Vislink Technologies Inc (VISL) 2017 Q2 法說會逐字稿

Welcome to the xG Technology Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note that this event is being recorded today, August 16, 2017.

I would now like to turn the conference over to Daniel Carpini, Vice President of Marketing at xG Technology.

Mr. Carpini, please go ahead, sir.

Thank you very much, operator.

Good afternoon, everyone, and thank you all for joining xG Technology's Second Quarter 2017 Earnings Conference Call.

Joining me today on the call are George Schmitt, Executive Chairman and Chief Executive Officer; and Roger Branton, Chief Financial Officer.

Before we turn the call over to management, I'd like to remind everyone of the safe harbor statement referenced in SEC filings.

The Private Security Litigation Reform Act of 1995 provided the safe harbor for certain forward-looking statements, including statements made during the course of today's call.

Statements contained herein that are not based upon current or historical fact and 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 and 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 the use of proceeds from the offering.

When used herein, the words anticipate, believe, estimate, upcoming, plan, target, intend and expect and similar expressions as it relates to xG Technology, its subsidiaries or 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 a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I'll refer you to the company's various filings with the Securities and Exchange Commission.

Now I'd like to turn the call over to George Schmitt, Executive Chairman and Chief Executive Officer.

George?

Thank you, Daniel, and thanks for coming on to the conference call for those of you that are on with us tonight.

We are very pleased with our second quarter results with over $14 million in revenue and positive cash flow.

In our results of operations, we included paydown of the liabilities we accepted as part of the Vislink acquisition of about $4.5 million in the first half of the year, about half of that or a little less occurred during the second quarter.

Without those payments, we had positive cash flow in the quarter in excess of $2 million.

It's important for investors to note that we still have around $2.5 million of those liabilities to be paid in future quarters.

So as we have these calls and as we put at our earnings releases, we will continue to show both GAAP and non-GAAP results to the best of our ability.

We also continue to -- ourselves run rate in excess of $1 million a week both during the quarter, and that continues now.

As we had anticipated, we have released our new Ka and Ku satellite products, along with our microLite 2, all of which are today acceptable for manufacturing, and we expect first shipments of these products to customers to happen late in this quarter or early in October.

As you may recall, we have several million dollars of orders pending for these products.

So as soon as we can get the manufacturing squared away, that revenue will begin to flow in.

During the last call, I spoke about our plan to complete a business case on bonded cellular and after -- as a new product and offering.

After we did the business case, we decided the margins were not high enough to go forward with development of the product and have decided to continue to concentrate our resources on our new Newsnet product and not to try to enter the already-crowded market-abundant cellular.

Another significant note for those of you that thoroughly read our filing with the Securities and Exchange Commission yesterday, you would have noticed that the going-concern issue that has been part of our filings is no longer included in Note 2 in the footnotes to our financial statements.

Our cash and forecast for the next year and our meeting our projections for the first half of this year showed that we are no longer dealing with the going-concern problem, and that's the first time that's happened since we listed our company on NASDAQ over 5 years ago.

This is a very significant milestone for our company and for our investors.

You all noticed, I'm sure, that yesterday we drew down the last availability of our shelf registration, which would have expired on August 21 next week.

As I said in a response to a question last quarter, we would only do that in contemplation of an acquisition.

While none is in an announceable form today, we thought it prudent to take down the $3.2 million while it was available to us.

We did that because we will not have the ability to file another shelf registration until around the end of the first quarter next year, and we felt it was important for us to have the cash on our balance sheet as we continue into negotiations with potential acquisitions.

We have also implemented the 24/7 repair portal and live answer for our customers around the world as we said we would in last quarter's call.

We continue to have significant backlog in orders, over $8 million as of today, and we expect to meet our target of at least $55 million in revenue for the year with significant EBITDA and net income.

Roger and I have with us today our 3 business units.

It has to answer any questions that any of you may have that he and I cannot answer.

With that, let me turn the call over to our Chief Financial Officer, Roger Branton.

Roger?

Okay.

Thank you, George.

Good afternoon, everyone.

So let's start with the second quarter income statement.

Second quarter 2017 revenues were $14.2 million compared to $1.6 million for the same period last year, which represented an increase of approximately $12.4 million.

Revenues were again a record high for the company and are directly attributable to the acquisition of Vislink.

The exchange rate impacted revenues negatively about $424,000, otherwise revenues would have approximately been $14.6 million for the quarter.

Cost of components and personnel were $9.6 million compared to $814,000 for the same period last year.

There was a onetime noncash purchase price amortization charge of $1.6 million included in the cost of components and personnel.

Excluding this amount, cost of components and personnel was approximately $8.1 million.

Adjusting for the exchange rate impact, gross margins were approximately 45% compared to gross margins of 51% for the same period last year.

G&A expenses were $6.4 million compared to $2.4 million for the second quarter of 2016, representing an increase of $4 million.

The increase is due to the inclusion of $2.7 million of G&A expenses as a result of the Vislink acquisition and onetime acquisition and restructuring fees of $1.3 million.

R&D expenses were $2.5 million for the quarter compared to $1.5 million for the 3 months last year.

The increase of $1 million is from the Vislink acquisition and also includes about $50,000 of onetime restructuring fees.

Depreciation and amortization was $1.1 million for the quarter, which includes $421,000 of additional depreciation on the step-up in assets from the Vislink acquisition.

Excluding this, depreciation and amortization decreased approximately $800,000 when compared to the second quarter of last year.

The decrease is from taking impairment charges at the end of last year, which resulted in less amortization for the second quarter of this year.

So second quarter 2017 loss from operations was $5.5 million.

Excluding the purchase price amortization, acquisition-related and restructuring charges and the foreign exchange impact, second quarter 2017 loss from operations was $1.7 million compared to a loss of operations of $4.6 million for the same period last year.

So other income and expense, the company recorded an additional bargain purchase gain of $3.7 million in the quarter, which was based on a final report from an independent valuation firm, who prepared the fair value analysis on the Vislink acquisition.

Also, the company recorded $1.1 million gain from an accounts payable debt extinguishment in the quarter.

So net loss for the quarter was $1 million.

And excluding the onetime charges, second quarter had net income of $3 million compared to a net loss of $4.6 million for the same period last year.

EBITDA, or earnings before interest, taxes depreciation and amortization, was $150,000.

Excluding the purchase price amortization, acquisition-related and restructuring charges and foreign exchange impact, second quarter EBITDA income was $3.8 million compared to an EBITDA loss last year of $2.9 million.

So regarding the first half, revenues were $23.6 million compared to $2.6 million for the first half of last year, representing an increase of $21 million, exchange rate impact of $771,000, revenues for the first half of $24.3 million.

Cost of components and personnel were $15.2 million.

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Margins were 45%, which were consistent with our forecast.

G&A expenses were $13 million for the first half compared to $4.4 million.

There's an increase of $9.3 million.

The increase is due to inclusion of $5.6 million of G&A expenses from the Vislink acquisition and onetime acquisition restructuring fees of $3.7 million, which were recorded in G&A.

R&D expenses for the first half, $4.4 million compared to $3.2 million last year.

Again, the increase reflects additional R&D expenses from the Vislink acquisition, but also includes $333,000 of onetime restructuring fees.

So depreciation and amortization was $2.1 million for the first half, includes $754,000 of additional depreciation for the step-up in the Vislink acquisition.

Excluding this, again, depreciation decreased approximately $1.5 million when compared to last year.

Again, the decrease related to impairment charges and lower amortization taken this year.

Other income and expense, the company recorded first half bargain purchase gain of $15.5 million, which was based on the final fair value analysis report.

We had $4 million in gains year-to-date on accounts payable in debt extinguishments.

So net income for the first half was $7.3 million.

Excluding onetime charges, second half had net income of $15 million compared to a loss of $8.6 million in the same period last year.

EBITDA was $10 million, excluding the non-GAAP charges, $17 million of EBITDA this year compared to an EBITDA loss of $6.9 million last year.

So when normalizing earnings, we take into these non-GAAP onetime charges, including purchase price amortization, acquisition-related fees, restructuring fees, foreign exchange adjustments, which are charges that do not necessarily impact operational performance.

We also include severance costs and any other material onetime charges.

We use these non-GAAP financial measures for planning purposes and to allow us to assess the performance of our operations as compared to our budgets.

As we previously advised the market, the company believed with the synergies, with IMT and xG, costs between $4 million and $5 million could potentially be eliminated from the business.

The company is pleased to report that we achieved that goal with an annual reduction in cost of approximately $5.1 million.

So moving on to the balance sheet.

At June 30, we ended the quarter with $4.7 million in cash; inventory of $18.7 million; accounts receivable of $10.4 million; total current assets of $36 million; current liabilities of $18 million, which is a working capital ratio of $18 million compared to $8 million at December of 2016, which represents a $10 million improvement.

At quarter end, xG's debt, including long-term obligations and accrued interest, stood unchanged at $2 million.

Regarding the cash flow statement, net cash provided by operating activities for the 6 months ended June 30 was $371,000 compared to $4.3 million used in operations for the same period last year.

As George mentioned, we also used $4.5 million of cash generated to pay down the liability assumption from the Vislink acquisition.

Net cash used in investing activities for the 6 months was $6.9 million compared to net cash used of $35,000 at the same period last year.

Primary use of cash was $6.5 million for the acquisition of Vislink.

Net cash used by financing activities was $1.8 million as compared to $4.2 million for the 6 months ended June 30, 2016.

Inflows were $3.5 million and $1.6 million from the issuance of equity and warrants, respectively, and outflows of $2 million that was paid on the Vislink promissory notes.

So with that, I will turn it back over to the operator for Q&A.

(Operator Instructions) Our first question comes from [Albert Jones] of Jones Capital Management.

Just to reiterate, the run rate is still $1 million per week?

Yes, $1 million and a little more.

Okay.

In past calls, it was mentioned there was some awards that could happen and -- from the NSC.

I haven't seen any of those reported, $4 million to $5 million or maybe some bigger ones that were coming maybe midyear.

Can you give us an update on those?

Sure, John Coleman is here.

He can quickly give you an update.

John?

The (inaudible) award was made about 6 weeks ago.

There were a total of 33 awards made, 22 of which went to academic institutions, only 11 went to commercial vendors.

Of the 11, only 4 were awarded for the area that we respond in, i.e., Resilience.

So only 20% of the total awards even addressed the problem we were addressing, and again, a small number of those, the commercial entities.

So it was a nonaward for us.

We do have several other proposals before the NSC pending right now.

In fact, 2 right now.

One, an Air Force requirement.

The additional one is a CIO DoD requirement.

Those are anticipated to award in this quarter in the latter part of the quarter, and we have another proposal deadline that we will submit and meet by 5 September.

So we'll have a total of 3 proposals pending by 5 September with the National Spectrum Consortium.

Our award rate, thus far, on submitted proposals to the National Spectrum Consortium we're batting 50%.

We've submitted 2 for view, and 1 was awarded.

We were one of the early awardees in the NSC.

So how many have dropped off the table so far?

Just the one?

Or are you calling it 80% or...

In the NSC, the National Spectrum Consortium, which is dealing with the challenge created by AWS-3.

The vacation of frequency is by government radio systems and moving into the commercial sector.

And specific for us into the electronic news gathering and broadcast services market, we have -- we are batting 50%.

We submitted 2 proposals to the NSC, and we won the first -- the second one we submitted, which is in the ENG VS market.

But we did lose 2 others that were not associated with the NSC, one with the NISC, as John said, and one with a University program we developed with the radio that went to somebody else here.

The John Hopkins Applied Physics Laboratory proposal we submitted to them was a nonaward.

There is no information available on who won the award or what the amount was.

John Hopkins has not released that, that was actually maybe for rent.

But it was outside the National Spectrum Consortiums.

Okay, I know you guys mentioned a new product that could hit later this quarter or early next quarter.

Do you see anybody like standing on the sidelines to wait for that product rather than putting in orders now?

Or do you still feel that your run rate can run at this $1 million a week up until that time?

We have -- we believe that the run rate will continue, and we're taking orders for the product now.

The problem is manufacturing those products and getting them fully tested and delivered to customers.

If I remember right, and John and James, correct me if I'm wrong, we have about $1.2 million for the 4K camera and approximately $700,000 for the microLite product pending now.

So we do have a couple of supply issues that we're working on.

That's why I said the first deliveries to customers would be late September or early October, but we're working on them.

We believe that we'll have them resolved in the next 30 to 45 days, and those orders will turn into revenue either late this quarter or early next quarter.

Our next question comes from Ted Ketterer of TK Associates.

I'm a little new to this company and I am a shareholder and very interested in it, and I just have a couple of brief questions.

But with your 3 product divisions, what's the total size of the market you guys are looking at?

Well, we're right in the midst of doing a strategic planning that has that.

But we're -- when you divide up the niches in the marketplace, we're in the wireless camera systems.

We get about 60% to 70% market share.

In public safety and entertainment, it's much lower than that, probably less than 10%.

And the military markets, it's -- percentage-wise, it's insignificant.

With a DoD budget of really almost $1 trillion now, we're noise in the background.

We do expect though that in the government market, we have a very large order that we believe will be processed either late September or early October, and we believe that we will win that because we won that one before on the same product and that's the product that's specified by the Army.

It's still going to be an insignificant amount of the budget from DoD.

But for us, it's a very, very significant order and would be the biggest order that we got -- that we have during this calendar year, at least as it is now.

Roger, you have a little more sense?

No, I think, Ted, your question is what's the total addressable markets for all our different product lines, is that...

Yes, that is the question.

And if you probably add on to that, is there a sort of an expected growth rate of that market?

Yes, I'll defer to some others here.

But when we talk about our business, we sort of generally split it up between the U.S. and the rest of the world.

So rest of the world is over $350 million addressable market for our products.

That's broken down by the business lines that George mentioned, whether it's SATCOM, cellular and microwave equipment.

The U.S. is approximately the same.

We have about a 50-50 market split between the Americas and rest of world.

Yes, and then the government side, what's that?

Virtually unlimited (inaudible)?

Compared to us, yes.

So I hope that gives you an idea.

It's...

It does.

And my next question is, you guys have -- you say you have over 100 patents, and you've been doing this for quite some time.

And if I'd looked at the balance sheet, it's -- you spent a lot of money doing it.

Could you -- do you have some idea of what you think the value of that patent portfolio is and is it reasonable to expect future revenue from that?

Well, maybe I can speak to the future revenue potential.

Easiest, we have several -- as John Coleman said, we have several proposals pending in front of the National Spectrum Consortium.

One of those would require the use of our patents, and it's my belief that our partner, who is probably 1,000x bigger than we are, will either license our technology or try to purchase the technology from us, should we win that.

They know that we have something they don't have.

They've included us in the proposal from the NSC, and that would be the first significant sale of the patents or the first significant revenue from us from the patents.

The use of the technology is being explored around the world by all 3 business units.

John, you may have something you want to add?

Coleman?

Well, yes, let me just talk to the specifics of the National Spectrum Consortium and what it is intended to do for the U.S. government.

You may be well aware that the solution to this, the current spectrum challenge, from the government standpoint has been to assign -- reassign spectrum from government users into the commercial market.

The AWS-3 auction is what I'm speaking specifically of.

And the government has also allocated significant funds in a strategic relocation fund -- SRF, to support the movement of government radios out of their current spectrum and into spectrum-sharing solutions in this case, in the commercial market.

The contract that we're currently working is a good example of that.

There's over $1.5 billion worth of government systems that are going to be required to move in the decade.

We're 3 years into the decade.

So there is a very well-funded and very well-aligned government initiative that falls in line with much of our patent portfolio.

The much -- most significant portions are portfolios that deal with both spectrum-sharing solutions and interference mitigation in shared solutions both come to play.

And what we're seeing in the NSC process, a lot of large system integrators who are now becoming more and more interested in what we have developed in the last 10 years and what its efficacy is in terms of dealing with this, the result of the AWS-3 auction.

The government solution is more efficient, more effective use through sharing and more resilient networks providing interference mitigation.

A lot of the significant portions of our patent portfolio apply directly to those.

George just sited one example, where we are in a bid with a major large system integrator against a government requirement for a prototype radio.

So we have grand opportunity, well-funded, well qualified and much aligned with our intellectual property.

Well, I cannot say which defense contractor we're working with.

You should think about companies like Lockheed Martin, L3, LITHOS, Raytheon and others of that ilk.

We've Harris -- Harris is another that we dealt with.

So we can't say who they are right now, but they would come from among that group that I just mentioned.

That's great.

Let me get back in the queue, and I'll just have one more question.

You go ahead and ask it while you're on, Ted.

Well, now that I'm on, okay.

Looking at this, you guys have spent 10 years, a lot of money, had your own interest diluted, diluted, diluted and could have been one of the favorites for any company that show a reverse split, and you're still at it.

What's the brass ring that keeps you guys coming in every day?

Well, my wife might not agree with what I'm going to say right now, but because all of us have lost significant amounts of our personal fortunes, but I still believe that if we can get over the first hurdle that... .

Which is what?

The first hurdle is getting the first big order out of either, the government or the commercial sector.

That then all the time and effort and money that we put in and other investors have put in the business will have been worth it.

We have not been able to get that first big one.

We busted our backsides trying to.

We've realigned our strategies.

We made a couple of acquisitions that are keeping us going and in good shape, but we have not gotten that first big win, and part of it might be just because we're too damn small.

So we're teaming now with the big guys, something that we did not do 5 years ago.

And looking back at it, we probably should have.

But we keep coming because when I think back to 30 years ago and where cellular was in those days when I first was building my first cellular networks, nobody believed that everybody would have a mobile phone either and we had to prove it in the '90s, and it took off.

And I guess in my pea brain, I still think if we can get over the first hurdle, that the same thing will happen with the technologies we've developed.

The world is going to run out of spectrum.

There's no way that the demand for data services on cellular networks is going to go away, at least that's my belief set.

And as the government is forced to go into shared spectrum technologies, what we've developed still today is the only way -- only one I know of that works in crowded spectrum and gives people a clear experience.

So I know I'm -- I know I have to sound stupid to investors because between those of us around the table, we've lost about $35 million of our own money.

That makes us stupid, but we're not quitting.

That doesn't make you stupid.

Okay, that answers -- one other thing, is there any serious potential for the medical device product company that's using the product, if it works?

Is there a lot of add-on to there or potential add-on?

Yes, there is when you get out of -- out in rural areas in the Americas and certainly in developing countries.

The -- the value of telemedicine, which you would never see in New York or San Francisco or any of our major cities or suburbs that have hospitals all around them and plenty of doctors and nurses to help them.

When you go to a place like Grenade or Trinidad or out in our own rural America, there still is plenty of room for an application of what we do.

(Operator Instructions) Our next question comes from Jonathan Blumberg of Warberg.

Just a quick question about the transaction that was announced today to raise new money.

Were -- the investors that put money into this deal today, were any of them people that had to surrender other securities?

Or was this just a straight new deal?

It was a straight new deal, Jonathan, from a viewpoint of it being a straight deal, but 2 of the investors had rights of participation and they exercised those in a significant way.

The third one is a major holder of our securities now, and that's all that was there.

It's a pretty vanilla warrant coverage, well above today's market price.

We did take a beating in the market today for having done that, but we were on the horns of a dilemma.

It was -- we either had to let that shelf expire and let that availability go away or take it in a market that was at least fairly decent for us.

And I just need to say, when we acquired Vislink, we did not take the bills that the former company owed to their auditors.

We -- so we cannot get certified audit results for 2016 to use -- to do a shelf filing in our country.

And I and the finance committee, and the board just felt that we should take advantage of the damn thing while we had it because we'd kick ourselves if we had an acquisition and we're having any difficulty raising money for it.

It was not our preferred outcome, but we just had to do it.

Okay.

And so I guess -- so my follow-up to that real quickly is do you know of -- or does the CFO know how many of the $2 warrants from December are still outstanding?

Yes, there is about 7.5 million still outstanding.

What's that down from it, if you don't mind me asking?

8 million.

Next, we have a follow-up question from [Albert Jones] of Jones Capital Management.

As far as the manufacturer of the new products, are you using previous manufacturers?

Or is this a total new manufacturing company that -- with the new products that you're going to have built for you?

Well, we build a lot of them in-house.

The satellite products are all built over in our facility in Hamil in England.

The microLite product is put together by a contract manufacturer that we've used before and by ourselves, and we do final test and shipping.

The issue is not being able to manufacture them and test them.

The issue is a couple of the components are just difficult for us to get our hands on today, and that problem exists for everybody.

So it's just -- it's something that I can't -- that we can't control inside the business on the supply side.

We searched around for alternatives, we can't find any right now.

But we know -- they told us they're coming, but I'll believe it when they appear on our loading dock.

Right.

As far as possible acquisitions, is there a certain technology?

Or just something that is more complementary to your business that you might be looking at?

Can you give me more color on what would be a good fit for you?

Well, some of our suppliers would be good fits for us and some of the relatively small companies that supply critical pieces to us.

There are a couple of folks that would put us into different market segments that we would look at and there are few in the government world that are small enough for us to mess with, so that's where they are.

Ladies and gentlemen, this will end the question-and-answer session.

The conference call has now also concluded.

We'd like to thank you all for attending today's presentation.

You may now disconnect from the call.