations center on the claim that the Company made materially false and misleading statements in its public filings and conference calls during the relevant class period concerning the Company’s spectrum licenses and the prospects for its spectrum business. The complaint seeks certification of a class, unspecified damages, fees, and costs. The case was reassigned to Judge John Michael Vasquez on March 3, 2016. On April 11, 2016, the court entered an order appointing Charles Frischer as lead plaintiff and approving lead plaintiff’s selection of Glancy Prongay & Murray LLP as lead counsel and Schnader Harrison Segal & Lewis LLP as liaison counsel. On June 17, 2016, lead plaintiff filed his amended class action complaint, which alleges the same claims described above. The defendants filed a joint motion to dismiss the complaint on August 17, 2016; the plaintiff opposed that motion on September 30, 2016, and the defendants filed their reply brief in further support of their motion to dismiss on October 31, 2016. 

 

On March 7, 2017, the Company and lead plaintiff in Zacharia action entered into a binding memorandum of understanding to settle the putative shareholder class action and dismiss the claims that were filed against the defendants in that action. Under the agreed terms, the Company will provide for a $2.25 million initial payment (the “Initial Payment”) and a $7.2 million additional payment (the “Additional Payment”). The Initial Payment will be paid into an escrow account within 15 days following preliminary court approval of the settlement, and will be fully covered by insurance policies maintained by the Company. The Additional Payment of $7.2 million will be paid within 60 days after the closing of a transaction to sell the Company’s spectrum licenses as specified in the Consent Decree with the FCC, or, in the event that the Company pays the non-transfer penalty specified in the Consent Decree, within 60 days after that payment is paid. In any event, the Additional Payment will be payable no later than December 31, 2018. The parties executed a formal settlement agreement on October 10, 2017, and a motion for preliminary approval of the settlement agreement is pending before the court.

 

On January 29, 2016, a shareholder derivative action captioned Hofer v. Jonas et al, No. 2:16-cv-00541-JMV-MF, was filed in the federal district court for the District of New Jersey against Howard Jonas, Davidi Jonas, Jonathan Rand, and the Company’s current independent directors William F. Weld, K. Chris Todd, and Fred S. Zeidman. Although the Company is named as a nominal defendant, the Company’s bylaws generally require the Company to indemnify its current and former directors and officers who are named as defendants in these types of lawsuits. The allegations are substantially similar to those set forth in the Zacharia complaint discussed above. The complaint alleges that the defendants engaged in (i) breach of fiduciary duties owed to the Company by making misrepresentations and omissions about the Company and failing to correct the Company’s public statements; (ii) abuse of control of the Company; (iii) gross mismanagement of the Company; and (iv) unjust enrichment. The complaint seeks unspecified damages, fees, and costs, as well as injunctive relief. On April 26, 2016, the case was reassigned to Judge John Michael Vasquez. On June 9, 2016, the court entered a stipulation previously agreed to by the parties that, among other things, stays the case on terms specified therein.

 

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Settlement of Claims with IDT and Sale of Straight Path IP Group

 

On April 9, 2017, the Company and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of potential indemnification claims asserted by each of the Company and IDT in connection with liabilities that may exist or arise relating to the subject matter of the investigation by (including but not limited to fines, fees or penalties imposed by) the FCC (the “Mutual Release”). For further discussion, please see Note 3 – Settlement of Claims with IDT and Sale of Straight Path IP Group.

 

PTPMS 

 

On May 29, 2012, the Company acquired certain licenses from PTPMS under an asset purchase agreement (the “PTPMS agreement”). On October 5, 2017, PTPMS filed a declaratory judgment action against the Company in the Superior Court of New Jersey, Law Division: Union County captioned PTPMS Communications, LLC v. Straight Path Communications Inc. The action seeks, among other things, a declaration judgment that the Company’s Merger with Verizon triggers an obligation to pay to PTPMS a profit share from the sale of licenses acquired from PTPMS (and that if the Company does not pay such profit share, then the transfer to Verizon of the licenses acquired from PTMPS is void), and a declaration determining the amount of such profit share. The Company and PTPMS are in discussions and any settlement remains subject to entering into a definitive agreement.

 

Other Legal

 

In addition to the foregoing, the Company may from time to time be subject to other legal proceedings that arise in the ordinary course of business. 

 

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FCC License Renewal

 

Our spectrum licenses in the LMDS and 39 GHz bands have historically been granted for ten-year terms. On April 20, 2016, and based on our submission of a renewal application and substantial service demonstration, the FCC granted our application to renew our LMDS BTA license for the LMDS A1 band (27.5 – 28.35 GHz) that covers parts of the New York City BTA for a ten-year period, until February 1, 2026. We have 15 other LMDS A1 licenses; nine of these licenses currently have a renewal date of August 10, 2018, and six of these licenses have a renewal date of September 21, 2018. However, following the adoption of the Upper Microwave Flexible Use (“UMFU”) Report and Order, we are only required to submit an application for renewal at those deadlines; we are not required to submit a substantial service demonstration for these licenses until the next build-out date specified in the UFMU Report and Order, which is June 1, 2024. That deadline was confirmed by the FCC in its Order on Reconsideration adopted on November 16, 2017.

 

Of the 15 BTAs in which we hold LMDS A2 band (29.1 – 29.25 GHz) and A3 band (31.075 – 31.225 GHz) spectrum, nine licenses currently have a renewal deadline of August 10, 2018 and six of these licenses currently have a renewal deadline of September 21, 2018. Of our 117 LMDS B band (31.0 – 31.075 GHz and 31.225 – 31.300 GHz) spectrum, five licenses currently have a renewal and substantial service deadline of August 10, 2018 and 112 licenses currently have a renewal and substantial service deadline of September 21, 2018. On August 3, 2017, the FCC adopted new rules governing the process by which licensees may seek renewal of their authorizations. Pursuant to those new rules, we believe that incumbent LMDS licensees that have already renewed their authorizations once (as we have) will not be required to demonstrate substantial service at renewal. Therefore, while we will be required to renew our authorizations for LMDS A2, A3 and B Blocks in 2018, no substantial service demonstration will be required until 2023.

 

The UMFU Report and Order substantial service deadline of June 1, 2024 also applies to our 735 39 GHz licenses, which currently have a renewal deadline of October 18, 2020.

 

For further discussion, please see “Regulatory Enforcement” above in this Note 14 to the Consolidated Financial Statements. 

 

Other Commitments and Contingencies  

 

The Former SPSI CEO is entitled to receive payments from future revenues generated from the leasing, licensing or sale of rights in certain of Straight Path Spectrum’s wireless spectrum licenses. Those payments are to be made out of 50% of the covered revenue and are in a maximum aggregate amount of $3.25 million. The payments arise under the June 2013 settlement of certain claims and disputes with the Former SPSI CEO and parties related to the Former SPSI CEO.

 

Approximately $22,000 and $17,000 was incurred to the Former SPSI CEO for this obligation for Fiscal 2018 and Fiscal 2017, respectively.

 

For a further discussion, see Note 2 – Verizon Merger Agreement above.

 

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

 

The following information should be read in conjunction with the accompanying Consolidated Financial Statements and the associated notes thereto of this Quarterly Report, and the audited Consolidated Financial Statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended July 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

As used below, unless the context otherwise requires, the terms “the Company,” “Straight Path,” “we,” “us,” and “our” refer to Straight Path Communications Inc., a Delaware corporation, and its subsidiaries, collectively.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for the year ended July 31, 2017.

 

Overview

 

We were formerly a subsidiary of IDT Corporation (“IDT”). On July 31, 2013, we were spun-off from IDT to its stockholders and became an independent public company (the “Spin-Off”).

 

Straight Path Communications Inc. is a communications asset company. We own, via intermediate wholly-owned entities, 100% of Straight Path Spectrum, Inc. (“Straight Path Spectrum”) and 100% of Straight Path Ventures, LLC (“Straight Path Ventures”), and prior to October 24, 2017, we owned 84.5% of Straight Path IP Group, Inc. (“Straight Path IP Group”).

 

Straight Path Spectrum’s wholly-owned subsidiary, Straight Path Spectrum, LLC, holds, leases, and markets fixed wireless spectrum. Straight Path Ventures is developing next generation wireless technology for 39 GHz.  

 

On January 11, 2017, the Company entered into a consent decree with the FCC settling the FCC’s investigation regarding Straight Path Spectrum’s spectrum licenses (the “Consent Decree”). See the discussion below.

 

On April 9, 2017, the Company and IDT entered into a binding term sheet (the “IDT Term Sheet”) to settle potential claims related to certain claims under agreements related to the Spin-Off, and to sell the Company’s interest in Straight Path IP Group to IDT. On October 24, 2017, the Company, IDT and other parties entered into a Settlement Agreement and Release (the “IDT Settlement Agreement”) and related agreements and consummated the settlement. See the discussion below.

 

On May 11, 2017, the Company entered into an Agreement and Plan of Merger (the “Verizon Merger Agreement”) with Verizon Communications, Inc. (“Verizon”) and a Verizon subsidiary. See the discussion below.

 

Recent Activity Related to Straight Path Spectrum

 

Verizon Merger Agreement

 

On May 11, 2017, the Company entered into the Verizon Merger Agreement with Verizon, a Delaware corporation, and Waves Merger Sub I, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Verizon (“Merger Sub”). Pursuant to the Verizon Merger Agreement, among other things, Merger Sub will be merged with and into the Company (the “Merger”) with the Company being the surviving corporation of the Merger.

 

For a full discussion of the Merger, see Note 2 – Verizon Merger Agreement in the Consolidated Financial Statements in Part I of this Quarterly Report.

 

On June 1, 2017, we and Verizon submitted applications to the FCC seeking consent to transfer control of our spectrum licenses to Verizon. The transfer of control applications was referenced in an FCC Public Notice on July 21, 2017, and the FCC established a pleading cycle, allowing interested parties to comment on why the transaction should be approved or denied. Petitions to deny the application were due on August 11, 2017, oppositions to those petitions due on August 18, 2017 and replies to those oppositions were due on August 25, 2017.

 

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Three parties – the Competitive Carriers Association, Public Knowledge and New America’s Open Technology Institute, and U.S. Telepacific – filed petitions to deny the transaction. INCOMPAS filed comments asking that the FCC closely examine the transaction. The petitioning parties argued that approval of the transaction would result in excessive spectrum aggregation in local markets, undermine competition in 5G mobile broadband by precluding others from acquiring 5G spectrum, improperly benefit Straight Path in violation of the FCC Consent Decree, and terminate existing spectrum leases. In response, we and Verizon argued that approval of this transaction will advance 5G leadership. We and Verizon explained that the transaction will not create any competitive issues, and, once Verizon acquires the spectrum, it will remain below the FCC’s spectrum threshold for competitive review across the vast majority of markets. We and Verizon argued that opponents of the transaction cannot use the transaction to challenge the Consent Decree, review of this transaction must be limited to the transaction, and that the terms of the Consent Decree are final and are the result of the FCC’s deliberate and sound policy choices. We and Verizon clarified that Verizon will honor our contractual obligations under existing spectrum leases with third parties. In their replies, the parties opposing the transaction maintained their prior arguments, and also argued that the FCC should auction our spectrum licenses instead of approving the transaction and that the transaction is not in the public interest. 

 

On September 7, 2017 and September 21, 2017, Hammer Fiber Optics (“Hammer”) filed ex parte letters noting a number of meetings with staff from the FCC’s Wireless Telecommunications Bureau (“WTB”) and Office of Engineering and Technology, and meetings with Chairman Ajit Pai’s, Commissioner Mignon Clyburn’s, and Commissioner Brendan Carr’s legal advisors. In the letters, Hammer discussed the relevance of the transaction with respect to the service it is providing, and also stated that it did not object to Verizon’s acquisition of our LMDS spectrum. 

 

On October 23, 2017, October 24, 2017 and November 9, 2017, the Competitive Carriers Association filed ex parte letters, noting meetings with staff from the WTB and Chairman Ajit Pai’s and Commissioner Brendan Carr’s legal advisors, and supplementing its prior filings in the transaction. In the letters, the Competitive Carriers Association reiterated its prior arguments regarding spectrum aggregation in local markets, 5G mobile broadband competition, and the Consent Decree.

 

On November 20, 2017 and November 29, 2017, Verizon filed ex parte letters, noting meetings with Commissioner offices rebutting the claims of the Competitive Carriers Association and explaining that alleged spectrum aggregation concerns were rendered even more irrelevant by the millimeter wave spectrum aggregation threshold adopted by the FCC in its Second Report and Order on November 16, 2017. 

 

FCC Regulatory Enforcement

 

On January 11, 2017, the Company entered into a consent decree with the Consent Decree. The Company agreed to pay an initial civil penalty of $15 million (the “Initial Civil Penalty”). The Consent Decree also bars the Company from entering into any new leases of its spectrum. For a further discussion, see Note 14 – Commitments and Contingencies - Regulatory Enforcement in the Consolidated Financial Statements in Part I of this Quarterly Report.

 

Federal Communications Commission (“FCC”) advances approval of mobile services in millimeter wave (“mmW”) bands, including adopting the Upper Microwave Flexible Use (“UMFU”) Report and Order

 

We hold a significant number of licenses approved for fixed and mobile wireless spectrum in the U.S., providing broad geographic coverage and a large amount of total bandwidth in many markets. Our 39 GHz licenses comprise our primary spectrum holdings. Currently, the U.S. is divided into 175 licensable Economic Areas (“EAs”) for 39 GHz spectrum. We hold 735 EA licenses in the 39 GHz band that cover all 175 EAs. Based on a comparison of the geographic areas covered by our licenses with the U.S. Census Bureau’s 2010 Census, we cover all of the U.S. population. Our 39 GHz licenses include at least 100 MHz of total bandwidth in every EA in the U.S., and in higher population areas, our 39 GHz licenses cover at least 600 MHz of bandwidth.

 

We also hold 133 LMDS Basic Trading Area (“BTA”) licenses, including 16 licenses in the 27.5 – 28.35 GHz LMDS A1 band that was included in the UMFU Report and Order adopted by the FCC on July 14, 2016.

 

On July 14, 2016, after a 21-month regulatory process, the FCC voted to adopt the UMFU Report & Order, which opens our spectrum for flexible mobile and fixed wireless services. As the demand for significantly greater capacity within wireless networks has grown rapidly, planning and investment for 5th generation (“5G”) mobile networks has become a major focus of the mobile industry. We believe that our spectrum holdings—which cover the entire continental U.S. and have capacity that is substantially greater than currently used access frequencies—are well-suited for use in 5G networks. While 5G technology is being developed and may be years away from commercialization, the preparatory steps—specifically putting in place a regulatory framework “where these technologies can flourish”—are underway. Straight Path is also participating in standard setting, namely through 3GPP, as a contributing member.

 

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Recent Activity Related to Straight Path Ventures

 

Straight Path Ventures develops next generation wireless technology, primarily for 39 GHz at its Gigabit Mobility Lab in Plano, Texas. Although work is at an early stage, the Company decided in Q3 2016 that this activity warrants a separate reportable business segment.

 

Straight Path Spectrum’s assets are complemented by technology being developed by Straight Path Ventures, which opened our Gigabit Mobility Lab in Plano, Texas. On August 22, 2016, Straight Path Ventures filed a provisional patent application with the United States Patent and Trademark Office (“USPTO”) for new beam training technologies in millimeter-wave gigabit broadband systems. On October 12, 2016, Straight Path Ventures filed a patent application with the USPTO for new millimeter-wave transceiver technologies. On August 31, 2017, Straight Path Ventures demonstrated its prototype 39 GHz Gigarray® solutions that achieved 800 megabits per second at a distance of 500 meters. Our Gigabit Mobility Lab continues to refine the Gigarray® for Fixed 5G®. On November 17, 2017, Straight Path Ventures demonstrated its prototype 39 GHz Gigarray® solutions that achieved 1 Gigabits per second at a distance of 1 kilometer.

 

Recent Activity Related to Straight Path IP Group

 

On April 9, 2017, the Company and IDT entered into a the IDT Term Sheet, providing for the settlement and mutual release of potential indemnification claims asserted by each of the Company and IDT in connection with liabilities that may exist or arise relating to the subject matter of the investigation by (including but not limited to fines, fees or penalties imposed by) the FCC (the “Mutual Release”). On October 24, 2017, the Company, IDT and other parties entered into a Settlement Agreement and Release (the “IDT Settlement Agreement”) and related agreements, and consummated the settlement.

 

Pursuant to the IDT Settlement Agreement, in exchange for the Mutual Release, the parties effected the following actions:

 

  1. IDT paid the Company $10 million and the right to receive 22% of the net proceeds of the Straight Path IP Group patent portfolio (as described in more detail below) in settlement of various claims. Such payment was deemed to be a tax-free contribution to capital by IDT effective prior to the Spinoff;
     
  2. IDT paid the Company $6 million for the Company’s ownership interest in Straight Path IP Group; and
     
  3.

The Company created a trust (the beneficial interests in which will be owned by Class B common stockholders of the Company) that will be entitled to receive 22 percent of the net proceeds, if any, received by Straight Path IP Group from any license, and certain transfers or assignments of any of the patent rights held, or any settlement, award or judgment involving any of the patent rights (including any net proceeds received after the closing of the Merger). The Company agreed to contribute $4,500,000 to the trust. As of October 31, 2017 and to the date of the filing of this report, the Company contributed $750,000. The trust agreement provides that the Company will pay the remaining $3.75 million at the earlier of (i) the closing date under the Verizon Merger Agreement or (ii) August 11, 2018.

 

Critical Accounting Policies

 

Our Consolidated Financial Statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended July 31, 2017. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policy relates to the valuation of intangible assets with indefinite useful lives. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended July 31, 2017 and the notes to our Consolidated Financial Statements.

 

Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

  an extended transition period to comply with new or revised accounting standards applicable to public companies; and
     
  an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.

 

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We are able to take advantage of these provisions until the end of the fiscal year ending after the fifth anniversary of our initial registration statement filed related to our spin-off from IDT, which is July 31, 2018, or such earlier time that we are no longer an emerging growth company and, if we do, the information that we provide stockholders may be different than you might receive from other public companies in which you hold equity. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our shares of common stock held by non-affiliates as of the last business day of the second quarter of our fiscal year end, or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

Results of Operations

 

We evaluate the performance of our continuing operating business segments based primarily on loss from operations. Accordingly, the income and expense line items below loss from operations are only included in our discussion of the consolidated results of operations.

 

Our financial results for Fiscal 2018 and Fiscal 2017 have been revised, in accordance with generally accepted accounting principles, to reflect the results of Straight Path IP Group as discontinued operations.

 

Three Months Ended October 31, 2017 (“Fiscal 2018”) Compared to Three Months Ended October 31, 2016 (“Fiscal 2017”)

 

Consolidated

 

   Three Months Ended     
   October 31,   Change 
   2017   2016   $ 
   (in thousands) 
Revenues  $165   $159   $6 
Direct cost of revenues   17    41    (24)
Research and development   137    160    (23)
Selling, general and administrative   3,241    3,361    (120)
Profit sharing settlement   10,000    -    10,000 
Loss from operations   (13,230)   (3,403)   (9,827)
Interest expense   (836)   -    (836)
Interest and other income   6    29    (23)
Provision for income taxes   (7)   (7)   - 
Loss from continuing operations   (14,067)   (3,381)   (10,686)
Loss from discontinued operations   (1,489)   (874)   (615)
Loss from discontinued operations attributable to noncontrolling interests   229    124    105 
Net loss attributable to Straight Path Communications Inc.  $(15,327)  $(4,131)  $(11,196)

 

Revenues. Revenues generated by Straight Path Spectrum were $165,000 and $159,000 in Fiscal 2018 and Fiscal 2017, respectively. Revenues increased due to revenue from the lease of spectrum to new customers (wireless network operators) prior to the Consent Decree with the FCC. The Consent Decree prohibits, and the Merger Agreement with Verizon restricts us, from entering into new spectrum leases.

 

No revenues were generated by Straight Path Ventures in Fiscal 2018 and Fiscal 2017.

 

No revenues were generated by Straight Path IP Group in Fiscal 2018 and Fiscal 2017 because no new licenses or settlements were entered into and the revenue from prior settlements or license agreements were fully realized in prior periods due to the expiration of the licensed patents. We were recognizing revenue over the terms of the settlements and license agreements related to such patents entered into in prior periods. Primarily all of the revenue was recognized as of September 30, 2015.

 

 24 

 

 

Direct cost of revenues. Direct cost of revenues decreased in Fiscal 2018 compared to Fiscal 2017.

 

Straight Path Spectrum incurred all of the direct costs of revenue in Fiscal 2018 and Fiscal 2017. Direct cost of revenues includes governmental fees and connectivity costs.

 

In Fiscal 2018 and Fiscal 2017, Straight Path IP Group had no revenues or cost of revenues because no new licenses or settlements were entered into and the revenue from licenses or settlements entered into in prior periods were fully realized in prior periods due to the expiration of the licensed patents. The Straight Path IP Group direct cost of revenues were costs related to enforcement efforts and litigation settlements and licensing arrangements, increased generally proportionally to the increase in settlement revenues, and were recognized over the same time period as corresponding revenues.

 

Research and development. Research and development totaled $137,000 in Fiscal 2018 and $160,000 in Fiscal 2017 and consist of expenses related to the development by our Gigabit Mobility Lab of next generation wireless technology for 39 GHz.

 

Selling, general and administrative expense.   Selling, general and administrative expense totaled $3,241,000 in Fiscal 2018 and $3,361,000 in Fiscal 2017 and consist primarily of employee salaries and benefits, non-cash stock-based compensation charges related to the issuances of restricted common stock and stock options to officers and employees, and legal and other professional fees.

 

Stock-based compensation is included in selling, general and administrative expense and, with respect to restricted stock granted, amounted to approximately $819,000 and $1,966,000 for Fiscal 2018 and Fiscal 2017, respectively. Stock-based compensation with respect to common stock included in discontinued operations amounted to $132,000 and $451,000 for Fiscal 2018 and Fiscal 2017, respectively.

 

As of October 31, 2017, there was approximately $6,433,000 of total unrecognized compensation cost related to non-vested restricted shares. We expect to recognize the unrecognized compensation cost as follows: Fiscal 2018 - $2,544,000, Fiscal 2019 - $2,705,000, Fiscal 2020 - $1,121,000 and Fiscal 2021 - $63,000.

 

Stock-based compensation expense related to the options issued in June 2016 is included in selling, general and administrative and amounted to approximately $0 and $78,000 for Fiscal 2018 and Fiscal 2017, respectively. Stock-based compensation with respect to stock options included in discontinued operations amounted to $0 and $19,000 for Fiscal 2018 and Fiscal 2017, respectively. There is no stock-based compensation expense in Fiscal 2018 as the stock options issued were fully vested by the end of Fiscal 2017.

 

Profit sharing settlement.   Profit sharing settlement totaling $10,000,000 represents the Company’s estimate to settle an action brought by PTPMS Communications, LLC (“PTPMS”). The action is still ongoing as of the date of the filing of this report. See Note 14 – Commitments and Contingencies - PTPMS to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report for a further discussion.

 

Interest expense. Interest expense in Fiscal 2018 consisted of interest expense of $306,000 and the amortization of debt discounts of $530,000. Interest expense in Fiscal 2018 included in discontinued operations consisted of interest expense of $76,000 and the amortization of debt discounts of $119,000. Interest expense and the amortization of debt discounts relate to the Loan Agreement. For a further discussion, see Note 7 – Loan Payable to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report. There was no interest expense in Fiscal 2017. 

 

Interest and other income.  Interest and other income in Fiscal 2018 is interest income of $6,000. Interest and other income in Fiscal 2017 included interest income of $7,000 and the reversal of prior period accruals of $22,000.

 

Income taxes. The Company recorded no federal income tax expense for Fiscal 2018 and Fiscal 2017 because the estimated annual effective tax rate was zero. As of October 31, 2017, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be fully realized.

 

The provision for both Fiscal 2018 and Fiscal 2017 represents state income taxes.

 

Loss from discontinued operations. As a result of the sale of Straight Path IP Group to IDT, the operating results of Straight Path IP Group for both Fiscal 2018 and Fiscal 2017 are classified as discontinued operations.

 

The loss from discontinued operations in Fiscal 2018 consists of selling, general and administrative costs of $1,294,000 and interest expense related to the Loan Agreement of $195,000. The loss from discontinued operations in Fiscal 2017 consists of selling, general and administrative costs of $875,000, interest income of $2,000 and income tax expense of $1,000.

 

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Straight Path Spectrum Segment

 

   Three Months Ended     
   October 31,   Change 
   2017   2016   $ 
   (in thousands) 
Revenues  $165   $159   $6 
Direct cost of revenues   17    41    (24)
Research and development   1    -    1 
Selling, general and administrative   2,886    3,104    (218)
Loss from operations before profit sharing settlement  $(2,739)  $(2,986)  $247 

 

Revenues.  Revenues generated by Straight Path Spectrum were $165,000 and $159,000 in Fiscal 2018 and Fiscal 2017, respectively. Revenues increased due to revenue from the lease of spectrum to new customers (wireless network operators) prior to the Consent Decree with the FCC. The Consent Decree prohibits and the Merger Agreement with Verizon restricts us from entering into new spectrum leases.

 

Direct cost of revenues. Direct cost of revenues includes governmental fees and connectivity costs.

 

Selling, general and administrative. Selling, general and administrative expense consist primarily of employee salaries and benefits, non-cash stock-based compensation charges related to the issuances of restricted common stock and stock options to officers and employees, and legal and other professional fees.

 

Straight Path Ventures Segment

 

   Three Months Ended     
   October 31,   Change 
   2017   2016   $ 
   (in thousands) 
Revenues  $-   $-   $- 
Direct cost of revenues   -    -    - 
Research and development   136    160    (24)
Selling, general and administrative   355    257    98 
Loss from operations before profit sharing settlement  $(491)  $(417)  $(74)

 

Research and development. Research and development consists of expenses related to development by our Gigabit Mobility Lab of next generation wireless technology for 39 GHz.

 

Selling, general and administrative. Selling, general and administrative expenses consist primarily of payroll and related payroll taxes and benefits as well as stock-based compensation expenses.

 

Straight Path IP Segment – Discontinued Operations

 

   Three Months Ended     
   October 31,   Change 
   2017   2016   $ 
   (in thousands) 
Revenues  $-   $-   $- 
Direct cost of revenues   -    -    - 
Research and development   -    -    - 
Selling, general and administrative   1,294    875    419 
Loss from operations before profit sharing settlement  $(1,294)  $(875)  $(419)

 

Revenues. Straight Path IP Group filed a series of lawsuits claiming infringement of a number of its key patents seeking both damages and injunctive relief. Many of these actions were settled and Straight Path IP Group had entered into licensing agreements with the former defendants. The gross payments under settlement and licensing agreements that were secured since our Spin-Off (the beginning of Fiscal 2014) totaled $18.3 million, all of which has been collected as of October 31, 2015. Most of these settlement agreements included license fees for the duration of the license term (which was over the remaining life of the covered patents), and were allocated across Fiscal 2014, 2015 and 2016 in the amounts of $4.2 million, $12.5 million and $1.6 million respectively, based on the settlement dates and if the settlement included a look back period for damages. Primarily all of the revenue from these settlements or licensing agreements was recognized as of September 30, 2015.

 

Direct cost of revenues. Direct cost of revenues consisted of legal expenses directly related to revenues from the litigation settlements described above. Straight Path IP Group incurred an aggregate of $9.0 million in expenses directly related to these settlements, which was recognized ratably in proportion to the recognition of the related revenue.

 

 26 

 

 

Selling, general and administrative. Selling, general and administrative expense consist primarily of employee salaries and benefits, non-cash stock-based compensation charges related to the issuances of restricted common stock and stock options to officers and employees, and legal and other professional fees.

 

Liquidity and Capital Resources

 

General

 

Historically, we have primarily satisfied our cash requirements through the initial funding provided in connection with the Spin-Off, proceeds from the sale or lease of rights in spectrum licenses, and settlements or licensing fees received in connection with intellectual property enforcement activities. In connection with the Spin-Off, IDT transferred cash to us such that we had approximately $15 million in cash at the time of the Spin-Off. Since that time, we have satisfied our cash requirements through Straight Path IP Group’s settlement and licensing agreements and Straight Path Spectrum’s revenue from spectrum leases. In February 2017, we borrowed $17.5 million pursuant to the Loan Agreement. For a further discussion, see Note 7 – Loan Payable to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report. We currently expect that our cash and cash equivalents on-hand at October 31, 2017, and the proceeds received from the consummation of the settlement with IDT and sale of Straight Path IP Group, will be sufficient to meet our anticipated cash requirements during the twelve months ending October 31, 2018.

 

As discussed above, we signed the Consent Decree with the FCC and incurred an Initial Civil Penalty of $15 million. To fund the payments of the Initial Civil Penalty, we entered into the Loan Agreement pursuant to which we borrowed the $17.5 million, which matures at the earlier of (i) March 31, 2018 or (ii) the consummation of the Merger. $15 million of the Loan Amount was used to pay the Initial Civil Penalty provided for in the Consent Decree in accordance with the payment requirements set forth in the Consent Decree. All of the installments were paid. The remainder of the Loan Amount was used for general corporate purposes and working capital needs. We expect to repay the remaining balance of the Loan Amount of approximately $3.9 million through a combination of exercise of warrants issued to the Lenders and other funding sources including the proceeds from the settlement with IDT and the sale of Straight Path IP Group (see Note 3 – Settlement of Claims with IDT and Sale of Straight Path IP Group to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report). 

 

On March 7, 2017, we and the lead plaintiff in Zacharia v. Straight Path Communications Inc. et al., entered into a binding memorandum of understanding to settle the putative shareholder class action and dismiss the claims that were filed against the Defendants in that action.  Under the agreed terms, we will provide for the $2.25 million Initial Payment and the $7.2 million Additional Payment. The Initial Payment will be paid into an escrow account within 15 days following preliminary court approval of the settlement, and will be fully covered by insurance policies maintained by us.  The Additional Payment of $7.2 million will be paid within 60 days after the closing of a transaction to sell our spectrum licenses as specified in the Consent Decree with the FCC, or, in the event that we pay the non-transfer penalty specified in the Consent Decree, within 60 days after that payment is paid. The Additional Payment will be paid by Verizon on our behalf if the Merger is consummated. In any event, the Additional Payment will be payable no later than December 31, 2018. The parties executed a formal settlement agreement on October 10, 2017, and a motion for preliminary approval of the settlement agreement is pending before the court. 

 

As of October 31, 2017, we had cash and cash equivalents of $7.5 million. In connection with the Spin-Off, we and IDT entered into various agreements prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with IDT after the Spin-Off. The Separation and Distribution Agreement includes, among other things, that IDT is obligated to reimburse us for the payment of liabilities arising or related to the period prior to the Spin-Off. For Fiscal 2016, Fiscal 2017 and Fiscal 2018 through the date of the filing of this report, no payments were made by IDT pursuant to this obligation.

 

As discussed above, on October 24, 2017, the Company, IDT and other parties entered into the IDT Settlement Agreement and related agreements, and consummated the settlement. The Company received $10 million and the right to receive 22% of the net proceeds, if any, from the Straight Path IP Group patent portfolio in settlement of various claims, and $6 million for the sale of Straight Path IP Group. In addition, the Company created a trust (the beneficial interests in which will be owned by Class B common stockholders of the Company) that will be entitled to receive 22 percent of the net proceeds, if any, received by Straight Path IP Group from any license, and certain transfers or assignments of any of the patent rights held, or any settlement, award or judgment involving any of the patent rights (including any net proceeds received after the closing of the Merger). The Company agreed to contribute $4,500,000 to the trust. As of October 31, 2017 and to the date of the filing of this report, the Company contributed $750,000. The trust agreement provides that the Company will pay the remaining $3.75 million at the earlier of (i) the closing date under the Verizon Agreement and (ii) August 11, 2018.

 

For further discussion, please see Note 3 – Settlement of Claims with IDT and Sale of Straight Path IP Group to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report. 

 

The Former SPSI CEO is entitled to receive payments from future revenues generated from the leasing, licensing, or sale of rights in certain a Straight Path Spectrum’s wireless spectrum licenses. Those payments are to be made out of 50% of the covered revenue and are in a maximum aggregate amount of $3.25 million. The payments arise under the June 2013 settlement of certain claims and disputes with the Former SPSI CEO and parties related to the Former SPSI CEO. Approximately $22,000 was incurred to the Former SPSI CEO for this obligation for Fiscal 2018 and approximately $17,000 for Fiscal 2017. If the Merger is consummated, Verizon will pay approximately $3 million to the Former SPSI CEO in satisfaction of our obligation. For further discussion, please see Note 2 – Verizon Merger Agreement to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report. 

 

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In addition, we estimate that we will incur various other fees and expenses in connection with the Merger, which will be paid by Verizon on our behalf. For further discussion, please see Note 2 – Verizon Merger Agreement to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report.  

 

Operating Activities

 

Cash flows used in operating activities in Fiscal 2018 totaled approximately $8.8 million and was used to fund the loss for the quarter.

 

Investing Activities  

 

Cash flows provided by investing activities in Fiscal 2018 totaled $6.0 million which represented the proceeds we received for the sale of Straight Path IP Group.

 

Financing Activities  

 

Cash flows provided by financing activities in Fiscal 2017 totaled approximately $1.8 million. The Company received $10 million from IDT under the IDT Settlement Agreement, $1,057,000 from the exercise of warrants and $8,000 for the exercise of stock options. These proceeds were offset by the repayment of loans under the Loan Agreement of $8.5 million and payments made to a trust as part of the IDT Settlement Agreement of $750,000. We also incurred costs of approximately $39,000 to amend the Loan Agreement.  

 

We do not anticipate paying any additional dividends on our common stock until we achieve sustainable profitability after satisfying all of our operational needs, including payments to the Former SPSI CEO and retaining certain minimum cash reserves. Following that time, we will retain sufficient cash to provide for investment in growth opportunities and provide for the creation of long-term stockholder value, particularly through development of the Straight Path Spectrum and Straight Path Ventures businesses and possibly the acquisition of complementary businesses or assets.  However, we do not intend to retain earnings beyond those needs and beyond what we believe we can effectively deploy, and we expect that such additional resources would be returned to stockholders via distributions or other means.  The payment of dividends in any specific period will be at the sole discretion of our Board. Except for any special dividend that may be paid in connection with the transactions contemplated by the IDT Settlement Agreement discussed in Note 3 to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report, the Verizon Merger Agreement does not permit us to pay any additional dividends on our common stock.

 

Contractual Obligations and Other Commercial Commitments

 

There are no material changes from the contractual obligations previously disclosed in Item 7 to Part I of our Annual Report on Form 10-K for the year ended July 31, 2017.
 

Off-Balance Sheet Arrangements

 

As of October 31, 2017, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources, other than the following.

 

In connection with the Spin-Off, we and IDT entered into various agreements prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with IDT after the Spin-Off, and a Tax Separation Agreement, which sets forth the responsibilities of us and IDT with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, we indemnify IDT and IDT indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. The Separation and Distribution Agreement includes, among other things, that IDT is obligated to reimburse us for the payment of any liabilities arising or related to the period prior to the Spin-Off.

 

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Item 3.    Quantitative and Qualitative Disclosures About Market Risks

 

The Company is not exposed to economic risk from foreign exchange rates, interest rates, credit risk, equity prices or commodity prices for the following reasons:

 

  1. All of the Company’s transactions are in US dollars.

 

  2. The Company has no outstanding debt payable.

 

  3. The Company does not own any marketable securities.

 

  4. The Company does not purchase any commodities.

 

Item 4.    Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2017.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting includes those policies and procedures that:

 

  1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

  2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

  3. provide reasonable assurance regarding prevention or timely detections of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of October 31, 2017 based on the guidelines established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as adopted in 2013 (COSO). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with US GAAP. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of October 31, 2017.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the first quarter of Fiscal 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

Legal proceedings in which we are involved are more fully described in Note 14 – Commitments and Contingencies to the Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.

 

Item 1A.     Risk Factors

 

Please see the discussion above regarding the Company’s status as an Emerging Growth Company. There are no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the year ended July 31, 2017.

 

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

 

In October 2017, the Company received the following proceeds:

 

1.$10 million under the IDT Settlement Agreement
   
2.Approximately $8,000 for the exercise of stock options.

 

The proceeds are being used for general working capital purposes.

 

Item 3.    Defaults Upon Senior Securities

 

None

 

Item 4.    Mine Safety Disclosures

 

Not applicable

 

Item 5.    Other Information

 

None

 

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Item 6.    Exhibits

 

Exhibit

Number

  Description
     
2.1 (1)   Agreement and Plan of Merger, dated as of May 11, 2017, by and among Straight Path Communications Inc., a Delaware corporation, Verizon Communications Inc., a Delaware corporation and Waves Merger Sub I, Inc., a Delaware corporation
     
3.1 (2)   Amendment to By-Laws of Straight Path Communications Inc.
     
10.1 (3)   Consent Decree between the Registrant, Straight Path Spectrum, LLC and the Federal Communications Commission dated January 11, 2017.
     
10.2 (4)   Loan Agreement between the Registrant and each Lender named on Schedule A thereto, dated February 6, 2017.
     

10.3*

  Omnibus Amendment and Waiver to Loan Agreement between the Registrant and each Lender named on Schedule A thereto, dated October 22, 2017.
     
10.4 (5)   IDT Term Sheet, dated April 9, 2017, relating to the settlement of claims between Straight Path Communications Inc. and IDT Corporation.
     

10.5*

  IDT Settlement Agreement and Release, dated October 24, 2017, relating to the settlement of claims between Straight Path Communications Inc. and IDT Corporation
     
31.1*   Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed or furnished herewith.

 

(1)      Incorporated by reference to the Company’s Form 8-K filed May 11, 2017.

(2)      Incorporated by reference to the Company’s Form 8-K filed April 13, 2017.

(3)      Incorporated by reference to the Company’s Form 8-K filed January 12, 2017.

(4)      Incorporated by reference to the Company’s Form 8-K filed February 7, 2017.

(5)      Incorporated by reference to the Company’s Form 8-K filed April 10, 2017.

 

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SIGNATURES

 

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

 

  STRAIGHT PATH COMMUNICATIONS INC.
     
December 11, 2017 By: /s/ Davidi Jonas
   

Davidi Jonas

Chief Executive Officer

     
December 11, 2017 By: /s/ Jonathan Rand
   

Jonathan Rand

Chief Financial Officer

 

 

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