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 APRIL 30, 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  ☐

 

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 June 9, 2017, the registrant had outstanding 787,163 shares of Class A common stock and 11,910,896 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				3
Item 1.		Financial Statements (Unaudited)		3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.		Quantitative and Qualitative Disclosures About Market Risks		40
Item 4.		Controls and Procedures		40
PART II. OTHER INFORMATION				41
Item 1.		Legal Proceedings		41
Item 1A.		Risk Factors		41
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.		Defaults Upon Senior Securities		44
Item 4.		Mine Safety Disclosures		44
Item 5.		Other Information		44
Item 6.		Exhibits		44
SIGNATURES				45

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, except per share data)

  

		April 30, 2017				July 31, 2016
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	14,555			$	11,361
Trade accounts receivable, net of allowance for doubtful accounts of $7 and $0, respectively			68				40
Inventory			1,669				-
Assets held for sale – Intellectual Property Business			33				-
Prepaid expenses and other current assets			183				1,627
Total current assets			16,508				13,028
Prepaid expenses – related to the sale of Spectrum Business to Verizon			2,856				-
Prepaid expenses – related to the sale of IP Business to IDT			1,054				-
Intangible assets			365				365
Other assets			164				104
Total Assets		$	20,947			$	13,497
Liabilities and Equity (Deficiency)
Current liabilities:
Trade accounts payable		$	5,238			$	684
Accrued expenses			916				1,042
Liabilities held for sale – Intellectual Property Business			329				-
Loans payable, net of debt discount of $2,119 and $0, respectively			10,256				-
FCC consent decree payable			7,000				-
Deferred revenue			132				73
Income taxes payable			-				225
Total current liabilities			23,871				2,024
Settlement payable - stockholders			7,200				-
Deferred revenue - long-term portion			75				92
Total liabilities			31,146				2,116
Commitments and contingencies
Equity (Deficiency)
Straight Path Communications Inc. stockholders’ equity:
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			8				8
Class B common stock, $0.01 par value; 40,000 shares authorized; 11,949 and 11,431 shares issued, 11,909 and 11,391 shares outstanding as of April 30, 2017 and July 31, 2016, respectively			119				114
Additional paid-in capital			36,235				21,589
Accumulated deficit			(43,774	)			(8,225	)
Treasury stock, 40 shares at cost			(428	)			(428	)
Total Straight Path Communications Inc. stockholders’ equity (deficiency)			(7,840	)			13,058
Noncontrolling interests			(2,359	)			(1,677	)
Total equity (deficiency)			(10,199	)			11,381
Total liabilities and equity (deficiency)		$	20,947			$	13,497

 

See accompanying notes to consolidated financial statements.

 

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, except per share amounts)

 

		Three Months Ended								Nine Months Ended
		April 30,								April 30,
		2017				2016				2017				2016
Revenues		$	167			$	219			$	491			$	2,034
Costs and expenses:
Direct cost of revenues			32				88				99				883
Research and development			144				505				433				879
Selling, general and administrative (related party of $2, $0, $207, and $0)			3,996				1,528				11,827				5,486
Total costs and expenses			4,172				2,121				12,359				7,248
Loss from operations before item listed below			(4,005	)			(1,902	)			(11,868	)			(5,214	)
Civil penalty – FCC consent decree			-				-				(15,000	)			-
Stockholder settlement			-				-				(7,200	)			-
Loss from operations			(4,005	)			(1,902	)			(34,068	)			(5,214	)
Other income (expense):
Interest expense, including amortization of debt discounts			(2,195	)			-				(2,195	)			-
Interest income			7				10				20				30
Other income			-				3				22				393
Total other income (expense)			(2,188	)			13				(2,153	)			423
Loss before income tax benefits (income taxes)			(6,193	)			(1,889	)			(36,221	)			(4,791	)
Provision for income tax benefits (income taxes)			(3	)			25				(10	)			19
Net loss			(6,196	)			(1,864	)			(36,231	)			(4,772	)
Net loss attributable to noncontrolling interests			203				19				682				269
Net loss attributable to Straight Path Communications Inc.		$	(5,993	)		$	(1,845	)		$	(35,549	)		$	(4,503	)
Loss per share attributable to Straight Path Communications Inc. stockholders:
Basic and diluted		$	(0.49	)		$	(0.15	)		$	(2.93	)		$	(0.38	)
Weighted-average number of shares used in calculation of loss per share:
Basic and diluted			12,186				11,905				12,117				11,856

 

See accompanying notes to consolidated financial statements.

 

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIENCY)

Nine Months Ended April 30, 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, 2016			787			$	8				11,431			$	114			$	21,589			$	(8,225	)		$	(428	)		$	(1,677	)		$	11,381
Common stock issued for exercises of stock options			-				-				1				-				8				-				-				-				8
Issuance of warrants with loans payable			-				-				-								4,040				-				-				-				4,040
Common stock issued for exercises of warrants			-				-				148				1				5,124				-				-				-				5,125
Common stock issued for compensation			-				-				369				4				5,184				-				-				-				5,188
Stock-based compensation			-				-				-				-				290				-				-				-				290
Net loss			-				-				-				-				-				(35,549	)			-				(682	)			(36,231	)
Balance as of April 30, 2017			787			$	8				11,949			$	119			$	36,235			$	(43,774	)		$	(428	)		$	(2,359	)		$	(10,199	)

 

See accompanying notes to consolidated financial statements.

 

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

		Nine Months Ended
		April 30,
		2017				2016
Operating activities:
Net loss		$	(36,231	)		$	(4,772	)
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock issued for compensation			5,188				2,191
Stock-based compensation			290				-
Amortization of debt discounts			2,001				-
Allowance for doubtful accounts			7				-
Depreciation			-				38
Changes in assets and liabilities:
Trade accounts receivable, net			(35	)			43
Due from settlement			-				(65	)
Inventory			(1,026	)			-
Assets held for sale – Intellectual Property Business			(33	)			-
Prepaid expenses – related to IP settlements and licensing			-				783
Prepaid expenses and other current assets			801				44
Prepaid expenses – development agreement			-				(300	)
Other assets			(60	)			9
Trade accounts payable			4,554				(68	)
Accrued expenses			(126	)			(392	)
FCC consent decree payable			7,000				-
Liabilities held for sale – Intellectual Property Business			329				-
Deferred revenue			42				(1,577	)
Income taxes payable			(225	)			-
Settlement payable - stockholders			7,200				-
Net cash used in operating activities			(10,324	)			(4,066	)
Investing activities:
Prepaid expenses – related to sale of Spectrum business to Verizon			(2,856	)
Prepaid expenses – related to sale of IP business to IDT			(1,054	)			-
Purchases of property and equipment			-				(1,383	)
Net cash used in investing activities			(3,910	)			(1,383	)
Financing activities:
Proceeds from loans payable			17,500				-
Costs related to loans payable			(80	)			-
Common stock issued upon exercise of stock options			8				1
Net cash provided by financing activities			17,428				1
Net increase (decrease) in cash and cash equivalents			3,194				(5,448	)
Cash and cash equivalents at beginning of period			11,361				18,620
Cash and cash equivalents at end of period		$	14,555			$	13,172
Supplemental schedule of noncash activities
Reclassification of prepaid marketing to inventory		$	643			$	-
Issuance of warrants with loans payable		$	4,040				-
Exercises of warrants reducing loans payable		$	5,125			$	-
Supplemental cash flow information
Cash paid during the period for interest		$	139			$	-
Cash paid during the period for income taxes		$	10			$	8

 

See accompanying notes to consolidated financial statements.

 

 

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. (“Straight Path”) and its subsidiaries 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 and nine months ended April 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2017. The balance sheet at July 31, 2016 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 combined and consolidated financial statements and footnotes thereto included in Straight Path’s Annual Report on Form 10-K for the fiscal year ended July 31, 2016, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

Straight Path, 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 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.

 

Straight Path was formerly a subsidiary of IDT Corporation (“IDT”). On July 31, 2013, Straight Path was spun-off by IDT to its stockholders and became an independent public company (the “Spin-Off”). Straight Path 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 (see Note 2).

 

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 – 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 – Putative Class Action and Shareholder Derivative Action.

 

On April 9, 2017, the Company and IDT entered into a binding 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. 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 2017 refers to the fiscal year ending July 31, 2017).

 

Note 2 — Verizon Merger Agreement

 

On May 11, 2017, the Company 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”). 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 the Company’s 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.

 

The board of directors (the “Board”) of the Company 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 the Company’s stockholders adopt the Verizon Merger Agreement.

 

The Company has 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.

 

The completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including: (i) adoption of the Verizon Merger Agreement by the Company’s stockholders; (ii) 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”); (iii) there being no law or injunction prohibiting consummation of the transactions contemplated under the Verizon Merger Agreement; (iv) the effectiveness of a registration statement on Form S-4 relating to the Merger; (v) subject to specified materiality standards, the continuing accuracy of certain representations and warranties of each party; (vi) continued compliance by each party in all material respects with its covenants; (vii) 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; (viii) 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; (ix) 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 (x) the FCC consent referred to in clause (ii) of this paragraph having become a Final Order (as defined in the Verizon Merger Agreement).

 

The Company has 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 the Company’s 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. 

 

 

The Verizon Merger Agreement contains certain termination rights for both the Company 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. 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 the Company 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, the Company 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 the Company’s 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 has entered into a voting agreement with Verizon concurrently with the entry into the Verizon Merger Agreement (the “Voting Agreement”). The Voting Agreement provides that Mr. Jonas (holding his Class A shares through a trust) will 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 will 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. The Company is not a party to the Voting Agreement. 

 

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 the Company with the SEC on May 11, 2017.

 

On May 11, 2017, the Agreement and Plan of Merger, dated as of April 9, 2017, by and among the Company, AT&T Inc. and Switchback Merger Sub Inc. (the “AT&T Merger Agreement”) was terminated in its entirety by the Company pursuant to the terms and conditions of the AT&T Merger Agreement. Also on May 11, 2017, Verizon paid to AT&T, on behalf of the Company, the $38 million Company Termination Fee (as defined in the AT&T Merger Agreement) concurrently with the termination of the AT&T Merger Agreement pursuant to the terms and conditions thereof.

 

The Company has incurred costs totaling approximately $2,856,000 related to the Verizon Merger Agreement. These costs will be included in the gain/loss recognized if the Merger is consummated. If the Merger is not consummated, the costs will be charged to operations in the period when such determination is made.

 

 

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 – Regulatory Enforcement)
	2.	Financial advisor  and legal fees - $63.9 million
	3.	Balance owed to PTPMS Communications, LLC (“PTPMS”) (see Note 14 – Other Commitments and Contingencies)
	4.	Balance owed to Former Chief Executive Officer of Straight Path Spectrum (the “Former SPSI CEO”) - $3.0 million (see Note 14 – Other Commitments and Contingencies)
	5.	Severance and retention payments to certain members of management – see below

 

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”), Jonathan Rand (“Rand”), Zhouyue Pi and David Breau (“Breau”) (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.

 

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 a binding term sheet (the “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”). Pursuant to the Term Sheet, in exchange for the Mutual Release, IDT will pay the Company $16 million, the Company will transfer to IDT its ownership interest in Straight Path IP Group, and stockholders of the Company will 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 of the Company with Verizon). As of the date of the filing of this report, the provisions under the Term Sheet have not been consummated. As such, the assets and liabilities of Straight Path IP Group have been classified as assets held for sale and liabilities held for sale on the consolidated balance sheet.

 

The Company incurred costs totaling approximately $1,054,000 related to the negotiation and execution of the Term Sheet. These costs will be included in the gain/loss recognized if the transaction is consummated. If the transaction is not consummated, the costs will be charged to operations in the period when such determination is made.

 

For a further discussion of the transaction, see the Form 8-K filed by the Company with the SEC on April 10, 2017.

 

Note 4 — Summary of Significant Accounting Policies and Recent Pronouncements

 

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended July 31, 2016.

 

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 beginning 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.

 

In June 2014, ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”) was issued.  Before the issuance of ASU 2014-15, there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This guidance is expected to reduce the diversity in the timing and content of footnote disclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. ASU 2014-15 becomes effective for the annual period ending after December 15, 2016 (year ended July 31, 2017 for the Company) and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

 

Effective August 1, 2016, the Company adopted ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). ASU 2015-01 eliminates from GAAP the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. The adoption of ASU 2015-01 did not have a significant impact on the Company’s consolidated financial statements.

 

Effective August 1, 2016, the Company adopted ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). The amendments in ASU 2015-02 change the analysis that reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in ASU 2015-02 are effective for fiscal years beginning after December 15, 2015. A reporting entity may apply the amendments in ASU 2015-02 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 did not have a material impact on the Company’s consolidated financial statements.

 

Effective August 1, 2016, 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 ended 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.

 

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 ended 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.

 

In March 2016, the FASB issued 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. This guidance is effective for annual periods beginning after December 15, 2016 (quarter ended October 31, 2017 for the Company), including interim periods within those fiscal years. 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 as of the filing of this report.

 

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 (quarter ended October 31, 2018 for the Company). The Company is currently evaluating the impact of ASU 2016-10 on its consolidated financial statements.

 

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.

 

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 ended 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 as of the filing of this report.

 

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 (quarter ended October 31, 2018 for the Company). Early adoption is permitted. The Company will evaluate the effects of adopting ASU 2016-18 if and when it is deemed to be applicable.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017 (quarter ended October 31, 2018 for the Company), including interim periods within those periods. The Company is currently evaluating the impact of adopting ASU 2017-01 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.

 

Note 5 — Fair Value Measures

 

At April 30, 2017 and July 31, 2016, the Company did not have any assets or liabilities measured at fair value on a recurring basis.

 

At April 30, 2017 and July 31, 2016, 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 April 30, 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 with a syndicate of investors (the “Lenders”) pursuant to which the Company borrowed $17.5 million (the “Loan Amount”). The loan matures on December 29, 2017. Interest accrues at a rate of 5% per annum until June 30, 2017 and then increases to a rate of 10% per annum. Other significant terms of the Loan Agreement include the following:

 

1.

$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. The remainder of the Loan Amount will be used for general corporate purposes and working capital needs.

 

2.

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).

 

3.

If any portion of the Loan Amount remains outstanding after June 30, 2017, the Lenders will receive additional warrants on a monthly basis with an aggregate exercise price equal to 10% (dropping to 7.5% in September 2017) of the then outstanding Loan Amount. The exercise price will be based on the weighted average trading price for the Class B common stock for the ten trading days preceding the warrant issue date.

 

4.

To the extent 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.  As of April 30, 2017, the Loan Amount was reduced by $5,125,000 as the result of the exercise of 147,682 warrants referred to above (see Note 8).

 

The fair value of the warrants at the date of grant totaled approximately $4,040,000. The Company estimated the fair value of the warrants using the Black-Scholes option pricing model with the following assumptions: Risk-free rate – 1.16%; dividend yield – 0%; Volatility – 96.68% and expected term – 1.92 years. 

 

Expected volatility is based on historical volatility of the Company’s common stock; 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.

 

The Company also incurred $80,000 of costs in connection with the loan that were paid in cash.

 

The fair value of the warrants and the cash loan costs are being amortized to interest expense over the term of the Loan Agreement. Amortization amounted to $2,001,000 for the three and nine months ended April 30, 2017.

 

Interest expense incurred under the Loan Agreement totaled $194,000 for the three and nine months ended April 30, 2017.

 

At April 30, 2017, loans payable were $10,256,000 which is net of unamortized debt discounts of $2,119,000.

 

 

Note 8 — Equity

 

Issuances of Class B Common Stock: 

 

Class B common stock activity for the nine months ended April 30, 2017 was as follows:

 

	1.	The Company issued 180,000 restricted shares to Jonas as compensation.
	2.	The Company issued 108,000 restricted shares to other officers and 56,000 restricted shares to other employees as compensation.
	3.	The Company issued 24,000 shares to directors as compensation.
	4.	The Company issued 1,250 restricted shares to a consultant as compensation.
	5.	The Company issued 1,440 shares upon the exercise of stock options and received proceeds of approximately $8,000.
	6.	The Company issued 147,682 shares to various Lenders upon the exercise of warrants and reduced the Loan Amount by $5,125,000.

 

In the period from May 1, 2017 to the filing of this report, the Company issued 1,865 shares for the exercise of stock options and received proceeds of approximately $11,000.

 

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

 

Issuances of Warrants: 

 

As discussed in Note 7, the Company issued warrants to purchase 252,161 shares of the Company’s Class B common stock as part of the Loan Agreement. The Company issued 147,682 shares to various Lenders for the exercise of certain of these warrants. At April 30, 2017, 104,479 warrants are still outstanding.

 

Treasury Stock for Payroll Tax Withholding:

 

Treasury stock consists of shares of Class B common stock that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. The fair market value 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 April 30, 2017 and July 31, 2016, there were 39,693 shares of treasury stock totaling approximately $428,000.

 

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 April 30, 2017, there are 1,503,532 shares of the Company’s Class B common stock reserved for the grant of awards under the 2013 Plan.

 

No stock options were issued in the nine months ended April 30, 2017.

 

Stock-based compensation is included in selling, general and administrative and, with respect to stock options granted, amounted to approximately $97,000 and $0 for the three months ended April 30, 2017 and 2016, respectively, and approximately $290,000 and $0 for the nine months ended April 30, 2017 and 2016, respectively.

 

 Issuances of unrestricted and restricted shares of Class B common stock included in stock-based compensation for the nine months ended April 30, 2017 are as follows:

 

In October 2016, the Company granted officers and employees 164,000 restricted shares of Class B common stock. The shares will vest over a two-to-four-year period. The aggregate fair value of the grant was approximately $4,392,000 which is being charged to expense on a straight-line basis over the vesting periods.

 

 

In addition, in October 2016, the Company issued 120,000 restricted shares of Class B common stock to Jonas as compensation as follows:

 

	1.	60,000 shares which vested immediately. The aggregate fair value of the grant was $1,866,000 which was charged to expense in the period issued.
	2.	60,000 shares which will vest over a three-year period. The aggregate fair value of the grant was $1,866,000 which is being charged to expense on a straight-line basis over the vesting period.

 

On September 9, 2016, the Company issued 1,250 restricted shares of Class B common stock to a consultant as compensation. The shares vest over a 13-month period. The aggregate fair value of the grant is being charged to expense on a straight-line basis over the vesting period.

 

On January 5, 2017, the Company granted three of its directors an aggregate of 24,000 restricted shares of Class B common stock. These grants are the annual grants to non-employee directors provided for in the Plan. The shares vested immediately. The aggregate fair value of the grant was approximately $886,000.

 

On April 10, 2017, the Company granted Jonas 60,000 restricted shares of Class B common stock. The shares will vest over a three-year period. The aggregate fair value of the grant was approximately $2,144,000 which is being charged to expense on a straight-line basis over the vesting periods.

 

Stock-based compensation is included in selling, general and administrative expense and, with respect to restricted stock granted, amounted to approximately $901,000 and $605,000 for the three months ended April 30, 2017 and 2016, respectively, and approximately $5,188,000 and $2,191,000 for the nine months ended April 30, 2017 and 2016, respectively. As of April 30, 2017, there was approximately $8,357,000 of total unrecognized compensation cost related to non-vested restricted shares. The Company expects to recognize the unrecognized compensation cost as follows: Fiscal 2017 - $973,000, Fiscal 2018 - $3,496,000, Fiscal 2019 - $2,704,000, Fiscal 2020 - $1,121,000 and Fiscal 2021 - $63,000.

 

Note 10 — Earnings (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 (loss) earnings 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 April 30,								Nine Months Ended April 30,
		2017				2016				2017				2016
		(in thousands)
Stock options			45				3				22				4
Warrants			61				-				43				-
Non-vested restricted Class B common stock			265				179				225				175
Shares excluded from the calculation of diluted (loss) earnings per share			371				182				290				179

 

There were no stock options or warrants 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.

 

Note 11 — Related Party Transactions

 

Legal Fees

 

The Company retained the services of a law firm to perform legal services.  One of the partners of the firm is a non-employee director of the Company.  Legal fees incurred amounted to approximately $2,000 and $207,000 for the three and nine months ended April 30, 2017, respectively. There were no fees incurred in fiscal year 2016. At both April 30, 2017 and July 31, 2016, the Company owed the law firm $0.

 

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 provide 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 or through January 31, 2017. Certain potential indemnification obligations will be released in exchange for the payments provided for in, and other provisions of, the Term Sheet, as described in Note 3 above.

 

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 the three and nine months ended April 30, 2017 and 2016.

 

 

Note 12 — Income Taxes

 

The Company recorded no federal income tax expense for Fiscal 2017 and Fiscal 2016 because the estimated annual effective tax rate was zero. As of April 30, 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 the three and nine months ended April 30, 2017 and 2016 represents state income taxes.

 

The federal return of Straight Path for the year ended July 31, 2015 is currently under audit by the Internal Revenue Service (“IRS”). No significant issues have been raised but as the audit has not been completed, the Company cannot determine if the IRS will assess additional tax, interest, and penalties.  

 

Note 13 — Business Segment Information 

 

Prior to November 1, 2015, the Company had two reportable business segments, Straight Path Spectrum, which holds fixed and mobile 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 was designated. Straight Path Ventures, whose results were previously included in our Straight Path Spectrum segment, 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 to Straight Path IP Group, Straight Path Spectrum, and Straight Path Ventures 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. Commencing on February 1, 2016, these expenses are being 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 are being allocated 100% to Straight Path Ventures;

 

2.

Employment expenses of our Chief Technology Officer are being 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 are being allocated 20% to Straight Path Spectrum and 80% to Straight Path Ventures;

 

4.

Employment expenses related to several other employees are being 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 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.

 

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

 

		Straight Path Spectrum				Straight Path IP				Straight Path Ventures				Total
		(in thousands)
Three Months Ended April 30, 2017
Revenues		$	167			$	-			$	-			$	167
Loss from operations before FCC Consent Decree and stockholder settlement			(2,683	)			(881	)			(441	)			(4,005	)
Three Months Ended April 30, 2016
Revenues		$	122			$	97			$	-			$	219
Loss from operations before FCC Consent Decree and stockholder settlement			(1,308	)			(160	)			(434	)			(1,902	)
Nine Months Ended April 30, 2017
Revenues		$	491			$	-			$	-			$	491
Loss from operations before FCC Consent Decree and stockholder settlement			(7,973	)			(2,612	)			(1,283	)			(11,868	)
Nine Months Ended April 30, 2016
Revenues		$	339			$	1,695			$	-			$	2,034
Loss from operations before FCC Consent Decree and stockholder settlement			(2,484	)			(2,173	)			(557	)			(5,214	)

 

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

 

		Straight Path				Straight Path				Straight Path
		Spectrum				IP Group				Ventures				Total
		(in thousands)
Total assets
April 30, 2017		$	4,048			$	15,799			$	1,100			$	20,947
July 31, 2016			10,174				2,223				1,100				13,497

 

None of the Company’s revenues were generated outside of the United States for either Fiscal 2017 or Fiscal 2016. The Company did not have any assets outside the United States at April 30, 2017 or July 31, 2016.

 

 

Note 14 — Commitments and Contingencies

 

Legal Proceedings 

 

Regulatory Enforcement

 

Allegations were made in an anonymous report released in November 2015 regarding the circumstances under which certain of our spectrum licenses were renewed by the FCC in 2011 and 2012. The Company conducted an independent investigation into these allegations. We met with the FCC and shared the Company’s conclusions, and the Company subsequently provided certain additional information requested by the FCC.

 

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.

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. If the Company sells its remaining spectrum licenses (see below) prior to the due date of any installation payment, any remaining installation payments will become due on the date of such closing.

 

5.

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).

 

6.

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.

 

The Company recorded the Initial Civil Penalty of $15 million. The liability is classified as “FCC consent decree payable” on the consolidated balance sheet and the associated expense is classified as “civil penalty – FCC consent decree” on the consolidated statement of operations. The first two installments of the Initial Civil Penalty totaling $8 million have been paid. As of April 30, 2017, FCC consent decree payable was $7 million.

 

As discussed in Note 2, the Company entered into the Verizon Merger Agreement. The fee owed per Item 5 above will be paid by Verizon as part of the Merger.

 

If the Merger is consummated, the Company believes that the Merger would satisfy the requirement under the Consent Decree as described in Item 5 above. However, if the Merger is not completed for any reason, including as a result of the Company’s stockholders failing to adopt the Verizon Merger Agreement, there is no guarantee that the Company will be able to otherwise sell its remaining spectrum licenses.  If the Merger is not completed for any reason and the Company does not submit applications to the FCC seeking consent to the sale of its remaining spectrum licenses to an alternative acquirer by January 12, 2018, there is no guarantee that the FCC would not seek to require the Company 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 the Company 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 the Company’s remaining spectrum licenses, either of which will have a material adverse effect on the Company’s financial condition and results of operations.

 

 

Putative Class Action and Shareholder Derivative 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 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”) 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 settlement remains subject to entering in a definitive agreement and court approval.

 

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, Jonas, 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.

 

 

Sipnet Appeal and Related IPRs

 

On April 11, 2013, Sipnet EU S.R.O. (“Sipnet”), a Czech company, filed a petition for an inter partes review (“IPR”) at the Patent Trial and Appeal Board of the United States Patent and Trademark Office (the “PTAB”) for certain claims of U.S. Patent No. 6,108,704 (the “‘704 Patent”). On October 9, 2014, the PTAB held that claims 1-7 and 32-42 of the ‘704 Patent are unpatentable. Straight Path IP Group appealed. On November 25, 2015, the U.S. Court of Appeals for the Federal Circuit (the “CAFC”) reversed the PTAB’s cancellation of all challenged claims, and remanded the matter back to the PTAB for proceedings consistent with the CAFC’s opinion. On May 23, 2016, the PTAB issued a final written decision finding that Sipnet failed to show that any of the challenged claims were unpatentable.

 

As discussed in more detail below, following the CAFC’s decision in Sipnet, the PTAB denied found that the petitioners were unable to show the unpatentability of the vast majority of the challenged claims. The petitioners have appealed the PTAB’s decisions to the CAFC. On June 5, 2017, the CAFC heard oral argument in the appeal, and a decision is pending.

 

On August 22, 2014, Samsung Electronics Co., Ltd. (“Samsung”) filed three petitions with the PTAB for IPR of certain claims of the ‘704 Patent and U.S. Patent Nos. 6,009,469 (the “‘469 Patent”) and 6,131,121 (the “‘121 Patent”). On March 6, 2015, the PTAB instituted the requested IPR. On June 15, 2015, Cisco Systems, Inc. (“Cisco”) and Avaya, Inc. (“Avaya”) joined this instituted IPR. On March 4, 2016, the PTAB issued a final written decision holding that Samsung failed to show that any claims of the ‘704 and ‘121 Patents were unpatentable. The PTAB also held that Samsung failed to show that the majority of the claims of the ‘469 Patent were unpatentable. On May 5, 2016, Samsung filed a notice of appeal to the CAFC. On May 6, 2016, Cisco and Avaya also filed notices of appeal.

 

On October 31, 2014, LG Electronics Inc. et al. (“LG”), Toshiba Corporation et al. (“Toshiba”), Vizio, Inc. (“Vizio”), and Hulu LLC (“Hulu”) filed three petitions with the PTAB for IPR of certain claims of the ‘704, ‘469, and ‘121 Patents. On May 15, 2015, the PTAB instituted the requested IPRs. On November 10, 2015, the PTAB granted petitions filed by Cisco and Avaya to join these IPRs. On November 24, 2015, the PTAB granted related petitions filed by Verizon Services Corp. and Verizon Business Network Services Inc. (the “Verizon affiliates”) to join for the ‘704 and ‘469 Patents. On May 9, 2016, the PTAB issued a final written decision holding that the petitioners failed to show that any claims of the ‘704 Patent were unpatentable. The PTAB also held that the petitioners failed to show that the majority of the claims of the ‘469 and ‘121 Patents were unpatentable. On May 20, 2016, the petitioners filed a notice of appeal to the CAFC, and this appeal was consolidated with the appeal of the Samsung IPR discussed above. On October 14, 2016, the appellants filed their opening brief. The respondents filed their opposition brief on December 7, 2016, and the appellants filed their reply brief on January 4, 2017. On June 5, 2017, the CAFC heard oral argument in the appeal, and a decision is pending.

 

On September 28, 2015, Cisco, Avaya, and the Verizon affiliates filed a petition for an IPR with the PTAB for all claims of U.S. Patent No. 6,701,365 (the “‘365 Patent”). On April 6, 2016, the PTAB denied the petition, finding that the petitioners had not demonstrated a reasonable likelihood that any challenged claim was unpatentable. This decision was not appealed to the CAFC.

 

Patent Enforcement

 

Following the CAFC’s decision in Sipnet and the PTAB’s decisions in the related IPRs, Straight Path IP Group has taken steps to re-commence its patent enforcement actions in federal district court that had been stayed or dismissed without prejudice during the pendency of the Sipnet Appeal and related IPRs.

 

On August 1, 2013, Straight Path IP Group filed complaints in the United States District Court for the Eastern District of Virginia against LG, Toshiba, and Vizio alleging infringement of the ‘704, ‘469, and ‘121 Patents and seeking damages related to such infringement. The actions were consolidated (the “consolidated action”) and assigned to Judge Anthony J. Trenga. In October 2014, Hulu intervened in the consolidated action as to Hulu’s streaming functionality in the accused products. In that same month, Amazon.com, Inc. (“Amazon”) moved to intervene, sever, and stay claims related to Amazon’s streaming functionality in the accused products. On October 13, 2014, Amazon filed an action in the United States District Court for the Northern District of California seeking declaratory relief of non-infringement of the ‘704, ‘469, and ‘121 Patents based in part on the allegations related to the consolidated action in Virginia (the “Amazon action”). On December 5, 2014, Straight Path IP Group filed a motion to dismiss Amazon’s complaint, or in the alternative, to transfer venue to the Eastern District of Virginia. On May 28, 2015, the California court transferred the Amazon action to Virginia, and the Virginia court later formally severed the Amazon action from the consolidated action. In November 2014, the parties jointly moved to stay the consolidated action and the Amazon action pending the completion of the Sipnet Appeal and related IPRs. On November 4, 2014, the court granted the stay. On May 23, 2016, Straight Path IP Group filed status reports with the court in both the consolidated action and the Amazon action requesting that the stay be lifted, and the defendants filed a statement and request for leave to file a motion to continue the stay. The court held oral argument, and on August 8, 2016, the court continued the stay pending the outcome of the defendants’ appeals of the PTAB’s denial of their IPRs.

 

 

On August 23, 2013, Straight Path IP Group filed a complaint in the United States District Court for the Eastern District of Texas against Samsung alleging infringement of the ‘704, ‘469, and ‘121 Patents and seeking damages related to such infringement. In September 2014, Straight Path IP Group and Samsung jointly filed a motion to stay the action. On October 29, 2014, the court granted the motion and stayed the action pending the outcome of the Sipnet Appeal and the Samsung IPR petitions. On May 31, 2016, Straight Path IP Group filed a notice informing the court of the results of the Samsung IPR and the Sipnet Appeal and requesting that the stay be lifted. On June 2, 2016, the defendants filed a notice asserting that the stay should remain pending their appeal of the PTAB’s decision in the Samsung IPR.  The court has not ruled on Straight Path IP Group’s request.

 

On September 24, 2014, Straight Path IP Group filed complaints against each of Apple, Inc. (“Apple”), Avaya, and Cisco in the United States District Court for the Northern District of California. Straight Path IP Group claims that (a) Apple’s telecommunications products, including FaceTime software, infringe four of Straight Path IP Group’s patents (the ‘704, ‘469, and ’121 Patents and U.S. Patent No. 7,149,208); (b) Avaya’s IP telephony, video conference, and telepresence products such as its Aura Platform infringe four of the Straight Path IP Group’s patents (the ‘704, ‘469, ‘121, and ‘365 Patents); and (c) Cisco’s IP telephony, video conference, and telepresence products such as the Unified Communications Solutions infringe four of Straight Path IP Group’s patents (the ‘704, ‘469, ‘121, and ‘365 Patents). On December 24, 2014, Straight Path IP Group dismissed the complaints against Avaya and Cisco without prejudice. On January 5, 2015, Straight Path IP Group dismissed the complaint against Apple without prejudice. On June 21, 2016, Straight Path IP Group filed new complaints against Avaya and Cisco alleging that certain of their products infringe four of Straight Path IP Group’s patents. On August 5, 2016, Avaya filed its answer, affirmative defenses, and counterclaims for declaratory judgments of noninfringement and invalidity of Straight Path IP Group’s patents, and the parties have commenced discovery. Also on August 5, 2016, Cisco filed its answer and affirmative defenses, and the parties have commenced discovery. On June 24, 2016, Straight Path IP Group filed a new complaint against Apple alleging that its FaceTime product infringes five of Straight Path IP Group’s patents. On August 5, 2016, Apple filed a partial motion to dismiss as well as its answer, affirmative defenses, and counterclaims for declaratory judgments of noninfringement and invalidity of Straight Path IP Group’s patents. Following oral argument, on October 21, 2016, the court granted in part and denied in part Apple’s motion. The court dismissed one claim as to the ‘469 Patent but denied Apple’s motion with respect to the other four patents at issue in the litigation. Discovery is underway in the Apple and Cisco actions.

 

On January 19, 2017, Avaya filed voluntary petitions under chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. On May 2, 2017, Straight Path IP Group filed a proof of claim in the Avaya bankruptcy proceeding.

 

On September 26, 2014, Straight Path IP Group filed a complaint against the Verizon affiliates and Verizon Communications in the United States District Court for the Southern District of New York. Straight Path IP Group claims the defendants’ telephony products such as its Advanced Communications Products, including Unified Communications and Collaboration and VOIP infringe on the ‘704, ‘469, and ‘365 Patents. On November 24, 2014, Straight Path IP Group dismissed the complaint without prejudice subject to a confidential standstill agreement with the defendants. On June 7, 2016, Straight Path IP Group filed a new complaint in the United States District Court for the Southern District of New York against the original Verizon parties as well as Verizon affiliate Cellco Partnership d/b/a Verizon Wireless, alleging that defendants’ IP telephony products such as FIOS Digital Voice, Unified Communications and Collaboration, Verizon Enterprise Solutions VoIP, Virtual Communications Express, Voice over LTE, and related hardware and software infringe the ‘704, ‘469 and ‘365 Patents. On August 5, 2016, Verizon filed its answer and affirmative defenses, and the parties commenced discovery. On September 13, 2016, Verizon filed a motion to stay the litigation pending a decision from the CAFC in the appeal of the Samsung IPR. On October 18, 2016, the court granted Verizon’s motion and stayed the litigation.

 

Straight Path IP Group generally pays law firms that represent it in litigation against alleged infringers of its intellectual property rights a percentage of the amounts recovered ranging from 0% to 40% depending on several factors.

 

FCC License Renewal 

 

Our spectrum licenses in the local multipoint distribution service (“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.

 

 

It is likely that the FCC will separate the renewal and substantial service deadlines for licenses that contain both A1 spectrum (for which mobile capabilities were adopted in the UMFU Report and Order) and A2 and A3 spectrum (for which mobile capabilities were not added). 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 and possible substantial service deadline of August 10, 2018 and six of these licenses currently have a renewal and possible substantial service deadline of September 21, 2018. The UMFU Report and Order does not affect the LMDS B band spectrum – the substantial service deadlines remain the same as the renewal deadlines. 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. 

 

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

 

Former SPSI CEO

 

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 $19,000 and $6,000 was incurred to the Former SPSI CEO for this obligation for the three months ended April 30, 2017 and 2016, respectively, and approximately $58,000 and $36,000 for the nine months ended April 30, 2017 and 2016, respectively.

 

For further discussion, see Note 2 above.

 

PTPMS 

 

On May 29, 2012, the Company acquired certain licenses from PTPMS under an asset purchase agreement. Under the terms of the agreement, PTPMS is entitled to a “profit share” of 20% of the net proceeds from any partition, sale, assignment, etc., of any or all of the licenses acquired. For further discussion, see Note 2 above.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report on Form 10-Q other than statements of historical fact or current fact are forward-looking statements that address activities, events or developments that we or our management expect, believe or anticipate will or may occur in the future. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors, many of which are beyond our control and could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “project,” “forecast,” “plan,” “may,” “will,” “should,” “could,” “expect,” or the negative thereof, or other words of similar meaning. In particular, these include, but are not limited to, statements of our current views and estimates of future economic circumstances, industry conditions in domestic and international markets, our future performance and financial results and the successful execution of the Merger. In evaluating these forward-looking statements, you should carefully consider the risks described herein and in other reports that the Company files with the SEC. See the section entitled “Risk Factors,” beginning on page 41 of this Quarterly Report on Form 10-Q. These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results to differ materially from the anticipated results and expectations expressed in such forward-looking statements.

 

Among the factors that may cause actual results and experiences to differ from the anticipated results and expectations expressed in such forward-looking statements are the following:

 

	●	the occurrence of any event, change or other circumstances that could give rise to the termination of the Verizon Merger Agreement;
	●	the risk that the Company’s stockholders may not adopt the Verizon Merger Agreement;
	●	the risk that the necessary regulatory approvals may not be obtained or may be obtained subject to conditions that are not anticipated or that may be burdensome;
	●	risks that any of the closing conditions to the proposed Merger may not be satisfied in a timely manner;
	●	risks related to disruption of management time from ongoing business operations due to the Merger;
	●	failure to realize the benefits expected from the Merger;
	●	the timing to complete the Merger;
	●	risks related to any legal proceedings that have been or may be instituted against the Company, Verizon and/or others relating to the Merger;
	●	the effect of the announcement of the Merger on the Company’s operating results and businesses generally; and
	●	the risk that the transaction contemplated by the Term Sheet with IDT is not consummated.

 

 

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 we own 84.5% of Straight Path IP Group, Inc. (“Straight Path IP Group”).

 

Straight Path Spectrum’s wholly-owned subsidiary, Straight Path Spectrum, LLC, holds fixed and mobile wireless spectrum. Straight Path Ventures is developing next generation wireless technology for 39 GHz. Straight Path IP Group owns intellectual property primarily related to communications over the Internet, and the licensing and other businesses related to this intellectual property.  

 

On April 9, 2017, the Company and IDT entered into a binding term sheet, providing for the settlement and mutual release of the 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 Federal Communications Commission (the “FCC”), and to sell the Company’s interest in Straight Path IP Group to IDT. 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.

 

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 the Company’s 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.

 

The board of directors (the “Board”) of the Company 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 the Company’s stockholders approve the Verizon Merger Agreement.

 

The Company has 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.

 

 

The completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including: (i) approval of the Verizon Merger Agreement by the Company’s stockholders; (ii) 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”); (iii) there being no law or injunction prohibiting consummation of the transactions contemplated under the Verizon Merger Agreement; (iv) the effectiveness of a registration statement on Form S-4 relating to the Merger; (v) subject to specified materiality standards, the continuing accuracy of certain representations and warranties of each party; (vi) continued compliance by each party in all material respects with its covenants; (vii) no event having occurred that has had, or would reasonably likely to have, a Material Adverse Effect (as defined in the Verizon Merger Agreement) on the Company; (viii) 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; (ix) 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 (x) the FCC consent referred to in clause (ii) of this paragraph having become a Final Order (as defined in the Verizon Merger Agreement).

 

The Company has 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 the Company’s 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 Securities and Exchange Commission (“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. 

 

The Verizon Merger Agreement contains certain termination rights for both the Company 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. Either the Company or Verizon may terminate the Verizon Merger Agreement if the closing 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 the Company 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, the Company 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 the Company’s 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, and is incorporated herein by reference.

 

In addition, Howard Jonas, who has the right to vote a majority of the voting power of the Company’s common stock has entered into a voting agreement with Verizon concurrently with the entry into the Verizon Merger Agreement (the “Voting Agreement”). The Voting Agreement provides that Mr. Jonas (holding his Class A shares through a trust) will 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 will 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. The Company is not a party to the Voting Agreement. 

 

 

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 the Company with the SEC on May 11, 2017 and is incorporated herein by reference.

 

On May 11, 2017, the Agreement and Plan of Merger, dated as of April 9, 2017, by and among the Company, AT&T Inc. and Switchback Merger Sub Inc. (the “AT&T Merger Agreement”) was terminated in its entirety by the Company pursuant to the terms and conditions of the AT&T Merger Agreement. Also on May 11, 2017, Verizon paid to AT&T, on behalf of the Company, the $38 million Company Termination Fee (as defined in the AT&T Merger Agreement) concurrently with the termination of the AT&T Merger Agreement pursuant to the terms and conditions thereof.

 

FCC Regulatory Enforcement

 

Allegations were made in an anonymous report released in November 2015 regarding the circumstances under which certain of our spectrum licenses were renewed by the FCC in 2011 and 2012. The Company conducted an independent investigation into these allegations. We met with the FCC and shared the Company’s conclusions, and the Company subsequently provided certain additional information requested by the FCC.

 

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”). 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 will keep all of its 28 GHz spectrum licenses.

 

4.

The Company agreed to pay a $15 million civil penalty (the “Initial Civil Penalty”) 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. If the Company sells its remaining spectrum licenses (see below) prior to the due date of any installation payment, any remaining installation payments will become due on the date of such closing.

 

5.

The Company agreed to submit to the FCC an application for approval of the 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).

 

6.

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.

 

The Consent Decree also bars the Company from entering into any new leases of its spectrum, which will limit our ability to increase our leasing revenue in the future. The first two installments totaling $8 million were paid and the remaining $7 million of the Initial Civil Penalty will be paid from the proceeds of the Loan Agreement discussed below.

 

 

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

 

1.

$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. The remainder of the Loan Amount is being used for general corporate purposes and working capital needs.

 

2.

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.

 

3.

If any portion of the Loan Amount remains outstanding after June 30, 2017, the Lenders will receive additional warrants on a monthly basis with an aggregate exercise price equal to 10% (dropping to 7.5% in September 2017) of the then outstanding Loan Amount. The exercise price will be based on the weighted average trading price for the Class B common stock for the ten trading days preceding the warrant issue date.

 

4.

To the extent 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.  As of April 30, 2017, the Loan Amount was reduced by $5,125,000 as the result of the exercise of 147,682 warrants referred to above.

 

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 FCC licenses that permit the use of the spectrum for fixed and mobile wireless services in the United States, providing broad geographic coverage and a large amount of total bandwidth in many areas. These include licenses in what are known as the 39 GHz band (38.6 – 40 GHz) and the 28 GHz A1 band (27.5 – 28.35 GHz). We also hold FCC licenses that permit the use of the spectrum for fixed wireless services in other parts of the LMDS band (29.1 – 29.25 GHz, 31.075 – 31.225 GHz, 31.0 – 31.075 GHz and 31.225 – 31.300 GHz). Our 39 GHz spectrum licenses cover the entire continental U.S. with an average of more than 600 megahertz (“MHz”) of bandwidth in the top 30 U.S. markets (measured by population according to the 2010 U.S. Census), as well as LMDS licenses in many key markets. The FCC initially allocated these frequency bands for fixed and mobile services, but established rules only for fixed services.

 

On July 14, 2016, the FCC adopted the UMFU Report and Order, which opens four millimeter-wave bands for flexible mobile and fixed wireless services. The rules apply to the LMDS A1 and 39 GHz bands, as well as the 37 GHz band and a new unlicensed band at 60 GHz (64.0-71.0 GHz). Among other things, the UMFU Report and Order changed the substantial service deadline for our 735 39 GHz licenses and 15 of our LMDS A1 licenses to June 1, 2024. For a further discussion, see Note 14 to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report under the heading “FCC License Renewal.”

 

Straight Path is also participating in standard setting, namely through 3GPP, as a contributing member.

 

Innovation in Fixed Wireless Applications: Accelerating Point-to-Multipoint (“PMP”) Platform in 39 GHz

 

On September 11, 2015, Straight Path entered into an agreement with Cambridge Broadband Networks Ltd. (“CBNL”) to expedite production of a 39 GHz PMP radio (“PMP Radios”). Straight Path agreed to a $1,000,000 non-recurring engineering fee. The Company signed a purchase order to CBNL for the acquisition of 500 PMP Radios for $2,100,000 and has paid a deposit of $630,000. 

 

In November 2016, the FCC approved CBNL’s 39 GHz VectaStar^® 600 PMP Radios for commercial use in the U.S. 

 

In December 2016, the Company and CBNL agreed to reduce the purchase order to 250 PMP Radios for $1,050,000. The Company received these PMP Radios in March 2017 and paid approximately $420,000 upon receipt.

 

Under the Verizon Merger Agreement, the Company has agreed to take certain actions intended to facilitate the consummation of the Merger, including but not limited to preparation of SEC filings, calling of stockholder meeting and the making of certain required regulatory filings. In addition, the Company must maintain its FCC licenses and comply with all regulatory requirements, including requirements under the Consent Decree. The Company will also be seeking to enter into definitive agreements and effectuate the previously disclosed settlement with IDT Corporation, including the transfer of the Company’s interest in Straight Path IP Group, subject to certain retained rights to proceeds from licensing and similar arrangement.

 

The Company has agreed with Verizon, except as provided in the Verizon Merger Agreement, to operate its business in the ordinary course and maintain its business, its licenses and relationships. However, the Company is restricted from taking certain actions that would be inconsistent with the intent of the Verizon Merger Agreement as more fully described in that agreement. Accordingly, the Company will be focused on satisfying the conditions to the completion of the Merger and will not be seeking to expand its leasing or other Spectrum business operations.

 

Recent Activity Related to Straight Path Ventures

 

Straight Path Ventures is developing 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.

 

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 September 19, 2016, Straight Path Ventures performed an indoor demonstration of our prototype 39 GHz Gigarray^® transceivers. Our Gigabit Mobility Lab continues to refine the Gigarray^® for Fixed 5G^®.

 

Recent Activity Related to Straight Path IP Group

 

On April 9, 2017, the Company and IDT entered into a binding term sheet (the “Term Sheet”), providing for the settlement and mutual release of the 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”). Pursuant to the Term Sheet, in exchange for the Mutual Release, IDT will pay the Company $16 million, the Company will transfer to IDT its ownership interest in Straight Path IP Group, and stockholders of the Company will receive 22 percent of 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 of the Company with Verizon). As of the date of the filing of this report, the provisions under the Term Sheet have not been consummated. As such, the assets and liabilities of Straight Path IP Group have been classified as assets held for sale and liabilities held for sale on the consolidated balance sheet.

 

On October 9, 2014, the Patent Trial and Appeals Board of the United States Patent and Trademark Office (the “PTAB”) issued an administrative decision stating that claims 1-7 and 32-42 of U.S. Patent No. 6,108,704 (the “‘704 Patent”) are unpatentable. Straight Path IP Group appealed that decision. On November 25, 2015, the U.S. Court of Appeals for the Federal Circuit (the “CAFC”) reversed the PTAB’s decision and remanded the case back to the PTAB for further proceedings. On May 23, 2016, the PTAB issued a final written decision finding none of the challenged claims unpatentable.

 

Following the favorable CAFC decision, the PTAB denied pending petitions for inter partes review (“IPR”) of the ‘704 Patent and other patents held by Straight Path IP Group. As well, the PTAB found nearly all the claims patentable over the prior art in pending IPRs. The petitioners have appealed to the CAFC, and oral argument was held on June 5, 2017. 

 

In civil actions pending in federal district courts for the Eastern District of Virginia and Eastern District of Texas, Straight Path IP Group has requested that the courts lift the stays previously put in place pending the outcome of the IPRs. The Eastern District of Virginia denied the request and continued the stay pending a decision on the CAFC appeal. The Eastern District of Texas has not yet ruled. Straight Path IP Group has filed a complaint for patent infringement against several Verizon affiliates in the U.S. District Court for the Southern District of New York, but the court granted Verizon’s motion to stay the litigation pending the outcome of the CAFC appeal. Straight Path IP Group has also filed complaints in the U.S. District Court for the Northern District of California against Apple, Inc., Avaya Inc., and Cisco Systems, Inc. Discovery is underway in the Apple and Cisco actions. Avaya Inc. recently filed voluntary petitions under chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. On May 2, 2017, Straight Path IP Group filed a proof of claim in the Avaya bankruptcy proceeding.

 

 

For further discussion of these actions and other legal proceedings, please see Note 14 to the Consolidated Financial Statements in Part I of this Quarterly Report.

 

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, 2016. 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, 2016 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.

 

We may take advantage of these provisions until the end of the fiscal year ending after the fifth anniversary of our initial registration statement, 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 end of our second fiscal quarter (which was not the case in respect of Fiscal 2017), or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

The JOBS Act permits an “emerging growth company” like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

 

 

Results of Operations

 

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

 

Three and Nine Months Ended April 30, 2017 (“Fiscal 2017”) Compared to Three and Nine Months Ended April 30, 2016 (“Fiscal 2016”)

 

Consolidated

 

		Three Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	167			$	219			$	(52	)
Direct cost of revenues			32				88				(56	)
Research and development			144				505				(361	)
Selling, general and administrative			3,996				1,528				2,468
Civil penalty – FCC consent decree			-				-				-
Stockholder settlement			-				-				-
Loss from operations			(4,005	)			(1,902	)			(2,103	)
Interest expense			(2,195	)			-				(2,195	)
Interest and other income			7				13				(6	)
Loss before income tax benefits (income taxes)			(6,193	)			(1,889	)			(4,304	)
Provision for income tax benefits (income taxes)			(3	)			25				(28	)
Net loss			(6,196	)			(1,864	)			(4,332	)
Net loss attributable to noncontrolling interests			203				19				184
Net loss attributable to Straight Path Communications Inc.		$	(5,993	)		$	(1,845	)		$	(4,148	)

 

 

		Nine Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	491			$	2,034			$	(1,543	)
Direct cost of revenues			99				883				(784	)
Research and development			433				879				(446	)
Selling, general and administrative			11,827				5,486				6,341
Civil penalty – FCC consent decree			15,000				-				15,000
Stockholder settlement			7,200				-				7,200
Loss from operations			(34,068	)			(5,214	)			(28,854	)
Interest expense			(2,195	)			-				(2,195	)
Interest and other income			42				423				(381	)
Loss before income tax benefits (income taxes)			(36,221	)			(4,791	)			(31,430	)
Provision for income tax benefits (income taxes)			(10	)			19				(29	)
Net loss			(36,231	)			(4,772	)			(31,459	)
Net loss attributable to noncontrolling interests			682				269				413
Net loss attributable to Straight Path Communications Inc.		$	(35,549	)		$	(4,503	)		$	(31,046	)

 

Revenues. Revenues generated by Straight Path Spectrum were $167,000 and $491,000 in the three and nine months of Fiscal 2017, respectively, and $122,000 and $339,000 in the three and nine months of Fiscal 2016, respectively. Revenues increased in Fiscal 2017 as the result of the leasing of spectrum to new customers (wireless network operators) prior to the Consent Decree with the FCC. The Consent Decree prohibits the Company from entering into new spectrum leases.

 

No revenues were generated by Straight Path IP Group in Fiscal 2017 because no new licenses or settlements were entered into and the revenue from prior licenses were fully realized in prior periods due to the expiration of the licensed patents. Revenues generated were $97,000 and $1.7 million in the three and nine months of Fiscal 2016, respectively. Primarily all of the revenues were recognized as of September 30, 2015. 

 

Direct cost of revenues. Direct cost of revenues decreased in Fiscal 2017 compared to Fiscal 2016.

 

Straight Path Spectrum incurred all of the direct costs of revenue in Fiscal 2017. Direct cost of revenues includes governmental fees and connectivity costs. No such costs were incurred in Fiscal 2016.

 

In Fiscal 2017, Straight Path IP Group had no revenues or cost of revenues because all licenses or settlements were fully realized in prior periods. 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 are recognized over the same time period as corresponding revenues.

 

Research and development. Research and development in Fiscal 2017 consists of expenses related to development by our Gigabit Mobility Lab of next generation wireless technology for 39 GHz. Research and development in Fiscal 2016 consists primarily of expenses related to an agreement to expedite production of a PMP Radio for a total fee of $1,000,000. For the three and nine months in Fiscal 2016, expenses recognized under the agreement totaled $400,000 and $700,000, respectively.

 

 

Selling, general and administrative. Selling, general and administrative expenses increased in Fiscal 2017 compared to Fiscal 2016 primarily as a result of the increase in the number of employees and salaries, an increase of non-cash stock-based compensation charges related to the issuances of restricted common stock to employees, and increased legal costs due to Straight Path IP Group’s appeal of the PTAB’s decision on the ‘704 Patent and related IPRs and the putative shareholder class action, derivative action, and regulatory enforcement activity.

 

Stock-based compensation is included in selling, general and administrative expense and, with respect to restricted stock granted, amounted to approximately $901,000 and $605,000 for the three months of Fiscal 2017 and 2016, respectively, and approximately $5,188,000 and $2,191,000 for the nine months of Fiscal 2017 and 2016, respectively. As of April 30, 2017, there was approximately $8,357,000 of total unrecognized compensation cost related to non-vested restricted shares. The Company expects to recognize the unrecognized compensation cost as follows: Fiscal 2017 - $973,000, Fiscal 2018 - $3,496,000, Fiscal 2019 - $2,704,000, 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 $97,000 and $290,000 for the three and nine months of Fiscal 2017, respectively.

 

Civil penalty – FCC Consent Decree. As discussed above, the Company signed the Consent Decree with the FCC on January 11, 2017. The Company incurred a $15 million civil penalty to be paid over a nine-month period. The Company recorded the penalty in January 2017. For a further discussion, see Note 14 to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report under the heading Regulatory Enforcement.

 

Stockholder settlement. As discussed above, 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”) and a $7.2 million additional payment (the “Additional Payment”). The Additional Payment was recorded by the Company in January 2017. For a further discussion, see Note 14 to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report under the heading Putative Class Action and Shareholder Derivative Action.

 

Interest and other income. Interest and other income in the three months of Fiscal 2017 consisted of interest expense of $194,000, amortization of debt discounts of $2,001,000 and interest income of $7,000. Interest and other income in the nine months of Fiscal 2017 consisted of interest expense of $194,000, amortization of debt discounts of $2,001,000, the reversal of prior period accruals of $22,000 and interest income of $20,000. Interest expense and the amortization of debt discounts relate to the Loan Agreement. For a further discussion, see Note 7 to the Consolidated Financial Statements contained in Item 1 of this Quarterly Report.

 

Interest and other income in the three months of Fiscal 2016 consisted of interest income of $10,000 and other income of $3,000. Interest and other income for the nine months of Fiscal 2016 included the reversal of prior period accruals of $390,000, interest income of $30,000 and other income of $3,000.

 

Income taxes. Straight Path Spectrum files its own tax returns. There is no provision for Straight Path Spectrum for Fiscal 2017 and Fiscal 2016 as it incurred a taxable loss in both periods. In addition, there is a 100% valuation allowance against the net operating losses generated by Straight Path Spectrum at both April 30, 2017 and 2016.

 

The provision in Fiscal 2017 and Fiscal 2016 represents state income taxes.

 

Net loss attributable to noncontrolling interests. The change in net loss attributable to noncontrolling interests was due to Straight Path IP Group incurring losses in the Fiscal 2017 periods compared to the loss in Fiscal 2016.

 

  

Straight Path Spectrum Segment

 

		Three Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	167			$	122			$	45
Direct cost of revenues			32				56				(24	)
Research and development			-				400				(400	)
Selling, general and administrative			2,818				974				1,844
Loss from operations before FCC consent decree and stockholder settlement		$	(2,683	)		$	(1,308	)		$	(1,375	)

  

		Nine Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	491			$	339			$	152
Direct cost of revenues			99				69				30
Research and development			-				700				(700	)
Selling, general and administrative			8,365				2,054				6,311
Loss from operations before FCC consent decree and stockholder settlement		$	(7,973	)		$	(2,484	)		$	(5,489	)

 

Revenues. Revenues generated by Straight Path Spectrum were $167,000 and $491,000 in the three and nine months of Fiscal 2017, respectively, and $122,000 and $339,000 in the three and nine months of Fiscal 2016, respectively. Revenues increased in Fiscal 2017 as the result of the leasing of spectrum to new customers (wireless network operators) prior to the Consent Decree with the FCC. The Consent Decree prohibits the Company from entering into new spectrum leases.

 

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

 

Research and development. Research and development in Fiscal 2016 consisted primarily of expenses related to an agreement to expedite production of a PMP Radio for a total fee of $1,000,000. For the three and nine months in Fiscal 2016, expenses recognized under the agreement totaled $400,000 and $700,000.

 

Selling, general and administrative.  Selling, general and administrative expense increased in Fiscal 2017 compared to Fiscal 2016 primarily as a result of the increase in the number of employees and increases in salaries including the change in allocation of corporate level compensation costs between entities, an increase of non-cash stock-based compensation charges related to the issuances of restricted common stock and stock options to employees, marketing expenses related to the installation of radio links, and increased legal costs due to the putative shareholder class action, derivative action, and regulatory enforcement activity.

 

 

Straight Path IP Group Segment

 

		Three Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	-			$	97			$	(97	)
Direct cost of revenues			-				32				(32	)
Research and development			-				-				-
Selling, general and administrative			881				225				656
Loss from operations before FCC consent decree and stockholder settlement		$	(881	)		$	(160	)		$	(721	)

 

		Nine Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	-			$	1,695			$	(1,695	)
Direct cost of revenues			-				814				(814	)
Research and development			-				-				-
Selling, general and administrative			2,612				3,054				(442	)
Loss from operations before FCC consent decree and stockholder settlement		$	(2,612	)		$	(2,173	)		$	(439	)

 

Revenues.  We have filed a series of lawsuits claiming infringement of a number of our key patents seeking both damages and injunctive relief. Many of these actions were settled and we had entered into licensing arrangements with the former defendants. In connection with the settlements and licenses, Straight Path IP Group recognized revenue of approximately $1.7 million in Fiscal 2016. The gross payments under settlement and licensing agreements that had been secured since the Company’s Spin-Off (the beginning of Fiscal 2014) totaled $18.3 million as of October 31, 2015, all of which has been collected. 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 had been 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. All of the revenue from these settlements has been recognized as of September 30, 2015.

 

The PTAB’s October 2014 decision on the ‘704 Patent previously had a materially adverse impact on our ongoing enforcement efforts. During the pendency of the appeal from that decision and related IPRs, a number of pending civil actions brought by Straight Path IP Group against various defendants were stayed or dismissed without prejudice. In light of the favorable outcome on appeal and the favorable PTAB rulings in the related IPR proceedings, Straight Path IP Group has re-commenced four civil actions (one of which has been stayed and one of which is subject to a bankruptcy proceeding) and has requested to lift the stays in two other actions (one request was denied). For further discussion of these actions, please see Note 14 to the Consolidated Financial Statements in Part I of this Quarterly Report.

 

Direct cost of revenues. Direct cost of revenues consisted of legal expenses directly related to revenues from the litigation settlements described above. We 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. We generally paid law firms that represented us in litigation against alleged infringers of our intellectual property rights a percentage of the amounts recovered ranging from 0% to 40% depending on several factors. In addition, there were other directly related legal expenses, such as expert testimony, travel, filing fees, and others.

 

Selling, general and administrative.  Selling, general and administrative expenses decreased in Fiscal 2017 compared to Fiscal 2016 primarily as a result of the change in the allocation of corporate level compensation costs between entities, including stock-based compensation for the issuances of restricted common stock and stock options to officers and employees, and decreased legal costs due to Straight Path IP Group’s appeal of the PTAB’s decision on the ‘704 Patent and related IPRs.

 

  

Straight Path Venture Segment

 

		Three Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	-			$	-			$	-
Direct cost of revenues			-				-				-
Research and development			144				105				39
Selling, general and administrative			297				329				(32	)
Loss from operations before FCC decree and stockholder settlement		$	(441	)		$	(434	)		$	(7	)

 

		Nine Months Ended
		April 30,								Change
		2017				2016				$
		(in thousands)
Revenues		$	-			$	-			$	-
Direct cost of revenues			-				-				-
Research and development			433				179				254
Selling, general and administrative			850				378				472
Loss from operations before FCC decree and stockholder settlement		$	(1,283	)		$	(557	)		$	(726	)

 

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, and the filing of one provisional patent applications and one patent application.

 

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.

 

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 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, the Company borrowed $17.5 million pursuant to a loan agreement with a syndicate of investors (the “Lenders”). For a further discussion, see Note 7 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 April 30, 2017 and the proceeds to be received upon consummation of the transaction contemplated by the Term Sheet with IDT will be sufficient to meet our anticipated cash requirements during the twelve months ending April 30, 2018.

 

As discussed above, the Company signed a Consent Decree with the FCC and incurred an Initial Civil Penalty of $15 million which is being paid in four installments through October 11, 2017 unless the Company sells its spectrum licenses before such date, in which case any remaining payment would be paid upon the closing of such sale. To fund the payments of the Initial Civil Penalty, the Company entered into the Loan Agreement with the Lenders pursuant to which the Company borrowed the $17.5 million, which matures on December 29, 2017. $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. The remainder of the Loan Amount is being used for general corporate purposes and working capital needs. The first two installments totaling $8 million were paid. The Company expects to repay the Loan Amount through a combination of exercise of warrants issued to the Lenders and other possible funding sources.

 

 

As discussed above, 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”) 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. The Additional Payment will be paid by Verizon on behalf of the Company if the Merger Agreement with Verizon is consummated. In any event, the Additional Payment will be payable no later than December 31, 2018. The settlement remains subject to entering in a definitive agreement and court approval.

 

As of April 30, 2017, we had cash and cash equivalents of $14.6 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 and through the date of the filing of this report, no payments were made by IDT pursuant to this obligation. As discussed above, on April 9, 2017, the Company and IDT entered into the Term Sheet providing for the settlement and mutual release of certain potential indemnification claims asserted by each of the Company and IDT and for the sale to IDT of the Company’s ownership interest in Straight Path IP Group, in exchange for payment from IDT to the Company of $16 million and a 22 percent interest in 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 of the Company with Verizon). The Company currently anticipates that the transaction contemplated by the Term Sheet will be consummated in the fourth quarter of Fiscal 2017. For further discussion, please see Note 3 to the Consolidated Financial Statements in Part I 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 $19,000 and $6,000 was incurred to the Former SPSI CEO for this obligation for the three months ended April 30, 2017 and 2016, respectively, and approximately $58,000 and $36,000 for the nine months ended April 30, 2017 and 2016, respectively. If the Merger is consummated, Verizon will pay approximately $3 million to the Former SPSI CEO in satisfaction of this obligation of the Company. For further discussion, see Note 2 to the Consolidated Financial Statements in Part I of this Quarterly Report.

 

In addition, the Company estimates that it will incur various other fees and expenses in connection with the Merger, which will be paid by Verizon on the Company’s behalf. For further discussion, see Note 2 to the Consolidated Financial Statements in Part I of this Quarterly Report.

 

 

Operating Activities

 

Cash flows used in operating activities in Fiscal 2017 totaled approximately $10.3 million and was used to fund the loss for the period.

  

Investing Activities

 

Cash flows used in investing activities in Fiscal 2017 totaled approximately $3.9 million. The Company incurred costs of approximately $2.86 million related to the Verizon Merger Agreement and approximately $1.05 million for the sale of Straight Path IP Group to IDT. These costs will be offset against the gain/(loss) recognized on the consummation of each respective transaction.

 

Financing Activities

 

Cash flows provided by financing activities in Fiscal 2017 totaled approximately $17.4 million. In February 2017, the Company borrowed $17.5 million, primarily to fund the payment of the Initial Civil Penalty under the FCC Consent Decree. The Company incurred costs of approximately $80,000 to obtain the loan agreement. In addition, the Company received $8,000 received for the exercise of stock options.

 

We do not anticipate paying dividends on our common stock for the foreseeable future. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.

 

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, 2016.

 

Off-Balance Sheet Arrangements

 

As of April 30, 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. As discussed above, on April 9, 2017, the Company and IDT entered into the Term Sheet providing for the settlement and mutual release of certain potential indemnification claims asserted by each of the Company and IDT and for the sale to IDT of the Company’s ownership interest in Straight Path IP Group, in exchange for payment from IDT to the Company of $16 million and a 22 percent interest in the net proceeds, if any, received by Straight Path IP Group from any license, transfer or assignment 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 of the Company with Verizon). As of the date of the filing of this report, the provisions under the Term Sheet have not been consummated. As such, the assets and liabilities of Straight Path IP Group have been classified as assets held for sale and liabilities held for sale on the consolidated balance sheet. For further discussion, please see Note 3 to the Consolidated Financial Statements in Part I of this Quarterly Report.

 

  

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’s only outstanding debt has a fixed contractual interest rate of 5% through June 30, 2017 and 10% from July 1, 2017 until the debt is fully repaid.

 

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 Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of April 30 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 April 30, 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 April 30, 2017.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended April 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

Legal proceedings in which we are involved are more fully described in Note 14 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 to 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, 2016.

 

The FCC may cancel or revoke our licenses for certain past or future violations of the FCC’s rules, or for our failure to comply with the Consent Decree, which could limit our operations and growth.

 

Our wireless operations and wireless licenses are subject to significant government regulation and oversight, primarily by the FCC and, to a certain extent, by Congress, other federal agencies and state and local authorities. In general, the FCC’s regulations impose potential limits on, among other things, the amount of foreign investment that may be made in some types of FCC licenses, on the transfer or sale of rights in licenses, on the construction and technical aspects of the operation of wireless communication systems, and on the nature of the services that can be provided within a particular frequency band. In addition, we are subject to certain regulatory and other fees levied by the FCC for certain classes of licenses and services. Under some circumstances, our licenses may be canceled or conditioned. We also may be fined for violation of the FCC’s rules, and in extreme cases, our licenses may be revoked.

 

As discussed in this Quarterly Report, we entered into a Consent Decree with the FCC settling the previously disclosed FCC investigation regarding our spectrum licenses. For further discussion of the Consent Decree, please see the heading “FCC Regulatory Enforcement” in Item 2 of Part I of this Quarterly Report. If the FCC were to conclude that we have not complied with the Consent Decree or its rules, it may impose additional fines and/or additional reporting or operational requirements, condition or revoke our remaining spectrum licenses, and/or take other action. If the FCC were to revoke a significant portion of our remaining spectrum licenses or impose material conditions on the use of our licenses, it could have a material adverse effect on the value of our spectrum licenses and our ability to generate revenues from utilization or sale of our spectrum assets.

 

Under the terms of the Consent Decree, we are unable to enter into new leases of our spectrum, which could limit our operations and growth.

 

The Consent Decree prohibits us from entering into new leases for our spectrum licenses and as a result will likely have a material adverse effect on our revenue related to our spectrum assets as leases expire or lessees terminate leases.

 

If we are unable to overcome this obstacle, our business may never develop and it could have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

There are risks and uncertainties associated with the Verizon Merger Agreement.

 

There are risks and uncertainties associated with our proposed Merger with Verizon. For example, the Merger may not be consummated, or may not be consummated as currently anticipated as a result of various factors, including but not limited to the failure to satisfy the closing conditions set forth in the Verizon Merger Agreement. Under certain circumstances, if the Verizon Merger Agreement is terminated, we may be required to pay a termination fee of $38 million to Verizon and reimburse Verizon for the payment of the AT&T Termination Fee (as defined in the Verizon Merger Agreement).

 

The Verizon Merger Agreement also restricts us from engaging in certain actions and taking certain actions without Verizon’s approval, which could prevent us from pursuing opportunities that may arise prior to the closing of the acquisition.

 

The Verizon Merger Agreement and the Consent Decree with the FCC subject us to restrictions on our business activities.

 

The Verizon Merger Agreement subjects us to restrictions on our business activities and generally obligates us to generally operate our businesses in all material respects in the ordinary course. These restrictions could have an adverse effect on our results of operations, cash flows and financial position and even may make it difficult or impossible to relaunch our operations in the event the Verizon Merger Agreement is terminated. Moreover, the Consent Decree with the FCC also bars the Company from entering into any new leases of its spectrum, which will limit our ability to increase our leasing revenue in the future in the event the Verizon Merger Agreement is terminated.

 

 

Completion of the Merger is subject to the conditions contained in the Verizon Merger Agreement, and if these conditions are not satisfied or waived, the Merger will not be completed.

 

Our obligations and the obligations of Verizon to complete the Merger are subject to the satisfaction or waiver of a number of conditions, including the receipt of various regulatory approvals. For a more complete summary of the required regulatory approvals and the conditions to the completion of the Merger, please review the Verizon Merger Agreement in its entirety, which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the SEC on May 11, 2017.

 

Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived prior to February 12, 2018, which date will automatically be extended another one hundred and eighty (180) days under certain circumstances, it is possible that the Verizon Merger Agreement will be terminated. Although we and Verizon have agreed in the Verizon Merger Agreement to use reasonable best efforts, subject to certain limitations, to satisfy certain of the conditions to the Merger, these and other conditions to the completion of the Merger may not be satisfied. The failure to satisfy all of the required conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring. There can be no assurance that the conditions to the completion of the Merger will be satisfied or waived or that the Merger will be completed. See the risk factor below titled “Failure to complete the Merger could negatively affect our stock price, future business and financial results.”

 

In order to complete the Merger, Verizon and the Company must obtain certain governmental approvals, and if such approvals are not granted or are granted with conditions, completion of the Merger may be jeopardized or the anticipated benefits of the Merger could be reduced.

 

Although Verizon and the Company have agreed in the Verizon Merger Agreement to use their reasonable best efforts, subject to certain limitations, to make certain governmental filings and obtain the required governmental approvals, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act clearance”) and receipt of all necessary consents from the FCC (the “FCC consent”), as the case may be, there can be no assurance that the relevant waiting periods will expire or be terminated early or that the relevant approvals will be obtained. In addition, the governmental authorities that provide these approvals have broad discretion in administering the governing regulations. As a condition to approving the Merger or related transactions, these governmental authorities may impose conditions, terms, obligations or restrictions or require divestitures or place restrictions on the conduct of Verizon’s business after completion of the Merger. To the extent necessary to obtain the FCC consent and any other consent from any governmental entity, including HSR Act clearance, required to consummate the Merger and the other transactions contemplated by the Verizon Merger Agreement, Verizon has agreed to take certain specified actions involving Verizon and its subsidiaries (including the surviving corporation after the closing date of the Merger) and the Company and its subsidiaries, which include disposing of, divesting, transferring or licensing certain spectrum and related assets, and Verizon and its subsidiaries will take other actions that are in the aggregate de minimis. Except as set forth in the foregoing sentence, Verizon’s and the Company’s respective obligations to use reasonable best efforts to obtain all regulatory approvals required to complete the Merger do not require Verizon and its affiliates and subsidiaries (including Straight Path and its subsidiaries following the effective time) to consent to an Adverse Regulatory Condition (as defined in the Verizon Merger Agreement). There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Merger or imposing additional material costs on or materially limiting the revenues of the combined company following the Merger, or otherwise adversely affecting, including to a material extent, Verizon’s businesses and results of operations after completion of the Merger. In addition, we can provide no assurance that these conditions, terms, obligations or restrictions will not result in the abandonment of the Merger.

 

The Verizon Merger Agreement contains provisions that could discourage a potential competing acquiror of the Company.

 

The Verizon Merger Agreement contains “no shop” provisions that, subject to certain exceptions, restrict the Company’s ability to solicit, initiate, or knowingly encourage and facilitate competing third-party proposals for the acquisition of its stock or assets. In addition, before the Company’s board of directors withdraws, qualifies or modifies its recommendation of the Merger with Verizon or terminates the Verizon Merger Agreement to enter into a third-party acquisition proposal, Verizon generally has an opportunity to offer to modify the terms of the Merger. In some circumstances, upon termination of the Verizon Merger Agreement, the Company will be required to pay a termination fee of $38 million and repay the AT&T Termination Fee (as defined in the Verizon Merger Agreement), which Verizon paid to AT&T on behalf of the Company.

 

  

These provisions could discourage a potential third-party acquiror that might have an interest in acquiring all or a significant portion of the Company from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share value than the value proposed to be received or realized in the Merger, or might otherwise result in a potential third-party acquiror proposing to pay a lower price to the Company’s stockholders than it might otherwise have proposed to pay because of the added expense of $38 million termination fee and repayment of the AT&T Termination Fee that may become payable in certain circumstances.

 

If the Verizon Merger Agreement is terminated and the Company decides to seek another business combination, it may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the Verizon Merger Agreement.

 

Failure to complete the merger could negatively impact the Company’s ability to comply with the FCC Consent Decree.

 

As previously disclosed, the Company is currently subject to the Consent Decree, pursuant to which the Company is required to pay $15 million in installments over a nine-month period ending October 12, 2017 and, if the Company does not submit applications to the FCC seeking consent to the sale of its remaining spectrum licenses by January 12, 2018, the Company will be obligated to pay an additional $85 million to the FCC or surrender the Company’s remaining spectrum licenses. The Company believes that, if consummated, the Merger would satisfy this requirement under the Consent Decree. However, if the Merger is not completed for any reason, including as a result of the Company’s stockholders failing to adopt the Verizon Merger Agreement, there is no guarantee that the Company will be able to otherwise sell its remaining spectrum licenses by January 12, 2018. If the Merger is not completed for any reason and the Company does not submit applications to the FCC seeking consent to the sale of its remaining spectrum licenses to an alternate acquiror by January 12, 2018, there is no guarantee that the FCC would not seek to require the Company 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 the Company will be able to obtain sufficient financing to pay the additional $85 million or repay the $17.5 million loan from the syndicate of investors, led by CF Special Situation Fund I, LP. A failure by the Company to comply with these requirements could lead to a default by the Company under the Consent Decree, loss of the Company’s remaining spectrum licenses and will have a material adverse effect on the Company’s financial condition or results of operations.

 

Failure to complete the Merger could negatively affect our stock price and our future business and financial results.

 

If the Merger is not completed for any reason, including as a result of failing to obtain various regulatory approvals, our ongoing business may be adversely affected, and, without realizing any of the benefits of having completed the Merger, we could be subject to a number of negative consequences, including the following:

 

	●	we may experience negative reactions from the financial markets, including negative impacts on our stock price;
	●	we may experience negative reactions from our customers and suppliers, or negative publicity generally;
	●	we may experience negative reactions from other potential acquirors which could materially reduce the value of the Company;
	●	we may experience negative reactions from our employees and may not be able to retain key management personnel and other key employees;
	●	we will have incurred, and will continue to incur, significant non-recurring costs in connection with the Merger that we may be unable to recover;
	●	the Verizon Merger Agreement places certain restrictions on the conduct of our business prior to completion of the Merger, the waiver of which is subject to the consent of Verizon (not to be unreasonably withheld, conditioned, or delayed), which may prevent us from making certain acquisitions, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Merger that may be beneficial to us; and
	●	matters relating to the Merger (including integration planning) will require substantial commitments of time and resources by our management, which could otherwise have been devoted to day-to-day operations and other opportunities that may be beneficial to us as an independent company.

 

Pursuant to the FCC Consent Decree, any subsequent sale(s) of the Company’s remaining 39 GHz and 28 GHz spectrum licenses would be subject to the requirement to pay the FCC 20% of the proceeds from such the sale(s). In addition, we could be subject to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against us to perform our obligations under the Verizon Merger Agreement. If the Merger is not completed, any of these risks may materialize and may adversely affect our business, financial condition, financial results and stock price.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None

 

Item 4.

Mine Safety Disclosures

 

Not applicable

 

Item 5.

Other Information

 

None

 

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 (5)		Term Sheet, dated April 9, 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.

 

  

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.
June 9, 2017	By:	/s/ DAVIDI JONAS
		Davidi Jonas Chief Executive Officer
June 9, 2017	By:	/s/ JONATHAN RAND
		Jonathan Rand Chief Financial Officer

 

 

 

45