xG Technology Inc (NASDAQ:XGTI) has had a pretty tough start to 2017, with the company down 44% as of Thursday’s close from its January 10 highs. However, as the markets opened on Friday morning in the US, xG picked up some volume, and the company now trades for a circa 16% premium on the day’s start price.
The run, we expect, is rooted in today serving as a deadline for a number of liabilities associated with xG’s recent acquisition of an entity called Vislink – an acquisition that has developed over the last couple of months, but seems to have injected a certain amount of uncertainty in terms of structure into market perception of both the combined entity (xG and Vislink) and the acquisition’s impact on shareholders. Specifically, and with relation to the latter, it seems there exists some concern surrounding a dilutive impact, and this is weighing on sentiment.
Here is an attempt to clear up the situation, and a look at what we can expect going forward.
We aren’t going to spend too much time on what the company does here, because we have covered this one on a number of occasions in the past. For those looking to get a more detailed description of its operations, take a look at our previous coverage here and here.
By way of a brief introduction, however, it is a network communications company that specializes in using technology to broadcast images, video, sound, live feed, that sort of thing. It operates across a range of different use cases, including military, sports broadcasting, entertainment and more. Basically, the company’s technology is designed to record video and sound from anywhere and simultaneously broadcast it in an alternative location.
Anyway, last year, xG announced that it was going to acquire the above-mentioned Vislink, and the deal initially look like a good move. The two companies’ technologies seem to go hand in hand, and operationally at least, should benefit each other. The deal would be funded by a $9.5 million promissory note and a little over $6 million in cash.
It’s the former, the promissory, that has shareholders concerned. However, as things have played out, xG has been able to pay more than $4.5 million on the balance of its promissory, and as per its latest announcement, is able to pay the remaining balance using cash flow and on hand reserves.
In other words, no dilution.
The acquisition is now complete, and Vislink management has teamed up with management of one of xG’s subs, a very strong one called IMT, to run the combined units both domestically in the US and internationally.
So where does the recent run come into the picture?
Well, as part of the acquisition, and to ensure a smooth transition, xG has had to take on some of the liabilities of Vislink. Basically, Vislink still owed some cash to suppliers, and xG has accepted liability for this cash. The cash that xG has to pay out to previous Vislink suppliers will come off the balance of the promissory, so long-term, it’s not going to affect anything. However, short-term, there is concern that the company may struggle to meet Vislink’s transferred liabilities. For the most part, this concern was dealt with earlier in the month, however some outstanding liabilities remained unmeasurable. Today is the deadline for those liabilities to be filed, and – in turn – is the day that we know their impact on xG’s short term liabilities. While the numbers have not been released, and in all honesty we did not expect them to be before next week, the action we are seeing suggests that somebody, somewhere, knows that this impact is minimal.
So that’s where things stand right now. We are going to keep an eye on this one early next week to see if we get some insight as to the quantifiable impact, but the upside run bodes well.
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Disclosure: We have no position in XGTI and have not been compensated for this article.