The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are
an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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 our 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”),
Vislink Communication Systems (“Vislink” or “VCS”), and xMax. There is considerable brand interaction,
owing to complementary market focus, compatible product and technology development roadmaps, and solution integration opportunities.
In addition to these brands, xG has a dedicated Federal Sector Group focused on providing next-generation spectrum sharing solutions
to national defense, scientific research and other federal organizations.
IMT:
On January 29, 2016, xG completed the acquisition
of the net assets that constituted the business of IMT, pursuant to an Asset Purchase Agreement by and between xG and Skyview Capital,
LLC. The IMT business 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, which has allowed IMT to develop integrated
solutions over the past 20 years that deliver reliable video footage captured from both aerial and ground-based sources to fixed
and mobile receiver locations.
Vislink:
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 Company refers to the hardware segment acquired
as Vislink Communications Systems (“Vislink” or ‘‘VCS’’). Vislink specializes in the wireless
capture, delivery and management of secure, high-quality, live video from the field to the point of usage. Vislink designs and
manufactures products encompassing microwave radio components, satellite communication, cellular and wireless camera systems, and
associated amplifier items. Vislink serves two core markets: broadcast and media and public safety and surveillance. In the broadcast
and media market, Vislink provides broadcast communication links for the collection of live news, sports and entertainment events.
Vislink’s 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 public safety and surveillance market,
Vislink provides secure video communications and mission-critical solutions for law enforcement, defense and homeland security
applications. Vislink’s customers in the 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, 2016, as amended. In the opinion
of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present
fairly the Company's financial position as of September 30, 2017, the results of its operations for the three and nine months ended
September 30, 2017 and 2016, the results of its cash flows for the nine months ended September 30, 2017 and 2016. Such adjustments
are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2017 may not be indicative
of results for the year ending December 31, 2017.
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Principles of Consolidation
The condensed consolidated financial statements
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
include the accounts of xG and its wholly-owned subsidiaries, IMT and Vislink, since the date the acquisition of IMT and Vislink
were completed. All intercompany transactions and balances have been eliminated in the consolidation.
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 and
manage its business as one operating segment. All long-lived assets of the Company reside in the U.S. and U.K.
Stock Options
The Company accounts for stock-based compensation
in accordance with Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation, which
requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and non-employee
directors, including employee stock options. Compensation expense based on the grant date fair value is generally amortized over
the requisite service period of the award on a straight-line basis. The fair value of options is calculated using the Black-Scholes
option pricing model to determine the fair value of stock options on the date of grant based on key assumptions such as stock price,
expected volatility and expected term. The Company’s estimates of these assumptions are primarily based on historical data,
judgment regarding future trends and factors.
Use of Estimates
Management makes estimates and assumptions
that affect the reported amounts of assets and liabilities, 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, and debt discounts and the valuation of the assets and liabilities acquired in the acquisitions
of IMT and Vislink.
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.
Earnings (Loss) Per Share
The Company reports earnings per share in accordance
with ASC Topic 260, “Earnings Per Share,” which establishes standards for computing and presenting earnings per share.
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income available to
common stockholders by the weighted-average number of shares of common stock and dilutive common stock equivalents then outstanding.
For the three and nine month period ended September 30, 2017, potential common stock equivalents consist of 8,695,273 common stock
warrants issuable upon their exercise and 6,270,500 common stock options. Under the treasury stock method, unexercised “in-the-money”
stock options and warrants are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds
are then used to purchase common stock at the average market price during the period and the excess number of options over the
number of shares assumed to be repurchased is included in the total dilutive shares outstanding. There were 6,270,500 “in-the-money”
stock options outstanding during the three and nine month period ended September 30, 2017 but were not exercisable and such shares
were excluded for the three and nine months ended September 30, 2017 since they had an anti-dilutive effect. The common stock warrants
were excluded as they were out of the money and had an anti-dilutive effect. There were no such participating securities outstanding
during the nine month period ended September 30, 2017.
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Fair Value of Financial Instruments
GAAP requires disclosing the fair value of
financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the 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.
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.
|
|
|
Level 2 –
|
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
|
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.
|
Foreign Currency and Other Comprehensive
Income (Loss)
The functional currency of our foreign subsidiaries
is typically the applicable local currency. The translation from the respective foreign currencies to United States Dollars (U.S.
Dollars) is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income
statement accounts using a weighted average exchange rate during the period. Gains or losses resulting from such translation are
included as a separate component of accumulated other comprehensive 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 the Company’s results of operations based on the difference between the foreign exchange rates on the transaction date
and on the reporting date. The Company recognized a net foreign exchange loss of approximately $7,000 and $245,000, respectively,
for the three and nine months ended September 30, 2017. 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. For the three
and nine months ended September 30, 2017, the increase in accumulated comprehensive gain was approximately $114,000 and $462,000,
respectfully.
NOTE 1 — ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The exchange rate adopted for the foreign exchange
transactions are the rates of exchange as quoted on OANDA, a Canadian-based foreign exchange company providing currency conversion,
online retail foreign exchange trading, online foreign currency transfers, forex information and website. Translation of amounts
from British Pounds into U.S. Dollars was made at the following exchange rates for the respective periods:
|
·
|
As of September 30, 2017 – British Pounds $1.3391 to US $1.00, and
|
|
·
|
For the nine months ended September 30, 2017 – British Pounds $1.2578 to US $1.00
|
Subsequent Events
Management has evaluated subsequent events
or transactions occurring through the date the condensed consolidated financial statements were issued and determined that no events
or transactions are required to be disclosed herein, except as disclosed.
Recently Issued Accounting Standards
The Company has considered additional new relevant
accounting standards that are in effect through the date of these financial statements. These pronouncements did not
have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that
there are any other new accounting standards that have been issued that might have a material impact on our financial position
or results of operations.
In September 2017, the FASB issued
Accounting Standard Update (“ASU”) 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with
Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff
Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” (“ASU
2017-13”). ASU 2017-13 amends the early adoption date option for certain companies related to the adoption of
ASU 2014-09 and ASU 2016-02. In preparation for the adoption of the new standard in the fiscal year beginning January
1, 2019, the Company continues to evaluate contract terms and potential impacts of the five-step model specified by the
new guidance. That five-step model includes: (1) determination of whether a contract, that is, an agreement between two or
more parties that creates legally enforceable rights and obligations, exists; (2) identification of the performance
obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the
performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied.
The Company anticipates adopting the standard using the modified retrospective approach at adoption. The Company
is currently evaluating individual customer contracts and will document changes, as needed, to our accounting policies
and controls as we continue to evaluate the impact of the adoption of this standard. The results of our procedures to
date indicate that the adoption of this standard will not have a material impact on our net income; however, the Company
continues to evaluate the impact of the adoption on related financial statement disclosures.
In August 2017, ASU
2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was
issued amending hedge accounting recognition and presentation requirements, including elimination of the requirement to
separately measure and report hedge ineffectiveness, and eases certain documentation and assessment requirements. This
standard has an effective date of January 1, 2019. We do not expect adoption of this standard to have a material impact on
our financial condition, results of operations or cash flows.
NOTE 1 — ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In July 2017, FASB issued
ASU No. 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480),
Derivatives and Hedging (Topic 815) (“ASU No. 2017-11”). ASU No. 2017-11 consists of two parts. The
amendments in Part I of ASU No. 2017-11e change the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded
conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a
down round feature. For freestanding equity classified financial instruments, the amendments require entities that present
earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered.
That effect is treated as a dividend and as a reduction of income available to common stockholders in basic EPS.
Convertible instruments with embedded conversion options that have down round features are now subject to the specialized
guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other
Options), including related EPS guidance (in Topic 260). The amendments in Part II of ASU No.
2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as
pending content in the codification, to a scope exception. Those amendments do not have an accounting effect. For public
business entities, the amendments in Part I of ASU No. 2017-11 are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of
ASU No. 2017-11 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal
years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim
period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. The amendments in Part II of ASU No. 2017-11 do not
require any transition guidance because those amendments do not have an accounting effect. Management is currently assessing
the applicability of ASU No. 2017-11 and has not determined the impact of the adoption, if any, as of September 30,
2017.
On May 16, 2017, the FASB issued ASU 2017-10,
Determining the Customer of the Operation Services — a consensus of the FASB Emerging Issues Task Force
(“ASU
2017-10”). The ASU clarifies the “diversity in practice in how an operating entity determines the customer
of the operation services for transactions within the scope of [ASC] 853, Service Concession Arrangements” by “clarifying
that the grantor is the customer of the operation services in all cases for those arrangements.” The amendments also allow
for a “more consistent application of other aspects of the revenue guidance, which are affected by this customer determination.”
For most entities that have adopted ASC 606, the ASU is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted. We do not expect this standard to have a material impact
on the Company’s reported results of operations or financial position.
On May 10, 2017, the FASB issued ASU 2017-09,
Scope
of Modification Accounting
(“ASU 2017-09”), which amends the scope of modification accounting for share-based payment
arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity
would be required to apply modification accounting under ASC 718. For all entities, ASU 2017-09 is effective for annual reporting
periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is
permitted, including adoption in any interim period. We do not expect this standard to have a material impact on the Company’s
reported results of operations or financial position.
In 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842) (“ASU 2016-02”) and related amendments. ASU 2016-02 provides a comprehensive new lease model that requires
lessees to recognize assets and liabilities for most leases and would change certain aspects of lessor accounting. ASU 2016-02
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption
permitted. A modified retrospective adoption approach is required. The Company is currently assessing the impact that this
standard will have on its financial position, results of operations, cash flows and disclosures.
NOTE 2 — LIQUIDITY AND FINANCIAL CONDITION
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.
Previously, the Company had disclosed management’s conclusion that substantial doubt existed as it related to the
Company’s ability to continue as a going concern. With the acquisition of Vislink, substantial doubt has been
remediated by increased revenues and a reduction of expenses which improved the cash flow from operations for the period
ended September 30, 2017. The Company believes it will have sufficient cash flow to fund operations for the next twelve months.
As reflected in the condensed consolidated
financial statements, the Company had an accumulated deficit at September 30, 2017 of $208 million and a loss from operations of
approximately $16.8 million for the nine months ended September 30, 2017. The Company historically had been funding its business
principally through debt and equity financings and advances from related parties. Cash flows from operating activities for the
nine months ended September 30, 2017 were positively affected as a result of the acquisition of Vislink in February 2017 (See Note
3), along with management’s continual cost containment.
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 its assets may be materially
impacted. The condensed consolidated financial statements do not include any adjustments related to the recovery and classification
of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue
as a going concern.
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’’). 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%. 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 fair value of the purchase consideration
issued to the sellers of Vislink was allocated to the net tangible assets acquired. The Company accounted for the Vislink acquisition
as the purchase of a business under 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 $31.5 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 third party appraisal
commissioned by management was finalized during the second quarter which resulted in the modification of the fair values estimated
of certain assets acquired as compared to the preliminary amounts previously reported.
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 discussion 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.
NOTE 3 — ACQUISITION OF VISLINK (continued)
When it became apparent there was a potential
for a bargain purchase gain, management reviewed the Vislink assets and liabilities acquired and the assumptions utilized in estimating
their fair values. Further revisions to the estimates were not deemed necessary and after 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 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 Brexit 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.
|
|
·
|
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 Brexit, 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
|
|
|
18,234,000
|
|
Property and equipment
|
|
|
3,868,000
|
|
Prepaid expenses
|
|
|
1,209,000
|
|
Accounts payable
|
|
|
(2,079,000
|
)
|
Accrued expenses
|
|
|
(451,000
|
)
|
Net tangible assets acquired
|
|
$
|
27,910,000
|
|
|
|
|
|
|
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
|
|
$
|
31,530,000
|
|
Consideration paid
|
|
|
16,000,000
|
|
Gain on bargain purchase
|
|
$
|
15,530,000
|
|
NOTE 3 — ACQUISITION OF VISLINK (continued)
The following presents the unaudited pro-forma
combined results of operations of xG with Vislink and IMT as if the entities were combined on January 1, 2016.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues, net
|
|
$
|
10,735
|
|
|
$
|
34,973
|
|
|
$
|
38,907
|
|
Net (loss) allocable to common stockholders
|
|
$
|
(7,415
|
)
|
|
$
|
(18,118
|
)
|
|
$
|
(19,752
|
)
|
Net (loss) per share
|
|
$
|
(4.72
|
)
|
|
$
|
(1.60
|
)
|
|
$
|
(24.63
|
)
|
Weighted average number of shares outstanding
|
|
|
1,570
|
|
|
|
11,290
|
|
|
$
|
802
|
|
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, 2016 or to project potential operating results
as of any future date or for any future periods.
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 as the Company paid $2 million in cash and the Sellers extinguished
the remaining $2.9 million principal owed. In the nine months ended September 30, 2017, the Company recorded $1.1 million as a
gain on payable extinguishment. This was the result of receiving a $1.1 million credit for inventory that a customer consumed prior
to the acquisition of Vislink, which the Company is now receiving as a credit against outstanding invoices owed to that customer.
The estimated useful life remaining on the
property and equipment acquired is 1 to 10 years and on the intangible assets is 3 to 10 years.
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, 2016
|
|
$
|
18,647,000
|
|
|
$
|
(17,288,000
|
)
|
|
$
|
12,378,000
|
|
|
$
|
(8,507,000
|
)
|
|
$
|
350,000
|
|
|
$
|
(35,000
|
)
|
|
$
|
360,000
|
|
|
$
|
(33,000
|
)
|
|
$
|
5,872,000
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,100,000
|
|
|
|
-
|
|
|
|
2,520,000
|
|
|
|
-
|
|
|
|
3,620,000
|
|
Impairments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
|
|
|
-
|
|
|
|
(691,000
|
)
|
|
|
-
|
|
|
|
(497,000
|
)
|
|
|
-
|
|
|
|
(152,000
|
)
|
|
|
-
|
|
|
|
(586,000
|
)
|
|
|
(1,926,000
|
)
|
Balance as of September 30, 2017
|
|
$
|
18,647,000
|
|
|
$
|
(17,979,000
|
)
|
|
$
|
12,378,000
|
|
|
$
|
(9,004,000
|
)
|
|
$
|
1,450,000
|
|
|
$
|
(187,000
|
)
|
|
$
|
2,880,000
|
|
|
$
|
(619,000
|
)
|
|
$
|
7,566,000
|
|
Software Development Costs
At September 30, 2017 and December 31, 2016,
the Company has net software capitalized costs of $0.7 million and $1.4 million, respectively. During the nine months ended September
30, 2017 and 2016, the Company recognized amortization of software development costs of $0.7 million and $2.5 million, respectively.
During the three months ended September 30, 2017 and 2016, the Company recognized amortization of software development costs of
$0.2 million and $0.7 million, respectively.
NOTE 4 — INTANGIBLE ASSETS (continued)
Patents and Licenses
At September 30, 2017 and December 31, 2016,
the Company has net capitalized patents and licenses of $3.4 million and $3.9 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 Company recognized $0.5 million
of amortization expense related to patents and licenses for the nine months ended September 30, 2017 and 2016 and $0.2 million
for the three months ended September 30, 2017 and 2016.
Other Intangible Assets
The Company’s remaining intangible assets
include the trade names, technology and customer lists acquired in its acquisition of Vislink and IMT. 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 2017
|
|
$
|
672,000
|
|
2018
|
|
|
2,298,000
|
|
2019
|
|
|
1,763,000
|
|
2020
|
|
|
993,000
|
|
2021
|
|
|
817,000
|
|
Thereafter
|
|
|
1,023,000
|
|
|
|
$
|
7,566,000
|
|
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 $35.00 per share. 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, 2017 was $87,000. On January 10, 2017, the Company
issued 24,397 shares of common stock as the semi-annual payment of interest of $90,000, which is also the fair value of the common
stock on the issuance date. On July 7, 2017, the Company issued 60,403 shares of common stock as the semi-annual payment of interest
of $90,000, which is also the fair value of the common stock on the issuance date. Interest expense was $45,000 and $135,000, respectively,
for the three and nine months ended September 30, 2017 and 2016.
NOTE 6 — DEBT ASSIGNMENT
On January 13, 2017, the Asset Purchase Modification
Agreement dated April 16, 2016 (the “Modification Agreement”), with a total obligation of $1,038,000 was assigned to
new holders of the debt (the “New Holders”) and in full settlement of that agreement the previous note holder was paid
in full. Simultaneously, the New Holders executed a new agreement on the same terms and conditions available to the previous note
holder plus $312,000 in issuance costs and $122,000 in guaranteed interest at 9% for a total obligation of $1,472,000. The Company
recorded the $1,472,000 as a current liability on the condensed consolidated balance sheet, recognized the guaranteed interest
of $122,000 in the condensed consolidated statement of operations, recorded the $312,000 as a contra liability account and amortized
$312,000 as interest expense for the nine months ended September 30, 2017.
NOTE 6 — DEBT ASSIGNMENT (continued)
In determining the appropriate accounting for
the foregoing debt exchange, the Company considered many elements of the transaction, including whether or not the exchange resulted
in a debt modification or extinguishment; the resulting accounting for transaction costs; the derecognition of the extinguished
debt; and the appropriate recording of the newly issued debt instrument. The Company referred to the guidance in ASC 470 which indicates that from the debtor's perspective, an exchange of debt instruments between or a modification of a debt instrument
by a debtor and a creditor in a non-troubled debt situation is deemed to have been accomplished with debt instruments that are
substantially different if the present value of the cash flows under the terms of the new debt instrument is at least ten percent
different from the present value of the remaining cash flows under the terms of the original instrument. It is also noted
in the literature that transactions between or among creditors do not result in a modification or exchange of the original debt
instrument between the debtor and creditor. Accordingly, those transactions do not affect the accounting by the debtor, the carrying
amount of the new note is not adjusted and the effects of the changes are to be reflected in future periods.
Series D Convertible Preferred Stock Leak-Out Agreement
On February 2, 2017, the New Holders agreed
that any sales of common stock underlying the Series D Convertible Preferred Stock, $0.00001 par value per share (the “Series
D Preferred Stock”), would not, in the aggregate, exceed 2.75% of that day’s dollar volume of the Company’s common
stock traded, provided that the New Holders shall be entitled to sell no less than an aggregate of $27,500 each trading day.
During the nine months ended September 30,
2017, the Company issued 5,000,000 shares of Series D Preferred Stock to the New Holders, which were simultaneously converted into
416,667 shares of common stock valued at approximately $648,000. The value of the common stock issued was based on the fair value
of the stock upon execution of the New Holders selling their respective shares. During the nine months ended September 30, 2017,
the Company made cash payments of $824,000 as full satisfaction of the remaining amount due. Interest expense for the nine months
ended September 30, 2017 and 2016 was $434,000 and $0, respectively.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Leases
The Company's office rental, deployment sites
and warehouse facility expenses equaled in aggregate approximately $180,000 and $163,000 for the three months ended September 30,
2017 and 2016, respectively, and $733,000 and $493,000 for the nine months ended September 30, 2017 and 2016. The leases in connection
with these facilities will expire on different dates from 2017 through 2025.
In connection with the acquisition of IMT,
the Company assumed the lease obligations relating to IMT’s warehouse and office space in Mt. Olive, New Jersey. Payments
under the Mt. Olive, New Jersey lease are $35,000 for the year ending December 31, 2017 as the lease expired in February 2017.
In January 2017, IMT signed a new lease for warehouse and office space in Hackettstown, New Jersey which runs through April 29,
2020. Future payments under such lease will amount to $232,000, of which $22,000 is the balance
due for the remainder of 2017.
In connection with the acquisition of Vislink,
the Company assumed the lease obligations relating to Vislink office space in Colchester, U.K. which runs through March 2025. Future
payments under such lease will amount to approximately $3,728,000, of which $173,000 is the balance
due for the remainder of 2017.
In connection with the acquisition of Vislink,
the Company assumed the lease obligations relating to Vislink office space in Dubai, United Arab Emirates. which runs through July
2018. Future payments under such lease will amount to approximately $40,000, of which $12,000 is the balance
due for the remainder of 2017.
In connection with the acquisition of Vislink,
the Company assumed the lease obligations relating to Vislink office space in Singapore which runs through August 2018. Future
payments under such lease will amount to approximately $99,000, of which $9,000 is the balance
due for the remainder of 2017.
The Company signed a new lease for office space
in Hemel, U.K. in May 2017 which runs through April 2023. Future payments under such lease will amount to approximately $1,237,000,
of which $58,000 is the balance
due for the remainder of 2017.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
(continued)
The total obligation under minimum future annual
rentals, exclusive of real estate taxes and related costs, are approximately as follows:
|
|
Amount
|
|
Balance 2017
|
|
$
|
367,000
|
|
2018
|
|
|
1,266,000
|
|
2019
|
|
|
1,117,000
|
|
2020
|
|
|
822,000
|
|
2021
|
|
|
615,000
|
|
Thereafter
|
|
|
1,496,000
|
|
|
|
$
|
5,683,000
|
|
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, 2017, the Company did not have any material legal actions pending.
NOTE 8 — STOCKHOLDERS’ EQUITY
August 2017 Financing
On August 18, 2017, the Company closed a financing
for 1,560,978 shares of common stock and warrants to purchase 780,489 shares of common stock (the “August 2017 Warrants”).
The Company received gross proceeds of $3,200,000 from the offering, before deducting placement agent fees and other
offering expenses payable by the Company. Aegis Capital Corp. acted as the sole placement agent for the offering.
The common stock was sold in a registered direct offering by means of a prospectus supplement to our then-existing shelf
registration statement, while the August 2017 Warrants were sold privately to the same investors by means of an exemption from
registration. The August 2017 Warrants are exercisable immediately on the date of issuance at an exercise price of $2.50
per share and will expire five (5) years after the initial date of issuance.
Lincoln Park Purchase Agreement
On May 19, 2017, the Company entered into a
purchase agreement (the “Lincoln Park Purchase Agreement”) and a registration rights agreement (the “Registration
Rights Agreement”) with Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“Lincoln Park”).
Under the terms and subject to the conditions of the Lincoln Park Purchase Agreement, the Company has the right to sell to Lincoln
Park, and Lincoln Park is obligated to purchase, up to $15,000,000 in shares of common stock, subject to certain limitations, from
time to time over the 30-month period commencing on the date that a registration statement covering the resale of shares of common
stock issuable under the Lincoln Park Purchase Agreement is declared effective by the Securities and Exchange Commission (the “SEC”)
and a final prospectus in connection therewith is filed. Pursuant to the Registration Rights Agreement, the Company agreed to file
such registration statement with the SEC within sixty (60) business days of the execution of the Lincoln Park Purchase Agreement.
NOTE 8 — STOCKHOLDERS’ EQUITY (continued)
Pursuant to the Lincoln Park Purchase
Agreement, the Company may, at its sole discretion and subject to certain conditions, direct Lincoln Park to purchase up to
125,000 shares of common stock on any business day (such purchases, “Regular Purchases”), provided that at least
one (1) business day has passed since the most recent Regular Purchase was completed, and in no event will the amount of a
single Regular Purchase exceed $1.0 million. The purchase price of Regular Purchases will be based on the prevailing market
prices of the common stock, which shall be equal to the lesser of the lowest sale price of the common stock during the
purchase date and the average of the three (3) lowest closing sale prices of the common stock during the ten (10) business
days prior to the purchase date. The Company may also direct Lincoln Park to purchase other amounts as accelerated purchases
or additional purchases if the closing sale price of the common stock is not below the threshold prices as set forth in the
Lincoln Park Purchase Agreement. There is no upper limit on the price per share that Lincoln Park must pay for common stock
under a Regular Purchase or an accelerated purchase.
In connection with its 2017 Annual Meeting
of Stockholders held on June 15, 2017, the Company did not receive stockholder approval, as required pursuant to Nasdaq Marketplace
Rule 5635(d), to issue shares of common stock under the Lincoln Park Purchase Agreement in an amount equal to 20% or more of the
Company’s outstanding shares of common stock. As such, the Company will not be permitted to draw down the full $15,000,000
in shares of common stock under the Lincoln Park Purchase Agreement unless and until the Company receives such stockholder approval.
Under the Lincoln Park Purchase
Agreement, the Company is required to issue to Lincoln Park 192,431 shares of common stock as commitment shares in
consideration for entering into the Lincoln Park Purchase Agreement. The 192,431 shares of common stock were issued
on September 11, 2017 with a fair market value of $302,000, which was included in general and administrative expenses for the
three and nine months ended September 30, 2017.
As of September 30, 2017, the Company has not
sold any shares of common stock under the Lincoln Park Purchase Agreement.
February 2017 Financing
On February 14, 2017, the Company completed
a public underwritten offering of 1,750,000 shares of its common stock and five year warrants to purchase up to an aggregate of
1,312,500 shares of its common stock at an exercise price of $2.00 per share. The Company received $3,500,000 in gross proceeds
from the offering, before deducting the associated underwriting discount and estimated offering expenses payable by the Company.
Aegis Capital Corp. acted as sole book-running manager for the offering.
Exercises of Warrants
From January 1, 2017 to September 30, 2017,
warrants issued in connection with the December 2016 financing were exercised into 1,062,113 shares of common stock. The Company
received $2,124,000 in gross proceeds from the exercise of such warrants.
NOTE 8 — STOCKHOLDERS’ EQUITY (continued)
Other Common Stock Issuances
During the nine months ended September 30, 2017, the Company issued:
|
·
|
1,321,873 shares of common stock to employees, directors,
consultants and other professionals for a total value of $2,304,000. The value of the common stock issued was based on the
fair value of the stock at the time of issuance.
|
|
·
|
416,667 shares of common stock valued at $648,000 upon conversion of 5,000,000 shares of Series D Preferred Stock. The value of the common stock issued was based on the fair value of the stock at the time of issuance.
|
|
·
|
104,218 shares of common stock for amounts previously deferred at a total value of $295,000.
|
|
·
|
84,800 shares of common stock in satisfaction of $180,000 interest accrued on the $2 Million Convertible Note. The number of shares of common stock issued was based upon the stated interest rate of the convertible promissory note and was determined by using the fair value of the common stock on the issuance date.
|
|
·
|
103,224 shares of 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.
|
Warrants and Options
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. During the three and nine months ended September 30, 2016, the Company recorded $39,000
and $264,000, respectively, as stock compensation expense from the amortization of stock options issued in prior periods.
On February 16, 2017, the Board of Directors
of the Company (the “Board”) approved a motion to cancel all outstanding stock options as the options were all out
of the money in all previous stock option plans, thereby cancelling the 1,844 options that were outstanding on December 31, 2016.
On March 16, 2017, the Board passed a motion
to grant options to certain directors, employees and advisors of the Company, and the Company issued 3,555,500 ten (10)-year options
with an exercise price of $1.55 per share on March 24, 2017. The fair value of the options granted on March 24, 2017 was $1.549
per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk
free interest rate of 1.90%, dividend yield of -0-%, volatility factor of 286.51% and the expected life of options of 6.00 years.
The options vest at one third on March 24, 2018, one third on March 24, 2019 and one third on March 24, 2020.
On July 1, 2017, the Company issued
2,810,000 ten (10)-year options to employees with an exercise price of $1.62 per share. The fair value of the options
granted on July 1, 2017 was $1.629 per share and was estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: risk free interest rate of 1.84%, dividend yield of -0-%, volatility factor of 283.93%
and the expected life of options is 6.00 years. The options vest at one third on July 1, 2018, one third on July 1, 2019 and
one third on July 1, 2020.
NOTE 8 — STOCKHOLDERS’ EQUITY
(continued)
As of September 30, 2017, the weighted average
remaining contractual life was 9.6 years for options outstanding and -0- years for options exercisable. The intrinsic value of
options exercisable at September 30, 2017 and 2016 was $0.04 per share and $0, respectively. As of September 30, 2017, the remaining
expense is approximately $8.0 million over the remaining amortization period which is 2.75 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 of time using the simplified method. The Company has not paid dividends on common stock and no assumption of dividend payment
is made in the model.
A summary of the Company’s warrant and
option activity is as follows:
Warrants
|
|
Number of Warrants
(in Shares)
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding January 1, 2017
|
|
|
7,611,904
|
|
|
$
|
5.98
|
|
Granted
|
|
|
2,145,489
|
|
|
|
2.19
|
|
Exercised
|
|
|
(1,062,113
|
)
|
|
|
2.06
|
|
Forfeited or Expired
|
|
|
(7
|
)
|
|
|
42,000.00
|
|
Outstanding, September 30, 2017
|
|
|
8,695,273
|
|
|
$
|
5.50
|
|
Exercisable, September 30, 2017
|
|
|
8,545,273
|
|
|
$
|
5.55
|
|
Options
|
|
Number of Options
(in Shares)
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding January 1, 2017
|
|
|
1,844
|
|
|
$
|
1,544.37
|
|
Granted
|
|
|
6,365,500
|
|
|
|
1.58
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(96,844
|
)
|
|
|
30.95
|
|
Outstanding, September 30, 2017
|
|
|
6,270,500
|
|
|
$
|
1.58
|
|
Exercisable, September 30, 2017
|
|
|
—
|
|
|
$
|
—
|
|
NOTE 9 — DERIVATIVE LIABILITIES
Each of the warrants issued in connection with
our August 2015, May 2016 and July 2016 underwritten offerings 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 September 30, 2017:
Number of shares underlying the warrants on September 30, 2017
|
|
|
968,080
|
|
Fair market value of stock
|
|
$
|
1.62
|
|
Exercise price
|
|
$
|
2.00 to 2,400.00
|
|
Volatility
|
|
|
141% to 177
|
%
|
Risk-free interest rate
|
|
|
1.13% to 1.92
|
%
|
Expected dividend yield
|
|
|
—
|
|
Warrant life (years)
|
|
|
1.1 to 3.8
|
|
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 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
1,374,000
|
|
|
$
|
1,222,000
|
|
|
$
|
1,183,000
|
|
|
$
|
1,284,000
|
|
Recognition of warrant liabilities on issuance dates
|
|
|
—
|
|
|
|
3,766,000
|
|
|
|
—
|
|
|
|
4,823,000
|
|
Reclassification to stockholders’ equity upon exercise
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,379,000
|
)
|
Change in fair value of derivative liabilities
|
|
|
(9,000
|
)
|
|
|
(2,565,000
|
)
|
|
|
182,000
|
|
|
|
(1,305,000
|
)
|
Ending balance
|
|
$
|
1,365,000
|
|
|
$
|
2,423,000
|
|
|
$
|
1,365,000
|
|
|
$
|
2,423,000
|
|
NOTE 10 — 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, 2017, the
Company incurred fees related to the Management Agreement of $75,000 and $225,000, respectively. For the three and nine
months ended September 30, 2016, the Company also incurred fees related to the Management Agreement of $75,000 and $225,000,
respectively. In addition, during the nine months ended September 30, 2017, the Board approved an additional $54,000 in fees
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. Roger Branton, the Company’s Chief Financial Officer, and George Schmitt, the
Company’s Chief Executive Officer and Executive Chairman, 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% Success
Fee (as defined below) if MBTH arranges financing for the Company, arranges a merger, consolidation or sale by the Company of substantially
all of the assets. The Company accrued approximately $436,000 for equity financings between August 1, 2015 and July 31, 2016 in
connection with the 3% Success Fee. No additional fees in connection with the 3% Success Fee have been accrued since.
The balance outstanding to MBTH at September
30, 2017 and December 31, 2016 was $1,368,000 and $96,000, respectively, and has been included in due to related parties on the
Condensed Consolidated Balance Sheet.
On March 3, 2016, our Board approved the issuance
of up to $300,000 in shares of common stock to MBTH as compensation for financial services in connection with the IMT acquisition.
Such shares of common stock were to be issued to MBTH in an initial tranche in the amount of up to $150,000 on March 15, 2016,
and a second tranche to MBTH of up to $150,000 in shares of common stock if IMT achieved certain performance goals by December
31, 2016. On August 10, 2016, the disinterested members of the Board, believing it to be in the best interest of the Company, resolved
to pay the award in cash instead of common stock. The Company accrued $150,000 in the due to related party balance owed to MBTH
for the initial tranche and paid this cash fee in 2016. During the nine months ended September 30, 2017, the Company accrued the
second tranche of $150,000 in the due to related party owed to MBTH.
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.
NOTE 10 — RELATED PARTY TRANSACTIONS
(continued)
(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”).
(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 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 an additional $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 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 accrued an additional $777,000
in fees as 5% of the Bargain Purchase Gain during the nine months ended 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 recorded $265,000 as the fair market
value 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 and accrued expenses on the accompanying Condensed Consolidated Balance Sheet as the warrant has not yet been issued.
From January 1, 2017 to September 30, 2017,
the Company issued 103,224 shares of common stock to MBTH in settlement of amounts due of $180,000.
NOTE 11 — CONCENTRATIONS
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.
During the nine months ended September 30,
2016, the Company did not record revenue from individual sales or services rendered in excess of 10% of the Company’s total
consolidated sales. During the three months ended September 30, 2016, the Company recorded revenue from individual sales or services
rendered from two customers of $272,000 (14%) and $261,000 (14%), both in excess of 10% of the Company’s total consolidated
sales.
At September 30, 2017, the Company did not
have any net accounts receivable due from one customer totaling over 10% of accounts receivable.
At September 30, 2016, approximately 42% of
net accounts receivable was due from three customers, respectively, as follows: $272,000 (16%), $232,000 (14%) and $189,000 (11%)
due from unrelated parties.
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.
During the nine months ended September 30,
2016, approximately 44% of the Company’s inventory purchases were derived from three vendors. During the three months ended
September 30, 2016, approximately 40% of the Company’s inventory purchases were derived from two vendors.
NOTE 12 – GEOGRAPHICAL INFORMATION
The Company has one operating segment and the
decision-making group is the senior executive management team.
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,084,000
|
|
|
$
|
5,411,000
|
|
South America
|
|
|
4,274,000
|
|
|
|
1,163,000
|
|
Europe
|
|
|
8,973,000
|
|
|
|
1,940,000
|
|
Asia/Rest of World
|
|
|
7,380,000
|
|
|
|
1,644,000
|
|
|
|
$
|
33,711,000
|
|
|
$
|
10,158,000
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,681,000
|
|
|
|
|
|
United Kingdom
|
|
|
4,628,000
|
|
|
|
|
|
|
|
$
|
11,309,000
|
|
|
|
|
|
NOTE 13 — SUBSEQUENT EVENTS
Treco Issuance
From October 1, 2017 to November
14, 2017, the Company issued a total of 52,942 shares of common stock in repayment of $90,000 in interest relating to its $2 million
long-term convertible note payable.
Other Common Stock Issuances
From October 1, 2017 to November 14, 2017,
the Company issued a total of 266,964 shares of common stock at fair value to employees, directors, consultants and general counsel
in lieu of paying approximately $434,000 worth of services.
From October 1, 2017 to November 14, 2017,
the Company issued a total of 167,393 shares of common stock to MBTH in settlement of amounts due of $270,000.