NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1—Basis of Presentation
The
accompanying unaudited Consolidated Financial Statements of Straight Path Communications Inc. and its subsidiaries (“Straight
Path”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended October 31, 2017 are not necessarily indicative of the results that may
be expected for the fiscal year ending July 31, 2018. The balance sheet at July 31, 2017 has been derived from Straight Path’s
audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes
thereto included in Straight Path’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017, as filed with the
U.S. Securities and Exchange Commission (the “SEC”).
Straight
Path Communications Inc., a Delaware corporation, was incorporated in April 2013. Straight Path owns 100% of Straight Path Spectrum,
Inc. (“Straight Path Spectrum”) and Straight Path Ventures, LLC (“Straight Path Ventures”), and until
October 24, 2017, we owned 84.5% of Straight Path IP Group, Inc. (“Straight Path IP Group”). In these financial statements,
the terms “the Company,” “Straight Path,” “we,” “us,” and “our” refer
to Straight Path, Straight Path Spectrum, Straight Path Ventures, Straight Path IP Group, and their respective subsidiaries on
a consolidated basis. All material intercompany balances and transactions have been eliminated in consolidation.
The
Company was formerly a subsidiary of IDT Corporation (“IDT”). On July 31, 2013, the Company was spun-off by IDT to
its stockholders and became an independent public company (the “Spin-Off”). The Company authorized the issuance of
two classes of its common stock, Class A (“Class A common stock”) and Class B (“Class B common stock”).
On
May 11, 2017, the Company entered into a merger agreement with Verizon Communications, Inc. (“Verizon”) and a Verizon
subsidiary. For a further discussion, see Note 2 –
Verizon Merger Agreement
.
On January 11, 2017, the Company entered into a consent decree
with the Federal Communications Commission (the “FCC”) settling the FCC’s investigation regarding Straight Path
Spectrum’s spectrum licenses (the “Consent Decree”). The Company agreed to pay an initial civil penalty of $15
million (the “Initial Civil Penalty”). For further discussion, see Note 14 –
Commitments and Contingencies
-
Regulatory Enforcement
.
On March 7, 2017, the Company and lead plaintiff in
Zacharia
v. Straight Path Communications Inc. et al
, No. 2:15-cv-08051-JMV-MF (D.N.J.), entered into a binding memorandum of understanding
to settle the putative shareholder class action and dismiss the claims that were filed against the Defendants in that action. Under
the agreed terms, the Company will provide for a $2.25 million initial payment (the “Initial Payment”) which will be
fully covered by insurance policies maintained by the Company and a $7.2 million additional payment (the “Additional Payment”).
For a further discussion, see Note 14 –
Commitments and Contingencies
-
Shareholder Litigation
.
On April 9, 2017, the Company and IDT entered into a binding
term sheet (the “IDT Term Sheet”) to settle potential claims related to certain claims under agreements related to
the Spin-Off, and to sell the Company’s interest in Straight Path IP Group to IDT. On October 24, 2017, the Company, IDT
and other parties entered into a Settlement Agreement and Release (the “IDT Settlement Agreement”) and related agreements
and consummated the settlement. For further discussion, see Note 3 –
Settlement of Claims with IDT and Sale of Straight
Path IP Group
.
The
Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal
year ending in the calendar year indicated (e.g., Fiscal 2018 refers to the fiscal year ending July 31, 2018).
Note
2—Verizon Merger Agreement
On April 9, 2017, we signed the Agreement and Plan of Merger
with AT&T Inc. and Switchback Merger Sub Inc. (the “AT&T Merger Agreement”). Among the terms, the AT&T
Merger Agreement allowed us to terminate the AT&T Merger Agreement if we received a better offer (as defined). If such an offer
was accepted, we would be required to pay AT&T a termination fee of $38 million. We did receive better offers from Verizon.
On May 11, 2017, we entered into an Agreement and Plan of Merger (the “Verizon Merger Agreement”)
with Verizon, a Delaware corporation, and Waves Merger Sub I, Inc., a Delaware corporation and a direct, wholly-owned subsidiary
of Verizon (“Merger Sub”). The Verizon Merger Agreement called for Verizon to pay the $38 million to AT&T on our
behalf. Such payment was made by Verizon on May 11, 2017.
Per
Section 7.3(b) of the Verizon Merger Agreement, “Termination by the Company,” if we terminated the Verizon agreement
as a result of receiving a Superior Proposal (as defined), before the Requisite Company Vote (as defined) being obtained, then
we would repay Verizon the $38 million paid to AT&T. This contingency would create a liability to us only if we accepted a
Superior Proposal. As of July 31, 2017, we did not receive and did not enter into an agreement for a Superior Proposal. The Requisite
Company Vote occurred on August 2, 2017, as further noted below. As a result, we never owed the termination fee to Verizon.
Pursuant
to the Verizon Merger Agreement, among other things, Merger Sub will be merged with and into the Company (the “Merger”)
with the Company being the surviving corporation of the Merger.
At the effective time of the Merger (the “Effective Time”),
each share of Class A common stock, par value $0.01 per share, of the Company and each share of Class B common stock, par value
$0.01 per share, of the Company (collectively, the “Shares”) issued and outstanding immediately prior to the Effective
Time (other than Shares owned by Verizon, Merger Sub or any other direct or indirect subsidiary of Verizon, and Shares owned by
the Company or any direct or indirect subsidiary of the Company, and in each case not held on behalf of third parties) will be
converted into the right to receive a number of validly issued, fully paid in and nonassessable shares of common stock of Verizon
(“Verizon Shares”) equal to the quotient determined by dividing $184.00 by the five (5)-day volume-weighted average
per share price ending on the second full trading day prior to the Effective Time, rounded to two decimal points, of Verizon Shares
on the New York Stock Exchange (the “Verizon Share Value”) and rounded to the nearest ten-thousandth of a share (collectively
and in the aggregate, the “Merger Consideration”). It is our intention that (i) the Merger shall qualify as a “reorganization”
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the Treasury regulations promulgated
thereunder, and (ii) the Verizon Merger Agreement shall constitute a plan of reorganization within the meaning of Treasury Regulation
Section 1.368-2(g), as noted in the Verizon Merger Agreement.
Our board of directors (the “Board”) has unanimously
approved the Verizon Merger Agreement and determined that the Verizon Merger Agreement and the transactions contemplated thereby,
including the Merger, are fair to, and in the best interests of, the Company and its stockholders, and has resolved to recommend
that our stockholders adopt the Verizon Merger Agreement.
We agreed, subject to certain exceptions with respect to unsolicited
proposals, not to directly or indirectly solicit competing acquisition proposals or to participate in any discussions concerning,
or provide non-public information in connection with, any unsolicited acquisition proposals. However, the Board may, subject to
certain conditions, change its recommendation in favor of approval of the Verizon Merger Agreement if, in connection with receipt
of a superior proposal or an event occurring after the date of the Verizon Merger Agreement with respect to the Company, it determines
in good faith, after consultation with its financial advisors and outside legal counsel, that the failure to take such action would
be inconsistent with its fiduciary duties to the Company’s stockholders under applicable law.
On August 2, 2017, we held a special meeting of our stockholders
to vote on a proposal to adopt the Verizon Merger Agreement. At such meeting, the proposal to adopt the Verizon Merger Agreement
was approved with 89% of the votes entitled to be cast at the special meeting voting; and of the votes cast, approximately 99%
of the votes cast in favor of the proposal to adopt the Verizon Merger Agreement. That approval terminated the Board’s ability
to consider unsolicited acquisition proposals, change its recommendation of the Merger and terminate the Verizon Merger Agreement
in connection therewith.
The completion of the Merger is subject to the satisfaction
or waiver of customary closing conditions, including: (i) receipt of regulatory approvals, including receipt of consent to the
Merger from the FCC and the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (“HSR”); (ii) there being no law or injunction prohibiting consummation of the transactions
contemplated under the Verizon Merger Agreement; (iii) the effectiveness of a registration statement on Form S-4 relating to the
Merger; (iv) subject to specified materiality standards, the continuing accuracy of certain representations and warranties of each
party; (v) continued compliance by each party in all material respects with its covenants; (vi) no event having occurred that has
had, or would reasonably be likely to have, a Material Adverse Effect (as defined in the Verizon Merger Agreement) on the Company;
(vii) receipt by the Company of an opinion from its tax counsel to the effect that the Merger will qualify as a “reorganization”
for United States federal income tax purposes within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended;
(viii) receipt of approval for listing the Verizon Shares on the New York Stock Exchange and the NASDAQ Global Select Market, subject
to official notice of issuance; and (ix) the FCC consent referred to in clause (i) of this paragraph having become a Final Order
(as defined in the Verizon Merger Agreement).
We and Verizon filed notification and report forms under the
HSR Act with the Federal Trade Commission and the Antitrust Division of the Department of Justice on May 19, 2017. The HSR Act
waiting period expired on June 19, 2017, and the condition for HSR Act clearance was satisfied.
On June 1, 2017, we and Verizon submitted applications to the
FCC seeking consent to transfer control of the Company’s spectrum licenses to Verizon. For further discussion, see Note 14
–
Commitments and Contingencies
-
Regulatory Enforcement
.
We have made customary representations and warranties in the Verizon Merger Agreement. The
Verizon Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to the conduct
of our business between the date of the signing of the Verizon Merger Agreement and the closing of the transactions contemplated
under the Verizon Merger Agreement. The representations and warranties made by the Company are qualified by disclosures made in
its disclosure schedules and SEC filings. None of the representations and warranties in the Verizon Merger Agreement survive the
closing of the transactions contemplated by the Verizon Merger Agreement
.
The
Verizon Merger Agreement contains certain termination rights for both us and Verizon including upon (i) an uncured breach by the
other party which results in the failure of a closing condition, (ii) the failure to receive the approval of the Verizon Merger
Agreement by the Company’s stockholders, and (iii) the Company’s Board changing its recommendation in favor of the
Verizon Merger Agreement. The Verizon Merger Agreement further provides that, upon termination of the Verizon Merger Agreement,
under certain circumstances following a change in recommendation by the Company in connection with its receipt of a superior proposal
or due to an Intervening Event (as defined in the Verizon Merger Agreement), the Company may be required to pay Verizon a termination
fee equal to $38 million. As a result of the adoption of the Verizon Merger Agreement at the special meeting of our stockholders
on August 2, 2017, we never owed the termination fee to Verizon. Either the Company or Verizon may terminate the Verizon Merger
Agreement if the completion of the Merger has not occurred on or before February 12, 2018 (as it may be extended as provided below,
the “Termination Date”); provided, however, that if regulatory approvals have not been obtained and all other conditions
to closing have been satisfied or waived, the Termination Date will automatically be extended for an additional one hundred and
eighty days. In addition, Verizon is required to pay us an aggregate amount equal to $85 million (the “Parent Termination
Fee”) in the event that the Merger has not closed by the extended Termination Date, and all conditions to closing other
than receipt of FCC consent or HSR approval (or expiration of the waiting period under the HSR) have been satisfied or waived.
In the event that the Verizon Merger Agreement is terminated other than as a result of Verizon’s breach or under circumstances
in which Verizon is required to pay the Parent Termination Fee, we will be required to pay Verizon an amount equal to the AT&T
Termination Fee (as defined in the Verizon Merger Agreement) paid by Verizon on our behalf.
The
Verizon Merger Agreement was attached as Exhibit 2.1 to the Form 8-K filed by the Company with the SEC on May 11, 2017 to provide
investors and security holders with information regarding its terms. It is not intended to provide any other factual information
about the Company, Verizon or Merger Sub, or to modify or supplement any factual disclosures about the Company or Verizon in their
public reports filed with the SEC. The Verizon Merger Agreement includes representations, warranties and covenants of the Company,
Verizon and Merger Sub made solely for purposes of the Verizon Merger Agreement and which may be subject to important qualifications
and limitations agreed to by the Company, Verizon and Merger Sub in connection with the negotiated terms of the Verizon Merger
Agreement. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may
be subject to a contractual standard of materiality different from those generally applicable to the Company’s or Verizon’s
SEC filings or may have been used for purposes of allocating risk among the Company, Verizon and Merger Sub rather than establishing
matters as facts.
The
foregoing summary of the Verizon Merger Agreement and the transactions contemplated thereby does not purport to be complete and
is subject to, and qualified in its entirety by, the full text of the Verizon Merger Agreement, which was attached as Exhibit
2.1 to the Form 8-K filed by the Company with the SEC on May 11, 2017.
In addition, Howard Jonas, who has the right to vote a majority
of the voting power of the Company’s common stock, entered into a voting agreement with Verizon concurrently with the entry
into the Verizon Merger Agreement (the “Voting Agreement”). The Voting Agreement provided that Mr. Jonas (holding his
Class A shares through a trust) would vote his Class A shares in the Company in favor of the Merger and the other transactions
contemplated in the Verizon Merger Agreement, on the terms and subject to the conditions set forth in the Voting Agreement. The
Voting Agreement would terminate automatically upon the earliest to occur of (i) the effective time of the Merger, (ii) the valid
termination of the Verizon Merger Agreement pursuant to Article VII thereof, (iii) a change of recommendation by the Board in the
event of a Superior Proposal or Intervening Event, (iv) any change being made to the terms of the Verizon Merger Agreement that
would terminate the Trust’s or Mr. Jonas’s obligation to vote in favor of the Merger (on the terms and subject to the
conditions in the Verizon Merger Agreement) or (v) February 12, 2018. We are not a party to the Voting Agreement. At the special
meeting of our stockholders on August 2, 2017, Mr. Jonas voted his shares in the Company in favor of the Merger.
The foregoing summary of the Voting Agreement and the transactions
contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the
form of Voting Agreement, which is attached as Exhibit A to the Verizon Merger Agreement, which was attached as Exhibit 2.1 to
the Form 8-K filed by us with the SEC on May 11, 2017 and is incorporated herein by reference.
The
Company has incurred costs totaling approximately $60,000 related to the Verizon Merger Agreement in Fiscal 2018. These costs
were included in selling, general and administrative expenses.
If
the Merger is consummated, the Company estimates that it will incur various fees and expenses, which will be paid by Verizon.
These fees and expenses include but are not limited to the following:
|
1.
|
Payment to the FCC of 20% of the Proceeds (as defined in the FCC Consent Decree) (see Note 14 –
Commitments and Contingencies
-
Regulatory Enforcement
)
|
|
|
|
|
2.
|
Financial advisor and legal fees - $63.9 million
|
|
|
|
|
3.
|
Balance owed to PTPMS Communications, LLC (“PTPMS”) (see Note 14 –
Commitments and Contingencies
-
PTPMS
)
|
|
|
|
|
4.
|
Balance owed to Former Chief Executive Officer of Straight Path Spectrum (the “Former SPSI CEO”) - $3.0 million (see Note 14 –
Commitments and Contingencies
-
Other Commitments and Contingencies
)
|
|
|
|
|
5.
|
The following severance
and retention payments to certain members of management:
|
In connection with its entry into the AT&T
Merger Agreement and then the Verizon Merger Agreement, the Company approved severance arrangements for Davidi Jonas (“Jonas”),
the Company’s Chief Executive Officer and President, Jonathan Rand (“Rand”), the Company’s Chief Financial
Officer and treasurer, Zhouyue (Jerry) Pi (“Pi”), the Company’s Chief Technology Officer, and David Breau (“Breau”),
the Company’s General Counsel (each an “Executive”, and collectively, the “Executives”). The severance
arrangements provide that if, within two years following the consummation of the Merger, the Company terminates an Executive’s
employment without “Cause” or an Executive resigns for “Good Reason” (each such term to be defined in
the severance agreements to be entered into prior to the consummation of the Merger), the Executive shall be entitled to receive
a lump sum payment equal to one and one-half times (1.5x) (two and one-half times (2.5x) for Jonas) the sum of the Executive’s
annual base salary and target bonus, subject to the execution of a release of claims.
The Company also approved retention bonus
payments for Jonas, Rand and Breau in the amounts of $1,800,000, $1,000,000 and $1,000,000, respectively. Subject to continued
employment through the consummation of the Merger, such individuals shall be entitled to receive their retention bonus payment
in a lump sum within thirty days following the consummation of the Merger.
Note
3—Settlement of Claims with IDT and Sale of Straight Path IP Group
On
April 9, 2017, the Company and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of potential
indemnification claims asserted by each of the Company and IDT in connection with liabilities that may exist or arise relating
to the subject matter of the investigation by (including but not limited to fines, fees or penalties imposed by) the FCC (the
“Mutual Release”). On October 24, 2017, the Company, IDT and other parties entered into a Settlement Agreement and
Release (the “IDT Settlement Agreement”) and related agreements, and consummated the settlement.
Pursuant
to the IDT Settlement Agreement, in exchange for the Mutual Release, the parties effected the following actions:
|
1.
|
IDT
paid the Company $10 million and the right to receive 22% of the net proceeds of the Straight Path IP Group patent portfolio (as
described in more detail below) in settlement of various claims. Such payment was deemed to be a tax-free contribution to capital
by IDT effective prior to the Spinoff;
|
|
|
|
|
2.
|
IDT
paid the Company $6 million for the Company’s ownership interest in Straight Path IP Group; and
|
|
|
|
|
3.
|
The Company created a trust (the beneficial interests in which will be owned by Class B common stockholders
of the Company) that will be entitled to receive 22 percent of the net proceeds, if any, received by Straight Path IP Group from
any license, and certain transfers or assignments of any of the patent rights held, or any settlement, award or judgment involving
any of the patent rights (including any net proceeds received after the closing of the Merger). The Company agreed to contribute
$4,500,000 to the trust. Such contribution has been classified as a dividend. As of October 31, 2017 and to the date of the filing
of this report, the Company contributed $750,000. The trust agreement provides that the Company will pay the remaining $3.75 million
at the earlier of (i) the closing date under the Verizon Merger Agreement or (ii) August 11, 2018.
|
As
discussed above, we sold our interest in Straight Path IP Group and the Company recognized a gain of $2,276,000 net of noncontrolling
interests. Such gain was classified as an increase to additional paid-in capital due to the voting interests Howard Jonas has
in each entity.
The Company incurred costs totaling approximately
$1,029,000 related to the negotiation and execution of the IDT Settlement Agreement. These costs were included in calculating
the gain recognized by the Company.
As
a result of the sale, the operations of Straight Path IP Group are classified as discontinued operations in the consolidated statements
of operations. The statement of operations for Fiscal 2017 have been restated to conform to the current presentation. The discontinued
operations of Straight Path IP Group for Fiscal 2018 and Fiscal 2017 are summarized below:
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,294
|
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,294
|
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,294
|
)
|
|
|
(875
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense including amortization of debt discounts
|
|
|
(195
|
)
|
|
|
-
|
|
Interest income
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(195
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Loss provision for income taxes
|
|
|
(1,489
|
)
|
|
|
(873
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,489
|
)
|
|
|
(874
|
)
|
|
|
|
|
|
|
|
|
|
Loss attributable to noncontrolling interests
|
|
|
229
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations attributable to Straight Path Communications Inc.
|
|
$
|
(1,260
|
)
|
|
$
|
(750
|
)
|
Note
4—Summary of Significant Accounting Policies and Recent Pronouncements
The
Company’s significant accounting policies are described in Note 1 to Consolidated Financial Statements in the
Annual Report on Form 10-K for the year ended July 31, 2017.
In
May 2014, ASU No. 2014-09, “
Revenue from Contracts with Customers
” (“ASU 2014-09”) was issued.
The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when
promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects
to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to
obtain or fulfill a contract, such as sales commissions, be capitalized as an asset and amortized as revenue is recognized. Adoption
of the new rules could affect the timing of both revenue recognition and the incurrence of contract costs for certain transactions.
The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement
of prior years and one requiring prospective application of the new standard with disclosure of results under old standards.
ASU
2014-09 was scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods
within that reporting period. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14, “R
evenue
from Contracts with Customers (Topic 606): Deferral of Effective Date
” (“ASU 2015-14”) which defers the
effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods after December 15, 2017 including
interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that reporting period. The Company will adopt the new standard
effective August 1, 2018. The Company is currently evaluating the impact of adoption and the implementation approach to be used
but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements as of the
date of the filing of this report.
Effective
February 1, 2017, the Company adopted ASU 2015-03, “
Interest – Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs
” (“ASU 2015-03”) as part of its initiative to reduce complexity
in accounting standards (the Simplification Initiative). The Board received feedback that having different balance sheet presentation
requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs
as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards, which
requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets.
Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts
Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts
and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6
further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation
of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt
discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update.
The adoption of ASU 2015-03 did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “
Financial
Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
”
(“ASU 2016-01”). The amendments require all equity investments to be measured at fair value with changes in the fair
value recognized through net income (other than those accounted for under the equity method of accounting or those that result
in consolidation of the investee). The amendments also require an entity to present separately, in other comprehensive income,
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk
when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
In addition, the amendments eliminate the requirement to disclose the fair value of financial instruments measured at amortized
cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance
sheet for public business entities. This guidance is effective for fiscal years beginning after December 15, 2017 (quarter ending
October 31, 2018 for the Company), including interim periods within those fiscal years. The Company will evaluate the effects
of adopting ASU 2016-01 if and when it is deemed to be applicable.
In
February 2016, the FASB issued ASU 2016-02, “
Leases (Topic 842)
” (“ASU 2016-02”) which supersedes
existing guidance on accounting for leases in “
Leases (Topic 840)
.” The standard requires lessees to recognize
the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the balance sheet a liability
to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the
lease term. The new guidance is effective for annual reporting periods beginning after December 15, 2018 (quarter ending October
31, 2019 for the Company) and interim periods within those fiscal years. The amendments should be applied at the beginning of
the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of
an interim or annual reporting period. The Company is currently evaluating the effects of adopting ASU 2016-02 on its consolidated
financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial
statements as of the date of the filing of this report.
Effective
August 1, 2017, the Company adopted ASU 2016-09, “
Improvements to Employee Share-Based Payment Accounting
”
(“ASU 2016-09”). ASU 2016-09 affects entities that issue share-based payment awards to their employees. ASU 2016-09
is designed to simplify several aspects of accounting for share-based payment award transactions which include the income tax
consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture
rate calculations. The Company will continue to estimate forfeitures at each reporting period, rather than electing an accounting
policy change to record the impact of such forfeitures as they occur. The adoption of ASU 2016-09 did not have a significant impact
on the Company’s consolidated financial statements.
In
April 2016, the FASB issued ASU 2016-10, “
Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing
” (“ASU 2016-10”) related to identifying performance obligations and licensing.
ASU 2016-10 is meant to clarify the guidance in FASB ASU 2014-09, “
Revenue from Contracts with Customers
.”
Specifically, ASU 2016-10 addresses an entity’s identification of its performance obligations in a contract, as well as
an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that
revenue is recognized over time or at a point in time. The pronouncement has the same effective date as the new revenue standard,
which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The
Company is currently evaluating the impact of ASU 2016-10 on its consolidated financial statements but the adoption is not expected
to have a significant impact on the Company’s consolidated financial statements as of the date of the filing of this report.
In
May 2016, the FASB issued ASU 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements
and Practical Expedients
” (“ASU 2016-12”). The amendments in ASU 2016-12 affect the guidance in ASU 2014-09
by clarifying certain specific aspects of the guidance, including assessment of collectability, treatment of sales taxes and contract
modifications, and providing certain technical corrections. ASU 2016-12 will have the same effective date and transition requirements
as the ASU 2014-09. The Company is currently evaluating the impact of ASU 2016-12 on its consolidated financial statements but
the adoption is not expected to have a significant impact on the Company’s consolidated financial statements as of the date
of the filing of this report.
In
August 2016, the FASB issued ASU 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments
” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and
cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017 (quarter ending October 31, 2018 for the Company). The new standard will require adoption on a retrospective
basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the
earliest date practicable. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial
statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements
as of the date of the filing of this report.
In
May 2017, the FASB issued ASU 2017-09, “
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
,
”
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December
15, 2017 (quarter ending October 31, 2018 for the Company). Early adoption is permitted. The Company is currently evaluating the
effects of adopting ASU 2017-09 on its consolidated financial statements but the adoption is not expected to have a significant
impact as of the filing of this report.
The
Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would
have a material effect on the accompanying consolidated financial statements.
Note
5—Fair Value Measures
At
October 31, 2017 and July 31, 2017, the Company did not have any assets or liabilities measured at fair value on a recurring
basis.
At
October 31, 2017 and July 31, 2017, the carrying amounts of the financial instruments included in cash and cash equivalents,
trade accounts receivable, prepaid expenses and other current assets, trade accounts payable, and accrued expenses approximated
fair value due to their short-term nature. The carrying value of the loans payable approximated its fair value as of October 31,
2017 and July 31, 2017 as the interest rate approximated market.
Note 6—Inventory
Inventory,
consisting solely of finished goods, is valued at the lower of cost or market.
Note
7—Loan Payable
On
February 6, 2017, the Company entered into a loan agreement (“Original Loan Agreement”) with a syndicate of investors
(the “Lenders”) pursuant to which the Company borrowed $17.5 million (the “Loan Amount”). The loan was
scheduled to mature on December 29, 2017. Interest accrued at a rate of 5% per annum until June 30, 2017 and then increased to
a rate of 10% per annum. Other significant terms of the Original Loan Agreement include the following:
|
1.
|
$15
million of the Loan Amount was required to be used to pay the Initial Civil Penalty provided for in the Consent Decree in accordance
with the payment requirements set forth in the Consent Decree. The remainder of the Loan Amount is being used for general corporate
purposes and working capital needs.
|
|
2.
|
Upon
funding the Loan Amount, the Lenders received warrants to purchase 252,161 shares of the Company’s Class B common stock
with an aggregate exercise price equal to $7.5 million based on an exercise price of $34.70 per share. The exercise price
was based on the weighted average trading price for the Class B common stock for the five trading days preceding the funding
date. The warrants expire at the earlier of December 31, 2018 or a liquidation event (as defined). Warrants to purchase 147,682
shares of Class B common stock were exercised by the holders in the third quarter of Fiscal 2017 (see Note 8 –
Equity
).
|
|
3.
|
From and after June 30, 2017, the Lenders were entitled to
receive additional warrants on a monthly basis with an aggregate value equal to 10% of the then outstanding Loan Amount for the
months of July 2017 and August 2017 and then 7.5% of the then outstanding Loan Amount for the months of August 2017 through December
2017. The exercise price for such warrants was based on the weighted average trading price for the Class B common stock for the
ten trading days preceding the warrant issue date. Under this provision, the Lenders received the following warrants:
a. On
July 3, 2017, the Lenders received warrants to purchase 6,899 shares of the Company’s Class B common stock with
an exercise price of $179.62 per share.
b. On
August 1, 2017, the Lenders received warrants to purchase 6,911 shares of the Company’s Class B common stock with
an exercise price of $179.26 per share.
c. On
September 1, 2017, the Lenders received warrants to purchase 5,188 shares of the Company’s Class B common stock
with an exercise price of $179.18 per share.
d. On
October 2, 2017, the Lenders received warrants to purchase 5,152 shares of the Company’s Class B common stock with
an exercise price of $180.48 per share.
e. On
November 1, 2017, the Lenders received warrants to purchase 1,610 shares of the Company’s Class B common stock with
an exercise price of $181.29 per share.
f. On
December 1, 2017, the Lenders received warrants to purchase 1,605 shares of the Company’s Class B common stock with
an exercise price of $182.02 per share.
|
|
4.
|
If the warrants are held by a Lender at the time of exercise, the exercise price will be paid by the reduction of the outstanding Loan Amount to the extent of such outstanding amounts. As of October 31, 2017, the Loan Amount was reduced by $5,125,000 as the result of the exercise of 147,682 warrants received by the Lenders upon making the loan (see Note 8 –
Equity
).
|
|
5.
|
The
Original Loan Agreement is secured by a first priority security interest in primarily all of the assets of the Company.
|
On
October 22, 2017, the Company entered into an omnibus amendment and waiver agreement (“Amended Loan Agreement”) with
the Lenders. Significant terms of the Amended Loan Agreement include the following:
|
1.
|
The
maturity date of the loan was changed to the earlier of (i) March 31, 2018 or (ii) the consummation of the Merger.
|
|
2.
|
The Company paid the Lenders $8.5 million of the outstanding Loan Amount and a 1% prepayment premium of $85,000.
|
|
3.
|
Each
warrantholder is entitled to elect, solely at the discretion of the warrantholder, to exercise any warrants held by such warrantholder
(i) by cashless exercise in accordance with their terms or (ii) by paying the applicable warrant price per share (in which case
such exercise will not result in any corresponding reduction of the Loan Amount and interest outstanding).
|
|
4.
|
The Company paid the Lenders an amendment fee of $38,754.
|
|
5.
|
The Lenders consented to the sale of Straight Path IP Group by the Company and the release of the security interest related to Straight Path IP Group.
|
|
6.
|
No additional warrants shall be issued after December 1, 2017.
|
The
fair value of the warrants at the date of grants in Fiscal 2018 was estimated using the Black-Scholes option pricing model with
the following assumptions:
Risk-free interest rate
|
|
1.01% - 1.15
|
%
|
Dividend yield
|
|
|
0
|
%
|
Volatility
|
|
|
5
|
%
|
Expected term (in years)
|
|
|
1.25
- 1.42
|
|
Volatility
is based on the estimated future volatility of the Company’s common stock over the terms of the warrants since the Company
entered into the Verizon Merger Agreement; the expected term until exercise represents the weighted-average period of time that
options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise
patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods
corresponding with the expected life of the option. The Company has not paid any dividends since its inception and does not anticipate
paying any dividends for the foreseeable future, so the dividend yield is assumed to be zero.
In
addition, in Fiscal 2017, the Company also incurred cash costs of $80,000 in connection with the loan.
The
fair value of the warrants, the cash loan costs and the amendment fee paid are amortized to interest expense over the terms of
the Loan Agreements. Amortization amounted to $530,000 and $0 for Fiscal 2018 and Fiscal 2017, respectively. Amortization included
in discontinued operations amounted to $119,000 and $0 for Fiscal 2018 and Fiscal 2017, respectively.
Interest expense incurred under the Loan Agreement totaled $306,000
and $0 for Fiscal 2018 and Fiscal 2017, respectively. Interest expense included in discontinued operations amounted to $76,000
and $0 for Fiscal 2018 and Fiscal 2017, respectively.
At October 31, 2017, loans payable were $3,334,000, which is
net of unamortized debt discounts of $541,000. At July 31, 2017, loans payable were $11,274,000, which is net of unamortized debt
discounts of $1,101,000.
Note
8—Equity
Issuances
of Class B Common Stock:
Class
B common stock activity for Fiscal 2018 was as follows:
|
1.
|
The Company issued 1,434 shares upon the exercise of stock options and received proceeds of $8,100.
|
|
|
|
|
2.
|
The Company issued 30,475 shares to various
Lenders upon the exercise of warrants and received proceeds of $1,057,000 (see Note 7 –
Loan Payable
).
|
Class
B common stock activity from November 1, 2017 to the date of the filing of this report was as follows:
|
1.
|
The
Company issued 50 shares upon the exercise of stock options and received proceeds of $283.
|
See
Note 9 –
Stock-Based Compensation
below for a further discussion.
Issuances
of Warrants:
As
discussed in Note 7 –
Loan Payable
, the Company issued warrants as part of the Loan Agreement. The following table
summarizes all warrant activity during Fiscal 2018.
|
|
Warrants
|
|
|
Weighted-
average
Exercise
Price
|
|
|
Weighted-
average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding as of August 1, 2017
|
|
|
111,378
|
|
|
$
|
43.68
|
|
|
|
1.4
|
|
|
$
|
15,118
|
|
Granted
|
|
|
17,251
|
|
|
|
179.60
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30,475
|
)
|
|
|
34.70
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable as of October 31, 2017
|
|
|
98,154
|
|
|
$
|
70.35
|
|
|
|
1.1
|
|
|
$
|
10,911
|
|
The
following table summarizes information about warrants outstanding and exercisable at October 31, 2017:
|
|
Warrants Outstanding and
Exercisable
|
|
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Remaining Life
In Years
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
Exercise prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
$34.70
|
|
|
74,004
|
|
|
|
1.1
|
|
|
$
|
34.70
|
|
|
|
74,004
|
|
$ 179.18 - $180.48
|
|
|
24,150
|
|
|
|
1.1
|
|
|
|
179.61
|
|
|
|
24,150
|
|
|
|
|
98,154
|
|
|
|
1.1
|
|
|
$
|
70.35
|
|
|
|
98,154
|
|
The
total intrinsic value of warrants exercised during Fiscal 2018 was $4,467,330. The aggregate intrinsic value in the table above
represents the total intrinsic value, based on the Company’s closing stock price of $181.51 as of October 31, 2017, which
would have been received by the warrant holders had all warrant holders exercised their warrants as of that date.
For the period from November 1, 2017 to the date of the filing
of this report, the Company issued warrants to purchase 3,215 shares of the Company’s Class B Common Stock (see Note 7 –
Loan Payable
). There were no warrant exercises for the period from November 1, 2017 to the date of the filing of this
report.
Treasury
Stock:
Treasury
stock consists of shares of Class B common stock that were tendered by our employees to satisfy their tax withholding obligations
in connection with the lapsing of restrictions on awards of restricted stock. The cost of the shares tendered was based on the
trading day immediately prior to the vesting date and the proceeds utilized to pay the withholding taxes due upon such vesting
event.
At
both October 31, 2017 and July 31, 2017, there were 39,693 shares of treasury stock at a value of $427,916.
Note
9—Stock-Based Compensation
Stock
Options:
Effective
as of July 31, 2013, the Company adopted the 2013 Stock Option and Incentive Plan (as amended and restated to date, the “2013
Plan”). As of October 31, 2017, there are 64,033 shares of the Company’s Class B common stock available for the grant
of awards under the 2013 Plan.
No
stock options were issued in Fiscal 2018.
Stock-based
compensation is included in selling, general and administrative and, with respect to stock options granted, amounted to approximately
$0 and $78,000 for Fiscal 2018 and Fiscal 2017, respectively. Stock-based compensation with respect to stock options included
in discontinued operations amounted to $0 and $19,000 for Fiscal 2018 and Fiscal 2017, respectively.
Common
Stock:
From
time to time, the Company issues Class B common stock (and options to purchase Class B common stock) to non-employee directors,
officers, other employees, and other service providers.
There
were no issuances of Class B common stock in Fiscal 2018.
Stock-based
compensation is included in selling, general and administrative expense and, with respect to common stock, amounted to approximately
$819,000 and $1,966,000 for Fiscal 2018 and Fiscal 2017, respectively. Stock-based compensation with respect to common stock included
in discontinued operations amounted to $132,000 and $451,000 for Fiscal 2018 and Fiscal 2017, respectively.
As
of October 31, 2017, there were 244,000 restricted shares of Class B common stock that had not vested. As of October 31, 2017,
there was approximately $6,433,000 of total unrecognized compensation cost related to issued but non-vested restricted shares.
The Company expects to recognize the unrecognized compensation cost as follows: Fiscal 2018 - $2,544,000, Fiscal 2019 - $2,705,000,
Fiscal 2020 - $1,121,000 and Fiscal 2021 - $63,000.
Note
10—Loss Per Share
Basic
(loss) earnings per share is computed by dividing net (loss) income attributable to all classes of common stockholders of the
Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted
earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to
include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using
the treasury stock method, unless the effect of such increase would be anti-dilutive.
The
following table sets forth the number of Class B shares of common stock issuable upon the exercise of stock options which were
excluded from the diluted per share calculation even though the exercise price was less than the average market price of the Class
B common shares and non-vested restricted Class B common stock because the effect of including these potential shares was anti-dilutive
due to the net loss incurred during that period:
|
|
Three Months Ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
42
|
|
|
|
3
|
|
Warrants
|
|
|
60
|
|
|
|
—
|
|
Non-vested restricted Class B common stock
|
|
|
269
|
|
|
|
118
|
|
Shares excluded from the calculation of diluted loss per share
|
|
|
371
|
|
|
|
121
|
|
The
following table sets forth the number of stock options to purchase Class B common stock which were excluded from the diluted per
share calculation because the exercise price was greater than the average market price of the Class B common shares:
|
|
Three Months Ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Warrants
|
|
|
5
|
|
|
|
—
|
|
Stock options
|
|
|
—
|
|
|
|
88
|
|
Shares excluded from the calculation of diluted loss per share
|
|
|
5
|
|
|
|
88
|
|
Note
11—Related Party Transactions
Legal
Fees
The Company retained the services of two
law firms to perform legal services. With respect to each of the firms, a non-employee director of the Company is a partner. Legal
fees incurred amounted to approximately $21,000 in Fiscal 2018 and $128,000 in Fiscal 2017. At October 31, 2017 and July 31, 2017,
the accounts payable balances owed to the law firms amounted to approximately $57,000 and $29,000, respectively. Accrued expenses
incurred to the law firms at October 31, 2017 and July 31, 2017 totaled $0 and $900,000, respectively.
IDT
In
connection with the Spin-Off, the Company and IDT entered into a Separation and Distribution Agreement and a Tax Separation Agreement
to complete the separation of the Company’s businesses from IDT, to distribute the Company’s common stock to IDT’s
stockholders and set forth certain understandings related to the Spin-Off. These agreements govern the relationship between the
Company and IDT after the distribution and also provided for the allocation of employee benefits, taxes and other liabilities
and obligations attributable to periods prior to the distribution. These agreements reflect terms between affiliated parties established
without arms-length negotiation. The Company believes that the terms of these agreements equitably reflect the benefits and costs
of the Company’s ongoing relationships with IDT.
Pursuant to the Separation and Distribution Agreement, the Company has agreed to indemnify IDT and IDT
has agreed to indemnify the Company for losses related to the failure of the other to pay, perform or otherwise discharge, any
of the liabilities and obligations set forth in the agreement. The Separation and Distribution Agreement includes, among other
things, that IDT is obligated to reimburse the Company for the payment of any liabilities of the Company arising or related to
the period prior to the Spin-Off. No payments were received in Fiscal 2016, Fiscal 2017 or through October 31, 2017, except as
follows. On October 24, 2017, the Company and IDT entered into the IDT Settlement Agreement, providing for the settlement and mutual
release of certain potential indemnification claims asserted by each of the Company and IDT, and to sell the Company’s interest
in Straight Path IP Group to IDT. For further discussion, please see Note 3 –
Settlement of Claims with IDT and Sale of Straight
Path IP Group
.
At
the Spin-Off, the Company entered into a Transition Services Agreement (“TSA”) with IDT, pursuant to which IDT has
provided certain services, including, but not limited to information and technology, human resources, payroll, tax, accounts payable,
purchasing, treasury, financial systems, investor relations, legal, corporate accounting, internal audit, and facilities for an
agreed period following the Spin-Off. As of January 1, 2015, all of these services are provided by other vendors. The Company
and IDT extended the TSA enabling the Company to seek input from IDT on an ad hoc basis if the Company deemed it necessary. No
services were provided under the TSA in Fiscal 2018 and Fiscal 2017.
Note
12—Income Taxes
The
Company recorded no federal income tax expense for Fiscal 2018 and Fiscal 2017 because the estimated annual effective tax rate
was zero. As of October 31, 2017, the Company continues to provide a valuation allowance against its net deferred tax assets since
the Company believes it is more likely than not that its deferred tax assets will not be fully realized.
The
provision for both Fiscal 2018 and Fiscal 2017 represents state income taxes.
The
federal return of Straight Path for the year ended July 31, 2015 was audited by the Internal Revenue Service
(“IRS”). The IRS made two adjustments which did not lead to any taxes being due or changes to the
financial statements and as such the Company decided not to appeal them. The only change is to reduce our net operating loss
carryforward.
Note
13—Business Segment Information
Prior
to November 1, 2015, the Company had two reportable business segments, Straight Path Spectrum, which holds, leases, and markets
fixed wireless spectrum, and Straight Path IP Group, which holds intellectual property primarily related to communications over
computer networks, and the licensing and other businesses related to this intellectual property. Effective November 1, 2015, a
third segment, referred to as Straight Path Ventures, has been designated. Straight Path Ventures focuses on developing next generation
wireless technology for 39 GHz at the Company’s Gigabit Mobility Lab in Plano, Texas.
The
Company’s reportable segments are distinguished by types of service, customers, and methods used to provide their services.
The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.
The
accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the
performance of its business segments based primarily on income (loss) from operations. There are no significant asymmetrical allocations
to segments.
The
Company allocates all of the corporate general and administrative expenses of Straight Path, Straight Path Spectrum, and Straight
Path Ventures and prior to October 24, 2017, Straight Path IP Group based upon the relative time of management and other corporate
resources expended relative to each business as well as the revenues earned by each division. For all periods through January
31, 2016, these were allocated 80% to Straight Path IP Group and 20% to Straight Path Spectrum. No expenses were allocated to
Straight Path Ventures because the amount of management’s time and other resources dedicated to Straight Path Ventures were
deemed to be immaterial. For the period from February 1, 2016 to October 23, 2017, these expenses were allocated 20% to Straight
Path IP Group and 80% to Straight Path Spectrum, except for the following:
|
1.
|
Expenses related to the Gigabit Mobility Lab were allocated 100% to Straight Path Ventures;
|
|
|
|
|
2.
|
Employment expenses of our Chief Technology Officer were allocated 20% to Straight Path IP Group, 20% to Straight Path Spectrum, and 60% to Straight Path Ventures;
|
|
|
|
|
3.
|
Employment expenses related to one employee were allocated 20% to Straight Path Spectrum and 80% to Straight Path Ventures;
|
|
|
|
|
4.
|
Employment expenses related to several other employees were allocated 100% to Straight Path Spectrum.
|
The
changes in allocations were brought about by the expiration of the licensed patents held by Straight Path IP Group and the increase
in activities of Straight Path Ventures. Straight Path IP Group recognized revenues over the terms of the settlements and license
agreements related to such patents entered into in prior periods. With the expiration of the key patents and the increase in activities
of Straight Path Ventures, the Company determined to modify the allocation, and in light of the then-anticipated level of activity
in Straight Path IP Group’s enforcement activities and Straight Path Ventures’ development activities, the Company
determined that a general 20% allocation to Straight Path IP Group, subject to the specific allocations listed above, represented
the appropriate split in light of all factors.
As
a result of the sale of Straight Path IP Group on October 24, 2017, the Company changed its allocations again as follows:
|
1.
|
Expenses related to the Gigabit Mobility Lab are being allocated 100% to Straight Path Ventures;
|
|
|
|
|
2.
|
Employment expenses of our Chief Technology Officer and one other employee are being allocated 20% to Straight Path Spectrum, and 80% to Straight Path Ventures;
|
|
|
|
|
3.
|
All of the corporate general and administrative expenses of Straight Path are being allocated 100% to Straight Path Spectrum;
|
|
|
|
|
4.
|
Employment expenses related to several other employees are being allocated 100% to Straight Path Spectrum.
|
Operating
results for the continuing business segments of the Company were as follows:
|
|
Straight
|
|
|
Straight
|
|
|
|
|
|
|
Path
|
|
|
Path
|
|
|
|
|
|
|
Spectrum
|
|
|
Ventures
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Three Months Ended October 31, 2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
165
|
|
|
$
|
-
|
|
|
$
|
165
|
|
Loss from operations
|
|
|
(12,739
|
)
|
|
|
(491
|
)
|
|
|
(13,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
159
|
|
|
$
|
-
|
|
|
$
|
159
|
|
Loss from operations
|
|
|
(2,986
|
)
|
|
|
(417
|
)
|
|
|
(3,403
|
)
|
Total
assets for the continuing business segments of the Company were as follows:
|
|
Straight
|
|
|
Straight
|
|
|
|
|
|
|
Path
|
|
|
Path
|
|
|
|
|
|
|
Spectrum
|
|
|
Ventures
|
|
|
Total
|
|
|
|
(in thousands)
|
|
October 31, 2017
|
|
$
|
8,997
|
|
|
$
|
1,100
|
|
|
$
|
10,097
|
|
July 31, 2017
|
|
|
8.740
|
|
|
|
1,100
|
|
|
|
9,840
|
|
None
of the Company’s revenues were generated outside of the United States. The Company did not have any assets outside the United
States.
Note
14—Commitments and Contingencies
Legal
Proceedings
Regulatory
Enforcement
On
January 11, 2017, the Company entered into the Consent Decree with the FCC settling the FCC’s investigation regarding Straight
Path Spectrum’s spectrum licenses on the terms specified therein. Material terms of the Consent Decree include the following:
|
1.
|
The
FCC agreed to terminate its investigation.
|
|
2.
|
Straight
Path Spectrum agreed to surrender 93 of its 828 39 GHz economic area spectrum licenses to the FCC, as well as 103 rectangular
service area licenses that the Company does not believe were material assets of the Company.
|
|
3.
|
Straight
Path Spectrum keeps all of its 28 GHz spectrum licenses.
|
|
4.
|
Straight
Path Spectrum is barred from entering into any new leases of its spectrum.
|
|
5.
|
The
Company agreed to pay the Initial Civil Penalty of $15 million in four installments as follows - $4 million on or before February
11, 2017; $4 million on or before April 11, 2017; $3.5 million on or before July 11, 2017; and $3.5 million on or before October
11, 2017.
|
|
6.
|
The
Company agreed to submit to the FCC an application for approval of a sale of its remaining 39 GHz and 28 GHz spectrum licenses
on or before January 11, 2018 and pay the FCC 20% of the proceeds from such the sale(s).
|
|
7.
|
If
the Company does not submit to the FCC an application for approval of a sale of its remaining spectrum licenses on or before
January 11, 2018, the Company will pay an additional penalty of $85 million or surrender its remaining spectrum licenses.
|
We recorded the Initial Civil Penalty of $15 million in Fiscal
2017. The associated expense was classified as “civil penalty – FCC consent decree” on the consolidated statement
of operations in the third quarter of Fiscal 2017. All of the installments of the Initial Civil Penalty totaling $15 million were
paid.
As discussed in Note 2, we entered into the Verizon Merger Agreement.
If the Merger is consummated, the fee owed per Item 6 above will be paid by Verizon as part of the Merger.
On June 1, 2017, the Company and Verizon submitted applications
to the FCC seeking consent to transfer control of the Company’s spectrum licenses to Verizon. The transfer of control applications
was referenced on an FCC Public Notice on July 21, 2017, and the FCC established a pleading cycle, allowing interested parties
to comment on why the transaction should be approved or denied. Petitions to deny the application were due on August 11, 2017,
oppositions to those petitions due on August 18, 2017 and replies to those oppositions were due on August 25, 2017.
Three parties – the Competitive Carriers Association,
Public Knowledge and New America’s Open Technology Institute, and U.S. Telepacific – filed petitions to deny the transaction,
change its recommendation of the Merger and terminate the Verizon Merger Agreement in connection therewith. The petitioning parties
argued that approval of the transaction would result in excessive spectrum aggregation in local markets, undermine competition
in 5G mobile broadband by precluding others from acquiring 5G spectrum, improperly benefit Straight Path in violation of the FCC
Consent Decree, and terminate existing spectrum leases. In response, the Company and Verizon argued that approval of this transaction
will advance 5G leadership. We and Verizon explained that the transaction will not create any competitive issues, and, once Verizon
acquires the spectrum, it will remain below the FCC’s spectrum threshold for competitive review across the vast majority
of markets. We and Verizon argued that opponents of the transaction cannot use the transaction to challenge the Consent Decree,
review of this transaction must be limited to the transaction, and that the terms of the Consent Decree are final and are the result
of the FCC’s deliberate and sound policy choices. We and Verizon clarified that Verizon will honor our contractual obligations
under existing spectrum leases with third parties. In their replies, the parties opposing the transaction maintained their prior
arguments, and also argued that the FCC should auction the Company’s spectrum licenses instead of approving the transaction
and that the transaction is not in the public interest.
On September 7, 2017, and September 21, 2017, Hammer Fiber Optics (“Hammer”) filed ex parte
letters noting a number of meetings with staff from the FCC’s Wireless Telecommunications Bureau (“WTB”) and
Office of Engineering and Technology, and meetings with Chairman Ajit Pai’s, Commissioner Mignon Clyburn’s, and Commissioner
Brendan Carr’s legal advisors. In the letters, Hammer discussed the relevance of the transaction with respect to the service
it is providing, and also stated that it did not object to Verizon’s acquisition of our LMDS spectrum.
On October 23, 2017, October 24, 2017 and November 9, 2017,
the Competitive Carriers Association filed ex parte letters, noting meetings with staff from the WTB and Chairman Ajit Pai’s
and Commissioner Brendan Carr’s legal advisors, and supplementing its prior filings in the transaction. In the letters, the
Competitive Carriers Association reiterated its prior arguments regarding spectrum aggregation in local markets, 5G mobile broadband
competition, and the Consent Decree.
We
believe that the submission to the FCC by us and Verizon of an application to transfer control of our spectrum licenses to Verizon
satisfies the requirement under the Consent Decree as described in Item 6 above. However, if the Merger is not completed for any
reason, there is no guarantee that the FCC would not seek to require us to pay the $85 million penalty or seek the forfeiture
of the Company’s remaining spectrum licenses. If the penalty is imposed by the FCC, there is no guarantee that we will be
able to obtain sufficient financing to pay the additional $85 million or repay the remaining amount due of the $17.5 million loan
from the Lenders. A failure by the Company to comply with these requirements could lead to a default by the Company under the
Consent Decree, loss of our remaining spectrum licenses, either of which will have a material adverse effect on our financial
condition and results of operations.
Shareholder
Litigation
On
July 5, 2017, JDS1 LLC, a putative Straight Path stockholder, filed a class action and derivative complaint in the Delaware Court
of Chancery captioned
JDS1, LLC v. IDT Corp.
, C.A. No. 2017-0486-SG. The complaint named Straight Path’s board of
directors, Howard Jonas, IDT, and The Patrick Henry Trust (the “Trust”) as defendants. The Company was named as a
nominal defendant. Plaintiff alleged, among other things, that Straight Path’s directors, Howard Jonas, and the Trust breached
their fiduciary duties in connection with the sale of certain of the Company’s IP assets and by resolving a possible claim
for indemnification that the Company held against IDT (the “Settlement”) for inadequate consideration and that IDT
aided and abetted that breach. Plaintiff moved for expedited proceedings. On July 11, 2017, another putative Straight Path stockholder,
the Arbitrage Fund, filed a class action complaint in the same court naming Howard Jonas, IDT, and the Trust as defendants, captioned
The Arbitrage Fund v. Jonas
, C.A. No. 2017-0502-SG. On July 24, 2017, the Court denied Plaintiff JDS1’s motion for
expedited proceedings and consolidated the two cases under the caption
In re Straight Path Communications Inc. Consolidated
Stockholder Litigation
, C.A. No. 2017-0486-SG, with the JDS1 complaint designated as the operative pleading. Plaintiffs subsequently
agreed to voluntarily dismiss defendants K. Chris Todd, William F. Weld and Fred S. Zeidman without prejudice. On August 14, 2017,
defendants Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated complaint. The Company,
named as a nominal defendant, filed a statement in response to the complaint. On August 29, 2017, Plaintiffs filed a consolidated
amended class action and derivative complaint alleging, among other things, that Howard Jonas, the Trust, and Davidi Jonas breached
their fiduciary duties in connection with the settlement and that IDT aided and abetted that breach. On September 13, 2017, defendants
Howard Jonas, IDT, and the Trust, as well as Davidi Jonas, moved to dismiss the consolidated amended complaint. On September 22,
2017, we filed a statement concerning the consolidated amended complaint. On November 2, 2017, the Delaware Court of Chancery
heard oral argument on defendants’ motions to dismiss. On November 20, 2017, the court issued an opinion holding that the
action was not yet ripe for adjudication and staying the action until the Merger closes or is terminated and upon motion of a
party to the action.
On
November 13, 2015, a putative shareholder class action was filed in the federal district court for the District of New Jersey
against Straight Path Communications Inc., and Jonas and Rand (the “individual defendants”). The case is captioned
Zacharia v. Straight Path Communications, Inc. et al.
, No. 2:15-cv-08051-JMV-MF, and is purportedly brought on behalf
of all those who purchased or otherwise acquired the Company’s common stock between October 29, 2013, and November 5, 2015.
The complaint alleges violations of (i) Section 10(b) of the Exchange Act of 1934, as amended (the “Exchange Act”)
and Rule 10b-5 of the Exchange Act against the Company for materially false and misleading statements that were designed to influence
the market relating to the Company’s finances and business prospects; and (ii) Section 20(a) of the Exchange Act against
the individual defendants for wrongful acts by controlling persons. The allegations center on the claim that the Company made
materially false and misleading statements in its public filings and conference calls during the relevant class period concerning
the Company’s spectrum licenses and the prospects for its spectrum business. The complaint seeks certification of a class,
unspecified damages, fees, and costs. The case was reassigned to Judge John Michael Vasquez on March 3, 2016. On April 11, 2016,
the court entered an order appointing Charles Frischer as lead plaintiff and approving lead plaintiff’s selection of Glancy
Prongay & Murray LLP as lead counsel and Schnader Harrison Segal & Lewis LLP as liaison counsel. On June 17, 2016, lead
plaintiff filed his amended class action complaint, which alleges the same claims described above. The defendants filed a joint
motion to dismiss the complaint on August 17, 2016; the plaintiff opposed that motion on September 30, 2016, and the defendants
filed their reply brief in further support of their motion to dismiss on October 31, 2016.
On
March 7, 2017, the Company and lead plaintiff in
Zacharia
action entered into a binding memorandum of understanding to
settle the putative shareholder class action and dismiss the claims that were filed against the defendants in that action. Under
the agreed terms, the Company will provide for a $2.25 million initial payment (the “Initial Payment”) and a $7.2
million additional payment (the “Additional Payment”). The Initial Payment will be paid into an escrow account within
15 days following preliminary court approval of the settlement, and will be fully covered by insurance policies maintained by
the Company. The Additional Payment of $7.2 million will be paid within 60 days after the closing of a transaction to sell the
Company’s spectrum licenses as specified in the Consent Decree with the FCC, or, in the event that the Company pays the
non-transfer penalty specified in the Consent Decree, within 60 days after that payment is paid. In any event, the Additional
Payment will be payable no later than December 31, 2018. The parties executed a formal settlement agreement on October 10,
2017, and a motion for preliminary approval of the settlement agreement is pending before the court.
On
January 29, 2016, a shareholder derivative action captioned
Hofer v. Jonas et al
, No. 2:16-cv-00541-JMV-MF, was filed in
the federal district court for the District of New Jersey against Howard Jonas, Davidi Jonas, Jonathan Rand, and the Company’s
current independent directors William F. Weld, K. Chris Todd, and Fred S. Zeidman. Although the Company is named as a nominal
defendant, the Company’s bylaws generally require the Company to indemnify its current and former directors and officers
who are named as defendants in these types of lawsuits. The allegations are substantially similar to those set forth in the
Zacharia
complaint discussed above. The complaint alleges that the defendants engaged in (i) breach of fiduciary duties owed to the
Company by making misrepresentations and omissions about the Company and failing to correct the Company’s public statements;
(ii) abuse of control of the Company; (iii) gross mismanagement of the Company; and (iv) unjust enrichment. The complaint seeks
unspecified damages, fees, and costs, as well as injunctive relief. On April 26, 2016, the case was reassigned to Judge John Michael
Vasquez. On June 9, 2016, the court entered a stipulation previously agreed to by the parties that, among other things, stays
the case on terms specified therein.
Settlement
of Claims with IDT and Sale of Straight Path IP Group
On
April 9, 2017, the Company and IDT entered into the IDT Term Sheet, providing for the settlement and mutual release of potential
indemnification claims asserted by each of the Company and IDT in connection with liabilities that may exist or arise relating
to the subject matter of the investigation by (including but not limited to fines, fees or penalties imposed by) the FCC (the
“Mutual Release”). For further discussion, please see Note 3 –
Settlement of Claims with IDT and Sale of Straight
Path IP Group
.
PTPMS
On May 29, 2012, the Company acquired certain licenses from PTPMS
under an asset purchase agreement (the “PTPMS agreement”). On October 5, 2017, PTPMS filed a declaratory judgment
action against the Company in the Superior Court of New Jersey, Law Division: Union County captioned
PTPMS Communications,
LLC v. Straight Path Communications Inc.
The action seeks, among other things, a declaration judgment that the Company’s
Merger with Verizon triggers an obligation to pay to PTPMS a profit share from the sale of licenses acquired from PTPMS (and that
if the Company does not pay such profit share, then the transfer to Verizon of the licenses acquired from PTMPS is void), and
a declaration determining the amount of such profit share. The Company and PTPMS are in discussions and any settlement remains
subject to entering into a definitive agreement.
Other
Legal
In
addition to the foregoing, the Company may from time to time be subject to other legal proceedings that arise in the ordinary
course of business.
FCC
License Renewal
Our spectrum licenses in the LMDS and 39 GHz bands have historically
been granted for ten-year terms. On April 20, 2016, and based on our submission of a renewal application and substantial service
demonstration, the FCC granted our application to renew our LMDS BTA license for the LMDS A1 band (27.5 – 28.35 GHz) that
covers parts of the New York City BTA for a ten-year period, until February 1, 2026. We have 15 other LMDS A1 licenses; nine of
these licenses currently have a renewal date of August 10, 2018, and six of these licenses have a renewal date of September 21,
2018. However, following the adoption of the Upper Microwave Flexible Use (“UMFU”) Report and Order, we are only required
to submit an application for renewal at those deadlines; we are not required to submit a substantial service demonstration for
these licenses until the next build-out date specified in the UFMU Report and Order, which is June 1, 2024. That deadline was
confirmed by the FCC in its Order on Reconsideration adopted on November 16, 2017.
Of the 15 BTAs in which we hold LMDS A2 band (29.1 – 29.25
GHz) and A3 band (31.075 – 31.225 GHz) spectrum, nine licenses currently have a renewal deadline of August 10, 2018 and
six of these licenses currently have a renewal deadline of September 21, 2018. Of our 117 LMDS B band (31.0 – 31.075 GHz
and 31.225 – 31.300 GHz) spectrum, five licenses currently have a renewal and substantial service deadline of August 10,
2018 and 112 licenses currently have a renewal and substantial service deadline of September 21, 2018. On August 3, 2017, the
FCC adopted new rules governing the process by which licensees may seek renewal of their authorizations. Pursuant to those new
rules, we believe that incumbent LMDS licensees that have already renewed their authorizations once (as we have) will not be required
to demonstrate substantial service at renewal. Therefore, while we will be required to renew our authorizations for LMDS A2, A3
and B Blocks in 2018, no substantial service demonstration will be required until 2023.
The
UMFU Report and Order substantial service deadline of June 1, 2024 also applies to our 735 39 GHz licenses, which currently have
a renewal deadline of October 18, 2020.
For
further discussion, please see “
Regulatory Enforcement
” above in this Note 14 to the Consolidated Financial
Statements.
Other
Commitments and Contingencies
The
Former SPSI CEO is entitled to receive payments from future revenues generated from the leasing, licensing or sale of rights in
certain of Straight Path Spectrum’s wireless spectrum licenses. Those payments are to be made out of 50% of the covered
revenue and are in a maximum aggregate amount of $3.25 million. The payments arise under the June 2013 settlement of certain claims
and disputes with the Former SPSI CEO and parties related to the Former SPSI CEO.
Approximately $22,000 and $17,000 was incurred to the Former SPSI CEO for this obligation for Fiscal 2018
and Fiscal 2017, respectively.
For
a further discussion, see Note 2 –
Verizon Merger Agreement
above.