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:

$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.

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).

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.

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).

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:

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

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

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).

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

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.

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.