NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business
The
overarching strategy of xG Technology, Inc. (“xG” or the “Company”) is to design, develop and deliver
advanced wireless communications solutions that provide customers in its target markets with enhanced levels of reliability, mobility,
performance and efficiency in their business operations and missions. xG’s business lines include the brands of Integrated
Microwave Technologies LLC (“IMT”) and Vislink Communication Systems (“Vislink” or “VCS”).
There is considerable brand interaction, owing to complementary market focus, compatible product and technology development roadmaps,
and solution integration opportunities.
IMT:
IMT
develops, manufactures and sells microwave communications equipment utilizing COFDM (Coded Orthogonal Frequency Division Multiplexing)
technology. COFDM is a transmission technique that combines encoding technology with OFDM (Orthogonal Frequency Division Multiplexing)
modulation to provide the low latency and high image clarity required for real-time live broadcasting video transmissions. IMT
has extensive experience in ultra-compact COFDM wireless technology, and this has allowed IMT to develop integrated solutions
that deliver reliable video footage captured from both aerial and ground-based sources to fixed and mobile receiver locations.
Vislink:
Vislink
Communications Systems (“Vislink” or ‘‘VCS’’) specializes in the wireless capture, delivery
and management of secure, high-quality, live video from the field to the point of usage. VCS designs and manufactures products
encompassing microwave radio components, satellite communication, cellular and wireless camera systems, and associated amplifier
items. VCS serves two core markets: broadcast and media and law enforcement, public safety and surveillance. In the broadcast
and media market, VCS provides broadcast communication links for the collection of live news and sports and entertainment events.
VCS’ customers in the broadcast and media market include national broadcasters, multi-channel broadcasters, network owners
and station groups, sports and live broadcasters and hosted service providers. In the law enforcement, public safety and surveillance
market, VCS provides secure video communications and mission-critical solutions for law enforcement, defense and homeland security
applications. VCS’ customers in the law enforcement, public safety and surveillance market include metropolitan, regional
and national law enforcement agencies as well as domestic and international defense agencies and organizations.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements
do not include all information or notes required by generally accepted accounting principles for annual financial statements and
should be read in conjunction with the consolidated financial statements as filed on the Company’s Annual Report on Form
10-K for the year ended December 31, 2017, filed with the United States Securities and Exchange Commission (the “SEC”)
on April 2, 2018. In the opinion of management, the unaudited condensed consolidated financial statements included herein
contain all adjustments necessary to present fairly the Company’s consolidated financial position as of September 30, 2018,
the results of its operations and cash flows for the nine months ended September 30, 2018 and 2017. Such adjustments are of a
normal recurring nature. The results of operations for the three and nine months ended September 30, 2018 may not be indicative
of results for the year ending December 31, 2018.
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles
of Consolidation
The
accompanying condensed consolidated financial statements which have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) include the accounts of xG and its wholly-owned subsidiaries,
IMT and Vislink, since the date Vislink was acquired. All intercompany transactions and balances have been eliminated in the consolidation.
Reclassifications
Certain
reclassifications have been made in the unaudited condensed consolidated financial statements for comparative purposes. These
reclassifications have no effect on the results of operations or financial position of the Company (see Note 12).
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s decision-making group is the senior executive management team. The Company and the decision-making group view
the Company’s operations as different product offerings but manage its business as one operating segment. All long-lived
assets of the Company reside in the U.S. and U.K.
Use
of Estimates
Management
makes estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities
at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates and assumptions include reserves and write-downs
related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s
deferred tax assets, valuation of equity and derivative instruments, debt discounts and the valuation of the assets and liabilities
acquired in the acquisition of Vislink.
Inventories
Inventory
is recorded at the lower of cost, on a first-in, first-out basis, or net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
Inventory valuation adjustments are included on the face of the unaudited condensed consolidated statements of operations for
the three and nine months ended September 30, 2018 and 2017.
Revenue
Recognition
The
Company recognizes revenues when persuasive evidence of an arrangement exists, services have been rendered, the price is fixed
and determinable, and collectability is reasonably assured. Revenues from management and consulting, time-and-materials service
contracts, maintenance agreements and other services are recognized as the services are provided or at the time the goods are
shipped, and title has passed.
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based
Compensation
The
Company accounts for stock compensation with persons classified as employees for accounting purposes in accordance with Accounting
Standards Codifications (“ASC”) 718 “Compensation – Stock Compensation”, which recognizes awards at
fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair
value of stock options is determined using the Black-Scholes Option Pricing Model. The fair value of common stock issued for services
is determined based on the Company’s stock price on the date of issuance.
The
Company accounts for stock compensation arrangements with persons classified as non-employees for accounting purposes in accordance
with ASC 505-50 “Stock-Based Transactions with Nonemployees”, which requires that such equity instruments are recorded
at their fair value on the measurement date. The measurement of share-based compensation is subject to periodic adjustment as
the underlying instruments vest. The fair value of stock options is estimated using the Black-Scholes Option Pricing Model and
the compensation charges are amortized over the vesting period.
Convertible
Debt Instruments
The
Company records debt net of debt discounts for beneficial conversion features and warrants, on either a relative fair value or
fair value basis depending on the respective accounting treatment of each instrument. Beneficial conversion features are recorded
pursuant to the Beneficial Conversion (“BCF”) and Debt Topics of the FASB Accounting Standards Codification. The amounts
allocated to warrants and beneficial conversion rights are recorded as debt discounts with corresponding entries to derivative
liability and additional paid-in-capital. Costs paid to third parties (
e.g.
, legal fees, printing costs, placement agent
fees) that are directly related to issuing the debt and that otherwise wouldn’t be incurred, are treated as a direct deduction
of the debt liability. Debt discount and issuance costs are generally amortized and recognized as additional interest expense
in the statement of operations over the life of the debt instrument using the effective interest method.
The
Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components
of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under
certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.
If the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income
or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date
and then that fair value is reclassified to stockholders’ equity.
(Loss)
Earnings Per Share
The
Company reports (loss) earnings per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes
standards for computing and presenting earnings per share. Basic (loss) earnings per share of common stock is calculated by dividing
net (loss) earnings allocable to common stockholders by the weighted-average shares of common stock outstanding during the period,
without consideration of common stock equivalents. Diluted (loss) earnings per share is calculated by adjusting the weighted-average
shares of common stock outstanding for the dilutive effect of common stock equivalents, including stock options and warrants,
outstanding for the period as determined using the treasury stock method. For purposes of the diluted net loss per share calculation,
common stock equivalents are excluded from the calculation because their effect would be anti-dilutive. Therefore, basic and diluted
net loss per share applicable to common stockholders is the same for periods with a net loss.
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
following table illustrates the determination of loss per share for each period presented (in thousands, except per share amounts):
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income – basic and diluted
|
|
$
|
(11,919
|
)
|
|
$
|
1,904
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
16,573
|
|
|
|
11,290
|
|
Dilutive stock options
|
|
|
—
|
|
|
|
—
|
|
Dilutive warrants
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares outstanding - diluted
|
|
|
16,573
|
|
|
|
11,290
|
|
Net (loss) earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.72
|
)
|
|
$
|
0.17
|
|
Dilutive
|
|
$
|
(0.72
|
)
|
|
$
|
0.17
|
|
Anti-dilutive potential common stock equivalents excluded from the calculation of (loss) earnings per share:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
6,092
|
|
|
|
6,271
|
|
Convertible debt
|
|
|
4,000
|
|
|
|
—
|
|
Warrants
|
|
|
11,892
|
|
|
|
8,695
|
|
Fair
Value of Financial Instruments
U.S.
GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are
recognized or unrecognized in the consolidated balance sheet. The fair value of the financial instruments disclosed herein is
not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement.
In
assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates
of market conditions and risks existing at the time. For certain instruments, including accounts receivable and accounts payable,
the Company estimated that the carrying amount approximated fair value because of the short maturities of these instruments. All
debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair
value.
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
U.S.
GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes
the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs
that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent
of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy
is described below:
Level
1 –
|
Quoted
prices in active markets for identical assets or liabilities. there are no fair valued assets or liabilities classified under
Level 1 as of September 30, 2018.
|
|
|
Level
2 –
|
Observable
prices that are based on inputs not quoted on active markets but corroborated by market data. there are no fair valued assets
or liabilities classified under Level 2 as of September 30, 2018.
|
|
|
Level
3 –
|
Unobservable
inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3
inputs (see Note 8).
|
Foreign
Currency and Other Comprehensive (Loss)/Income
The
functional currency of our foreign subsidiary is typically the applicable local currency which is British Pounds. The translation
from the respective foreign currency to United States Dollars (US Dollar) is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for income statement accounts using an average exchange rate during the
period. Gains or losses resulting from such translation are included as a separate component of accumulated other comprehensive
(loss)/income. Gains or losses resulting from foreign currency transactions are included in foreign currency income or loss except
for the effect of exchange rates on long-term inter-company transactions considered to be a long-term investment, which are accumulated
and credited or charged to other comprehensive income.
Transaction
gains and losses are recognized in our results of operations based on the difference between the foreign exchange rates on the
transaction date and on the reporting date. The foreign currency exchange gains and losses are included as a component of general
and administrative expenses, in the accompanying Unaudited Condensed Consolidated Statements of Operations.
The
Company has recognized foreign exchanges gains and losses and changes in accumulated comprehensive income approximately as follows:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net foreign exchange transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
|
|
$
|
126,000
|
|
|
$
|
7,000
|
|
|
$
|
355,000
|
|
|
$
|
245,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases)
|
|
$
|
(23,000
|
)
|
|
$
|
114,000
|
|
|
$
|
(49,000
|
)
|
|
$
|
462,000
|
|
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
exchange rates adopted for the foreign exchange transactions are the rates of exchange as quoted on OANDA, a Canadian-based foreign
exchange company and internet website providing currency conversion, online retail foreign exchange trading, online foreign currency
transfers, and forex information. Translation of amounts from British Pounds into United States dollars was made at the following
exchange rates for the respective periods:
|
●
|
As
of September 30, 2018 – British Pounds $1.3025 to US Dollars $1.00.
|
|
|
|
|
●
|
Average
rate for the nine months ended September 30, 2018 – British Pounds $1.3511 to US Dollars $1.00.
|
Subsequent
Events
The
Company has evaluated subsequent events in accordance with ASC 855, Subsequent Events, through the filing date of this Quarterly
Report, and determined that no events have occurred that have not been disclosed elsewhere in the notes to the condensed consolidated
financial statements (unaudited) that would require adjustments to disclosures in the condensed consolidated financial statements
(unaudited), except as disclosed herein (see Note 13).
Recently
Issued Accounting Standards
In
August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic
820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 removes
certain disclosures, modifies certain disclosures, and added additional disclosures. The standard is effective for fiscal
years beginning after December 15, 2019, including interim periods within that reporting period, with early adoption
permitted. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective
basis. The Company is currently assessing the impact the new guidance will have on its disclosures.
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to
customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). ASU 2018-07 is effective
for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, with early adoption
permitted. The adoption of ASU 2018-07 is not expected to have a material impact on our results of operations, financial position
or liquidity or our related financial statement disclosures.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification,
to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet
and disclosing key information about leasing arrangements. Under these amendments, lessees are required to recognize lease assets
and lease liabilities for leases classified as operating leases under ASC 840. After the issuance of ASC No. 2016-02, the FASB
issued additional amendments related to ASU No. 2016-02: (1) ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient
for Transition to Topic 842; (2) ASU No. 2018-10: Codification Improvements to Topic 842, Leases; and (3) ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements. ASU No. 2016-02 and related amendments are effective for financial statements issued for fiscal
years beginning after December 15, 2018, and early adoption is permitted. The Company’s operating leases include building and
equipment leases. The Company is evaluating our current operating leases and expects that most of these current operating leases
will be impacted by this ASU and related amendments resulting in increases in assets and liabilities in the Company’s consolidated
financial statements. The Company intends to adopt these amendments during the first quarter of fiscal 2019.
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic
606). ASU 2014-09 completes the joint effort by the FASB and IASB to improve financial reporting by creating common revenue recognition
guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). The ASU 2014-09 revenue recognition
model virtually replaces all existing revenue recognition guidance and applies to all companies that enter into contracts with
customers to transfer goods or services. ASU 2014-09 (as updated by ASU 2015-14 in August 2015, ASU No. 2016-08 in March 2016,
ASU No. 10 in April 2016 and ASU No. 12 in May 2016) is effective for public entities for interim and annual reporting periods
beginning after December 15, 2017. Public and nonpublic entities have the choice to apply ASU 2014-09 either retrospectively to
each reporting period presented or by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application
and not adjusting comparative information. Our emerging growth company (“EGC”) status expires at the end of this calendar
year of 2018. Upon the loss of EGC status, an issuer is required to adopt the standard in its next filing. This accounting standard
becomes effective for the Company for reporting periods beginning after December 15, 2018, and interim reporting periods thereafter,
specifically the first quarter of 2019. The Company is still evaluating whether the adoption of ASU 2014-09 will have a material
impact on its consolidated financial statements. Additionally, the Company intends to utilize the modified retrospective adoption
and recognize the cumulative effect of initially applying ASU 2014-09, if significant, as an adjustment to the opening balance
of accumulated deficit at the date of initial application.
Other
recent accounting standards issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or
future consolidated financial statements.
NOTE
2 — LIQUIDITY AND FINANCIAL CONDITION
Under
ASU 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company
has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future
financial obligations as they become due within one year after the date that the financial statements are issued. As required
by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have
not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability
to continue as a going concern in accordance with the requirement of ASC 205-40.
As reflected in the condensed consolidated
financial statements, the Company had $1.2 million in cash on the balance sheet. The Company had working capital and an accumulated deficit of $5.4 million and $231.6 million,
respectively, at September 30, 2018. In addition, the Company had a loss from operations of approximately $12.2 million and
cash used in operating activities of $5.2 million for the nine months ended September 30, 2018.
The Company’s condensed consolidated
financial statements are prepared assuming the Company can continue as a going concern, which contemplates continuity of operations
through realization of assets, and the settling of liabilities in the normal course of business. The Company completed a cost
reduction plan announced in April 2018 that resulted in approximately $8.2 million in annual savings. Savings were realized through
immediate cost reductions affecting the xMax division by eliminating certain personnel costs, associated benefits and reduction
in facilities and other expenses. The Company has also identified an additional $1.3 million in additional savings, primary related
to facilities consolidation and severance. The Company believes it can raise additional working capital through equity or debt
offerings; however, no assurance can be provided that the Company will be successful in such capital raising efforts.
On May 29, 2018, the Company completed
a private placement of $4 million in principal amount of 6% Senior Secured Convertible Debentures and warrants to purchase 3,000,000
shares of the Company’s common stock, $0.00001 par value per share, by executing certain agreements with accredited institutional
investors. The Company received $3,637,000 net of debt issuance costs consisting of legal and placement fees totaling $363,000.
Because of such cost reduction efforts and the Company’s existing working capital, management believes that the Company
has sufficient working capital to continue as a going concern for a period of at least twelve months from the date these financial
statements have been issued.
The
ability to recognize revenue and ultimately cash receipts is contingent upon, but not limited to, acceptable performance of the
delivered equipment and services. If the Company is unable to close on some of its revenue producing opportunities in the near
term, the carrying value of its assets may be materially impacted.
NOTE
3 — ACQUISITION OF VISLINK
Acquisition
of Vislink International Limited
On
February 2, 2017, the Company completed the acquisition of certain assets and liabilities related to the hardware segment of Vislink
International Limited, an England and Wales registered limited company (the ‘‘UK Seller’’), and Vislink
Inc., a Delaware corporation (the ‘‘US Seller’’, and together with the UK Seller, the ‘‘Sellers’’),
pursuant to a Business Purchase Agreement, dated December 16, 2016, as amended on January 16, 2017, by and among the Company,
the Sellers and Vislink PLC, an England and Wales registered limited company, as guarantor. The purchase price paid for the transaction
was an aggregate of $16 million consisting of (i) $6.5 million in cash consideration, and (ii) promissory notes in the aggregate
principal amount of $9.5 million (the ‘‘Notes’’). In connection with the Notes, the Company entered into
a Security Agreement, dated February 2, 2017, with each of the Sellers (the ‘‘Security Agreements’’).
Pursuant to the Security Agreements, as collateral security for the Company’s obligations under the Notes, the Company
granted the Sellers a security interest in certain assets purchased from the Sellers in connection with the transaction. The
Notes were originally due to mature on March 20, 2017 (the ‘‘Maturity Date’’). Interest on the Notes was
payable in cash on the Maturity Date at a rate per annum equal to LIBOR plus 1.9%.
The
fair value of the purchase consideration issued to the sellers of Vislink was allocated to the net assets acquired. The Company
accounted for the Vislink acquisition as the purchase of a business under U.S. GAAP under the acquisition method of accounting,
and the assets and liabilities acquired were recorded as of the acquisition date at their respective fair values and consolidated
with those of the Company. The fair value of the net assets acquired was approximately $26.9 million. The excess of the aggregate
fair value of the net tangible assets has been treated as a gain on bargain purchase in accordance with ASC 805. The purchase
price allocation was based, in part, on management’s knowledge of Vislink’s business and the results of a third-party
appraisal commissioned by management.
The
Company utilized the services of an independent appraisal company to assist it in assessing the fair value of the assets and liabilities
acquired. This assessment included an evaluation of the fair value of inventory, fixed assets and the fair value of the intangible
assets acquired based upon the expected cash flows from the assets acquired. Additionally, the Company incorporated the carrying
value of the remaining working capital as Vislink’s management represented that the carrying value of these assets and liabilities
served as a reasonable proxy for fair value. The valuation process included discussions with management regarding the history
and business operations of Vislink, a study of the economic and industry conditions in which Vislink competes and an analysis
of the historical and projected financial statements and other records and documents.
When
it became apparent there was potential for a bargain purchase gain, management reviewed the Vislink assets and liabilities acquired
and the assumptions utilized in estimating their fair values. The Company determined that provisional amounts, previously recognized,
required adjustments to reflect new information obtained. According to ASC 805-10-25-15, the Company has a period of time, referred
to as the measurement period, to finalize the accounting for a business combination. Upon additional review of identifying and
valuing all assets and liabilities of the business, the Company concluded that recording a bargain purchase gain with respect
to Vislink was appropriate and required under U.S. GAAP.
The
Company then undertook a review to determine what factors might contribute to a bargain purchase and if it was reasonable for
a bargain purchase to occur. Factors that contributed to the bargain purchase price were:
|
●
|
The
Vislink acquisition was completed with motivated Sellers who had a public strategy to concentrate on growing their software
business as opposed to their technology and hardware businesses. As a strategic decision, the Sellers intended to sell off
the assets of the hardware business.
|
|
|
|
|
●
|
The
announcement of the U.K. leaving the European Union led to a decline in the pound, which led to pressure by Vislink’s
creditors to raise funds. The owners of Vislink were motivated to complete a transaction in order to use the proceeds to reduce
the line of credit they owed to the bank.
|
NOTE
3 — ACQUISITION OF VISLINK (continued)
|
●
|
The
industry in 2015 and 2016 experienced a downturn as decreased spending combined with economic uncertainty caused corporations
to delay wireless and broadcast infrastructure upgrades. The Sellers believed these trends would continue. According to IBISWorld,
industry revenue is expected to fall at an annualized rate of 0.6% over the next five years reflecting further deterioration
in the industry. As a result, the Sellers decided to sell the business.
|
|
|
|
|
●
|
Prior
to the U.K. leaving the European Union, Vislink was under contract to be sold for a much higher price. The Company took advantage
of the economic and industry downturn to negotiate a favorable price which was less than the value of the assets acquired
for a total purchase consideration of $16 million.
|
Based
upon these factors, the Company concluded that the occurrence of a bargain purchase was reasonable.
Purchase Consideration
|
|
|
|
|
|
|
|
|
|
Amount of consideration:
|
|
$
|
16,000,000
|
|
|
|
|
|
|
Tangible assets acquired and liabilities assumed at fair value
|
|
|
|
|
Accounts receivable
|
|
$
|
7,129,000
|
|
Inventories
|
|
|
15,232,000
|
|
Property and equipment
|
|
|
3,868,000
|
|
Prepaid expenses
|
|
|
944,000
|
|
Accounts payable
|
|
|
(2,294,000
|
)
|
Customer deposits
|
|
|
(1,137,000
|
)
|
Accrued expenses
|
|
|
(451,000
|
)
|
Net tangible assets acquired
|
|
$
|
23,291,000
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
|
|
Trade names and technology
|
|
$
|
1,100,000
|
|
Customer relationships
|
|
|
2,520,000
|
|
Total Identifiable Intangible Assets
|
|
$
|
3,620,000
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
26,911,000
|
|
Consideration
|
|
|
16,000,000
|
|
Gain on bargain purchase
|
|
$
|
10,911,000
|
|
Since
the closing of the transaction, the Company assumed $4.6 million of additional Vislink liabilities, thus reducing the principal
amount due to the Sellers by $4.9 million. On March 17, 2017, the Company came to an agreement with the Sellers, pursuant to which
the Company paid $2 million in cash and the Sellers extinguished the remaining $2.9 million of principal owed under the Notes
and the Company recorded a gain on debt extinguishment in its Consolidated Statements of Operations. During the fourth quarter
of 2017, the Company finalized its purchase price allocation analysis in accordance with ASC 805. As such, the Company’s
final reported gain on bargain purchase was determined to be $10.9 million reduced from its previously reported gain on bargain
purchase of $15.5 million. Such adjustments were made due to the Company completing its analysis of the net realizable value of
certain of the tangible assets acquired.
The
estimated useful life remaining on the property and equipment acquired is 1 to 11 years and on the intangible assets is 3 to 10
years.
The
following presents the unaudited pro-forma combined results of operations of xG and Vislink as if the entities were combined on
January 1, 2017.
|
|
For the Nine
Months
Ended
September 30, 2017
|
|
|
|
|
|
Revenues, net
|
|
$
|
34,973
|
|
Net loss
|
|
$
|
(18,118
|
)
|
Net loss per share
|
|
$
|
(1.60
|
)
|
Weighted average number of shares outstanding
|
|
|
11,290
|
|
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisitions been completed as of January 1,
2017 or to project potential operating results as of any future date or for any future periods.
NOTE
4 — INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
|
Software
Development
Costs
|
|
|
Patents
and Licenses
|
|
|
Trade
Names and
Technology
|
|
|
Customer
Relationships
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Costs
|
|
|
Amortization
|
|
|
Costs
|
|
|
Amortization
|
|
|
Costs
|
|
|
Amortization
|
|
|
Costs
|
|
|
Amortization
|
|
|
Net
|
|
Balance as of December 31, 2017
|
|
$
|
18,647,000
|
|
|
$
|
(18,211,000
|
)
|
|
$
|
12,378,000
|
|
|
$
|
(9,171,000
|
)
|
|
$
|
1,450,000
|
|
|
$
|
(243,000
|
)
|
|
$
|
2,880,000
|
|
|
$
|
(836,000
|
)
|
|
$
|
6,894,000
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairments
|
|
|
-
|
|
|
|
(168,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(168,000
|
)
|
Amortization
|
|
|
-
|
|
|
|
(268,000
|
)
|
|
|
-
|
|
|
|
(498,000
|
)
|
|
|
-
|
|
|
|
(168,000
|
)
|
|
|
-
|
|
|
|
(656,000
|
)
|
|
|
(1,590,000
|
)
|
Balance as of September 30, 2018
|
|
$
|
18,647,000
|
|
|
$
|
(18,647,000
|
)
|
|
$
|
12,378,000
|
|
|
$
|
(9,669,000
|
)
|
|
$
|
1,450,000
|
|
|
$
|
(411,000
|
)
|
|
$
|
2,880,000
|
|
|
$
|
(1,492,000
|
)
|
|
$
|
5,136,000
|
|
Amortization
of intangible assets amounted to $0.5 million and $1.6 million for the three and nine months ended September 30, 2018, respectively,
and $0.6 million and $1.9 million for the three and nine months ended September 30, 2017, respectively.
Software
Development Costs:
At
September 30, 2018 and December 31, 2017, the Company had net capitalized software costs of $0.0 million and $0.4 million, respectively.
During the nine months ended September 30, 2018 and 2017, the Company recognized amortization of software development costs of
$0.3 million and $0.7 million, respectively. During the three months ended September 30, 2018 and 2017, the Company recognized
amortization of software development costs of $0.0 million and $0.2 million, respectively.
The
Company’s software development costs subject to amortization are amortized using the straight-line method over their estimated
useful lives of five years. The Company evaluates the recoverability of software development costs periodically by considering
events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. The Company
considered potential impairment indicators of xMax software development costs at June 30, 2018 and recorded $0.2 million of impairment
due to the winding down of the xMax division during the second quarter of 2018.
Patents
and Licenses:
At
September 30, 2018 and December 31, 2017, the Company had net capitalized costs of patents and licenses of $2.7 million and $3.2
million, respectively. The Company amortizes patents and licenses that have been filed over their useful lives which range between
18.5 to 20 years. The costs of provisional patents and pending applications is not amortized until the patent is filed and is
reviewed each reporting period to determine if it is likely that the patent will be successfully filed. The Company recognized
$0.5 million of amortization expense related to patents and licenses for the nine months ended September 30, 2018 and 2017,
and $0.2 million for the three months ended September 30, 2018 and 2017.
Other
Intangible Assets
The
Company’s remaining intangible assets include the trade names, technology and customer lists acquired in its acquisition
of IMT and Vislink. The Company amortizes trade names, technology and customer relationships over their useful lives which range
between 3 to 15 years.
Estimated
amortization expense for total intangible assets for the succeeding five years is as follows:
Balance
2018
|
|
$
|
441,000
|
|
2019
|
|
|
1,763,000
|
|
2020
|
|
|
993,000
|
|
2021
|
|
|
818,000
|
|
2022
|
|
|
574,000
|
|
Thereafter
|
|
|
547,000
|
|
|
|
$
|
5,136,000
|
|
The
Company’s intangible assets acquired in 2016 and 2017 will be amortized over a weighted average remaining life of approximately
2.60 years.
NOTE
5 — CONVERTIBLE NOTES PAYABLE
Treco
On
October 6, 2011, the Company entered into a convertible promissory note (the “$2 Million Convertible Note”) in favor
of Treco International, S.A. (“Treco”), as part of the settlement compensation to Treco for terminating an infrastructure
agreement. The $2 Million Convertible Note is payable on its maturity date, October 6, 2018 and is convertible, at Treco’s
option, into shares of the Company’s common stock at a price of $42,000 per share. The Company anticipates this note
to be converted according to the original conversion terms. Interest at the rate of 9% per year is payable semi-annually in
cash or shares of the Company’s common stock, at the Company’s option. The accrued interest at September 30, 2018
was $87,000. On May 24, 2018, the Company issued 89,109 shares of common stock as the semi-annual payment of interest of $90,000.
Interest expense was $45,000 and $135,000, respectively, for the three and nine months ended September 30, 2018 and 2017.
May
2018 Financing
On
May 29, 2018, the Company completed a private placement of $4 million in principal of 6% Senior Secured Convertible Debentures
(the “Debentures”) and warrants to purchase 3,000,000 shares of the Company’s common stock, par value $0.00001
per share, by executing certain agreements with accredited institutional investors. The Company received $3,636,760 net of debt
issuance costs consisting of legal and placement fees totaling $363,240. The Debentures have a maturity date of May 29, 2019,
with a conversion rate of $1.00 per share (which was subsequently amended, see Note 13). If held beyond maturity, the conversion
rate shall equal the lesser of (i) the then conversion price and (ii) 85% of the Volume Weighted Average Price (“VWAP”)
for the trading day immediately prior to the applicable conversion date. The Company shall pay interest to the holders on the
aggregate and unconverted and outstanding principal amount on January 1, April 1, July 1 and October 1, with the remaining principal
balance due at maturity.
The
warrants have a maturity date of May 29, 2023 with an exercise price of $1.00 per share. The warrants meet the definition of a
derivative as noted in ASC 815-10-15-83 and ASC 815-10-15-88. The Company allocated the proceeds from the issuance of this note
and the warrants based on the fair value for each item. Consequently, the Company recorded a value of $1,788,171 on the warrants
and these associated costs are required to be accounted for as liabilities and were immediately expensed as interest. Furthermore,
in September 2018, 200,000 warrants were released to various individuals involved in the financing as incentive fees incurred
carrying identical dates and terms. The Company recognized an additional value of $116,400 on these warrants, recording them as
a debt discount, increasing derivative liabilities, and immediately expensing as interest. The warrants were valued using the
binomial model style simulation. The assumptions used in the binomial model style simulation at the date the funds were received
are as follows: (1) dividend yield of 0%; (2) expected volatility of 163.50%; (3) risk-free interest rate of 0.27%; and (4) expected
life of 5.00 years. The Company also determined that the convertible promissory notes contained beneficial conversion rights and
calculated the relative fair value and assigned $193,877 to the BCF.
Items
recorded to interest expense, net for the three and nine months period ending September 30, 2018 and 2017 are:
|
|
For
the Three Months Ended
September 30,
|
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Contractual
interest expense
|
|
$
|
61,334
|
|
|
$
|
-
|
|
|
$
|
82,688
|
|
|
$
|
-
|
|
Debt
discount amortization
|
|
|
140,427
|
|
|
|
-
|
|
|
|
189,271
|
|
|
|
-
|
|
Warrant
costs
|
|
|
116,400
|
|
|
|
-
|
|
|
|
1,904,571
|
|
|
|
-
|
|
Total
recorded to interest expense, net
|
|
$
|
318,161
|
|
|
$
|
-
|
|
|
$
|
2,176,530
|
|
|
$
|
-
|
|
The
warrants issued in the private placement were considered to be issued as an incentive to complete the closing of the financing
and therefore, the initial grant date fair value of such warrants were included within interest expense, net on the condensed
consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017. As of September 30, 2018,
the remaining period over which any discount will be amortized is eight months. The Debentures are summarized as follows as of
September 30, 2018:
Principal
amount borrowed
|
|
$
|
4,000,000
|
|
Debt
discount incurred
|
|
|
2,461,698
|
|
Amortization
of debt discount
|
|
|
(2,093,842
|
)
|
Un-amortized
debt discount
|
|
|
367,856
|
|
Ending
Balance – September 30, 2018
|
|
$
|
3,632,144
|
|
NOTE
6 — COMMITMENTS AND CONTINGENCIES
Leases:
The
Company leases office space in Sunrise, Florida pursuant to a lease which runs through May 2019. Future payments under such lease
will amount to $105,000.
The
Company leases warehouse space in Sunrise, Florida pursuant to a lease which runs through January 2019. Future payments under
such lease will amount to $6,000.
The
Company leases warehouse and office space in Hackettstown, New Jersey which runs through April 29, 2020. Future payments under
such lease will amount to $144,000.
The
Company leases office space in Hemel, U.K. which runs through October 2020. Future payments under such lease will amount to approximately
$502,000.
In
connection with the acquisition of Vislink, the Company assumed the lease obligations relating to Vislink office space in the
following locations:
Location
|
|
Lease
End Date
|
|
Approximate
Future
Payments
|
|
Colchester,
U.K.
|
|
March
2025
|
|
$
|
3,153,000
|
|
Billerica,
MA
|
|
May 2021
|
|
$
|
1,176,000
|
|
Anaheim,
CA
|
|
July 2021
|
|
$
|
84,000
|
|
Singapore
|
|
August 2020
|
|
$
|
64,000
|
|
Dubai,
United Arab Emirates
|
|
June 2019
|
|
$
|
17,000
|
|
The
Company’s office, deployment sites and warehouse facilities rent expenses aggregated to approximately $367,000 and $180,000
during the three months ended September 30, 2018 and 2017, respectively, and $1,120,000 and $733,000 during the nine months ended
September 30, 2018 and 2017. The leases will expire on different dates from 2019 through 2025. The Company’s total obligation
of minimum future annual rentals, exclusive of real estate taxes and related costs, is approximately as follows:
Year
Ending December 31,
|
|
|
|
Balance
2018
|
|
$
|
441,000
|
|
2019
|
|
|
1,634,000
|
|
2020
|
|
|
1,284,000
|
|
2021
|
|
|
598,000
|
|
2022
|
|
|
398,000
|
|
Thereafter
|
|
|
896,000
|
|
|
|
$
|
5,251,000
|
|
NOTE
6 — COMMITMENTS AND CONTINGENCIES (continued)
Legal:
The
Company is subject, from time to time, to claims by third parties under various legal theories. The defense of such claims, or
any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial
condition and cash flows. For the nine months ended September 30, 2018 the Company did not have any material legal actions pending.
Pension:
The
Company at its discretion may make matching contributions to the 401(k) plan its employees participate in. For the nine months
ended September 30, 2018 and 2017, the Company made matching contributions of $67,000 and $0, respectively.
The
Company currently operates a Group Personal Pension Plan in its U.K. subsidiary and funds are invested with Royal London. U.K.
employees are entitled to join the plan to which the Company contributes varying amounts subject to status. In addition, the Company
operates a stakeholder pension scheme in the U.K. For the nine months ended September 30, 2018 and 2017, the Company made matching
contributions of $165,000 and $113,000, respectively.
NOTE
7 — STOCKHOLDERS’ EQUITY
Common
Stock Issuances
During
the nine months ended September 30, 2018, the Company:
|
●
|
I
ssued
1,890,535 shares of its common stock for employees, directors, consultants and other professionals for a total value of $1,708,000.
The value of the common stock issued was based on the fair value of the stock at the time of issuance.
|
|
|
|
|
●
|
R
ecognized
$3,114,000 of compensation costs associated with outstanding stock options in general and administrative expenses with a corresponding
capital contribution.
|
|
|
|
|
●
|
I
ssued
264,981 shares of its common stock in satisfaction of related party obligations valued at $180,000. The value of the common
stock issued was based on the fair value of the stock at the time of issuance.
|
|
|
|
|
●
|
I
ssued
12,232 shares of its common stock in satisfactions of amounts previously deferred for employee/consultant agreements
in the amount of $19,000. The value of the common stock issued was based on the fair value of the stock at the time of
issuance.
|
|
|
|
|
●
|
I
ssued
89,109 shares of its common stock in satisfaction of accrued interested on the Treco convertible promissory
note valued at $90,000. The value of the common stock issued was based on the fair value of the stock at the time of issuance.
|
Beneficial
Conversion Feature
The
Company determined that the foregoing Debentures contained a BCF and calculated a relative fair value of $194,000 assigned to
the BCF. During the nine months ended September 30, 2018 and 2017, $66,000 and $0, respectively, were amortized to interest expense
using the effective interest method with the remaining amortization period being eight months.
NOTE
7 — STOCKHOLDERS’ EQUITY (continued)
Warrants
and Options
Effective,
April 30, 2018, the Board of Directors by unanimous written consent, approve of the immediate vesting of all remaining options
for employees who were terminated on April 30, 2018 and June 25, 2018.
During
the three and nine months ended September 30, 2018, the Company recorded approximately $639,000 and $3,114,000, respectively,
as stock compensation expense from the amortization of stock options issued, of which $0.8 million was the expense for accelerating
the vesting of the remaining options for terminated employees. During the three and nine months ended September 30, 2017, the
Company recorded approximately $795,000 and $1,397,000, respectively, as stock compensation expense from the amortization of stock
options issued in prior periods. As of September 30, 2018, the weighted average remaining contractual life was 8.66 years for
options outstanding and 8.58 years for options exercisable. The intrinsic value of options exercisable at September 30, 2018 and
2017 was $0 and $0.04 per share, respectively. As of September 30, 2018, the remaining expense is approximately $3.98 million
over the remaining amortization period which is 1.72 years. The Company estimates forfeiture and volatility using historical information.
The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues over the equivalent lives
of the options. The expected life of the options represents the estimated period using the simplified method. The Company has
not paid dividends on its common stock and no assumption of dividend payment(s) is made in the model.
A
summary of the warrant and option activity is as follows:
Warrants
|
|
Number
of Warrants
(in Shares)
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
January 1, 2018
|
|
|
8,695,273
|
|
|
$
|
5.50
|
|
Granted
|
|
|
3,200,000
|
|
|
|
1.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
or Expired
|
|
|
(2,900
|
)
|
|
|
8,177.00
|
|
Outstanding,
September 30, 2018
|
|
|
11,892,373
|
|
|
$
|
2.21
|
|
Exercisable,
September 30, 2018
|
|
|
11,892,373
|
|
|
$
|
2.21
|
|
Options
|
|
Number
of Options
(in Shares)
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
January 1, 2018
|
|
|
6,550,500
|
|
|
$
|
1.58
|
|
Granted
|
|
|
220,000
|
|
|
|
0.89
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
or Expired
|
|
|
(678,332
|
)
|
|
|
1.58
|
|
Outstanding,
September 30, 2018
|
|
|
6,092,168
|
|
|
$
|
1.55
|
|
Exercisable,
September 30, 2018
|
|
|
2,600,526
|
|
|
$
|
1.57
|
|
NOTE
8 — DERIVATIVE LIABILITIES
Each
of the warrants issued in connection with the August 2015, May 2016 and, July 2016 underwritten offerings, the August 2017 and
May 2018 debt financings and the February 2016 Series B Preferred Stock offering, have been accounted for as derivative
liabilities as each of the warrants contain a net cash settlement provision whereby, upon certain fundamental events, the holders
could put the warrants back to the Company for cash.
The
following are the key assumptions used in connection with the valuation of the warrants exercisable into common stock on the date
of issuance and September 30, 2018:
Number
of shares underlying the warrants on September 30, 2018
|
|
|
4,948,569
|
|
Fair market
value of stock
|
|
$
|
0.46
|
|
Exercise price
|
|
$
|
1.00
to 13.79
|
|
Volatility
|
|
|
139%
to 154
|
%
|
Risk-free
interest rate
|
|
|
2.85%
to 2.96
|
%
|
Expected
dividend yield
|
|
|
—
|
|
Warrant
life (years)
|
|
|
0.1
to 4.7
|
|
Level
3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the
fair value of the liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s
accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures.
The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are
the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.
Level
3 Valuation Techniques:
Level
3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that
the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within
Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments. In accordance
with ASC Topic 480,
Distinguishing Liabilities from Equity
, the fair value of these warrants is classified as a liability
on the Company’s Condensed Consolidated Balance Sheets because, according to the terms of the warrants, a fundamental transaction
could give rise to an obligation of the Company to pay cash to its warrant holders. Such instruments do not have fixed settlement
provisions and have also been recorded as derivative liabilities. Corresponding changes in the fair value of the derivative liabilities
are recognized in earnings on the Company’s Condensed Consolidated Statements of Operations in each subsequent period.
The
Company’s derivative liabilities are carried at fair value and are classified as Level 3 in the fair value hierarchy due
to the use of significant unobservable inputs. In order to calculate fair value, the Company uses a binomial model style simulation,
as the value of certain features of the warrant derivative liabilities would not be captured by the standard Black-Scholes Option
Pricing Model.
The
following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at
fair value on a recurring basis:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Beginning
balance
|
|
$
|
2,533,000
|
|
|
$
|
1,373,000
|
|
|
$
|
2,399,000
|
|
|
$
|
1,183,000
|
|
Recognition
of warrant liabilities on issuance dates
|
|
|
116,000
|
|
|
|
—
|
|
|
|
1,904,000
|
|
|
|
—
|
|
Change
in fair value of derivative liabilities
|
|
|
(848,000
|
)
|
|
|
(183,000
|
)
|
|
|
(2,502,000
|
)
|
|
|
7,000
|
|
Ending
balance
|
|
$
|
1,801,000
|
|
|
$
|
1,190,000
|
|
|
$
|
1,801,000
|
|
|
$
|
1,190,000
|
|
NOTE
9 — RELATED PARTY TRANSACTIONS
MB
Technology Holdings, LLC
On
April 29, 2014, the Company entered into a management agreement (the “Management Agreement”) with MB Technology Holdings,
LLC (“MBTH”), pursuant to which MBTH agreed to provide certain management and financial services to the Company for
a monthly fee of $25,000. The Management Agreement was effective January 1, 2014. For the three and nine months ended September
30, 2018 and 2017, the Company incurred fees related to the Management Agreement of $75,000 and $225,000, respectively. Roger
Branton, the Company’s Chief Executive Officer, Chief Financial Officer and director, and George Schmitt, the Company’s
director and former Chief Executive Officer and Executive Chairman of the Board, are directors of MBTH, and Richard Mooers, a
director of the Company, is the Chief Executive Officer and a director of MBTH.
The
Company has agreed to award MBTH a 3% cash success fee if MBTH arranges financing, a merger, consolidation or sale by the Company
of substantially all of its assets. The Company incurred approximately $0 for fees associated with financings during the three
and nine months ended September 30, 2018 and 2017, respectively. In addition, during the nine months ended September 30, 2018
and 2017, the Company’s Board of Directors approved an additional $49,000 and $54,000 fee, respectively, to be paid to MBTH
as consideration for additional efforts provided by MBTH in connection with the Company’s financing and acquisition efforts.
The Company recorded these fees in general and administrative expenses on the accompanying Condensed Consolidated Statement of
Operations.
Effective May 1, 2018, MBTH assumed
the liability of the office rent for the Company’s corporate headquarters in Sarasota, Florida.
The
balance outstanding to MBTH at September 30, 2018 and December 31, 2017 was $586,000 and $998,000, respectively, and has been
included in due to related parties on the Condensed Consolidated Balance Sheet.
On
November 29, 2016, the Company and MBTH entered into an acquisition services agreement (the ‘‘M&A Services Agreement’’)
pursuant to which the Company engaged MBTH to provide services in connection with merger and acquisition searches, negotiating
and structuring deal terms and other related services. The M&A Services Agreement incorporates by reference the terms of the
Management Agreement, as well as the Company’s agreement with MBTH on January 12, 2013 to pay MBTH a 3% success fee (the
‘‘3% Success Fee’’) on any financing arranged for the Company, merger or consolidation of the Company
or sale by the Company of substantially all of its assets. The M&A Services Agreement has the following additional terms:
(1)
The Company will pay MBTH an acquisition fee equal to the greater of $250,000 or 8% of the total acquisition price (the ‘‘Acquisition
Fee’’). Where possible, the Company will pay MBTH 50% of the Acquisition Fee at closing of a transaction, and in any
case, not later than thirty (30) days following such closing, 25% of the Acquisition Fee three (3) months following such closing
and 25% of the Acquisition Fee six (6) months following such closing.
(2)
In addition to any other fees, the Company will pay MBTH a due diligence fee of $250,000 only on successfully closed transactions.
This due diligence fee shall be paid to MBTH as warrants to purchase shares of common stock of the Company in an amount equal
to $250,000 divided by the lower of the market price of the common stock on the day of closing of the transaction or the price
of equity offered to finance such acquisition. The exercise price of such warrants will be $0.01.
(3)
The Company and MBTH agreed to waive the 3% Success Fee in connection with the Company’s proposed acquisition of Vislink.
The Company and MBTH also agreed to waive, on a case by case basis, the 3% Success Fee whenever any future Acquisition Fee is
more than $1 million.
(4)
In the event the Company engages an independent, external advisor to value an acquisition and the valuation is higher than the
price negotiated by MBTH on behalf of the Company, then MBTH will receive an additional fee of 5% of such gain (the “Bargain
Purchase Gain”).
NOTE
9 — RELATED PARTY TRANSACTIONS (continued)
(5)
MBTH has the option to convert up to 50% of its fees into shares of common stock of the Company, so long as the receivable remains
outstanding. The conversion price will be the lower of 110% of the price of the common stock on the day of closing of a transaction
or the price of equity securities offered in connection with any acquisition financing. If MBTH converts at least 25% of its fees,
then the Company agrees to register all shares of common stock of the Company held by MBTH.
(6)
If MBTH’s services assist the Company in achieving forward sales of at least $50 million via acquisitions, then the Company
agrees to offer MBTH a three (3) year option to acquire up to 25% of the Company’s shares of common stock outstanding after
such issuance (the “Block Purchase Option”). The price per share of common stock will be 125% of the price of the
Company’s common stock on the day the option is exercised.
On
February 16, 2017, the Board of Directors amended the terms of the Block Purchase Option in the M&A Services Agreement to
allow MBTH the option to acquire 25% of the fully diluted outstanding shares of common stock and warrants of the Company at a
price of $2.10 per share and for a five-year term. There has been no impact on the results from operations since the certainty
of the performance condition is not known.
The
M&A Services Agreement is effective as of November 1, 2016 and will automatically renew annually, unless earlier terminated
by the Company or MBTH upon thirty (30) days’ written notice.
The
Company accrued $1,480,000 in acquisition fees during the nine months ended September 30, 2017 in connection with the acquisition
of Vislink as per the M&A Services Agreement. The $1,480,000 in acquisition fees represents 8% of the acquisition price. The
Company recorded these fees in general and administrative expenses on the accompanying Condensed Consolidated Statement of Operations
and included such fees in due to related parties on the Condensed Consolidated Balance Sheet. The Company did not incur any fees
pursuant to the M&A Services Agreement during the nine months ended September 30, 2018.
The
Company accrued an additional $777,000 in fees as 5% of the Bargain Purchase Gain during the nine months ending September 30,
2017, in connection with the acquisition of Vislink as per the M&A Services Agreement. The $777,000 represents 5% of the Bargain
Purchase Gain of $15,530,000 after an independent, external advisor valued the acquisition. The Company recorded these fees in
general and administrative expenses on the accompanying Condensed Consolidated Statement of Operations and included such fees
in due to related parties on the Condensed Consolidated Balance Sheet. The Company did not incur any fees pursuant to the M&A
Services Agreement during the nine months ended September 30, 2018.
During
the nine months ending September 30, 2017, the Company recorded $265,000 as the Fair Market Value (“FMV”) of the warrant
paid to MBTH in connection with the closing of the Vislink acquisition as per the M&A Services Agreement. The Company recorded
these fees in general and administrative expenses on the accompanying Condensed Consolidated Statement of Operations. The Company
did not incur any fees pursuant to the M&A Services Agreement during the nine months ended September 30, 2018.
From
January 1, 2018 to September 30, 2018, the Company issued 264,981 shares of common stock to MBTH in settlement of amounts due
of $180,000, which was the approximate grant date fair value of the shares.
NOTE
10 — CONCENTRATIONS
During
the three months ended September 30, 2018, the Company recorded sales to one customer of $2,196,000 (26%) in excess of 10% of
the Company’s total consolidated sales. During the nine months ended September 30, 2018, the Company did not record sales
of over 10% from any one customer.
During
the nine months ended September 30, 2017, the Company recorded revenue from individual sales or services rendered of $3,668,000
(11%) in excess of 10% from one customer of the Company’s total consolidated sales. During the three months ended September
30, 2017, the Company did not record revenue from individual sales or services rendered in excess of 10% of the Company’s
total consolidated sales.
At
September 30, 2018, approximately $857,000 (16%) of net accounts receivable was due from one customer.
At
December 31, 2017, approximately 33% of net accounts receivable was due from two customers broken down individually as follows:
$1,634,000 (20%) and $1,073,000 (13%).
During
the three and nine months ended September 30, 2018, approximately 13% of the Company’s inventory purchases were derived
from one vendor and approximately 15% of the Company’s inventory purchases were derived from one vendor.
During
the nine months ended September 30, 2017, approximately 32% of the Company’s inventory purchases were derived from two vendors.
During the three months ended September 30, 2017, approximately 28% of the Company’s inventory purchases were derived from
one vendor.
NOTE
11 – GEOGRAPHICAL INFORMATION
The
Company has one operating segment and the decision-making group is the senior executive management team.
|
|
Nine
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
Three
Months
Ended
|
|
|
Three
Months
Ended
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
12,510,000
|
|
|
$
|
13,084,000
|
|
|
$
|
5,784,000
|
|
|
$
|
5,411,000
|
|
South
America
|
|
|
1,094,000
|
|
|
|
4,274,000
|
|
|
|
56,000
|
|
|
|
1,163,000
|
|
Europe
|
|
|
8,239,000
|
|
|
|
8,972,000
|
|
|
|
795,000
|
|
|
|
1,940,000
|
|
Asia
|
|
|
3,423,000
|
|
|
|
4,010,000
|
|
|
|
1,328,000
|
|
|
|
984,000
|
|
Rest
of World
|
|
|
2,216,000
|
|
|
|
3,371,000
|
|
|
|
362,000
|
|
|
|
660,000
|
|
|
|
$
|
27,482,000
|
|
|
$
|
33,711,000
|
|
|
$
|
8,325,000
|
|
|
$
|
10,158,000
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
Long-Lived
Assets:
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
3,859,000
|
|
|
$
|
6,020,000
|
|
United
Kingdom
|
|
|
3,725,000
|
|
|
|
5,292,000
|
|
|
|
$
|
7,584,000
|
|
|
$
|
11,312,000
|
|
NOTE
12 — PRIOR PERIOD FINANCIAL STATEMENT REVISION
During
the second quarter of 2018, the Company identified an error related to the non-recognition of a derivative liability embedded
in common stock warrants issued to investors as part of the August 2017 equity financing. Whereas part of the proceeds has been
allocated to additional paid-in-capital and not to a derivative liability. Additionally, no gain or loss was recognized as part
of the mark to market valuation of the derivative liability.
The
Company assessed the materiality of these errors on our financial statements for prior periods in accordance with the SEC Staff
Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, codified in Accounting Standards Codification (ASC) 250-10-20, Error in Previously Issued Financial
Statements, and concluded that they were not material to any prior annual or interim periods. The Company has corrected these
errors for all prior periods presented by revising the consolidated financial statements and other financial information included
herein. The Company also corrected the timing of immaterial previously recorded out-of-period adjustments and reflected them in
the revised prior period financial statements, where applicable. Periods not presented herein will be revised, as applicable,
in future filings.
The
effects of the correction of immaterial errors on our Condensed Consolidated Financial Statements were as follows (in thousands):
|
|
September
30, 2017
|
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
|
Previously
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Consolidated
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
16,710
|
|
|
$
|
1,146
|
|
|
$
|
17,856
|
|
Stockholders’
equity before accumulated deficit
|
|
|
235,630
|
|
|
|
(1,321
|
)
|
|
|
234,309
|
|
Accumulated
deficit
|
|
|
(207,570
|
)
|
|
|
175
|
|
|
|
(207,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
44,770
|
|
|
$
|
-
|
|
|
$
|
44,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the three months ended
|
|
$
|
1,729
|
|
|
$
|
175
|
|
|
$
|
1,904
|
|
|
|
December
31, 2017
|
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
|
Previously
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Consolidated
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
19,019
|
|
|
$
|
1,128
|
|
|
$
|
20,147
|
|
Stockholders’
equity before accumulated deficit
|
|
|
237,472
|
|
|
|
(1,321
|
)
|
|
|
236,151
|
|
Accumulated
deficit
|
|
|
(219,845
|
)
|
|
|
193
|
|
|
|
(219,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
36,646
|
|
|
$
|
-
|
|
|
$
|
36,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended
|
|
$
|
(10,546
|
)
|
|
$
|
193
|
|
|
$
|
(10,353
|
)
|
NOTE
12 — PRIOR PERIOD FINANCIAL STATEMENT REVISION (Continued)
|
|
March
31, 2018
|
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
|
Previously
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Consolidated
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
18,564
|
|
|
$
|
688
|
|
|
$
|
19,252
|
|
Stockholders’
equity before accumulated deficit
|
|
|
238,467
|
|
|
|
(1,321
|
)
|
|
|
237,146
|
|
Accumulated
deficit
|
|
|
(222,614
|
)
|
|
|
633
|
|
|
|
(221,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
34,417
|
|
|
$
|
-
|
|
|
$
|
34,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the three months ended
|
|
$
|
(3,769
|
)
|
|
$
|
440
|
|
|
$
|
(3,329
|
)
|
NOTE
13 — SUBSEQUENT EVENTS
May
2018 Financing Amendment
On
October 9, 2018, the Company agreed to modify with the holders representing $3.5 million of the $4 million aggregate
principal amount of Debentures issued on May 29, 2018 (the “Majority Holders”), to amend and restate the
Debentures (the “Amended Debentures” or the “Amendments”). The Amendments principally provide for
:
1.
The ability to make monthly redemption payments in shares of common stock;
2.
The issuance of 302,655 shares of common stock as compensatory shares;
3.
A good-faith effort to modify the monthly redemption provisions before the next monthly redemption date;
4.
An amendment of the conversion price to $0.45; and
5.
In the event that any of the Majority Holders convert its Amended Debenture, the Company shall be given dollar for dollar credit
for any and all conversions effected in any month against any monthly redemption amount and provided, further,
that in the event that a Majority Holder’s conversions in any particular month exceed such Majority Holder’s individual
monthly redemption amount, such overage shall carry over into
the succeeding month to be credited against the monthly redemption amount.
From
October 1, 2018 to November 14, 2018, the Company issued a total of 222,224 shares of common stock for Principal conversions totaling
$100,000.
Treco
Issuance
From
October 1, 2018 to November 14, 2018, the Company issued a total of 187,735 shares of common stock in repayment of $90,000 in
interest relating to its $2 million convertible note payable.
Other
Common Stock Issuances
From
October 1, 2018 to November 14, 2018, the Company issued a total of 192,601 shares of common stock having a fair value to employees,
directors, consultants and general counsel in lieu of paying approximately $85,000 worth of services.
From
October 1, 2018 to November 14, 2018, the Company issued a total of 46,512 shares of common stock to MBTH in settlement of amounts
due of $20,000, which was the grant date fair value of such shares.