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EX-23.1 - CONSENT OF ZWICK & BANYAI, PLLC - Straight Path Communications Inc.f10k2017ex23-1_straightpath.htm
EX-32.2 - CERTIFICATION - Straight Path Communications Inc.f10k2017ex32-2_straightpath.htm
EX-32.1 - CERTIFICATION - Straight Path Communications Inc.f10k2017ex32-1_straightpath.htm
EX-31.2 - CERTIFICATION - Straight Path Communications Inc.f10k2017ex31-2_straightpath.htm
EX-31.1 - CERTIFICATION - Straight Path Communications Inc.f10k2017ex31-1_straightpath.htm
EX-21.1 - SUBSIDIARIES - Straight Path Communications Inc.f10k2017ex21-1_straightpath.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒     Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934

 

for the fiscal year ended July 31, 2017,

 

or

 

☐     Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934.

 

Commission File Number: 1-36015

 

STRAIGHT PATH COMMUNICATIONS INC.

(Exact name of registrant as specified in its charter)

 

Delaware   45-2457757
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Class B common stock, par value $.01 per share   NYSE American

 

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒ 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒   

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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

 

Large accelerated filer Accelerated filer ☒  
Non-accelerated filer ☐   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 Act). Yes ☐  No ☒ 

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based on the closing price on January 31, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) of the Class B common stock of $35.04 per share, as reported on the NYSE American, was approximately $111,832,000.    

 

As of October 10, 2017, the registrant had outstanding 787,163 shares of Class A common stock and 11,948,705 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.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The definitive proxy statement relating to the registrant’s Annual Meeting of Stockholders, to be held February 6, 2018, is incorporated by reference into Part III of this Form 10-K to the extent described therein.

 

 

 

 

 

 

Index

 

Straight Path Communications Inc.

 

Annual Report on Form 10-K

  

Part I 1
   
Item 1. Business 1
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 28
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Mine Safety Disclosures 32
   
Part II 33
   
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33
Item 6. Selected Financial Data 35
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 47
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48
Item 9A. Controls and Procedures 48
Item 9B. Other Information 48
   
Part III 49
   
Item 10. Directors, Executive Officers and Corporate Governance 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 49
Item 13. Certain Relationships and Related Transactions, and Director Independence 49
Item 14. Principal Accounting Fees and Services 49
   
Part IV 50
   
Item 15. Exhibits, Financial Statement Schedules 50
   
Signatures 51

 

 

 

 

Part I

 

As used in this Annual Report, unless the context otherwise requires, the terms “the Company,” “Straight Path Communications,” “SPCI,” “we,” “us,” and “our” refer to Straight Path Communications Inc., a Delaware corporation and its subsidiaries, collectively. Each reference to a fiscal year in this Annual Report refers to the fiscal year ending in the calendar year indicated (for example, Fiscal 2017 refers to the fiscal year ended July 31, 2017).

 

Item 1. Business.

 

OVERVIEW

 

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.  

 

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. 

 

Each of our businesses is described in more detail below.

 

Financial information by segment is presented below in Note 14 to our Consolidated Financial Statements in this Annual Report.

 

Our main offices are located at 5300 Hickory Park Drive Suite 218, Glen Allen, Virginia 23059. The telephone number at our headquarters is (804) 433-1522, and our website is www.straightpath.com.

 

We make available, free of charge, through the investor relations page of our website (straightpath.com/investors) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers, and beneficial owners of more than 10% of our equity as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the “SEC”). We have adopted a code of business conduct and ethics for all of our employees, including our chief executive officer and chief financial officer. Copies of the code of business conduct and ethics are available on our website.

  

Our website and the information contained therein or incorporated therein are not incorporated into this Annual Report on Form 10-K or our other filings with the SEC.

 

KEY EVENTS IN OUR HISTORY AND RECENT DEVELOPMENTS

 

We were incorporated in the State of Delaware in April 2013.

 

On July 31, 2013, IDT, our former parent corporation, completed a tax-free spin-off (the “Spin-Off”) of our capital stock, through a pro rata distribution of our common stock to its stockholders of record as of the close of business on July 25, 2013 (the “Spin-Off record date”). As a result of the Spin-Off, each of IDT’s stockholders received: (i) one share of our Class A common stock for every two shares of IDT’s Class A common stock held on the Spin-Off record date; (ii) one share of our Class B common stock for every two shares of IDT’s Class B common stock held on the Spin-Off record date; and (iv) cash in lieu of a fractional share of all classes of our common stock. 

 

On April 9, 2017, we and IDT entered into a binding term sheet (the “IDT Term Sheet”), providing for the settlement and mutual release of the potential indemnification claims asserted by each of the us 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 the sale of our interest in Straight Path IP Group to IDT. See the discussion below. 

  

 1 

 

 

Straight Path Spectrum

 

Verizon Merger Agreement

 

On May 11, 2017, we entered into an Agreement and Plan of Merger (“the Verizon Merger Agreement”) with Verizon Communications, Inc. (“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 us or any our direct or indirect subsidiaries, and in each case not held on behalf of third parties) will be converted into the right to receive a number of validly issued, fully paid in and nonassessable shares of common stock of Verizon (“Verizon Shares”) equal to the quotient determined by dividing $184.00 by the five (5)-day volume-weighted average per share price ending on the second full trading day prior to the Effective Time, rounded to two decimal points, of Verizon Shares on the New York Stock Exchange (the “Verizon Share Value”) and rounded to the nearest ten-thousandth of a share (collectively and in the aggregate, the “Merger Consideration”). It is our intention that (i) the Merger shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the Treasury regulations promulgated thereunder, and (ii) the Verizon Merger Agreement shall constitute a plan of reorganization within the meaning of Treasury Regulation Section 1.368-2(g), as noted in the Verizon Merger Agreement.

 

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

 

We agreed, subject to certain exceptions with respect to unsolicited proposals, not to directly or indirectly solicit competing acquisition proposals or to participate in any discussions concerning, or provide non-public information in connection with, any unsolicited acquisition proposals.

 

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

 

The completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including:

 

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

 

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

  

 2 

 

 

On June 1, 2017, we and Verizon submitted applications to the FCC seeking consent to transfer control of our spectrum licenses to Verizon. For further discussion, please see Item 3 to Part 1 “Legal Proceedings” in this Annual Report.

 

We have made customary representations and warranties in the Verizon Merger Agreement. The Verizon Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to the conduct of our business between the date of the signing of the Verizon Merger Agreement and the closing of the transactions contemplated under the Verizon Merger Agreement. The representations and warranties made by us are qualified by disclosures made in our 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 us and Verizon including upon (i) an uncured breach by the other party which results in the failure of a closing condition, (ii) the failure to receive the approval of the Verizon Merger Agreement by our stockholders, and (iii) our 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 us in connection with our receipt of a superior proposal or due to an Intervening Event (as defined in the Verizon Merger Agreement), we may be required to pay Verizon a termination fee equal to $38 million. As a result of the adoption of the Verizon Merger Agreement at the special meeting of our stockholders on August 2, 2017, we never owed the termination fee to Verizon. Either we 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 us an aggregate amount equal to $85 million (the “Parent Termination Fee”) in the event that the Merger has not closed by the extended Termination Date, and all conditions to closing other than receipt of FCC consent or HSR approval (or expiration of the waiting period under the HSR) have been satisfied or waived. In the event that the Verizon Merger Agreement is terminated other than as a result of Verizon’s breach or under circumstances in which Verizon is required to pay the Parent Termination Fee, we will be required to pay Verizon an amount equal to the AT&T Termination Fee (as defined in the Verizon Merger Agreement) paid by Verizon on our behalf. 

 

The Verizon Merger Agreement was attached as Exhibit 2.1 to the Form 8-K filed by us 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 us, Verizon or Merger Sub, or to modify or supplement any factual disclosures about us or Verizon in their public reports filed with the SEC. The Verizon Merger Agreement includes representations, warranties and covenants of us, 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 us, 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 our or Verizon’s SEC filings or may have been used for purposes of allocating risk among the us, 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 us 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 our common stock 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. We are not a party to the Voting Agreement. At the special meeting held on August 2, 2017, Mr. Jonas voted his shares in the Company in favor of the Merger.

 

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

  

 3 

 

 

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 us pursuant to the terms and conditions of the AT&T Merger Agreement. Also on May 11, 2017, Verizon paid to AT&T, on our behalf, 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.

 

Under the Verizon Merger Agreement, we have 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, we must maintain our FCC licenses and comply with all regulatory requirements, including requirements under a consent decree with the FCC (see discussion below). We will also be seeking to enter into definitive agreements and effectuate the previously disclosed settlement with IDT, including the transfer of our interest in Straight Path IP Group, subject to certain retained rights to proceeds from licensing and similar arrangement.

 

We have 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, we are 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, we 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.

 

FCC Regulatory Enforcement

 

On January 11, 2017, we 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 we do not believe were material assets of the Company.

 

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

 

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

 

  5. We 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 we sell our 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.

 

  6. We 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).

 

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

 

As the Consent Decree bars us from entering into any new leases of our spectrum, this will limit our ability to increase our leasing revenue in the future. The first three installments totaling $11.5 million were paid and the remaining $3.5 million of the Initial Civil Penalty will be paid from the proceeds of a loan agreement discussed below.

  

 4 

 

 

Loan Agreement

 

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

 

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

 

  2. Upon funding the Loan Amount, the Lenders received warrants to purchase 252,161 shares of our Class B common stock with an aggregate value 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.

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

 

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

 

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

 

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

 

d.    On October 2, 2017, the Lenders received warrants to purchase 5,143 shares of our Class B common stock with an exercise price of $180.48 per share.

 

  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 July 31, 2017, the Loan Amount was reduced by $5,125,000 as the result of the exercise of 147,682 warrants received by the Lenders upon making the loan.  There were no additional warrant exercises for the period from August 1, 2017 to the date of the filing of this report.

 

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

 

The outstanding Loan Balance as of October 10, 2017 was $12,375,435.

 

Settlement with IDT

 

On April 9, 2017, we and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of the potential indemnification claims asserted by each of us 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”), and the sale of our interest in Straight Path IP Group to IDT. As of the date of the filing of this report, the parties have not yet consummated the settlement agreement and mutual release contemplated by the IDT Term Sheet. The definitive settlement agreement is under negotiation. For further discussion, please see Note 3 to the Consolidated Financial Statements in this Annual Report – Settlement of Claims with IDT and Sale of Straight Path IP Group. 

 

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 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 local multipoint distribution service (“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 Annual Report under the heading “FCC License Renewal.”

 

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

 

 5 

 

 

 

Straight Path Ventures

 

Straight Path Ventures is developing next generation wireless technology primarily for 39 GHz at our Gigabit Mobility Lab in Plano, Texas.

 

On August 22, 2016, Straight Path Ventures filed a provisional patent application with the United States Patent and Trademark Office (“USPTO”) for new beam training technologies in millimeter-wave gigabit broadband systems. On October 12, 2016, Straight Path Ventures filed a patent application with the USPTO for new millimeter-wave transceiver technologies.

 

On August 31, 2017, Straight Path Ventures demonstrated its prototype 39 GHz Gigarray® solutions that achieved 800 megabits per second at a distance of 500 meters. Our Gigabit Mobility Lab continues to refine the Gigarray® for Fixed 5G®

 

Straight Path IP Group

 

On April 9, 2017, we and IDT entered into the IDT Term Sheet to settle potential claims related to certain claims under agreements related to the Spin-Off, and the sale of our interest in Straight Path IP Group to IDT. For a further discussion, please see Note 3 to the Consolidated Financial Statements in this Annual Report – Settlement of Claims with IDT and Sale of Straight Path IP Group.

 

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 appealed to the CAFC. On June 23, 2017, the CAFC affirmed the PTAB’s decision. 

 

Following the second affirmance by the CAFC, the stays that had been in place in the civil actions pending in federal district courts for the Eastern District of Virginia and Eastern District of Texas have been lifted. Straight Path IP Group’s suit against several Verizon affiliates in the U.S. District Court for the Southern District of New York is currently stayed until December 8, 2017. Straight Path IP Group has also filed complaints in the U.S. District Court for the Northern District of California against Apple, Inc. (“Apple”), Avaya Inc. (“Avaya”), and Cisco Systems, Inc. (“Cisco”). Expert discovery is underway in the Apple and Cisco actions. However, Avaya 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. In addition, on September 13, 2017, Apple filed a request in the USPTO for ex parte reexamination of U.S. Patent No. 7,149,208 in the USPTO. 

 

STRAIGHT PATH SPECTRUM

 

Overview  

 

We hold a significant number of licenses approved for fixed and mobile wireless spectrum in the United States, providing broad geographic coverage and a large amount of total bandwidth in many areas. These include licenses in the 39 GHz (38.6-40 GHz) band and the 28 GHz (27.5-28.35 GHz) portion of the LMDS band. We also hold licenses for fixed wireless spectrum in other parts of the LMDS band. We have 39 GHz spectrum licenses covering 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.

 

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

 

Currently, our spectrum is used primarily to provide fixed wireless services for existing Wireless Internet Service Providers (“WISPs”) and Mobile Network Operators (“MNOs”). MNOs have used our spectrum for macro cellular backhaul where fiber backhaul is not available or as a substitute for fiber.

 

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History

 

In December 2001, IDT, through its subsidiary, Winstar Holdings, LLC, acquired certain FCC spectrum licenses and other assets from the bankruptcy estate of Winstar Communications, Inc. IDT acquired certain other FCC spectrum licenses through other unrelated transactions. Certain of those spectrum licenses were transferred to Straight Path Spectrum, Inc. (then known as IDT Spectrum, Inc.). Certain licenses were allowed to lapse upon expiration, and others were extended.

 

Our Spectrum Holdings

 

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

 

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

 

Our Strategy

 

We have agreed with Verizon, except as provided in the Verizon Merger Agreement, to operate our business in the ordinary course and maintain our business, our licenses and relationships. However, we are 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, we are currently 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. The Consent Decree with the FCC bars us from entering into any new leases of our spectrum, which limits our ability to increase our leasing revenue in the future. In addition, under the Verizon Merger Agreement, we are 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, we currently are not seeking to expand our leasing or other spectrum business operations. See the discussion above.

 

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

 

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Our Services

 

Spectrum Leasing Services

 

We currently lease spectrum and provide related services for last mile, mid-mile, fixed access, and backhaul applications to internet service and telecommunications providers and other companies that operate fixed wireless networks and have the staff and operational systems to support a network build-out. The Consent Decree with the FCC bars us from entering into any new leases of our spectrum, which limits our ability to increase our leasing revenue in the future. In addition, under the Verizon Merger Agreement, we are 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, we currently are not seeking to expand our leasing or other spectrum business operations. 

 

See the discussion above.

 

Point-to-Multipoint Installations

 

Fixed wireless operations in our bands can be deployed using PTP or PMP installations.  PTP typically deploys highly directive antennas at each end of the link, which requires dedicated transceiver hardware at each end of the link.  In PMP applications, a transceiver can support multiple connection points thus reducing the expense of additional hardware and the space demands of that equipment.  Our spectrum holdings are expressly authorized for PMP applications by the FCC.  In PMP deployments, a hub with sectored antennas can provide connectivity to a number of terminals anywhere within the hub’s coverage area.  New sites can be added without revisiting the hub site, up to capacity limits that vary based on hardware design, capacity considerations by the operator, or other factors.

 

5G

 

The exponentially increasing demand for mobile broadband, coupled with the shortage of spectrum (below 3 GHz) traditionally used for mobile communication and mobile data transmission has spurred technological advances that can utilize millimeter wave frequencies—such as ours—to “access” mobile devices.

 

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Until 2016, millimeter wave frequencies,1 those bands from 24 GHz and higher, including our 39 GHz and LMDS spectrum, had not been considered for access to mobile devices due to their propagation characteristics. As a result, millimeter wave frequencies have been limited to fixed, line-of-sight applications. Lower frequency access spectrum, on the other hand, can penetrate or bypass interposing objects, such as buildings, and reach to the endpoints, i.e. end-user devices, such as mobile phones, tablets, and other portable devices without line-of-sight (non line-of-sight). Over the past several years, as data consumption has increased exponentially and concern has risen regarding the adequacy of the current supply of access spectrum (often referred to as the “spectrum crunch”), technologists have developed innovative base station devices with far greater number of antenna components (i.e. phased array) that can overcome the current propagation limitations for short, yet substantial distances, far shorter than fixed line-of-sight links, yet far greater distances and capacity than current Wi-Fi implementations.

 

Straight Path Spectrum joined NYU WIRELESS as an Industrial Affiliate to support and encourage the advances and commercialization of 5G millimeter wave technology. Of note, many leading technology companies—Samsung, Intel, Ericsson, NSN, and others—are also Industrial Affiliates at NYU WIRELESS. Straight Path also hired Jerry Pi as our Chief Technology Officer in September 2014. Mr. Pi is a pioneer in 5G technology, having led the group at Samsung that developed a working prototype for mobile transmission at 28 GHz. Mr. Pi is a leader in millimeter wave mobility technology. He has co-authored more than 30 technical journals and conference papers and is a co-inventor of more than 150 patents and applications.

 

The recognition of millimeter wave mobility as a necessary solution for the data demand and spectrum crunch has reached the highest levels. The FCC adopted rules on July 14, 2016 to allow mobile services in a number of millimeter wave bands, as addressed above.

 

Sales and Marketing

 

The Consent Decree with the FCC bars us from entering into any new leases of our spectrum, which limits our ability to increase our leasing revenue in the future. In addition, under the Verizon Merger Agreement, we are 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, we currently are not seeking to expand our leasing or other spectrum business operations. 

 

Competition

 

We operate in the highly competitive telecommunications market. We compete primarily on the basis of our fixed wireless spectrum portfolio, experience and technical skills, competitive pricing model, service quality, reliability, and deployment speed.

 

We face significant competition from entities that deliver voice and data transmission service and capacity through a variety of methods, including copper, fiber, coaxial cable, and other wireless communications solutions.

 

Our principal competitors to our current spectrum leasing services are fiber providers such as Level 3 Communications, Inc., NEON and Verizon, cable companies such as Comcast and Time Warner, other spectrum license holders such as Nextlink Wireless, LLC, long-distance interexchange carriers such as AT&T and Verizon, and the wireless operators that lease Common Carrier fixed microwave service from the FCC. Each competitive network option may offer advantages based on the wireless operators’ particular application, such as capacity or distance requirements, deployment time, or many other factors. 

 

Many of our competitors have longer operating histories, long-standing relationships with customers and suppliers, greater name recognition, and greater financial, technical and marketing resources than we do and, as a result, may have substantial competitive advantages over us. Additionally, market perceptions as to reliability and security for fixed wireless solutions as compared to copper or fiber networks provide us with additional marketing challenges. We may not be able to exploit new or emerging technologies or adapt to changes in customer requirements more quickly than these competitors, or devote the necessary resources to the marketing and sale of our services.

 

 

 

1 While millimeter wave traditionally refers to frequencies between 30 and 300 GHz, we use the term to refer to 24 GHz and above, as that is the range that the FCC has indicated an interest in developing to allow mobile usage therein.

 

The FCC imposes significant regulation on licensees of wireless spectrum with respect to how wireless spectrum is used by licensees, the nature of the services that licensees may offer and how the services may be offered, and resolution of issues of interference between spectrum bands.  The adoption or modification of laws or regulations relating to our spectrum licenses and operations could limit or otherwise adversely affect the manner in which we currently conduct our business and compete with other fixed wireless service providers.

 

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With regards to the possibility of our spectrum being utilized in 5G networks, the UMFU Report and Order adopted by the FCC on July 14, 2016 allowed for mobile usage in four bands, including our 39 GHz and 28 GHz LMDS A1 spectrum. While we believe 39 GHz is the best path forward, we recognize that competing interests abound. Other license holders in other bands will certainly attempt to raise the profile of their assets as ideal for mobile services, while others will raise the profile of bands yet to be licensed. In addition, on July 14, 2016, the FCC issued a Further Notice of Proposed Rulemaking that, among other things, proposed to adopt flexible fixed and mobile use in bands that could make up to 17.7 GHz of additional spectrum available, and ultimately holders of licenses in these bands may compete with Straight Path.

 

Unlicensed spectrum—in millimeter waves and below—can also be a source of competition.  As well, MNOs are incentivized to maximize efficiencies in the spectrum they’ve already acquired. Equipment manufacturers may search for solutions that will optimize the status quo, and delay the move to millimeter wave mobility. 

 

Regulatory Framework

 

Significant statements concerning the regulatory environment are set forth in Item 1A to Part I “Risk Factors” in this Annual Report, and we strongly recommend reviewing that section in conjunction with this section.

 

Our wireless operations and wireless licenses in the 39 GHz and LMDS bands are subject to significant regulation and oversight, primarily by the FCC and, to a certain extent, by Congress, other federal agencies, and state and local authorities. At the federal level, the FCC has jurisdiction over the use of the electromagnetic spectrum, including exclusive jurisdiction over licensing and technical rules for operations of mobile wireless carriers, certain site acquisition matters, and all interstate telecommunications services. State regulatory commissions have jurisdiction over intrastate common carrier and certain other communications providers, unless preempted by the FCC. Municipalities may regulate limited aspects of our business by, for example, imposing zoning requirements, requiring installation permits, and controlling access to public rights-of-way. The regulations of these agencies are continually evolving through rulemakings, adjudications, and other administrative and judicial proceedings, and future regulatory changes or interpretation of existing regulations could have an adverse effect on our business.

 

FCC Licensing and Regulation

 

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.  The FCC imposes significant regulation on licensees of wireless spectrum with respect to how radio spectrum is used by licensees, the nature of the services that licensees may offer and how the services may be offered, and resolution of issues of interference between spectrum bands.  In addition, we are subject to certain regulatory and other fees levied by the FCC for certain classes of licenses and services.  The adoption or modification of laws or regulations relating to our wireless licenses and operations could limit or otherwise adversely affect the manner in which we currently conduct our business.  Under some circumstances, our licenses may be canceled or conditioned.  We also may be fined for any violation of the FCC’s rules, and in extreme cases, our licenses may be revoked.

 

The FCC determines the use of specific frequency bands by particular services.  If the FCC decides in the future to allocate additional spectrum in the high frequency bands to competing services, the successful auction of that spectrum could increase the number of entities that hold this spectrum, and its general availability could have a material adverse effect on the value of our spectrum.   In addition, on July 14, 2016, the FCC issued a Further Notice of Proposed Rulemaking that, among other things, proposed to adopt flexible fixed and mobile use in bands that could make up to 17.7 GHz of additional spectrum available. This may increase potential competition with our wireless licenses and have an adverse effect on our business.

 

Our spectrum licenses in the LMDS and 39 GHz bands have historically been granted for ten-year terms. On April 20, 2016, 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 UMFU Report and Order, the next substantial service demonstration date for these 16 LMDS A1 licenses is June 1, 2024, not at the renewal deadline.

 

It is likely that the FCC will issue new licenses for the LMDS A1 spectrum on the one hand and the A2 and A3 licenses on the other, with separate renewal and substantial service deadlines for each (as noted above, the substantial service demonstration dates for the A1 licenses will be June 1, 2024). 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 likely substantial service deadline of August 10, 2018 and six of these licenses currently have a renewal and likely substantial service deadline of September 21, 2018. The UMFU Report and Order does not affect the LMDS B band spectrum. Of our 117 LMDS B band (31.0 – 31.075 GHz and 31.225 – 31.300 GHz) spectrum, five licenses currently have a renewal and substantial service deadline of August 10, 2018 and 112 licenses currently have a renewal and substantial service deadline of September 21, 2018. On August 3, 2017, the FCC adopted new rules governing the process by which licensees may seek renewal of their authorizations. However, for the licenses we hold, those rules do not go into effect until January 1, 2023, after all of licenses will be renewed.

 

The UMFU Report and Order build-out date of June 1, 2024 also applies to our 735 39 GHz licenses, which currently have a renewal date of October 18, 2020. 

 

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The “substantial service” requirement referenced above applies to each of these LMDS and 39 GHz licenses.   Substantial service showings for each of our licenses were filed on or before the final construction deadline.  The substantial service requirement is intended to provide licensees with flexibility in constructing their licenses.  The FCC has established “safe harbor” guidelines that provide licensees with a degree of certainty as to how to comply with the requirement, and those guidelines were made more stringent in the UMFU Report and Order. In addition, the UMFU Report and Order provides that current licensees in the 28 GHz and 39 GHz bands who, under the current rules, face a deadline for demonstrating substantial service after the adoption date of the UMFU Report and Order will not be required to demonstrate substantial service at renewal. Rather, those licensees will be required to fulfill the performance requirements for their respective licenses by June 1, 2024. If the FCC finds that a licensee has failed to meet the substantial service requirement for any license, however, that authorization is subject to termination.

 

The FCC rules require that certain providers of telecommunications file reports with, and make contributions to, the Universal Service Fund (“USF”).  In general, while reports may have to be filed, contributions to the USF generally need not be made with respect to revenues received for “resale-type” or “leased” services — telecommunications capacity sold or leased in bulk to a carrier who then uses that capacity to provide services to end-users.  Conversely, revenues received with respect to “retail-type” services generally are subject to a USF contribution requirement. Historically, we have not been subject to a USF contribution requirement.  Our future operations may require us to make USF reports and/or contributions, depending on the nature of the services we offer and the type of customers we serve.  USF contributions, which are typically passed to the customer, may make our services more expensive.

 

Additionally, the FCC requires the payment of annual and other fees in certain circumstances, including but not limited to regulatory fees, application processing fees, and contributions to other funds.  If any of these requirements change, it may make our services more expensive.

 

On January 11, 2017, we entered into the Consent Decree with the FCC settling the FCC’s investigation regarding Straight Path Spectrum’s spectrum licenses. See the discussion above. 

 

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

 

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

 

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

 

State Regulation

 

We believe that the fixed wireless communications that we are providing are not subject to state public utility regulation.  Nonetheless, it is possible that one or more state regulators will seek to assert jurisdiction over us, and therefore, impose additional regulatory burdens on, us and our services.  If one or more state regulatory commissions were to impose regulations on our services, our compliance could materially increase our costs of providing services and therefore have an adverse impact on our business operations and profitability.

 

Significant statements concerning the regulatory environment are set forth in Item 1A to Part I “Risk Factors” in this Annual Report, and we strongly recommend reviewing that section in conjunction with this section.

 

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STRAIGHT PATH VENTURES

 

Straight Path Ventures, a Delaware limited liability company and a subsidiary of SPCI, develops next generation wireless technology, particularly for the 39 GHz band. Straight Path Spectrum’s assets are complemented by technology being developed by Straight Path Ventures, which opened our Gigabit Mobility Lab in Plano, Texas run by Jerry Pi. On August 22, 2016, Straight Path Ventures filed a provisional patent application with the USPTO for new beam training technologies in millimeter-wave gigabit broadband systems. On October 12, 2016, Straight Path Ventures filed a patent application with the USPTO for new millimeter-wave transceiver technologies. On August 31, 2017, Straight Path Ventures demonstrated its prototype 39 GHz Gigarray® solutions that achieved 800 megabits per second at a distance of 500 meters. Our Gigabit Mobility Lab continues to refine the Gigarray® for Fixed 5G®. 

 

STRAIGHT PATH IP GROUP

 

Straight Path IP Group, a Delaware corporation and a subsidiary of SPCI, holds and derives value from a portfolio of patents covering aspects of communications, primarily related to communications over the Internet. Straight Path IP Group’s principal business is the acquisition, development, licensing, and protection of intellectual property. 

 

On April 9, 2017, we and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of the potential indemnification claims asserted by each of us 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 IDT Term Sheet, in exchange for the Mutual Release, IDT will pay us $16 million, we will transfer to IDT our ownership interest in Straight Path IP Group, and our stockholders 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). As of the date of the filing of this report, the parties have not yet consummated the settlement agreement and mutual release contemplated by the IDT Term Sheet. The definitive settlement agreement is under negotiation.

 

Straight Path IP Group presently owns eleven patents issued by the USPTO and their foreign counterparts that primarily relate to various communications technologies and include, among other things, patents facilitating the use of communications over the Internet, which we refer to as the NetSpeak Portfolio. 

  

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Our intellectual property currently consists of the following patents:

 

NetSpeak Portfolio:

 

U.S. Patent No. 6,108,704:   Point-to-point internet protocol and its foreign counterparts, German Patent No. 852868 and Taiwan Patent No. NI-096566

  

U.S. Patent No. 6,131,121:   Point-to-point computer network communication utility utilizing dynamically assigned network protocol addresses;
   
U.S. Patent No. 6,701,365:   Point-to-point internet protocol;
   
U.S. Patent No. 6,513,066:   Establishing a point-to-point internet communication;
   
U.S. Patent No. 6,185,184:   Directory server for providing dynamically assigned network protocol addresses;
   
U.S. Patent No. 6,829,645:   Method and apparatus for establishing point-to-point communications over a computer network;
   
U.S. Patent No. 6,687,738:   Establishing an internet telephone call using e-mail;
   
U.S. Patent No. 6,009,469:   Graphic user interface for internet telephony application;
   
U.S. Patent No. 6,226,678:   Method and apparatus for dynamically defining data communication utilities;
   
U.S. Patent No. 6,178,453:   Virtual circuit switching architecture;
   
U.S. Patent No. 7,149,208:   Method and apparatus for providing caller identification based responses in a computer telephony environment.

 

These patents had finite lives. The claims of U.S. Patent No. 6,108,704 and its continuations, continuations-in-part, and divisionals expired on September 25, 2015. One patent in the NetSpeak portfolio, U.S. Patent No. 6,178,453, expired on April 4, 2017. Straight Path IP Group may continue to enforce the patents for patent infringement that occurred before expiration, although we do not anticipate filing additional actions. The complexity of patent and common law, combined with our limited resources, create risk that our efforts to protect our patents may not be successful.  We cannot be assured that our patents will be upheld, or that third parties will not invalidate our patents.

 

Straight Path IP Group also owns the Droplet portfolio. The Droplet patent portfolio includes United States Patents Nos. 6,847,317; 7,844,122; 7,525,463; 8,279,098; 7,436,329; 7,679,649, 8,947,271, 8,896,717, 8,849,964, 8,896,652 and a number of U.S. and foreign patent applications.

 

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On October 9, 2014, the PTAB held the claims at issue in the ‘704 Patent were unpatentable, and Straight Path IP Group appealed the decision to the CAFC. On November 25, 2015, the CAFC reversed the PTAB’s cancellation of all challenged claims, and remanded back to the PTAB for proceedings consistent with the opinion. On May 23, 2016, the PTAB issued a final written decision finding none of the challenged claims were unpatentable. Subsequently, 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 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 appealed to the CAFC. On June 23, 2017, the CAFC issued its decision affirming the PTAB’s final written decision. That decision became final on July 31, 2017 when the CAFC issued its mandate.

 

Straight Path IP Group has six pending actions in federal district court, against Apple, Avaya, Cisco, Verizon, LG Electronics Inc. et al. (“LG”) and other defendants (including Amazon.com, Inc. (“Amazon”)), and Samsung. Several of these actions had been stayed during the pendency of the CAFC appeal, but are now unstayed an in various stages of discovery.

 

For further discussion of these actions and other legal proceedings, please see Item 3 to Part 1 “Legal Proceedings” in this Annual Report.

 

The aggregate fees collected from settlements or license agreements since our Spin-Off under the 12 settlement agreements is $18,338,000. No settlements or license agreements were entered into in Fiscal 2016 or Fiscal 2017. 

 

EMPLOYEES

 

As of October 10, 2017, we had nine employees. 

  

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Item 1A. Risk Factors.

 

RISK FACTORS

 

Our business, operating results or financial condition could be materially adversely affected by any of the following risks associated with any one of our businesses, as well as the other risks highlighted elsewhere in this document, particularly the discussions about competition. The trading price of our common stock could decline due to any of these risks. Note that references to “our”, “us”, “we”, etc. used in each risk factor below refers to the business about which such risk factor is provided.

 

Risks Related to Straight Path Spectrum

 

Please see the discussion above regarding our status as an Emerging Growth Company.

 

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 Annual Report, we entered into the Consent Decree with the FCC settling any claims arising from the previously disclosed FCC investigation regarding our spectrum licenses and terminating that investigation. 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, 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.

 

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.

 

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 us 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.

 

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.

  

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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 our 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 and our 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 receipt of all necessary consents from the FCC (the “FCC consent”), there can be no assurance that the relevant approvals will be obtained. In addition, the governmental authority that provides these approvals has broad discretion in administering the governing regulations. As a condition to approving the Merger or related transactions, the governmental authority 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 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.

  

 16 

 

 

Failure to complete the Merger could negatively impact our ability to comply with the Consent Decree with the FCC. 

 

As previously disclosed, we are currently subject to the Consent Decree, pursuant to which we are required to pay $15 million in installments over a nine-month period ending October 12, 2017. In addition, if we do not submit applications to the FCC seeking consent to the sale of our remaining spectrum licenses by January 12, 2018, we will be obligated to pay an additional $85 million to the FCC or surrender our remaining spectrum licenses. We believe that the submission by the Company and Verizon of applications to transfer our spectrum licenses to Verizon satisfies this requirement under the Consent Decree. However, if the Merger is not completed for any reason, there is no guarantee that the FCC would not seek to require us to pay the $85 million penalty or seek the forfeiture of our remaining spectrum licenses. If the penalty is imposed by the FCC, there is no guarantee that we will be able to obtain sufficient financing to pay the additional $85 million or repay the remaining amount due of the $17.5 million loan from the Lenders. A failure by us to comply with these requirements could lead to a default by us under the Consent Decree, loss of our remaining spectrum licenses and will have a material adverse effect on our 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 our value;
     
  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 Consent Decree with the FCC, any subsequent sale(s) of our 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. 

 

 17 

 

 

Our FCC licenses are subject to renewal and substantial service requirements.  If any licenses are not renewed upon expiration, that could limit the expansion of our business and our ability to lease spectrum and market services provided over our licenses, and could harm our operating results.

 

Our spectrum licenses in the LMDS and 39 GHz bands are granted for ten-year terms. Currently, renewal dates for our LMDS A licenses are in August and September 2018 (except our BTA license for the LMDS A1 band that covers parts of the New York City BTA, which was recently renewed until February 1, 2026), and renewal dates for our 39 GHz licenses are currently in October 2020.  On August 3, 2017, the FCC adopted new rules governing the process by which licensees may seek renewal of their authorizations. However, for the licenses we hold, those rules do not go into effect until January 1, 2023, after all of licenses will be renewed. A “substantial service” requirement applies to each of these licenses.   The UMFU Report and Order provides that licensees in the 28 GHz A1 band (27.5 – 28.35 GHz) and 39 GHz bands will not be required to fulfill the performance requirements for their respective licenses until June 1, 2024. It is likely that the FCC will issue new licenses for the LMDS A1 spectrum on the one hand and the LMDS A2 and A3 spectrum on the other, with separate renewal and substantial service deadlines for each (as noted above, the substantial service demonstrations dates for the A1 licenses will be June 1, 2024). The FCC’s prior “substantial service” requirements for both LMDS and 39 GHz licensees provided licensees with flexibility in constructing their licenses while the “safe harbor” guidelines provided licensees with a degree of certainty as to how to comply with the requirements. The build-out requirements in the UMFU Report and Order do not generally contain that flexibility, with specific requirements for fixed and mobile services. We do not know how the FCC will apply these requirements. If the FCC finds that a licensee has failed to meet these new build-out requirements for any license, that authorization could be terminated.

 

If the Merger is not consummated, we may never develop a significant market for leases, licenses, or purchases of our spectrum assets, and we may not obtain meaningful revenues or achieve profitability. 

 

Our spectrum holdings are among our core assets.  A substantial market for our spectrum licenses may never develop and the prospects for that market may be adversely affected by the following:

 

5G networks may not be developed;

 

5G networks may not utilize 28 GHz or 39 GHz spectrum;
   
5G standards may inhibit interest and/or investment in our holdings;

 

the anticipated demand for fixed services may not materialize;

 

the fixed services market may be dominated by unlicensed band wireless backhaul options;

 

the fixed services market may be dominated by fiber solutions not requiring any wireless spectrum;

 

the technology we have invested in may not be completed or permitted for use by the FCC;

 

the market for the technology we have invested in may decrease or not materialize;

 

the macro network may not use 28 GHz or 39 GHz spectrum or very little of it;

 

new wireless technologies that provide enough capability in existing microwave bands, available at low cost from the FCC, may be sufficient for wireless backhaul and other fixed wireless needs;

 

front haul solutions including Common Public Radio Interface or remote radio head backhaul may not use 28 GHz or 39 GHz spectrum, instead preferring fiber, other microwave channels, or unlicensed band spectrum;

 

networks may require non line-of-sight spectrum;

 

FCC regulatory impact;

 

new spectrum allocation by the FCC, thereby increasing competition and/or supply;

 

lack of available equipment for our band from manufacturers;

 

cost of site acquisition; and

 

small cell networks may not be developed.

 

If we are unable to overcome these (and potentially other) obstacles, our business may never develop and it could have a material adverse effect on our business, prospects, results of operations, and financial condition.

  

 18 

 

 

If the Merger is not consummated, even if a market develops, we may be unable to successfully execute any of our currently identified business opportunities or future business opportunities that we determine to pursue. 

 

In order to pursue business opportunities, we will need to forge market alliances with hardware developers and system integrators, as well as maintain the integrity of our spectrum. Our ability to do any of these successfully could be affected by one or more of the following factors:

 

our ability to effectively manage our third-party relationships;

 

our ability to manage the expansion of our operations, which could result in increased costs, high employee turnover, or damage to customer relationships;
   
our ability to attract and retain qualified personnel, which may be affected by the significant competition in our industry for persons experienced in network operations and engineering;

 

equipment failure (not provided by us) or interruption of service, which could adversely affect our reputation and our relations with our customers;
   
our ability to respond to regulatory or policy changes and/or requirements in our industry;

 

our ability to accurately predict and respond to the rapid technological changes in our industry and the evolving demands of the markets we serve; and

 

our ability to raise substantial additional capital to fund our growth.

 

Our failure to adequately address one or more of the above factors could have a significant impact on our ability to implement our business plan with respect to mobile backhaul and fiber network extensions and our ability to pursue other opportunities that arise, which might negatively affect our business.

 

If the Merger is not consummated, the success of our business strategy will rely on the continued growth in demand for high volume of data for mobile and home use. 

 

The demand for spectrum depends on the continued growth in demand for high volume of data for mobile and home use. The provision of mobile use is a continually evolving sector of the telecommunications industry, and is subject to a number of risks and uncertainties, including:

 

the continued development and market acceptance of mobile devices enabled for mobile applications;
   
the continued development and use of high-bandwidth mobile applications;
   
historical perceptions regarding the burdens and unreliability of previous mobile wireless technologies;
   
●  high rates of consumer adoption of mobile applications;
   
increased levels of usage by subscribers;
   
increased or burdensome government presence through policy and regulatory changes;
   
increases in the number of overall subscribers; and
   
the continued development of 5G technology and regulations allowing for mobility in our band(s).

  

 19 

 

 

If the Merger is not consummated, our revenues will depend on the lease of fixed services to wireless service providers. 

 

Our current revenues are derived from the lease of fixed services to wireless service providers. Any competitor’s substitute service with similar performance and coverage characteristics and a lower cost structure could create downward price pressure and adversely affect our sales efforts. In addition, competing technologies could be developed that would make our services obsolete. Accordingly, any changes that could decrease demand for our services, whether due to pricing pressure, technological changes, or otherwise, could materially and adversely affect our business and results of operations.

 

If the Merger is not consummated, our plan to grow revenues from 5G mobile services is highly speculative.

 

We plan to derive a substantial portion of our future revenues from the use of our 28 GHz and/or 39 GHz spectrum in as yet undeveloped 5G mobile networks. Such 5G networks may never be developed or put to commercial use. Even if they are developed and put to commercial use, our spectrum might not be used in such networks. In addition, even if our spectrum can be used in such networks, it could take many years before that occurs. Regulatory and technology changes could make our spectrum less useful or valuable in such networks, which would adversely affect our ability to generate revenue from our spectrum and could materially and adversely affect our business and results of operations.

 

If the Merger is not consummated, the value of our FCC licenses could decline, which could materially affect our ability to raise capital, and have a material adverse effect on our business and the value of our stock.

 

A decline in the value of our FCC licenses could negatively impact our ability to raise capital both privately and in the public markets and could significantly reduce the value of the spectrum assets. The value of any or all of our FCC licenses could decrease as a result of many factors, including:

 

increases in supply of spectrum that provides similar functionality;

 

new wireless technology in unlicensed bands that provides the same capability of our network;

 

a decrease in the demand for services offered with any of our FCC licenses;

 

lower values placed on similar licenses in future FCC auctions;

 

regulatory limitations on the use, leases, transfer, or sale of rights in any of our FCC licenses;

 

removal or conditioning of our licenses;

 

increase in cost or requirements for maintaining licenses; or

 

bankruptcy or liquidation of any comparable companies.

 

Many of these factors depend on circumstances beyond our control. The occurrence of any of these events could have a material adverse effect on our ability to generate revenues and on our business, prospects, results of operations, and financial condition.

  

 20 

 

 

The telecommunications and wireless markets are highly competitive, and if the Merger is not consummated, we may be unable to compete effectively, especially against competitors with greater financial and other resources, which could materially and adversely affect our ability to operate effectively.

 

We operate in a highly competitive environment and may not be able to compete successfully. We expect to compete with new providers and technologies not yet introduced. Given the intense competition, we may be unable to compete effectively with other technologies and spectrum holders in the short-term and, consequently, we may be unable to develop our business objectives.

 

Many of our competitors, particularly wireless carriers, are much larger and have significantly greater financial resources and experience than us. If we are unable to compete effectively against existing and future competitors our business will be harmed.

 

One of our competitive advantages is our national coverage, and particularly, the extensive bandwidth we are able to offer to customers in congested metropolitan areas.  If competitors are able to offer a solution without any significant coverage exceptions, it could mitigate one of our competitive advantages and harm the attractiveness of our offering, which could have a material adverse impact on our sales.

 

Many of our competitors offer other telecommunications and wireless solutions to complement their spectrum leasing and sales activities.  Since we currently offer only spectrum sales and leasing services, we may not be able to compete with such competitors.

 

Additional spectrum may become available from the FCC in the Further Notice of Proposed Rulemaking issued on July 14, 2016 or in other proceedings, increasing the number of or viability of our competitors or even allowing potential buyers to obtain their own spectrum outright, reducing their need to obtain spectrum from us.

 

Other entities may obtain FCC licenses to operate spectrum in the same markets as we do, offering similar throughput capacities with comparable transmission reliability.  These entities may decide to enter our business and may have more spectrum available to use in a given market than we do.  If the FCC decides in the future to allocate and allow use of additional spectrum in the high frequency bands to fixed and/or mobile services, the successful auction of that spectrum could increase the number of entities that hold this spectrum, and its general availability could have a material adverse effect on the value of our spectrum.  Companies that would otherwise use our services could instead decide to acquire spectrum rights in these auctions or obtain services from the winners of those auctions. Unsuccessful auctions of spectrum may generate low winning bids and could therefore reduce the values of spectrum in neighboring bands, including the value of our spectrum licenses. Alternatively, the FCC may decide to allocate additional spectrum for licensing without auctions to certain classes of users, such as state and local government agencies, that otherwise might be potential customers of our services. On July 14, 2016, the FCC issued a Further Notice of Proposed Rulemaking that potentially allocates up to 17.7 GHz of spectrum for flexible fixed or mobile usage.

 

If the Merger is not consummated, we may need to protect incumbent operations.

 

Prior to adopting service rules for the 39 GHz spectrum distributed by auction, the FCC permitted licensees to define their own service areas. Applicants for licenses provided the latitude and longitude points for the boundaries of their desired service area, thereby creating service areas generally rectangular in shape – rectangular service areas (“RSAs”).  Auction license winners like us are required to protect, and not cause harmful interference to, RSA licensees.  There are RSA licenses that are not owned by us within some of our 39 GHz licenses which may deprive us of the full use of our spectrum in those affected areas. 

 

If the Merger is not consummated, we anticipate a lengthy sales cycle, which could make our revenues difficult to forecast and cause our results to fall short of expectations.

 

We anticipate that our sales cycle will be lengthy due to the time often necessary for customized design of specific solutions or the possibility that our customers may incur added recurring costs for our products and service offerings or added one-time costs to replace their current telecommunications systems. Our sales cycles will be subject to a number of significant delays over which we have little or no control. Due to our anticipated lengthy sales cycle, we expect that our revenues will be difficult to forecast and may fall short of expectations.

    

 21 

 

 

Because we are thinly staffed and highly dependent on a limited number of management persons, if the Merger is not consummated, we may not be able to pursue longer term business opportunities, which could limit our revenue growth. Given our short operating history and limited experience, we may not be able to scale our operations, if necessary, to meet market demand and/or regulatory build-out deadlines.

 

As of October 10, 2017, we had nine employees who work directly for us. We have historically relied on third parties for services and support.  Our ability to find and respond to opportunities to deliver our services in a cost-effective manner may be limited by the number of personnel we employ and our lack of capital and other operational resources. Even if we are able to identify customers to whom we can provide services, we may have to hire additional personnel without whom we may only be able to provide limited support for those services. This could result in customer dissatisfaction and loss. Additionally, our competitors, many of whom have significantly more personnel and greater resources, may be better able to seek and respond to opportunities than we can. Given our small number of employees, short operating history, and limited experience, we may not be able to scale our operations, if necessary, to meet market demand and/or regulatory build-out deadlines. This could have a material adverse effect on our ability to generate revenues and on our business, growth, results of operations, and financial condition.

 

A substantial portion of Straight Path Spectrum’s historical revenues were derived from a limited number of customers, and the loss of those customers would have a negative effect on our revenues.

 

The loss of any of our customers would have a material adverse effect on our results of operations and cash flows.

 

The extensive and continually evolving regulations to which we are subject could increase our costs and adversely affect our ability to implement our business plan successfully if the Merger is not consummated.

 

The FCC, various state regulatory bodies, local zoning authorities, and other governmental entities regulate us and the operation and installation of underlying equipment. These regulators conduct regular rulemaking proceedings and issue interpretations of existing rules that apply to us and affect our business operations, directly or indirectly.  The FCC in particular imposes significant regulation on licensees of wireless spectrum with respect to how wireless spectrum is used by licensees, the nature of the services that licensees may offer and how the services may be offered, and resolution of issues of interference between spectrum bands.  The adoption or modification of laws or regulations relating to our wireless licenses and operations could limit or otherwise adversely affect the manner in which we currently conduct our business. Such regulatory proceedings could impose additional obligations on us or our customers, reduce the attractiveness of our service, give rights to our competitors, increase our costs, make the business plans of the carriers or other customers that purchase or may purchase our services less viable, and otherwise adversely affect our ability to implement our business plan.

 

We could be harmed by network disruptions, security breaches, or other significant disruptions or failures of our IT infrastructure and related systems.

 

To be successful, we need to continue to have available a high capacity, reliable and secure network. We face the risk, as does any company, of a security breach, whether through cyber-attack, malware, computer viruses, sabotage, or other significant disruption of our IT infrastructure and related systems. We face a risk of a security breach or disruption from unauthorized access to our proprietary or classified information on our systems. The secure maintenance and transmission of our information is a critical element of our operations. Our information technology and other systems that maintain and transmit our information, or those of service providers or business partners, may be compromised by a malicious third-party penetration of our network security, or that of a third party service provider or business partner, or impacted by advertent or inadvertent actions or inactions by our employees, or those of a third party service provider or business partner. As a result, our information may be lost, disclosed, accessed or taken without our consent.

 

Although we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging, especially in light of the growing sophistication of cyber-attacks and intrusions. We may be unable to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures.

 

Network disruptions, security breaches and other significant failures of the above-described systems could (i) disrupt the proper functioning of these networks and systems, and therefore, our operations; (ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of our proprietary, confidential, sensitive or otherwise valuable information, including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; (iii) require significant management attention or financial resources to remedy the damages that result or to change our systems; or (iv) result in a loss of business, damage our reputation or expose us to litigation. Any or all of which could have a negative impact on our results of operations, financial condition and cash flows. 

  

 22 

 

 

The wireless communications services industry in which we operate is continually evolving. Our services may become obsolete, and we may not be able to develop competitive products or services on a timely basis or at all if the Merger is not consummated.

 

The wireless communications services industry is characterized by rapid technological change, competitive pricing, frequent new service introductions, and evolving industry standards and regulatory requirements. The backhaul infrastructure that supports this dynamic industry must be similarly flexible and able to adapt to these changes. Our success depends on our ability to anticipate and adapt to these challenges and to offer competitive services on a timely basis. We face a number of difficulties and uncertainties associated with this reliance on technological development, such as:

 

competition from service providers using other means to deliver similar or alternative services;
   
competition from new service providers using more efficient, less expensive technologies, including products or services not yet invented or developed;
   
customers self-provisioning their own services;
   
gaining and sustaining market acceptance of the technology underlying our services;
   
realizing economies of scale;
   
responding successfully to advances in competing technologies in a timely and cost-effective manner;
   
existing, proposed, or undeveloped technologies that may render fixed wireless backhaul and other services less profitable or obsolete; and
   
increase in costs or requirements to maintain licenses.

 

As the services offered by us and our competitors develop, wireless carriers may not accept our services as a commercially viable alternative to other means of delivering wireless backhaul and other services. Accordingly, our inability to keep pace with technological development could materially and adversely affect our business.

 

Our reliance upon spectrum licensed by the FCC includes additional risks.

 

Our reliance on and use of FCC-licensed spectrum imposes additional risks on our business, including:

 

increases in spectrum acquisition costs;
   
adverse changes to regulations governing spectrum/licensee rights;
   
the risk that spectrum will not be commercially usable or free of harmful interference from licensed or unlicensed operators in our or adjacent bands;
   
the risk that the government or other license holders introduce an oversupply of substantially similar spectrum into the market;
   
the risk that competitors, customers, or other users may over utilize line-of-sight licensed spectrum and thus alter the FCC availability or allocation of such wireless spectrum in markets or geographic areas where we require it;
   
change in the FCC rules regarding the licensing or use of wireless spectrum; and
   
invalidation of any authorization to use all or a significant portion of the spectrum, resulting in, among other things, impairment charges related to assets recorded for such spectrum.

 

 23 

 

 

Risks Related to Straight Path IP Group

 

The Settlement of Claims with IDT and sale of Straight Path IP Group may not be consummated.

 

As discussed above, on April 9, 2017, we and IDT entered into the IDT Term Sheet to settle potential claims related to certain claims under agreements related to the Spin-Off, and the sale of our interest in Straight Path IP Group to IDT. Among other things, (i) IDT will pay us $16 million; (ii) we will transfer to IDT our ownership interest in Straight Path IP Group; and (iii) our stockholders 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 by Straight Path IP Group (“current patent portfolio”), or any settlement, award or judgment involving any of the patent rights (including any net proceeds received after the closing of the Merger).

 

The transactions contemplated by the IDT Term Sheet may never be consummated. If the transactions are not consummated, there is no guarantee that we will be able to obtain sufficient financing to pay the balance on the loan from the Lenders, which could have a material adverse effect on our cash flow and financial condition. 

 

There is no assurance that stockholders will receive any monetary benefit from their beneficial interest in the trust that will hold an interest in the current patent portfolio.

 

The IDT Term Sheet contemplates that a trust will be created for the purpose of holding an interest in the current patent portfolio. Such interest will entitle the trust to distributions equal to 22% of any net recovery from the portfolio. Our stockholders, as designated beneficiaries of the trust, will share in any such distributions on a pro rata basis. Any such payments made to the stockholders, as beneficiaries of the trust, will be dependent upon Straight Path IP Group’s ability to successfully prosecute or enforce the patents in the current patent portfolio. Stockholders and the trust will not directly control or hold the patents in the current patent portfolio and will have no control over the strategy or actions regarding patent enforcement and prosecution of the patents in the portfolio. There can be no assurance of the amount, if any, of net recovery that Straight Path IP Group will be able to obtain from the current patent portfolio. In addition, the beneficial interests in the trust will not be securities nor tradeable interests and will not be listed on any securities exchange. Stockholders will not be able to sell, assign, transfer or pledge their beneficial interest in the trust, except under limited circumstances. Consequently, the monetary benefit stockholders will receive from the trust, if any, will be dependent upon the net recovery from the current patent portfolio.

 

We may fail to enforce our intellectual property rights.

 

If we fail to obtain or maintain adequate protections, or are unsuccessful in enforcing our patent rights, we may not be able to either realize additional value from our patents, or prevent third parties from benefiting from those patents without benefit to us. In addition, our existing patents have finite lives, and have all expired. Although Straight Path IP Group may continue to enforce the patents for patent infringement that occurred before expiration, we do not anticipate filing additional actions. There is no guarantee that the patents will be adequately exploited or commercialized, and there is no guarantee that there will ever be any net proceeds distributed to our stockholders.

 

The USPTO may grant a re-examination of our patents.

 

In 2010 and 2011, certain patents in Straight Path IP Group’s portfolio successfully emerged from re-examination proceedings at the USPTO.  Nevertheless, our patents may be subject to further requests to the USPTO to reexamine our patents.  Although we believe that our patents are valid, they may be deemed invalid during a re-examination.  Moreover, any litigation filed after the grant of a re-examination may be subject to an order to stay the litigation while the re-examination proceeds.  Therefore, while a re-examination is pending, we may be unable to enforce our patents. Similarly, if claims are invalidated through IPR (or re-exam or a different litigation), active cases may be stayed during appeal, and the court may dismiss the case based on a finding of invalidity in another forum.

 

The USPTO may grant an IPR.

 

The Leahy-Smith America Invents Act (“AIA”) created a new procedure for challenging an issued patent at the PTAB of the USPTO: the IPR. A petitioner challenging a patent must allege “that there is a reasonable likelihood that the petitioner would prevail with respect to at least one of the claims challenged in the petition.” (35 U.S.C. § 314(a)). As discussed in the Legal Proceedings section below, various parties, including some of the defendants in actions we brought to enforce our patent rights, filed petitions for IPRs at the PTAB for certain claims of our patents. Although the PTAB has denied all of those petitions and those denials have been affirmed on appeal, additional IPR’s might be filed that could curtail our ability to enforce our patent rights during the pendency of any IPR proceeding, and could result in the invalidation of some or all of our patents.

  

 24 

 

 

Our exposure to uncontrollable outside influences, including new legislation, court rulings, or actions by the USPTO, could adversely affect our licensing and enforcement business and results of operations.

 

Our licensing and enforcement business is subject to numerous risks from outside influences, including the following:

 

New legislation, regulations, or court rulings related to enforcing patents could adversely affect our business and operating results.

 

Straight Path IP Group has spent, and plans to spend, a significant amount of resources to enforce our rights. If new legislation, regulations or rules are implemented either by Congress, the USPTO, or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our expenses and revenue. Recently, U.S. patent laws were amended with the enactment of the Leahy-Smith America Invents Act, or the AIA, which took effect on September 16, 2012. The AIA includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the AIA changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or activities. As well, the AIA introduced new post grant proceedings, namely IPRs, to allow a third party to challenge the validity of patent claims. The AIA and its implementation has increased the uncertainties and costs surrounding the enforcement of our patented technologies, and this could have a material adverse effect on our business and financial condition.

 

In addition, the U.S. Department of Justice (the “DOJ”) has conducted reviews to evaluate the impact of patent assertion entities on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ could impact the ability to effectively license and enforce patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies.

 

Further, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions. 

 

Finally, political leaders have recently made statements related to regulation of patent enforcement entities. Any such legislation that materially restricts our enforcement activities could have a negative impact on our ability to execute on Straight Path IP Group’s business plan, the value of our patents, and our operating results.

 

Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patents.

 

It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than other business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed revenue. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries and trial courts.

 

Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer.

 

Federal trial courts that hear our patent enforcement actions also hear criminal cases. Criminal cases always take priority over patent enforcement actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings before federal judges, and as a result, we believe that the risk of delays in our patent enforcement actions will have a greater effect on our business in the future unless this trend changes.

 

As patent enforcement litigation becomes more prevalent, it may become more difficult for us to voluntarily license our patents.

 

The more prevalent patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties.

 

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Any litigation to protect our intellectual property or any third-party claims to invalidate our patents could have a material adverse effect on our business.

 

It may be necessary for us to commence patent litigation against third parties whom we believe require a license to our patents. We may incur significant expenses and commit significant management time with respect to such legal proceedings which may adversely affect our financial condition and results of operations. Moreover, there can be no assurance that we would be successful in any additional legal proceedings and the outcome of such litigation could be harmful to us. In addition, we may be subject to claims seeking to invalidate our patents, as typically asserted by defendants in patent litigation. If we are unsuccessful in enforcing and validating our patents and/or if third parties making claims against us seeking to invalidate our patents are successful, they may be able to obtain injunctive or other equitable relief, which effectively could block our ability to license or otherwise capitalize on our proprietary technologies. In addition, then existing licensees of our patents may no longer be obligated to pay royalties to us. Successful litigation against us resulting in a determination that our patents are not valid or enforceable, and/or that third parties do not infringe, may have a material adverse effect on us.  Further, the courts have discretion to award reasonable attorney fees for “exceptional” cases lacking merit or for being unreasonably litigated.

 

We may require additional financing in the future, which may not be available, or may not be available on favorable terms.

 

We may need additional funds to finance our operations to make additional investments, or to acquire complementary businesses or assets.  We may be unable to generate these funds from our operations.  Additionally, we may experience delays in collecting judgments if defendants decide to appeal jury findings of infringement at federal district courts.   We may incur out-of-pocket costs related to our IP enforcement and such expenses could be material and beyond our means. In addition, as we focus our resources on the Straight Path Spectrum and Straight Path Ventures businesses, we may require additional financing from other sources to fund ongoing infringement litigation, which may not be available.

 

The availability of new technology may render our intellectual property obsolete.

 

While we anticipate that our technology will remain relevant to internet telephony and other applications at least through the expiration of our patents, unanticipated rapid widespread adoption of new technologies that do not infringe our patents could affect our enforcement strategy.  In addition, prospective licensees may seek to develop ‘work arounds’ to our patents for purposes of avoiding entering into a licensing agreement with Straight Path IP Group.

 

Risks Related to Straight Path Ventures

 

Our technology research and development efforts may be unsuccessful.

 

Our technology research and development efforts are exploratory in nature and are intended to develop new types of products. Our efforts may prove unsuccessful and may not result in the development of any products. Even if we are able to develop any products, we may not be able to generate revenues or profits from such products.

 

We may fail to obtain patent protection for our inventions.

 

If we are not able to protect our proprietary technology, trade secrets, and know-how, our competitors may use our inventions to develop competing products. The standards which the USPTO uses to grant patents, and the standards which courts use to interpret patents, are not always applied predictably or uniformly and can change, particularly as new technologies develop. Consequently, the level of protection, if any, that will be provided by our patents if we attempt to enforce them and they are challenged in court, is uncertain. In addition, the type and extent of patent claims that will be issued to us in the future is uncertain. Any patents which are issued may not contain claims which will permit us to stop competitors from using similar technology.

 

In addition to any patented technology, we may also rely on unpatented technology, trade secrets, and confidential information. We may not be able to effectively protect our rights to this technology or information. Other parties may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. We generally require each of our employees and consultants to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. However, these agreements may not provide effective protection of our technology or information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.

 

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If the Merger is not consummated, we may be unable to realize any revenue from our inventions.

 

Our business and prospects must be considered in light of the risks and uncertainties to which companies with new and rapidly evolving technology, products and services are exposed. These risks include the following:

 

we may be unable to develop sources of new revenue or sustainable growth in revenue because our current and anticipated technologies, products and services may be inadequate or may be unable to attract or retain customers;
   
intense competition and rapid technological change could adversely affect the market’s acceptance of our existing and new products and services; and
   
we may be required to incur unanticipated expenditures if product changes or improvements are required. Moreover, new industry standards might redefine the products that we are able to sell, especially if these products are only in the prototype stage of development. If product changes or improvements are required, success in marketing these products by us and achieving or sustaining profitability from these products could be delayed or halted.

 

Risk Factors Generally Relating to Us and Our Common Stock

 

Investors may suffer dilution.

 

We may engage in equity financing to fund our future operations and growth.  If we raise additional funds by issuing equity securities, stockholders may experience significant dilution of their ownership interest (both with respect to the percentage of total securities held, and with respect to the book value of their securities) and such securities may have rights senior to those of the holders of our common stock. Moreover, we have in the past and may in the future take actions that dilute our interests (and thus our stockholders’ interest) in certain of our subsidiaries.

 

We are controlled by our principal stockholder, which limits our ability of other stockholders to affect our management.

 

All of the SPCI Class A Common Stock distributed in the Spin-Off are held in trust with an independent trustee, the Alliance Trust Company LLC (the “Trustee”). Howard Jonas retained the economic benefit of the shares placed in the trust, but does not have voting or dispositive power or control with respect to such shares, except in certain circumstances. As of October 10, 2017, the Trustee has voting power or control over 787,163 shares of our Class A common stock representing approximately 66% of the combined voting power of our outstanding common stock.  

 

We intend to exercise our option for the “controlled company” exemption under NYSE American rules with respect to our Nominating Committee.

 

We are a “controlled company” as defined in section 801(a) of the NYSE American Company Guide because more than 50% of the combined voting power of all of our outstanding common stock will be beneficially owned by a single stockholder. As a “controlled company,” we will be exempt from certain NYSE American rules requiring a board of directors with a majority of independent members, a compensation committee composed entirely of independent directors and a nominating committee composed entirely of independent directors. These independence standards are intended to ensure that directors who meet those standards are free of any conflicting interest that could influence their actions as directors. We intend to apply this “controlled company” exemption for our corporate governance practices with respect to the independence requirements of our Nominating Committee. Accordingly, with respect to our Nominating Committee you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE American, and if we were to apply the controlled company exemption to other independence requirements, you would not have the protection afforded by those requirements either.

 

We have limited resources and could find it difficult to raise additional capital.

 

We may need to raise additional capital in order for stockholders to realize increased value on our securities.

 

Given the current global economy, there can be no assurance that we will be able to obtain the necessary funding on commercially reasonable terms in a timely fashion. Failure to receive such funding could have a material adverse effect on our business, prospects, and financial condition.

 

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Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

We lease the following properties:

 

  1. Our headquarters is located at 5300 Hickory Park Drive, Suite 218, Glen Allen, Virginia, 23059. The lease expires on May 31, 2019 and the annual rental is approximately $7,700.
     
  2. A satellite office in Englewood Cliffs, New Jersey under a lease that expires on April 30, 2018. The annual rental is $37,200.
     
  3. An office in Plano, Texas for use as a development lab. The lease term expires on December 31, 2018 and the average annual rental is approximately $18,000.

 

Item 3. Legal Proceedings.

 

Regulatory Enforcement

 

On January 11, 2017, we 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 we do not believe were material assets of the Company.

 

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

 

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

 

  5. We 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 we sell our 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.

 

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

 

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

 

We recorded the Initial Civil Penalty of $15  million and the associated expense is classified as “civil penalty – FCC consent decree” on the consolidated statement of operations. The first three installments of the Initial Civil Penalty totaling $11.5 million were paid. The remaining liability is classified as “FCC consent decree payable” on the consolidated balance sheet. As of July 31, 2017, FCC consent decree payable was $3.5 million.

 

If the Merger with Verizon is consummated, the fee set forth in Item 6 above will be paid by Verizon as part of the Merger.

 

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

 

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

 

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

 

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

 

Shareholder Litigation

 

On July 5, 2017, JDS1 LLC, a putative Straight Path stockholder, filed a class action and derivative complaint in the Delaware Court of Chancery captioned JDS1, LLC v. IDT Corp., C.A. No. 2017-0486-SG. The complaint named Straight Path’s board of directors, Howard Jonas, IDT, and The Patrick Henry Trust (the “Trust”) as defendants. We were named as a nominal defendant. Plaintiff alleged, among other things, that Straight Path’s directors, Howard Jonas, and the Trust breached their fiduciary duties in connection with the sale of certain of our IP assets and by resolving a possible claim for indemnification that we held against IDT (the “Settlement”) for inadequate consideration and that IDT aided and abetted that breach. Plaintiff moved for expedited proceedings. On July 11, 2017, another putative Straight Path stockholder, the Arbitrage Fund, filed a class action complaint in the same court naming Howard Jonas, IDT, and the Trust as defendants, captioned The Arbitrage Fund v. Jonas, C.A. No. 2017-0502-SG. On July 24, 2017, the Court denied Plaintiff JDS1’s motion for expedited proceedings and consolidated the two cases under the caption In re Straight Path Communications Inc. Consolidated Stockholder Litigation, C.A. No. 2017-0486-SG, with the JDS1 complaint designated as the operative pleading. Plaintiffs subsequently agreed to voluntarily dismiss defendants K. Chris Todd, William F. Weld and Fred S. Zeidman without prejudice. On August 14, 2017, defendants Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated complaint. We, named as a nominal defendant, filed a statement in response to the complaint. On August 29, 2017, Plaintiffs filed a consolidated amended class action and derivative complaint alleging, among other things, that Howard Jonas, the Trust, and Davidi Jonas breached their fiduciary duties in connection with the settlement and that IDT aided and abetted that breach. On September 13, 2017, defendants Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated amended complaint. On September 22, 2017, we filed a statement concerning the consolidated amended complaint. 

 

On November 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 our 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 us for materially false and misleading statements that were designed to influence the market relating to our 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 we made materially false and misleading statements in its public filings and conference calls during the relevant class period concerning our 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.

 

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On March 7, 2017, we and lead plaintiff in the Zacharia action entered into a binding memorandum of understanding to settle the putative shareholder class action and dismiss the claims that were filed against the defendants in that action.  Under the agreed terms, we 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 us.  The Additional Payment of $7.2 million will be paid within 60 days after the closing of a transaction to sell our spectrum licenses as specified in the Consent Decree with the FCC, or, in the event that we pay the non-transfer penalty specified in the Consent Decree, within 60 days after that payment is paid.  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 our current independent directors William F. Weld, K. Chris Todd, and Fred S. Zeidman. Although we are named as a nominal defendant, our bylaws generally require us 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 us by making misrepresentations and omissions about the Company and failing to correct our 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. 

 

The 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 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 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.

 

The petitioners appealed the PTAB’s decisions to the CAFC. On June 23, 2017, the CAFC issued its decision affirming the PTAB’s final written decision. That decision became final on July 31, 2017 when the CAFC issued its mandate.

 

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 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. As discussed above, the CAFC affirmed the PTAB’s decision on June 23, 2017.

 

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On October 31, 2014, 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. As discussed above, the CAFC affirmed the PTAB’s decision on June 23, 2017.

 

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.

 

Ex Parte Re-examination

  

On September 13, 2017, Apple filed a request for ex parte re-examination of U.S. Patent No. 7,149,208 (the “‘208 Patent”).

 

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 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. The action was stayed during the pendency of the two successive CAFC appeals. On September 13, 2017, the Court held a scheduling conference, and the pretrial conference is set for January 18, 2018.

 

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. The action was stayed during the pendency of the two successive CAFC appeals. On September 11, 2017, the Court reopened the case and placed it back on the active docket.

 

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On September 24, 2014, Straight Path IP Group filed complaints against each of 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, ‘121, and ‘208 Patents); (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. Expert 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. On July 5, 2017, the court lifted the stay and set a scheduling conference for September 15, 2017, but on September 11, 2017, the court stayed the case until December 8, 2017 at Straight Path IP Group’s request. 

 

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. Beginning on October 2, 2017, Straight Path IP Group will pay one of these law firms $100,000 per month as a non-refundable fee that is creditable against any contingency fee payment that may be due to the law firm in the future. 

 

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

 

On April 9, 2017, we and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of potential indemnification claims asserted by each of us 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, (i) IDT will pay the Company $16 million; (ii) the Company will transfer to IDT its ownership interest in Straight Path IP Group; and (iii) our stockholders 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). As of the date of the filing of this report, the parties have not yet consummated the settlement agreement and mutual release contemplated by the IDT Term Sheet. The definitive settlement agreement is under negotiation. 

 

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

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

  

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

 

Our Class B common stock is quoted on the NYSE American and trades under the symbol “STRP.”  Trading commenced on the NYSE American on August 1, 2013.

 

The table below sets forth the high and low sales prices for our Class B common stock as reported by the NYSE American for Fiscal 2017 and 2016.

 

   High   Low 
Fiscal year ended July 31, 2016        
First Quarter  $49.72   $21.09 
Second Quarter  $34.10   $7.62 
Third Quarter  $39.75   $20.72 
Fourth quarter  $40.75   $15.83 
           
Fiscal year ended July 31, 2017          
First Quarter  $31.96   $15.06 
Second Quarter  $51.50   $21.85 
Third Quarter  $133.79   $26.89 
Fourth Quarter  $235.88   $120.00 

 

On October 10, 2017, there was 1 holder of record of our Class A common stock and 135 holders of record of our Class B common stock. These numbers do not include the number of persons whose shares are in nominee or in “street name” accounts through brokers. On October 9, 2017, the last sales price reported on the NYSE American for our Class B common stock was $181.94 per share. 

 

We have never paid cash dividends except as discussed below.

 

In April 2015, Straight Path IP Group declared a dividend totaling $5,647,342. Straight Path IP Group paid $875,338 to its minority stockholders in respect of operations during Fiscal 2014 and Fiscal 2015. Such dividends were charged to noncontrolling interests. The dividend to Straight Path of $4,772,004 was not paid as of the filing of this report but the effect of this is eliminated in producing our consolidated financial statements.

 

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

 

The information required by Item 201(d) of Regulation S-K will be contained in our definitive proxy statement relating to our Annual Meeting of Stockholders, to be held February 6, 2018, which we will file with the SEC within 120 days after July 31, 2017, and which is incorporated by reference herein.

 

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Performance Graph of Stock

 

The line graph below compares the cumulative total stockholder return on our Class B common stock with the cumulative total return of the New York Stock Exchange Composite Index and the Standard& Poor’s 500 Index for the period beginning August 1, 2013 and ending July 31, 2017. The graph and table assume that $100 was invested on August 1, 2013 with the cumulative total return of the Standard & Poor’s 500 Index and Telecommunication Services Index. Cumulative total stockholder returns for our Class B common stock, Standard & Poor’s 500 Index and Telecommunication Services Index are based on our fiscal year.

 

 

 

   7/24/13   7/31/13   7/31/14   7/31/15   7/31/16   7/31/17 
                         
Straight Path Communications Inc   100.00    108.47    167.29    399.49    309.15    3040.68 
S&P 500   100.00    105.09    122.89    136.66    144.34    167.49 
S&P Telecommunication Services   100.00    100.20    109.00    107.11    135.41    125.89 

  

Issuer Purchases of Equity Securities

 

There were no purchases by us of our shares during the fourth quarter of Fiscal 2017.

 

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Item 6. Selected Financial Data.

 

The following selected financial data should be read in conjunction with, and are qualified in their entirety by, the consolidated financial statements and related notes thereto contained in “Item 8. Financial Statements and Supplementary Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

 

We were formerly a subsidiary of IDT. On July 31, 2013, we were spun-off by IDT to its stockholders and became an independent public company.

  

Year ended July 31,                        
(in thousands, except per share data)   2017     2016     2015     2014  
Revenues   $ 658     $ 2,156     $ 13,240     $ 4,796  
Direct cost of revenues     115       933       6,043       2,487  
Research and development     582       1,286       -       -  
Selling, general and administrative     20,772       9,024       6,931       3,001  
Civil penalty - FCC consent decree     15,000       -       -       -  
Settlement of litigation     7,200       -       -       -  
Income (loss) from operations     (43,011 )     (9,087 )     266       (692 )
Interest expense, including amortization of debt discounts     (2,688 )     -       -       -  
Interest income     30       39       38       22  
Other income     22       398       334       386  
Income (loss) before income taxes     (45,647 )     (8,650 )     638       (284 )
Income tax benefits (provision for income taxes)     (13 )     4       (2,714 )     2,353  
Net income (loss)     (45,660 )     (8,646 )     (2,076 )     2,069  
Net loss (income) attributable to noncontrolling interests     1,013       349       111       (32 )
Net income (loss) attributable to Straight Path Communications Inc. (SPCI)     (44,647 )     (8,297 )     (1,965 )     2,037  
Total assets     11,850       13,497       20,238       30,439  
Cash dividend declared     -       -       -       -  
Net income (loss) per share attributable to SPCI stockholders - basic     (3.67 )     (0.70 )     (0.17 )     0.19  
Net income (loss) per share attributable to SPCI stockholders - diluted     (3.67 )     (0.70 )     (0.17 )     0.18  
Weighted average of common shares outstanding - basic     12,176       11,871       11,457       10,667  
Weighted average of common shares outstanding - diluted     12,176       11,871       11,457       11,267  

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in this Annual Report. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.

 

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.

 

OVERVIEW AND RECENT DEVELOPMENTS

 

We are a communications asset company. We own 100% of Straight Path Spectrum, 100% of Straight Path Ventures, and 84.5% of Straight Path IP Group. Straight Path Spectrum’s wholly-owned subsidiary, Straight Path Spectrum, LLC holds wireless spectrum. Straight Path Ventures develops next generation wireless technology, particularly 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. We were formerly a subsidiary of IDT. On July 31, 2013, we were spun-off from IDT to its stockholders and became an independent public company. 

 

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Straight Path Spectrum

 

The following events were discussed above:

 

On July 14, 2016, the FCC voted to adopt the UMFU Report and Order, which opens four mmW bands for flexible mobile and fixed wireless services. The rules apply to 28 GHz (27.50-28.35 GHz, or LMDS A1), 37 GHz (37.0-38.6 GHz), and 39 GHz (38.6-40.0 GHz) bands, and a new unlicensed band at 60 GHz (64.0-71.0 GHz).

 

On January 11, 2017, we 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. For further discussion, please see Note 11 – Regulatory Enforcement.

 

On April 9, 2017, we and IDT entered into the IDT Term Sheet to settle potential claims related to certain claims under agreements related to the Spin-Off, and the sale of our interest in Straight Path IP Group to IDT. For further discussion, please see Note 3 to the Consolidated Financial Statements in this Annual Report – Settlement of Claims with IDT and Sale of Straight Path IP Group. 

 

On May 11, 2017, we entered into the Verizon Merger Agreement with Verizon and Merger Sub. 

 

Straight Path Ventures

 

Straight Path Ventures is developing next generation wireless technology primarily for 39 GHz at its Gigabit Mobility Lab in Plano, Texas. On August 22, 2016, Straight Path Ventures filed a provisional patent application with the USPTO for new 39 GHz transceiver technology. On October 12, 2016, Straight Path Ventures filed a patent application with the USPTO for new millimeter-wave transceiver technologies. On August 31, 2017, Straight Path Ventures demonstrated its prototype 39 GHz Gigarray® solutions that achieved 800 megabits per second at a distance of 500 meters.

 

Straight Path IP Group

 

On April 9, 2017, we and IDT entered into the IDT Term Sheet to settle claims potential under agreements related to the Spin-Off, and the sale of our interest in Straight Path IP Group to IDT. For further discussion, please see Note 3 to the Consolidated Financial Statements in this Annual Report – Settlement of Claims with IDT and Sale of Straight Path IP Group. 

 

On October 9, 2014, the PTAB issued an administrative decision stating that claims 1-7 and 32-42 of the ‘704 Patent are unpatentable. Straight Path IP Group appealed that decision. On November 25, 2015, 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 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. On June 23, 2017, the CAFC affirmed the PTAB’s decision.

 

Following the second affirmance by the CAFC, the stays that had been in place in the civil actions pending in federal district court, except in the suit against several Verizon affiliates. In that suit, on July 5, 2017, the court lifted the stay that had been in place pending the outcome of the CAFC appeal and set a scheduling conference for September 15, 2017. However, on September 11, 2017, the parties jointly agreed to a 90-day stay. The court granted the stay until December 8, 2017. Straight Path IP Group has also filed complaints against Apple, Avaya, and Cisco. Expert discovery is underway in the Apple and Cisco actions. However, Avaya recently filed voluntary petitions under chapter 11 of the U.S. Bankruptcy Code. On May 2, 2017, Straight Path IP Group filed a proof of claim in the Avaya bankruptcy proceeding. In addition, on September 13, 2017, Apple filed a request for ex parte reexamination of U.S. Patent No. 7,149,208 in the USPTO. 

  

For further discussion of these actions and other legal proceedings, please see Item 3 to Part I “Legal Proceedings” in this Annual Report.

  

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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. 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 estimates 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 estimates are as follows:

 

1.The valuation of warrants issued to the Lenders.
   
2.The valuation of stock options issued to officers and employees
   
3.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. See Note 1 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant accounting policies and estimates.

 

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

 

RESULTS OF OPERATIONS

 

Year Ended July 31, 2017 (“Fiscal 2017”) Compared to Year Ended July 31, 2016 (“Fiscal 2016”)

 

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.

 

Consolidated

 

    Year Ended        
    July 31,     Change  
    2017     2016     $  
    (in thousands)  
Revenues   $ 658     $ 2,156     $ (1,498 )
Direct cost of revenues     115       933       (818 )
Research and development     582       1,286       (704 )
Selling, general and administrative     20,772       9,024       11,748  
Civil penalty – FCC consent decree     15,000       -       15,000  
Settlement of litigation     7,200       -       7,200  
Loss from operations     (43,011 )     (9,087 )     (33,924 )
Interest expense     (2,688 )     -       (2,688 )
Interest and other income     52       437       (385 )
Loss before income taxes     (45,647 )     (8,650 )     (36,997 )
Income tax benefits (provision for income taxes)     (13 )     4       (17 )
Net loss     (45,660 )     (8,646 )     (37,014 )
Net loss attributable to noncontrolling interests     1,013       349       664  
Net loss attributable to Straight Path Communications Inc.   $ (44,647 )   $ (8,297 )   $ (36,350 )

 

Revenues. Revenues generated by Straight Path Spectrum were $658,000 and $461,000 in Fiscal 2017 and Fiscal 2016, respectively. Revenues increased due to revenue from the lease of spectrum to new customers (wireless network operators) prior to the Consent Decree with the FCC. The Consent Decree prohibits and the Merger Agreement with Verizon restricts us from entering into new spectrum leases.

 

No revenues were generated by Straight Path IP Group in Fiscal 2017 because no new licenses or settlements were entered into and the revenue from prior settlements or license agreements were fully realized in prior periods due to the expiration of the licensed patents. Revenues were $0 and $1.7 million in Fiscal 2017 and Fiscal 2016, respectively. Revenues generated by Straight Path IP Group decreased substantially due to the expiration of the licensed patents. We were recognizing revenue over the terms of the settlements and license agreements related to such patents entered into in prior periods. Primarily all of the revenue was recognized as of September 30, 2015. 

  

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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 by Straight Path Spectrum in Fiscal 2016.

 

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

 

Research and development. Research and development 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 consisted primarily of expenses related to the agreement to expedite production of a point-to-multipoint (“PMP”) radio for a total fee of $1,000,000 and expenses related to development by our Gigabit Mobility Lab.

 

Selling, general and administrative expense.   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, increased legal costs due to Straight Path IP Group’s appeal of the PTAB’s decision on the ‘704 Patent and related IPRs, shareholder litigation and regulatory enforcement activity, and the costs incurred for the merger with Verizon.

 

Stock-based compensation is included in selling, general and administrative expense and, with respect to restricted stock granted, amounted to approximately $6,205,000 and $2,737,000 for Fiscal 2017 and Fiscal 2016, respectively. As of July 31, 2017, there was approximately $7,385,000 of total unrecognized compensation cost related to non-vested restricted shares. We expect to recognize the unrecognized compensation cost as follows: Fiscal 2018 - $3,496,000, Fiscal 2019 - $2,705,000, Fiscal 2020 - $1,121,000 and Fiscal 2021 - $63,000.

 

Stock-based compensation expense related to the options issued in June 2016 is included in selling, general and administrative and amounted to approximately $355,000 and $32,000 for Fiscal 2017 and Fiscal 2016, respectively.

 

Civil penalty – FCC Consent Decree. We signed the Consent Decree with the FCC on January 11, 2017. We incurred a $15 million civil penalty to be paid over a nine-month period. We recorded the penalty in January 2017. For a further discussion, see Note 11 to the Consolidated Financial Statements contained in Item 8 of this Annual Report under the heading Regulatory Enforcement. 

 

Settlement of litigation. As discussed above, On March 7, 2017, we 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, we 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 us in January 2017. For a further discussion, see Note 11 to the Consolidated Financial Statements contained in Item 8 of this Annual Report under the heading Shareholder Litigation.

 

Interest expense. Interest expense in Fiscal 2017 consisted of interest expense of $402,000 and the amortization of debt discounts of $2,286,000. Interest expense and the amortization of debt discounts relate to the Loan Agreement. For a further discussion, see Note 8 to the Consolidated Financial Statements contained in Item 8 of this Annual Report. There was no interest expense in Fiscal 2016. 

 

Other income (expense). Other income (expense) in Fiscal 2017 consisted of the reversal of prior period accruals of $22,000 and interest income of $30,000. Other income (expense) in Fiscal 2016 included the reversal of prior period accruals of $390,000, interest income of $39,000 and other income of $8,000.

 

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 July 31, 2017 and 2016.

 

The provision for income taxes for Fiscal 2017 represents state income taxes. The provision for income tax benefits for Fiscal 2016 represents a federal refund from a prior year of $39,000 net of state income taxes of $35,000.

 

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

 

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Straight Path Spectrum Segment

 

   Year Ended     
   July 31,   Change 
   2017   2016   $ 
   (in thousands) 
Revenues  $658   $461   $197 
Direct cost of revenues   115    119    (4)
Research and development   2    1,000    (998)
Selling, general and administrative   14,757    4,850    9,907 
Loss from operations before FCC consent decree and settlement of litigation  $(14,216)  $(5,508)  $(8,708)

 

Revenues. Revenues generated by Straight Path Spectrum were $658,000 and $461,000 in Fiscal 2017 and Fiscal 2016, respectively. Revenues increased due to revenue from the lease of spectrum to new customers (wireless network operators) prior to the Consent Decree with the FCC. The Consent Decree prohibits and the Merger Agreement with Verizon restricts us from entering into new spectrum leases.

 

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

 

Research and development. Research and development in Fiscal 2016 consisted of expenses related to a development agreement in September 2015 to expedite production of a PMP radio for a total fee of $1,000,000.  

 

Selling, general and administrative expense.   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, increased legal costs due to the shareholder litigation, regulatory enforcement activity, and the costs incurred for the merger with Verizon.

 

Straight Path IP Group Segment

 

   Year Ended     
   July 31,   Change 
   2017   2016   $ 
   (in thousands) 
Revenues  $-   $1,695   $(1,695)
Direct cost of revenues   -    814    (814)
Research and development   -    -    - 
Selling, general and administrative   4,658    3,569    1,089 
Loss from operations before FCC consent decree and settlement of litigation  $(4,658)  $(2,688)  $(1,970)

 

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 agreements 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 were secured since our 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 were allocated across Fiscal 2014, 2015 and 2016 in the amounts of $4.2 million, $12.5 million and $1.6 million respectively, based on the settlement dates and if the settlement included a look back period for damages. Primarily all of the revenue from these settlements or licensing agreements was recognized as of September 30, 2015. 

 

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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, the favorable PTAB rulings in the related IPR proceedings, and the subsequent affirmance on a second appeal, Straight Path IP Group has re-commenced all of its civil litigations in federal district court (except for one that has been stayed by mutual agreement of the parties and one of which is subject to a bankruptcy proceeding). For further discussion of these actions, please see Item 3 to Part I “Legal Proceedings” in this Annual 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, beginning on October 2, 2017, Straight Path IP Group will pay one of the law firms $100,000 per month as a non-refundable fee creditable against any contingency payment that may be paid to that firm in the future. There are also other directly related legal expenses, such as expert testimony, travel, filing fees, and others.

 

Selling, general and administrative expense. 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 (including stock-based compensation for the issuances of restricted common stock and stock options to officers and employees) among our segments due to changes in relative levels of operations and management’s time, and, and increased legal costs due to Straight Path IP Group’s appeal of the PTAB’s decision on the ‘704 Patent and related IPRs.

 

Straight Path Ventures Segment

 

   Year Ended     
   July 31,   Change 
   2017   2016   $ 
   (in thousands) 
Revenues  $-   $-   $- 
Direct cost of revenues   -    -    - 
Research and development   580    286    294 
Selling, general and administrative   1,357    605    752 
Loss from operations before FCC consent decree and settlement of litigation  $(1,937)  $(891)  $(1,046)

 

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

 

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

 

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Fiscal 2016 Compared to Year Ended July 31, 2015 (“Fiscal 2015”)  

 

Consolidated

 

   Year Ended     
   July 31,   Change 
   2016   2015   $ 
   (in thousands) 
Revenues  $2,156   $13,240   $(11,084)
Direct cost of revenues   933    6,043    (5,110)
Research and development   1,286    -    1,286 
Selling, general and administrative   9,024    6,931    2,093 
Income (loss) from operations   (9,087)   266    (9,353)
Interest and other income   437    372    65 
Income (loss) before income taxes   (8,650)   638    (9,288)
Income tax benefits (provision for income taxes)   4    (2,714)   2,718 
Net loss   (8,646)   (2,076)   (6,570)
Net loss attributable to noncontrolling interests   349    111    238 
Net loss attributable to Straight Path Communications Inc.  $(8,297)  $(1,965)  $(6,332)

 

Revenues. Revenues generated by Straight Path Spectrum were $461,000 and $426,000 in Fiscal 2016 and Fiscal 2015, respectively. Revenues increased due to revenue from the lease of spectrum to new customers (wireless network operators).

 

Revenues generated by Straight Path IP Group were $1.7 million and $12.8 million in Fiscal 2016 and Fiscal 2015, respectively. Revenues generated by Straight Path IP Group decreased substantially due to the expiration of the licensed patents. We were recognizing revenue over the terms of the settlements and license agreements related to such patents entered into in prior periods. Primarily all of the revenue was recognized as of September 30, 2015.  

 

Direct cost of revenues. Direct cost of revenues decreased in Fiscal 2016 compared to Fiscal 2015 primarily due to the decrease in the direct cost of revenues of Straight Path IP Group. The Straight Path IP Group direct cost of revenues were costs related to enforcement efforts and litigation settlements and licensing arrangements and were recognized over the same time period as corresponding revenues.  

 

Research and development. Research and development consists primarily of expenses related to a development agreement in September 2015 to expedite production of a PMP radio for a total fee of $1,000,000, and expenses related to development by our Gigabit Mobility Lab of next generation wireless technology for 39 GHz. For Fiscal 2016, expenses recognized under the development agreement totaled $1,000,000.

 

Selling, general and administrative expense.   Selling, general and administrative expenses increased in Fiscal 2016 compared to Fiscal 2015 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, marketing expenses related to the installation of radio links, and increased legal costs due to: 1) the putative shareholder class action, derivative action, and regulatory enforcement activity, and 2) Straight Path IP Group’s appeal of the PTAB’s decision on the ‘704 Patent and related IPRs.

 

Stock-based compensation expense included in consolidated selling, general and administrative expense was $2.77 million and $3.35 million in Fiscal 2016 and Fiscal 2015, respectively.

 

Interest and other income.  Interest and other income in Fiscal 2016 included interest income of $39,000 and the reversal of prior period accruals of $390,000. Interest and other income in Fiscal 2015 included interest income of $37,000, gain on the sale of a patent of $35,000, the reversal of prior period accruals of $143,000, and the reduction in commissions owed totaling $130,000 from the settlement with the Former SPSI CEO.

 

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Income taxes. Straight Path Spectrum files its own tax returns. There is no provision for Straight Path Spectrum for Fiscal 2016 and Fiscal 2015 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 July 31, 2016 and 2015.

 

Straight Path Ventures files its own tax returns. There is no provision for Straight Path Ventures for Fiscal 2016 and Fiscal 2015 since it is a partnership return, and its results are passed to its partners, both of which are included in the consolidated tax return of Straight Path.

 

The operations of Straight Path IP Group are included in the consolidated tax return of Straight Path. There is no provision for Straight Path for the years ended July 31, 2016 and 2015 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 at July 31, 2016. The benefit in Fiscal 2016 represents a federal refund from a prior year net of current state income and franchise taxes.

 

The provision for income taxes for Fiscal 2015 consisted solely of certain state income taxes.

 

Net income attributable to noncontrolling interests. The change in net loss (income) attributable to noncontrolling interests was due to Straight Path IP Group incurring losses in the Fiscal 2016 periods compared to being profitable in the Fiscal 2015 periods.

 

Straight Path Spectrum Segment

 

   Year Ended     
   July 31,   Change 
   2016   2015   $ 
   (in thousands) 
Revenues  $461   $426   $35 
Direct cost of revenues   119    -    119 
Research and development   1,000    -    1,000 
Selling, general and administrative   4,850    2,067    2,783 
Loss from operations  $(5,508)  $(1,641)  $(3,867)

 

Revenues. Revenues generated by Straight Path Spectrum were $461,000 and $426,000 in Fiscal 2016 and Fiscal 2015, respectively. Revenues increased due to revenue from the lease of spectrum to new customers (wireless network operators).

 

Direct cost of revenues. Direct cost of revenues includes governmental fees and connectivity costs. No such costs were incurred in Fiscal 2015.

 

Research and development. Research and development consists of expenses related to a development agreement in September 2015 to expedite production of a PMP radio for a total fee of $1,000,000.

 

Selling, general and administrative expense.   Selling, general and administrative expenses increased in Fiscal 2016 compared to Fiscal 2015 primarily as a result of the hiring of new employees, and the related increase in compensation costs, including stock-based compensation for the issuances of restricted common stock 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

 

   Year Ended     
   July 31,   Change 
   2016   2015   $ 
   (in thousands) 
Revenues  $1,695   $12,814   $(11,119)
Direct cost of revenues   814    6,043    (5,229)
Research and development   -    -    - 
Selling, general and administrative   3,569    4,864    (1,295)
Income (loss) from operations  $(2,688)  $1,907   $(4,595)

 

 43 

 

 

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 have been settled and we have entered into licensing agreements with the former defendants. In connection with the settlements and license agreements, Straight Path IP Group recognized revenue of approximately $1.7 million and $12.8 million in Fiscal 2016 and Fiscal 2015, respectively. The gross payments under settlement and licensing agreements that have been secured since our Spin-Off (the beginning of Fiscal 2014) totaled $18.3 million as of July 31, 2016, all of which has been collected. Most of these settlement agreements included license fees for the duration of the license term, and were allocated across Fiscal 2014, 2015 and 2016 in the amounts of $4.2 million, $12.5 million and $1.6 million respectively, based on the settlement dates and if the settlement included a look back period for damages. The license term was through the expiration of the licensed patents. Primarily all of the revenue from these settlements was 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, the favorable PTAB rulings in the related IPR proceedings, and the subsequent affirmance on a second appeal, Straight Path IP Group has re-commenced all of its civil litigations in federal district court (except for one that is stayed by agreement of the parties and one that is subject to a bankruptcy proceeding). For further discussion of these litigations, please see Item 3 to Part I “Legal Proceedings” in this Annual 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, beginning on October 2, 2017, Straight Path IP Group will pay one of the law firms $100,000 per month as a non-refundable fee creditable against any contingency payment that may be paid to that firm in the future; there are also other directly related legal expenses, such as expert testimony, travel, filing fees, and others.

 

Selling, general and administrative expense. Selling, general and administrative expenses increased in Fiscal 2016 compared to Fiscal 2015 primarily as a result of the increase in compensation costs, including stock-based compensation for 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.

 

Straight Path Ventures Segment

 

   Year Ended     
   July 31,   Change 
   2016   2015   $ 
   (in thousands) 
Revenues  $-   $-   $- 
Direct cost of revenues   -    -    - 
Research and development   286    -    286 
Selling, general and administrative   605    -    605 
Loss from operations  $(891)  $-   $(891)

 

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

 

Selling, general and administrative. Selling, general and administrative expenses consist primarily of payroll and related payroll taxes and benefits as well as stock 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, we borrowed $17.5 million pursuant to the Loan Agreement. For a further discussion, see Note 8 to the Consolidated Financial Statements. We currently expect that our cash and cash equivalents on-hand at July 31, 2017 and the proceeds to be received upon consummation of the settlement with IDT, will be sufficient to meet our anticipated cash requirements during the twelve months ending July 31, 2018.

 

As discussed above, we signed the Consent Decree with the FCC and incurred an Initial Civil Penalty of $15 million which is being paid in four installments through the earlier of October 11, 2017 or the consummation of the Merger. To fund the payments of the Initial Civil Penalty, we entered into the Loan Agreement pursuant to which we borrowed the $17.5 million, which matures on December 29, 2017. $15 million of the Loan Amount is being 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 first three installments totaling $11.5 million were paid. The remainder of the Loan Amount is being used for general corporate purposes and working capital needs. We expect to repay the remaining balance of the Loan Amount through a combination of exercise of warrants issued to the Lenders and other possible funding sources including the proceeds from the settlement with IDT and the sale of Straight Path IP Group (see Note 3 to the Consolidated Financial Statements contained in Item 8 of this Annual Report under the heading Settlement of Claims with IDT and Sale of Straight Path IP Group). 

 

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

 

As of July 31, 2017, we had cash and cash equivalents of $8.5 million. In connection with the Spin-Off, we and IDT entered into various agreements prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with IDT after the Spin-Off. The Separation and Distribution Agreement includes, among other things, that IDT is obligated to reimburse us for the payment of liabilities arising or related to the period prior to the Spin-Off. For Fiscal 2016, Fiscal 2017 and 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, we and IDT entered into the IDT Term Sheet providing for the settlement and mutual release of certain potential indemnification claims asserted by each of the us and IDT and for the sale to IDT of our ownership interest in Straight Path IP Group, in exchange for payment from IDT to us 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). We currently anticipate that the transaction contemplated by the IDT Term Sheet will be consummated in the first quarter of Fiscal 2018. For further discussion, please see Note 3 to the Consolidated Financial Statements contained in Item 8 of this Annual Report under the heading Settlement of Claims with IDT and Sale of Straight Path IP Group

 

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 $77,000 was incurred to the Former SPSI CEO for this obligation for Fiscal 2017 and approximately $48,000 for Fiscal 2016. If the Merger is consummated, Verizon will pay approximately $3 million to the Former SPSI CEO in satisfaction of our obligation. For further discussion, please see Note 2 to the Consolidated Financial Statements contained in Item 8 of this Annual Report. 

 

In addition, we estimate that we will incur various other fees and expenses in connection with the Merger, which will be paid by Verizon on our behalf. For further discussion, please see Note 2 to the Consolidated Financial Statements contained in Item 8 of this Annual Report. 

 

Year Ended July 31, 2017 (“Fiscal 2017”) Compared to Year Ended July 31, 2016 (“Fiscal 2016”)

 

   Year Ended
July 31,
 
   2017   2016 
   (in thousands) 
Cash flows provided by (used in):        
Operating activities  $(21,019)  $(7,269)
Investing activities   (1,029)   - 
Financing activities   19,222    10 
Decrease in cash and cash equivalents  $(2,826)  $(7,259)

 

Operating Activities 

 

Cash flows used in operating activities in Fiscal 2017 totaled approximately $21.0 million and were used to fund the loss for the year. 

 

Investing Activities 

 

Cash flows used in investing activities in Fiscal 2017 totaled approximately $1.0 million. We incurred costs of approximately $1.0 million for the sale of Straight Path IP Group to IDT. These costs will be offset against the gain or loss recognized on the consummation of the transaction.

 

Financing Activities 

 

Cash flows provided by financing activities in Fiscal 2017 totaled approximately $19.2 million. In February 2017, we borrowed $17.5 million under the Loan Agreement, primarily to fund the payment of the Initial Civil Penalty under the Consent Decree with the FCC. We incurred costs of approximately $80,000 to obtain the Loan Agreement. In addition, we received $1.8 million received for the exercise of stock options. 

 

We do not anticipate paying any additional dividends on our common stock until we achieve sustainable profitability (after satisfying all of our operational needs, including payments to the Former SPSI CEO and retaining certain minimum cash reserves. Following that time, we will retain sufficient cash to provide for investment in growth opportunities and provide for the creation of long-term stockholder value, particularly through development of the Straight Path Spectrum and Straight Path Ventures businesses and possibly the acquisition of complementary businesses or assets.  However, we do not intend to retain earnings beyond those needs and beyond what we believe we can effectively deploy, and we expect that such additional resources would be returned to stockholders via distributions or other means.  The payment of dividends in any specific period will be at the sole discretion of our Board. Except for any special dividend that may be paid in connection with the transactions contemplated by the IDT Term Sheet discussed below in Note 3 to the Consolidated Financial Statements contained in Item 8 of this Annual Report, the Verizon Merger Agreement does not permit us to pay any additional dividends on our common stock. 

 

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Year Ended July 31, 2016 (“Fiscal 2016”) Compared to Year Ended July 31, 2015 (“Fiscal 2015”)

 

   Year Ended
July 31,
 
   2016   2015 
   (in thousands) 
Cash flows provided by (used in):        
Operating activities  $(7,269)  $(1,890)
Investing activities   -    20 
Financing activities   10    (742)
Decrease in cash and cash equivalents  $(7,259)  $(2,612)

 

Operating Activities

 

Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically payments of trade accounts payable and timing of settlements of lawsuits brought by Straight Path IP Group.

 

Investing Activities

 

There were no investing activities in Fiscal 2016.

 

Financing Activities

 

In Fiscal 2016, we received $10,000 upon the exercise of stock options.

  

Contractual Obligations and Other Commercial Commitments

 

We currently lease our corporate headquarters in Glen Allen, Virginia under a lease that expires on May 31, 2019. The annual rent is approximately $7,700.

 

We currently lease our satellite office in Englewood Cliffs, New Jersey under a lease that expires on April 30, 2018. The annual rent is $37,200.

 

Effective December 1, 2015, we lease an office in Plano, Texas for use as a development lab. The lease term expires on December 31, 2018 and the average annual rental is approximately $18,000.

 

The following table sets forth our future contractual obligations as of July 31, 2017.

  

   Payment due by period 
       Less than   1-3   3-5   More than 
   Total   1 year   years   years   5 years 
Operating leases (1)  $67,495   $53,456   $14,039   $-   $- 

  

(1) Effective August 1, 2013, we began leasing space on a roof for some of its telecom equipment as part of its spectrum operations. The monthly rental is currently $600. In addition, we currently lease space on two additional roofs for some of its telecom equipment as part of its spectrum operations. The total monthly rental for these two roofs is $500. All three leases continue on a month-to-month basis until terminated by either party with 30 days’ notice. 

 

 46 

 

 

Off-Balance-Sheet Arrangements

 

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

 

In connection with the Spin-Off, we and IDT entered into various agreements prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with IDT after the Spin-Off, and a Tax Separation Agreement, which sets forth our and IDT’s responsibilities 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, we and IDT entered into the IDT Term Sheet. As of the date of the filing of this report, the parties have not yet consummated the settlement agreement and mutual release contemplated by the IDT Term Sheet. The definitive settlement agreement is under negotiation. 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 contained in Item 8 of this Annual Report. 

 

Item 7A. 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 our transactions are in US dollars.
     
  2. Our only outstanding debt has a fixed contractual interest rate of 10%.
     
  3. We do not own any marketable securities.
     
  4. We do not purchase any commodities.

 

Item 8. Financial Statements and Supplementary Data.

 

The Consolidated Financial Statements and supplementary data of the Company and the report of the independent registered public accounting firm thereon are set forth starting on page F-1 herein are incorporated herein by reference.

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

  1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
     
  2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
     
  3. provide reasonable assurance regarding prevention or timely detections of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

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

 

Changes in Internal Control over Financial Reporting

 

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

 

Attestation Report of the Registered Public Accounting Firm

 

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies.”

 

Item 9B. Other Information.

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

The following is a list of our executive officers and directors along with the specific information required by Rule 14a-3 of the Securities Exchange Act of 1934:

 

Executive Officers

 

Davidi Jonas - Chairman of the Board, Chief Executive Officer and President

Jonathan Rand - Chief Financial Officer

Zhouyue (Jerry) Pi - Chief Technology Officer

David Breau - General Counsel

 

Management Directors

 

Davidi Jonas

 

Independent Directors

 

K. Chris Todd - Partner at the law firm of Kellog, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.

 

William F. Weld - Partner at the law firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (“Mintz Levin”) and a principal of ML Strategies, LLC, a consulting affiliate of Mintz Levin.

 

Fred S. Zeidman - Director of Petro River Oil Corporation.

 

The remaining information required by this Item will be contained in the Proxy Statement relating to our 2018 Annual Meeting of Stockholders (the “Proxy Statement”), which we will file with the SEC within 120 days after July 31, 2017, and which is incorporated by reference herein.

 

We make available free of charge through the investor relations page of our website (www.straightpath.com/investors) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity, as soon as reasonably practicable after such reports are electronically filed with the SEC. We have adopted a code of business conduct and ethics for all of our employees, including our principal executive officer, principal financial officer. A copy of the code of business conduct and ethics is available on our website.

 

Our website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the SEC.

 

Item 11. Executive Compensation.

 

The information required by this Item will be contained in the Proxy Statement, which we will file with the SEC within 120 days after July 31, 2017, and which is incorporated by reference herein.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The information required by this Item will be contained in the Proxy Statement, which we will file with the SEC within 120 days after July 31, 2017, and which is incorporated by reference herein.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

The information required by this Item will be contained in the Proxy Statement, which we will file with the SEC within 120 days after July 31, 2017, and which is incorporated by reference herein.

 

Item 14. Principal Accounting Fees and Services.

 

The information required by this Item will be contained in the Proxy Statement, which we will file with the SEC within 120 days after July 31, 2017, and which is incorporated by reference herein.

 

 49 

 

Part IV

 

Item 15. Exhibits, Financial Statement Schedules. 

 

(a) The following documents are filed as part of this Report:

 

1. Report of Independent Registered Public Accounting Firms on Consolidated Financial Statements

 

  Consolidated Financial Statements covered by Report of Independent Registered Public Accounting Firm

 

2. Financial Statement Schedule.

 

  All schedules have been omitted since they are either included in the Notes to Consolidated Financial Statements or not required or not applicable.

 

3. The exhibits listed in paragraph (b) of this item.

 

(b) Exhibits.

 

Exhibit

Number

  Description of Exhibits
2.1 (1)   Separation and Distribution Agreement, dated July 31, 2013
     
2.2 (2)   Agreement and Plan of Merger, dated as of May 11, 2017, by and among Straight Path Communications Inc. Verizon Communications Inc. and Waves Merger Sub I, Inc.
     
3.1 (1)   Amended and Restated Certificate of Incorporation of the Registrant
     
3.2 (4)   Amendment to By-Laws of Straight Path Communications Inc.
     
10.1 (3)   Amended 2013 Stock Option and Incentive Plan
     
10.2 (1)   Transition Services Agreement, dated July 31, 2013
     
10.3 (1)   Tax Separation Agreement, dated July 31, 2013
     
10.4 (5)   Consent Decree between the Registrant, Straight Path Spectrum, LLC and the Federal Communications Commission dated January 11, 2017.
     
10.5 (6)   Loan Agreement between the Registrant and each Lender named on Schedule A thereto, dated February 6, 2017.
     
10.6 (7)   IDT Term Sheet, dated April 9, 2017, relating to the settlement of claims between Straight Path Communications Inc. and IDT Corporation.
     
21.1*   Subsidiaries of the Registrant
     
23.1*   Consent of Zwick & Banyai, PLLC
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officer pursuant to Section 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 herewith.

# Management contract or compensatory plan or arrangement. 

 

(1)    Incorporated by reference to the Company’s Form 10-12G/A filed July 31, 2013.

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

(3)    Incorporated by reference to the Company’s Form DEF 14A filed November 24, 2014.

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

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

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

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

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Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  STRAIGHT PATH COMMUNICATIONS INC.
     
  By: /s/ Davidi Jonas
   

Davidi Jonas

Chief Executive Officer

 

Date: October 10, 2017

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature   Titles   Date
         
/s/ Davidi Jonas   Chief Executive Officer,   October 10, 2017
Davidi Jonas   President and Director (Principal Executive Officer)    
         
/s/ Jonathan Rand   Chief Financial Officer   October 10, 2017
Jonathan Rand   (Principal Financial Officer and Principal Accounting Officer)    
         
/s/ K. Chris Todd   Director   October 10, 2017
K. Chris Todd        
         
/s/ William F. Weld   Director   October 10, 2017
William F. Weld        
         
/s/ Fred S. Zeidman   Director   October 10, 2017
Fred S. Zeidman        

  

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

STRAIGHT PATH COMMUNICATIONS INC.

 

Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of July 31, 2017 and 2016 F-3
   
Consolidated Statements of Operations for the Years Ended July 31, 2017, 2016 and 2015 F-4
   
Consolidated Statements of Equity for the Years Ended July 31, 2017, 2016 and 2015 F-5
   
Consolidated Statements of Cash Flows for the Years Ended July 31, 2017, 2016 and 2015 F-6
   
Notes to Consolidated Financial Statements F-7

 

 F-1 

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of Straight Path Communications Inc.

 

We have audited the accompanying consolidated balance sheets of Straight Path Communications Inc. as of July 31, 2017 and 2016, and the related consolidated statements of operations, equity, and cash flows for each of the years in the three-year period ended July 31, 2017. Straight Path Communications Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Straight Path Communications Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Straight Path Communications Inc.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Straight Path Communications Inc. as of July 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended July 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Zwick & Banyai, PLLC  
Zwick & Banyai, PLLC  
Southfield, Michigan  
   

October 10, 2017

 

 F-2 

 

  

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

  

July 31,

2017

   July 31,
2016
 
         
Assets    
Current assets:        
Cash and cash equivalents  $8,535   $11,361 
Trade accounts receivable, net of allowance for doubtful accounts of $19 and $0, respectively   51    40 
Inventory   1,588    - 
Assets held for sale – Intellectual Property Business   3    - 
Prepaid expenses and other current assets   118    1,627 
Total current assets   10,295    13,028 
Prepaid expenses – related to the sale of IP Business to IDT   1,029    - 
Intangible assets   365    365 
Other assets   161    104 
Total assets  $11,850   $13,497 
           
Liabilities and Equity (Deficiency)          
Current liabilities:          
Trade accounts payable (related party of $29 and $25)  $3,210   $684 
Accrued expenses  (related party of $900 and $65)   3,502    1,042 
Liabilities held for sale – Intellectual Property Business   357    - 
FCC consent decree payable   3,500    - 
Loans payable, net of debt discount of $1,101 and $0, respectively   11,274    - 
Deferred revenue   217    73 
Income taxes payable   -    225 
Total current liabilities   22,060    2,024 
Settlement of litigation   7,200    - 
Deferred revenue - long-term portion   75    92 
Total liabilities   29,335    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 at July 31, 2017 and 2016   8    8 
Class B common stock, $0.01 par value; 40,000 shares authorized; 11,989 and 11,431 shares issued, 11,949 and 11,391 shares outstanding as of July 31, 2017 and 2016   120    114 
Additional paid-in capital   38,377    21,589 
Accumulated deficit   (52,872)   (8,225)
Treasury stock, 40 shares at cost at July 31, 2017 and 2016   (428)   (428)
Total Straight Path Communications Inc. stockholders’ equity (deficiency)   (14,795)   13,058 
Noncontrolling interests   (2,690)   (1,677)
Total equity (deficiency)   (17,485)   11,381 
Total liabilities and equity (deficiency)  $11,850   $13,497 

 

See accompanying notes to consolidated financial statements.

 

 F-3 

 

 

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except per share amounts)

 

   Year Ended July 31, 
   2017   2016   2015 
             
Revenues  $658   $2,156   $13,240 
                
Costs and expenses:               
Direct cost of revenues   115    933    6,043 
Research and development   582    1,286    - 
Selling, general and administrative (related party of $1,613, $596 and $420)   20,772    9,024    6,931 
                
Total costs and expenses   21,469    11,243    12,974 
                
Income (loss) from operations before items listed below   (20,811)   (9,087)   266 
                
Civil penalty – FCC consent decree   15,000    -    - 
Settlement of litigation   7,200    -    - 
                
Income (loss) from operations   (43,011)   (9,087)   266 
                
Other income (expense):               
Interest expense, including amortization of debt discounts   (2,688)   -    - 
Interest income   30    39    38 
Other income   22    398    334 
                
Total other income (expense)   (2,636)   437    372 
                
Income (loss) before income taxes   (45,647)   (8,650)   638 
Income tax benefits (provision for income taxes)   (13)   4    (2,714)
                
Net loss   (45,660)   (8,646)   (2,076)
Net loss attributable to noncontrolling interests   1,013    349    111 
                
Net loss attributable to Straight Path Communications Inc.  $(44,647)  $(8,297)  $(1,965)
                
Loss per share attributable to Straight Path Communications Inc. stockholders:               
Basic and diluted  $(3.67)  $(0.70)  $(0.17)
                
Weighted-average number of shares used in calculation of loss per share:               
Basic and diluted   12,176    11,871    11,457 

 

See accompanying notes to consolidated financial statements.

 

 F-4 

 

  

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF EQUITY

Years Ended July 31, 2017, 2016 and 2015

(In Thousands)

 

   Class A   Class B   Common Stock   Additional   (Accumulated Deficit)             
   Common Stock   Common Stock   To Be   Paid-In   Retained   Treasury   Noncontrolling     
   Shares   Amount   Shares   Amount   Issued   Capital   Earnings   Stock   Interests   Total 
                                     
Balance as of August 1, 2014   787   $8    11,013   $110   $-   $14,886   $2,037   $-   $(342)  $16,699 
                                                   
Common stock issued or to be issued for compensation   -    -    265    3    1,495    1,849    -    -    -    3,347 
                                                   
Common stock issued for exercises of stock options   -    -    12    -    -    68    -    -    -    68 
                                                   
Common stock issued for deferred stock units   -    -    20    -    -    -    -    -    -    - 
                                                   
Reversal of prior period related party payables   -    -    -    -    -    513    -    -    -    513 
                                                   
Common stock repurchased for withholding tax purposes   -    -    -    -    -    -    -    (545)   -    (545)
                                                   
Sale of treasury stock   -    -    -    -    -    -    -    65    -    65 
                                                   
Forfeiture of unvested shares   -    -    (2)   -    -    -    -    -    -    - 
                                                   
Net loss for the year ended July 31, 2015   -    -    -    -    -    -    (1,965)   -    (111)   (2,076)
                                                   
Dividends   -    -    -    -    -    -    -    -    (875)   (875)
                                                   
Balance as of July 31, 2015   787    8    11,308    113    1,495    17,316    72    (480)   (1,328)   17,196 
                                                   
Common stock issued or to be issued for compensation   -    -    121    1    (1,495)   4,231    -         -    2,737 
                                                   
Common stock issued for exercises of stock options   -    -    2    -    -    10    -    -    -    10 
                                                   
Stock options issued for compensation   -    -    -    -    -    32    -    -    -    32 
                                                   
Issuance of treasury shares for 401K match   -    -    -    -    -    -    -    52    -    52 
                                                   
Net loss for the year ended July 31, 2016   -    -    -    -    -    -    (8,297)   -    (349)   (8,646)
                                                   
Balance as of July 31, 2016   787   $8    11,431   $114   $-   $21,589   $(8,225)  $(428)  $(1,677)  $11,381 
                                                   
Common stock issued for compensation   -    -    369    4    -    6,201    -    -    -    6,205 
                                                   
Stock-based compensation   -    -    -    -    -    355    -    -    -    355 
                                                   
Common stock issued for exercises of stock options   -    -    41    1    -    1,801    -    -    -    1,802 
                                                   
Issuance of warrants with loans payable   -    -    -    -    -    

3,307

    -    -    -    

3,307

 
                                                   
Common stock issued for exercises of warrants   -    -    148    1    -    5,124    -    -    -    5,125 
                                                   
Net loss for the year ended July 31, 2017   -    -    -    -    -    -    

(44,647

)   -    

(1,013

)   

(45,660

)
                                                   
Balance as of July 31, 2017   787   $8    11,989   $120   $-   $

38,377

   $(52,872)  $(428)  $

(2,690

)  $

(17,485

)

 

See accompanying notes to consolidated financial statements.

 

 F-5 

 

  

STRAIGHT PATH COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

   Year Ended July 31, 
   2017   2016   2015 
             
Operating activities:            
Net loss  $(45,660)  $(8,646)  $(2,076)
Adjustments to reconcile net loss to net cash used in operating activities:               
Common stock issued or to be issued for compensation   6,205    2,737    3,347 
Stock-based compensation   355    32    - 
Amortization of debt discounts   2,286    -    - 
Allowance for doubtful accounts   19    -    - 
Issuance of treasury shares for 401K match   -    52    - 
Gain from sale of patent   -    -    (35)
Deferred income taxes   -    -    2,809 
Changes in assets and liabilities:               
Trade accounts receivable   (30)   42    (21)
Inventory   (945)   -    - 
Assets held for sale – Intellectual Property Business   (3)   -    - 
Prepaid expenses and other current assets   866    (1,354)   (181)
Prepaid expenses - related to settlements and licensing   -    783    4,977 
Other assets   (57)   11    20 
Trade accounts payable   2,526    446    238 
Accrued expenses   2,460    214    (538)
Liabilities held for sale – Intellectual Property Business   357    -    - 
FCC consent decree payable   3,500    -    - 
Due to IDT Corporation   -    -    (6)
Deferred revenue   127    (1,586)   (10,179)
Income taxes payable   (225)   -    (245)
Settlement of litigation   7,200    -    - 
Net cash used in operating activities   (21,019)   (7,269)   (1,890)
                
Investing activities:               
Prepaid expenses – related to sale of IP business to IDT   (1,029)   -    - 
Purchase of intangibles   -    -    (15)
Proceeds from sale of patent   -    -    35 
Net cash provided by (used in) investing activities   (1,029)   -    20 
                
Financing activities:               
Proceeds from loans payable   17,500    -    - 
Costs related to loans payable   (80)   -    - 
Common stock issued upon exercise of stock options   1,802    10    68 
Sale of treasury stock   -    -    65 
Dividends paid to stockholders of noncontrolling interests   -    -    (875)
Net cash provided by (used in) financing activities   19,222    10    (742)
                
Net decrease in cash and cash equivalents   (2,826)   (7,259)   (2,612)
Cash and cash equivalents at beginning of year   11,361    18,620    21,232 
Cash and cash equivalents at end of year  $8,535   $11,361   $18,620 
                
Supplemental schedule of noncash activities               
Reclassification of prepaid marketing to inventory  $643   $-   $- 
Issuance of warrants with loans payable  $3,307   $-   $- 
Exercises of warrants reducing loans payable  $5,125   $-   $- 
Common stock repurchased for withholding tax purposes  $-   $-   $545 
Reversal of prior period related party payables  $-   $-   $513 
                
Supplemental cash flow information               
Cash paid during the year for interest  $305   $-   $- 
Cash paid during the year for income taxes  $13   $15   $119 

 

See accompanying notes to consolidated financial statements.

 

 F-6 

 

  

STRAIGHT PATH COMMUNICATIONS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1—Description of Business and Summary of Significant Accounting Policies

 

Description of Business

Straight Path Communications Inc. (“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 “Company” refers to Straight Path, Straight Path Spectrum, Straight Path Ventures, and Straight Path IP Group on a consolidated basis. All material intercompany balances and transactions are eliminated in producing our consolidated financial statements.

 

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

 

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

 

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

 

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

 

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., Fiscal 2017 refers to the fiscal year ending July 31, 2017).

 

Straight Path Spectrum

Straight Path Spectrum’s wholly-owned subsidiary, Straight Path Spectrum, LLC, holds a broad collection of exclusively licensed commercial fixed and mobile wireless spectrum licenses. These licenses, granted by the FCC, include 735 licenses in the 39 gigahertz (“GHz”) band and 133 licenses in the local multipoint distribution service (“LMDS”) band. Straight Path Spectrum offers its customers point-to-point and point-to-multipoint wireless broadband digital telecommunications services. The broad geographical reach of the licenses enables Straight Path Spectrum to provide its services throughout the United States. The Consent Decree with the FCC 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 addition, under the merger agreement with Verizon, we are 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, we currently are not seeking to expand our leasing or other spectrum business operations.

 

For further discussion, see Note 11 – Regulatory Enforcement.

 

In October 2010, Straight Path Spectrum paid an aggregate of $210,000 to renew certain of its 39 GHz spectrum licenses and established a new expiration date of October 18, 2020 for these licenses. The Company included the license renewal costs in other assets, which are being charged to expense on a straight-line basis over the ten-year term of the licenses.

 

Straight Path Ventures

Straight Path Ventures, a Delaware limited liability company, develops next generation wireless technology for 39 GHz at its Gigabit Mobility Lab in Plano, Texas. On August 22, 2016, Straight Path Ventures filed a provisional patent application with the United States Patent and Trademark Office (“USPTO”) for new 39 GHz transceiver technology. On October 12, 2016, Straight Path Ventures filed a patent application with the USPTO for new millimeter-wave transceiver technologies. On August 31, 2017, Straight Path Ventures demonstrated its prototype 39 GHz Gigarray® solutions that achieved 800 megabits per second at a distance of 500 meters.

 

Straight Path IP Group

Straight Path IP Group is a Delaware corporation. The Company believes that many parties are operating by infringing on Straight Path IP Group’s intellectual property, specifically one or more of Straight Path IP Group’s patents related to communications over the Internet. The Company is enforcing its rights and seeking to license its patents in order to generate revenue.

  

 F-7 

 

  

STRAIGHT PATH COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

Straight Path IP Group’s patent portfolio consists of the NetSpeak and Droplet portfolios. The NetSpeak portfolio includes U.S. Patents Nos. 6,131,121; 6,701,365; 6,513,066; 6,185,184; 6,829,645; 6,687,738; 6,009,469; 6,226,678; 7,149,208 and 6,178,453, and the foreign counterparts to U.S. Patent No. 6,108,704, which are German Patent No. 852868 and Taiwan Patent No. NI-096566. The Droplet portfolio includes U.S. Patents Nos. 6,847,317; 7,844,122; 7,525,463; 8,279,098; 7,436,329; 7,679,649, 8,947,271, 8,896,717, 8,849,964, 8,896,652 and a number of U.S. and foreign patent applications.

 

These patents had finite lives, and all of them have expired. Straight Path IP Group may continue to enforce the patents for patent infringement that occurred before expiration, although we do not anticipate filing additional actions. There is no guarantee that the patents will be adequately exploited or commercialized.

 

We generally pay law firms that represent 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, beginning on October 2, 2017, Straight Path IP Group will pay one of the law firms $100,000 per month as a non-refundable fee creditable against any contingency payment that may be paid to that firm in the future; there are also other directly related legal expenses, such as expert testimony, travel, filing fees, and others.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

 

Revenue Recognition

Straight Path Spectrum lease revenues are recognized on a straight-line basis over the contractual lease period, which generally range from one to five years. Revenues from sale of rights in FCC licenses are recognized upon execution of the agreement by both parties, provided that the amounts are fixed or determinable, there are no significant undelivered obligations and collectability is reasonably assured.

 

Straight Path Spectrum recorded the amounts that the former Chief Executive Officer of Straight Path Spectrum (the “Former SPSI CEO”) was entitled to, related to leases, in “Selling, general and administrative” expense, in the same period the related revenues were recognized.

 

Straight Path Ventures develops next generation wireless technology and has no revenue at this time.

 

Straight Path IP Group licensed its portfolio of patents to companies who used these patents in the provision of their product(s) and/or service(s). The contractual terms of the license agreements entered into in prior periods generally provided for payments over an extended period of time. For the licensing agreements with fixed royalty payments, Straight Path IP Group generally recognized revenue on a straight-line basis over the contractual term of the license, once collectability of the amounts was reasonably assured. For the licensing agreements with variable royalty payments which are based on a percentage of sales, Straight Path IP Group earned royalties at the time that the customers’ sales occurred. Straight Path IP Group’s customers, however, did not report and pay royalties owed for sales in any given period until after the conclusion of that period. As Straight Path IP Group was unable to estimate the customers’ sales in any given period to determine the royalties due to Straight Path IP Group, it recognized royalty revenues when sales and royalties were reported by customers and when other revenue recognition criteria were met.

 

In addition, Straight Path IP Group entered into certain settlements of patent infringement disputes. The amount of consideration received upon any settlement (including but not limited to past royalty payments and future royalty payments) was allocated to each element of the settlement based on the fair value of each element. In addition, revenues related to past royalties were recognized upon execution of the agreement by both parties, provided that the amounts were fixed or determinable, there were no significant undelivered obligations and collectability was reasonably assured. Straight Path IP Group did not recognize any revenues prior to execution of the agreement since there was no reliable basis on which it could estimate the amounts for royalties related to previous periods or assess collectability.

 

Direct Cost of Revenues

Direct cost of revenues for Straight Path Spectrum consists primarily of network and connectivity costs. Such costs are charged to expense as incurred. Direct cost of revenues for Straight Path IP Group consisted of legal expenses directly related to revenues from litigation settlements.

 

 F-8 

 

  

STRAIGHT PATH COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

Cash Equivalents and Concentrations of Credit Risk

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of money market accounts. The Company maintains principally all cash and cash equivalent balances in various financial institutions, which at times may exceed the amounts insured by the Federal Deposit Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred any losses on these accounts.

 

Inventory

Inventory, consisting solely of finished goods, is valued at the lower of cost or market determined on the first-in, first-out (FIFO) basis. The Company periodically evaluates inventory items and establishes reserves for obsolescence accordingly. The Company also reserves for excess quantities, slow-moving goods, and for other impairment of value based upon assumptions of future demand and market conditions. No reserve for obsolescence was recorded as of July 31, 2017.

 

Intangible Assets

Intangible assets consist primarily of the cost of the wireless spectrum licenses that were transferred to the Company by an entity controlled by the Former SPSI CEO in connection with the June 2013 settlement of all outstanding claims and disputes with the Former SPSI CEO and parties related to the Former SPSI CEO (see Note 11 – Other Commitments and Contingencies – Former SPSI CEO). The wireless spectrum licenses are not amortized since they are deemed to have an indefinite life. These assets are reviewed annually or more frequently under certain conditions for impairment using a fair value approach. On August 1, 2013, the Company adopted the accounting standard update that reduced the complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and improved consistency in impairment testing guidance among long-lived asset categories. The Company may first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. Prior to the adoption of this update, the Company was required to test indefinite-lived intangible assets for impairment by comparing the fair value of the asset with its carrying amount. The adoption of this standard update did not impact the Company’s financial position, results of operations or cash flows.

 

No impairment was recorded as of July 31, 2017 and 2016.

 

Income Taxes

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in its assessment of a valuation allowance. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.

 

The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability.

 

The Company classifies interest and penalties on income taxes as a component of income tax expense.

 

 F-9 

 

  

STRAIGHT PATH COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

Contingencies

The Company accrues for loss contingencies when both (a) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (b) the amount of loss can reasonably be estimated. When the Company accrues for loss contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range. The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have been incurred.

 

Loss per Share

Basic loss per share is computed by dividing net 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 loss per share is computed in the same manner as basic loss 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 and warrants using the treasury stock method, unless the effect of such increase is anti-dilutive.

 

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

 

   Years Ended 
   July 31, 
   2017   2016   2015 
   (in thousands) 
             
Stock options   29    3    4 
Warrants   65         
Non-vested restricted Class B common stock   251    196    331 
                
Shares excluded from the calculations of diluted loss per share   345    199    335 

 

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

 

   Years Ended 
   July 31, 
   2017   2016   2015 
   (in thousands) 
             
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