xG Technology Announces Results for the Second Quarter of 2018

The Company Achieved $7 million in Cost Reductions; Actions Continue to Strengthen Its Financial Position and Enable Profitable Revenue Growth

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xG Technology, Inc.

Aug 14, 2018, 18:00 ET

SARASOTA, Fla., Aug. 14, 2018 /PRNewswire/ -- xG Technology, Inc. (Nasdaq: XGTI, XGTIW), whose IMT and Vislink brands are recognized as the global leaders in live video communications in the broadcast, law enforcement and defense markets, announced today its results for the second quarter ended June 30, 2018. The Company also announced today that it achieved $7 million in annual savings from cost reduction initiatives implemented in the second quarter of 2018, which is an increase of $2 million over previous guidance. xG will hold a conference call to discuss second quarter results on Wednesday, August 15, 2018 at 5:00 p.m. Eastern Time (details below).

Second Quarter Results

Revenues for the three and six months ended June 30, 2018 were $9.4 million and $19.1 million compared to $14.2 million and $23.6 million in the corresponding periods in 2017.
Gross margins increased to 52.4% of revenue in the second quarter 2018, compared to 31.8% of revenue in the second quarter of 2017.
Net loss attributable to common shareholders was $6.4 million, or $(0.40) per share in the second quarter of 2018 compared to a net loss of $1.0 million, or $(0.09) per share in the second quarter of 2017. Net loss attributable to common shareholders was $9.7 million, or $(0.62) per share for the six months ended June 30, 2018 compared to net income of $7.3 million, or $0.69 per share for the six months ended June 30, 2017.
EBITDA (earnings before interest, taxes depreciation and amortization) was a negative $2.4 million and a negative $3.6 million for the three and six months ended June 30, 2018, respectively.
Ended the second quarter 2018 with $2.2 million in cash compared to $2.8 million at December 31, 2017 and $455,000 at the end of the first quarter of 2018.

Taking into account the cost reduction initiatives implemented in the second quarter of 2018, the Company reported the following Non-GAAP Second Quarter Results¹:

Excluding stock option expense, one-time expenses and discontinued operations, xG reported an adjusted net loss of $749,000.
Excluding stock option expense, one-time expenses and discontinued operations xG reported an adjusted EBITDA loss of $224,000 which includes a write-down of $121,000 in non-cash items related to inventory.

"This was a transformational quarter," emphasized Roger Branton, CEO and co-founder of xG Technology, "In the second quarter we took decisive steps to stabilize our business. As a result of these actions, and the traction we have established in our core markets, we are well-positioned for future growth. During the quarter, we achieved $7 million in annual cost savings related to discontinued operations, specifically $6.2 million in labor cost savings and $800,000 in non-labor cost savings. We also identified an additional $1.3 million in non-labor cost savings to be realized over the next year, primarily by reducing the footprint of certain facilities. In addition, in the second quarter we raised $4 million in capital and solved some key supply chain challenges. We received significant new orders during the quarter, entered into collaborations with large government agencies, and signed an agreement with Panasonic to integrate our wireless camera control and 4K technology into Panasonic's studio camera line. We will continue to execute on our plan to achieve profitability, while at the same time focus on driving margin expansion and improving our earnings," concluded Mr. Branton.

Second Quarter 2018 Key Business Highlights

Implemented a cost reduction program that resulted in annual cost savings of $7 million and identified another $1.3 million to be realized over the next year.
Eliminated the routine practice of utilizing shares of the Company's common stock for current compensation of employees, significantly reducing the amount of shares in the market each month. Going forward, the use of shares and derivatives will be tied to and aligned with increases in shareholder value.
Received orders valued at over $750,000 for HD (high-definition) airborne video downlink system (AVDS) equipment and related services from law enforcement agencies located in Virginia, Massachusetts, Oregon and California.
Received a $2.3 million contract to supply live video transmission equipment to a major professional US sports association, for installation in arenas and configured to capture and distribute live images of in-game action.
Was awarded a $1.4 million order to supply airborne video downlink solutions to the U.S Air Force. The contract calls for the supply of transmit and receive systems, ground-based units designed to display real-time video imagery taken by aerial assets, related component and accessories, and training services.
Announced a partnership with Panasonic to integrate IMT Vislink's external wireless solution into Panasonic studio cameras.
Announced a partnership between IMT Vislink and Frontline Communications to deploy a customized newsnet® electronic news gathering (ENG) vehicle for performing on-site demonstrations at broadcast client locations.
Announced a collaboration between IMT Vislink and K2 Unmanned Systems, LLC on the launch of K2's new law enforcement tactical drone. IMT Vislink is providing interoperable, encrypted HD video downlink technology for use with the system.

Financial Results Conference Call Details

xG management will hold a conference call to discuss its Q2 2018 results and provide a corporate update on Wednesday, August 15, 2018 at 5:00 p.m. Eastern Time. To participate in the conference call, please call 1-844-825-9789 (toll free) or 1-412-317-5169 (international call-in) and ask to join the xG Technology call. The call will also be simultaneously webcast. Listeners can access the webcast live through the Company's website at http://www.xgtechnology.com/about-xg-technology/investor-information/. For those who cannot participate in the call, an audio replay will be made available on xG's website.

¹NON-GAAP FINANCIAL MEASURES

We disclose non-GAAP financial measures as we believe they provide useful information on actual operating performance. Readers are cautioned that non-GAAP financial measures do not have any standardized meaning prescribed by U.S. GAAP and therefore may not be comparable to similar measures presented by other companies.

Non-GAAP gross margin excludes the impact of purchase price amortization on the step up of assets as a result of the bargain purchase gain and the impact of foreign exchange gains or losses.

Non-GAAP income (loss) from operations excludes the impact of purchase price amortization related to the Vislink acquisition, acquisition-related expenses and restructuring expenses.

We use the above-noted non-GAAP financial measures for planning purposes and to allow us to assess the performance of our business before including the impacts of the items noted above as they affect the comparability of our financial results. These non-GAAP measures are reviewed regularly by management and the Board of Directors as part of the ongoing internal assessment of our operating performance. Adjusted EBITDA is defined as net income (loss) plus purchase price amortization, acquisition-related expense, restructuring expense, depreciation and amortization, foreign exchange gains or losses and interest expense.

Adjusted EBITDA is a metric used by investors and analysts for valuation purposes and we believe that it is an important indicator of our operating performance.

About xG Technology, Inc.

Technology's IMT and Vislink brands are recognized as the global leaders in live video communications and are trusted suppliers to tier-1 customers in broadcast/sports/entertainment, and law enforcement/public safety/defense markets. Their products have been engineered to deliver high levels of performance, reliability, build quality, extended operating ranges and compact form factors. In the broadcast, sports and entertainment sectors, IMT and Vislink provide high-definition communication links to reliably capture, transmit and manage live event footage. In the law enforcement, public safety & defense markets, IMT and Vislink provide secure video communications and mission-critical solutions to local, national and international agencies and organizations. More information can be found at www.imt-solutions.com and www.vislink.com.

Based in Sarasota, Florida, xG Technology has over 80 patents and pending patent applications. xG is a publicly traded company listed on the NASDAQ Capital Market (symbol: XGTI) For more information, please visit www.xgtechnology.com.

Cautionary Statement Regarding Forward Looking Statements

Statements contained herein that are not based upon current or historical fact are forward-looking in nature and constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements reflect the Company's expectations about its future operating results, performance and opportunities that involve substantial risks and uncertainties. These statements include but are not limited to statements regarding the intended terms of the offering, closing of the offering and use of any proceeds from the offering. When used herein, the words "anticipate," "believe," "estimate," "upcoming," "plan," "target", "intend" and "expect" and similar expressions, as they relate to xG Technology, Inc., its subsidiaries, or its management, are intended to identify such forward-looking statements. These forward-looking statements are based on information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause the Company's actual results, performance, prospects, and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

FOR MORE INFORMATION

xG Technology:
Daniel Carpini
941-953-9035
[email protected]

Investor Relations:
John Marco
CORE IR
516-222-2560
[email protected]

xG TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)

	June 30,		December 31,
	2018		2017
	(unaudited)
ASSETS
Current assets
Cash	$	2,185	$	2,799
Accounts receivable, net		5,357		8,337
Inventories, net		16,016		14,753
Prepaid expenses and other current assets		704		626
Total current assets		24,262		26,515
Property and equipment, net		2,744		3,237
Intangible assets, net		5,577		6,894
Total assets	$	32,583	$	36,646
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	8,084	$	10,918
Accrued expenses		2,945		3,150
Convertible note payable		2,000		2,000
Convertible promissory notes, net of discount of $508 and $0, respectively		3,492		—
Due to related parties		691		998
Deferred revenue and customer deposits		1,642		634
Obligation under capital leases		10		18
Derivative liabilities		2,533		2,399
Total current liabilities		21,397		20,117
Long-term obligation under capital leases, net of current portion		24		30
Total liabilities		21,421		20,147
Commitments and contingencies
Stockholders' equity
Preferred stock – $0.00001 par value per share: 10,000,000 shares authorized as of June 30, 2018 and December 31, 2017; 0 shares issued and outstanding as of June 30, 2018 and December 31, 2017		—		—
Common stock – $0.00001 par value per share, 100,000,000 shares authorized, 16,674,874 and 14,897,392 shares issued and 16,674,872 and 14,897,390 outstanding as of June 30, 2018 and December 31, 2017, respectively		—		—
Additional paid in capital		240,220		235,819
Accumulated other comprehensive income		328		354
Treasury stock, at cost – 2 shares at June 30, 2018 and December 31, 2017, respectively		(22)		(22)
Accumulated deficit		(229,364)		(219,652)
Total stockholders' equity		11,162		16,499
Total liabilities and stockholders' equity	$	32,583	$	36,646

The accompanying notes are an integral part of these condensed consolidated financial statements.

xG TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS EXCEPT NET (LOSS) INCOME PER SHARE DATA)

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Revenue	$	9,424	$	14,218	$	19,157	$	23,553
Cost of revenue and operating expenses
Cost of components and personnel		4,487		9,695		9,277		15,266
Inventory valuation adjustments		121		(23)		234		76
General and administrative expenses		6,028		6,441		11,860		12,989
Research and development expenses		2,925		2,511		5,367		4,385
Impairment charge		168		—		168		—
Amortization and depreciation		818		1,143		1,705		2,132
Total cost of revenue and operating expenses		14,547		19,767		28,611		34,848
Loss from operations		(5,123)		(5,549)		(9,454)		(11,295)
Other (expense) income
Changes in fair value of derivative liabilities		605		27		1,654		(190)
Gain on bargain purchase		—		3,691		—		15,530
Gain on debt and payables extinguishments		—		1,090		—		3,990
Other income (expense)		38		(253)		38		(253)
Interest expense, net		(1,903)		(47)		(1,950)		(531)
Total other (expense) income		(1,260)		4,508		(258)		18,546
Net (loss) income	$	(6,383)	$	(1,041)	$	(9,712)	$	7,251

Basic (loss) earnings per share	$	(0.40)	$	(0.09)	$	(0.62)	$	0.69

Diluted (loss) earnings per share	$	(0.40)	$	(0.09)	$	(0.62)	$	0.69

Weighted average number of shares outstanding:

Basic		16,154		11,405		15,555		10,500

Diluted		16,154		11,405		15,555		10,500

Comprehensive (loss) income:
Net (loss) income	$	(6,383)	$	(1,041)	$	(9,712)	$	7,251
Unrealized (loss) gain on currency translation adjustment		(109)		365		328		348

Comprehensive (loss) income	$	(6,492)	$	(676)	$	(9,384)	$	7,599

The accompanying notes are an integral part of these condensed consolidated financial statements.

Reconciliation of GAAP to Non-GAAP Results

Our financial statements are prepared in accordance with US GAAP on a basis consistent for all periods presented. In addition to results reported in accordance with US GAAP, we use non-GAAP financial measures as supplemental indicators of our operating performance. We disclose non-GAAP measures as we believe that these measures provide better information on actual operating results.

Readers are cautioned that non-GAAP financial measures do not have any standardized meaning prescribed by US GAAP and therefore may not be comparable to similar measures presented by other companies.

xG TECHNOLOGY, INC.
RECONCILIATION OF GAAP to NON-GAAP RESULTS
QUARTER ENDING JUNE 30, 2018

		Stock			Non
	GAAP	Option	One-Time	Discontinued	GAAP
In thousands of US$	Q2	Expense	Expenses	Operations	Q2
Revenue	$9,424			$ (26)	$9,398
Gross margin	52.4%				52.3%

Cost of revenue and operating expenses
Cost of components and personnel	4,487				4,487
Inventory valuation adjustments	121				121
General and administrative expenses	6,029	(613)		(880)	4,537
Research and development expenses	2,925	(1,047)		(758)	1,120
Impairment charge	168			(168)
Amortization and depreciation	817	-	-	(337)	480
Total cost of revenue and operating expenses	14,547	(1,660)		(2,143)	10,745

Income (loss) from operations	(5,123)	1,660		2,117	(1,347)

Other income (expense)
Changes in fair value of derivative liabilities	605				605
Other expense	38				38
Interest expense	(1,903)	-	1,858	-	(45)
Total other income (expense)	(1,260)	-	1,858	-	598

Net income (loss)	$(6,383)	$1,660	$1,858	$2,117	$(749)

EBITDA	$(3,663)	$1,660	-	$1,780	$(224)

xG TECHNOLOGY, INC.
RECONCILIATION OF GAAP to NON-GAAP RESULTS SIX MONTHS ENDING JUNE 30, 2018

		Stock			Non
	GAAP	Option	One-Time	Discontinued	GAAP
In thousands of US$	H1	Expense	Expenses	Operations	H1
Revenue	$19,157			$ (427)	$18,730
Gross margin	51.6%				50.9%

Cost of revenue and operating expenses
Cost of components and personnel	9,277			(84)	9,193
Inventory valuation adjustments	234			-	234
General and administrative expenses	11,861	(1,023)	(63)	(1,663)	9,112
Research and development expenses	5,367	(1,451)	-	(1,759)	2,157
Impairment charge	168	-	-	(168)	-
Amortization and depreciation	1,704	-	-	(674)	1,030
Total cost of revenue and operating expenses	28,611	(2,474)	(63)	(4,348)	21,726

Income (loss) from operations	(9,454)	2,474	63	3,921	(2,996)

Other income (expense)
Changes in fair value of derivative liabilities	1,654				1,654
Other expense	38				38
Interest expense	(1,950)	-	1,858	-	(92)
Total other income (expense)	(258)	-	1,858	-	1,600

Net income (loss)	$(9,712)	$2,474	$1,921	$3,921	$(1,396)

EBITDA	$(6,058)	$2,474	63	$3,247	$(274)