xG Technology Inc (NASDAQ:XGTI) closed out Thursday's session at just shy of $1 a share. By the Friday morning bell in the US, the company went for $0.56 – a more than 42% drop overnight. The collapse comes on the back of a public offering pricing, and a huge warrant issue, and the impact that both have from a dilution perspective.Let's take a look at things in a little more detail.First, what's xG? From the company description:
xG Technology, Inc. develops a portfolio of intellectual property, which is embedded in its software algorithms that offer cognitive interference mitigation and spectrum access solutions for a range of applications using commercial off the shelf devices.
Wow. Ok, let's translate. It's essentially a wireless network portfolio. It targets potential clients like the DoD in an attempt to offer them wireless communications tools that are secure and reliable. It's picked up a few decent DoD contracts across the last twelve months, primarily revolving around its xMax (lead) product. We know DoD contracts can be a great source of bread and butter revenue in this type of space, so what's the deal with the overnight collapse?Well, as mentioned, xG reported last night that it had priced a public offering as follows:
7,300,000 Units, at a price of $0.685 per Unit, each of which consists of one share of its common stock and 1.25 of a Warrant to purchase one share of its common stock at an exercise price of $0.685 per share.
In other words, it priced at a more than 30% discount to its then open market bid. Instantly dilutive, and offered at a steep discount. That's not even taking the warrants into account.But that's not all. Nope, there's more:
The Company has also granted to the underwriters a 45-day option to acquire an additional 1,095,000 shares and/or 1,368,750 warrants to cover overallotments in connection with the offering.
The transaction as a whole should net xG somewhere in the region of $4.3 million, assuming the overalotted shares and put to work, with a portion set aside to pay off debt. Total debt is somewhere in the region of $3 million, which isn’t terrible, but cash on hand (pre issue) is nothing to write home about – around $500K at March 31 – and quarterly burn was a little over $2.8 million during Q1. In other words, this raise isn’t going to last long.That means one thing – more raises near term. Revenues picked up during the first quarter on a YoY basis, reported at $929K for the period versus $584K for the comparable period a year earlier, but it's going to take more growth than that if shareholders are to avoid a serious degree of dilution over the coming few years.So what's next? Well, we'll get a better idea of where the company expects to go with the funds it raises in the upcoming unit offering across the next couple of quarters. A 1:12 reverse split became effective this time last month, but with the company now trading below the minimum $1 threshold for NASDAQ listing, there's every chance another split will be required as a survival method. xG would struggle with a delisting, and so that – alongside the capital allocation – is going to be our primary focus as far as forming a bias on the company is concerned. We'll see how things play out, and keep you updated as developments hit press.If you want to stay abreast of these developments, put your email address in the bar at the bottom of this page and hit subscribe. You'll get our newsletter delivered straight to your inbox with all the important developments included, and we'll give you a free eBook as well!Disclosure: We have no position in XGTI and have not been compensated for this article.
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