xG Technology, Inc. (NASDAQ:XGTI) Q3 2018 Earnings Conference Call November 15, 2018 5:00 PM ET
Scott Arnold - MD, CORE IR
Roger Branton - CEO
John Payne - President & COO
Hello and welcome to the xG Technology Third Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. And note that today's event is being recorded, today, November 15, 2018. After today's call, the recording replay will be made available on the Company's website at www.xgtechnology.com/about-xg-technology/investor-information/.
I would now like to turn the conference over to Scott Arnold, Managing Director of CORE IR Investor Relations. Mr. Arnold, please go ahead.
Thank you, Sara, and thank you all for joining xG Technology's third quarter 2018 earnings conference call to discuss xG Technology's financial results and corporate developments for the quarter ended September 30, 2018.
Joining me today on the call is Roger Branton, Chief Executive Officer; and John Payne IV, President and Chief Operating Officer.
After close of business yesterday, xG Technology released financial results for the third quarter ended September 30, 2018. If you have not seen the press release, please visit the Company's New & Events website page at www.xgtechnology.com.
Before I turn the call over to management, I'd like to remind everyone of the Safe Harbor statement referenced in the SEC filings. The Private Securities Litigation Reform Act of 1995 provides a 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 facts 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.
When used herein, the words anticipate, believe, estimate, upcoming, plan, target, intend and expect and similar expressions as they relate to xG Technology, 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 a more detailed discussion of some of the ongoing risks and some uncertainties of the company's business, I'll refer you to the Company's various filings with the Securities and Exchange Commission.
And now, it is my pleasure to turn the call over to Roger Branton, xG Technology's Chief Executive Officer. Roger?
Okay. Thank you, Scott, and welcome everyone to our third quarter 2018 earnings call.
I'd like to begin with some opening comments, go through a few of the highlights from Q3, and I cover some operational update, talk a little bit about of our Investor Relations development, and then provide some financial results for Q3.
So I'm very pleased to report that in Q3 we completed the difficult task of rightsizing our business, overhauling our processes, and simplifying the operations. The cost reduction program that was began in Q2 and culminated in my appointment as CEO, and John Payne's appointment as Chief Operating Officer in Q3. The actions necessary to rightsize and cost justify our business were two-fold, meaning, it was not just focused on cutting costs. It was also necessary to rationalize the best revenue opportunities and eliminate low value sales or products. In the short term, this rightsizing can result in a reduction in the top-line, but overall it is a step in the right direction towards achieving our goals particularly our goal of being able to generate cash to fund our operations.
Once these actions are substantially done, the result is you have a much more stable business with all the key parts moving in the same direction. Now we have gone through this process. We have a much more stable business and we're in a better position today to grow organically and on a profitable basis.
In addition, this new structure positions us to grow the top-line of the business via carefully sought out and executed acquisition program which will strategically benefit the company, all of which is in the best interest of shareholders.
So some highlights for Q3. In July, we will release the new product called the TSM-2020. This is a key component of our Airborne Video Downlink Solution which is used by law enforcement to capture real time, high definition video from Airborne craft for immediate viewing by ground-based personnel. Innovations like this solidify our market leadership in Downlink Technology because of the advanced situational awareness our systems deliver for public safety. We expect continued growth in this market segment due to the ongoing demands for effective, surveillance systems for policing and defense.
In August, we entered into a strategic partnership with Cogent Technologies giving Vislink exclusive responsibility for sales of all Cogent products outside of China. Cogent is a strong Asian brand focused on 4G portable transmission devices. They're also focused on bonded cellular solutions and wireless microwave transmission products. Their company is the leading media solutions provider in China and we have a long relationship with them. This agreement is a testament to Vislink's strong name recognition in international markets where our business remains very healthy.
Also in August, we announced the launch of a new satellite communications product in our Advent line. This includes low cost antennas, decoders and encoders. We already have a wide offering of Satcom Solutions and the new products provide a cost effective high quality reliable transmission in small form factors. This allows for mobile and rapid deployment across the globe for transmitting and receiving high quality video in the field.
Also in August, we announced that we were chosen as the official radio frequency broadcast equipment supplier to the Volvo Ocean Race event. This is around-the-world yachting event that is considered one of the most grueling sporting challenges on the planet. Our extensive experience in transmitting video across large distances in all weather and in challenging conditions was the key factor in selecting us to provide wireless video transmission equipment for it.
Finally, we had the first public product display of our joint collaboration with Panasonic which paired IMT Vislink's HCAM 4K camera system with Pan -- Panasonic studio cameras. This partnership was originally announced back in Q2 and that the public unveiling, we also introduced an upgrade to our wireless transmission platform that delivers ultra low latency. This is an important requirement for demanding live news and sports broadcast applications.
We continue to work closely with other leading camera manufacturers like Panasonic including Sony, Grass Valley, and others, to allow them to take advantage of the innovative features of our HCAM 4K transmitters.
So some operational updates since assuming our new roles in Q3. John Payne and I have accomplished a great deal in a very short amount of time. I'd like to give you a few highlights. Relative to the cost cuts we eliminated 65 full time and contracted positions from the business, with salary and benefits savings totaling approximately $7.3 million. We also renewed approximately 900,000 non-labor costs related to the closure of the Sunrise facility in Florida. This includes a reduction in space, elimination of some insurances including general liability and auto equipment rental. We've also eliminated some utilities, travel, and office expenses. So total completed labor and non-labor annual savings increased to $8.2 million over the previously announced guidance of $7 million.
We also continue to track $1.3 million in additional savings which primarily includes consolidation of our facilities in Billerica, Massachusetts, and Colchester, United Kingdom, and the remaining lease commitment for the Sunrise facility.
Consolidation of the Colchester site is expected to be completed in December 2018. The Sunrise facility is slated to close in May of 2019. And we are working on sub-lease solutions for the Billerica site which runs through May of 2021.
Thus we're in track with $9.5 million of annual costs removed from the business. These actions assuming our 50% gross margins reduced our breakeven by approximately $19 million in revenues, or roughly $5 million a quarter. Revenue needed to breakeven has been reduced from $15 million a quarter to approximately $10 million a quarter.
So removing cost in the business creates some operational challenges which require refocus of responsibilities, it requires tightly aligning resources with our priorities, and it also requires a commitment to and from the remaining work force and also demands some improved efficiencies.
Some examples and steps we took to address this in the third quarter, I'm going to go through a few of them. One issue we had to deal with was dealing with a critical supplier. One of our products was sold source with such supplier, the supplier shift defective boards we ended up shipping some of these boards to our customers. This resulted in some customer returns, and delayed customer payments. We have successfully de-risked the situation. We have moved to another more qualified U.S. supplier that is well known to us. The new boards were received in pristine working condition and the product is being currently swapped out with our customers. This issue did impact working capital for Q3 and also impacted sales.
We've continued our focus on reducing inventory. We have minimized what we call book on shift. This is the practice of buying inventory for orders that are expected to be received and then quickly shipped out in the same quarter. The risk with this policy is that the order does not come in the company tends to hold excess inventory and a lot of this is custom which can negatively impact cash flow. By changing this policy, we reduced our inventory from $16 million in Q2 to roughly $14 million in Q3, thereby increasing our cash flow.
Speaking of cash flow, I want to point out that John Payne has done a great job communicating our goals to our employees. He's been traveling to our London offices and Dubai offices and implementing a new culture which is focusing on cash flow and profitability. This has included revising payment procedures and no longer accepting orders with unfavorable payment terms. While our top-line might be slightly affected in a short-term by this policy, it has improved cash flow, which as I've stressed throughout the call and since I assumed the CEO role is the company's top priority.
We've also been able to consolidate some management teams across the organization and we're seeing daily improved upon internal communication as well collaboration particularly between the engineering teams and operations groups.
These examples of operations decisions were made to better position the company for long-term profitability. We recognize that doing this decreased our top-line in the short-term. Specifically, we rationalized our best revenue opportunities and eliminated low value sales where the collective risk did not exceed the benefit.
Also for Q3, I want to point out we did have $1 million in orders, in Q3 that did not ship. The delay related to installation scheduling and/or a shortage in specific components, these orders have been moved to Q4.
So as far as Investor Relations and Corporate Governance during the last 120 days or so CORE IR has coordinated and we have completed three non-dealer Road Shows and we also participated in the MicroCap Conference in New York last month. We are currently scheduled to attend the LD Conference in California in December. The goal of these Road Shows is to increase our visibility with new institutional investors as well as sell-side analysts. So some of the feedback, we've received from over 40 plus meetings with investors indicate that we need to do a better job articulating our current business. We have considered changes, we need to make, and we will be communicating those changes in upcoming sessions.
Also our no nonsense operational and financial focus has attracted the attention of potential acquisition targets, financial partners, and some operational executives. As part of our strategic and operational realignment, we are actively evaluating these opportunities and we'll also report back when there's something definitive.
We also have developed a short list of candidates to be added to our board of directors. We anticipate being able to fulfill our requirements here in the not too distant future. We also want to welcome Sue Swenson to the board as our new Board Chair. Sue has jumped right in with a fresh perspective, providing key direction during the time we have been rightsizing the company.
We also want to thank the departing board members Gary Cuccio and Ken Hoffman. We certainly appreciate all the time and advice they have provided over the years.
Lastly, we hear a lot on these Road Shows about public safety and core cutting and/or streaming. We're very excited to see other segments of the TNT market trying to catch up with us here. As you all know, we've always been in this market and this was our company's original focus. And now that we are using our new operational, financial focus to reinvest and defend these businesses.
So as far as financial highlights for Q3, on a non-GAAP basis when normalizing earnings, we do take into account non-GAAP one-time charges as well as non-cash stock option expenses and discontinued operations. This is critical as we need to understand the impact of our operational decisions that have on our business. We use these non-GAAP measures to allow us to assess the performance of our operations as compared to budgets in our recent actions.
Some of the key highlights in the third quarter. Revenues were $8.3 million, cost of components and personnel was $4.2 million, and our gross margins remained steady at 49.1%. And as I said previously we had $1 million in orders expected to ship in Q3 that have now moved to Q4.
G&A expenses were $3.8 million. R&D expenses were $960,000. Depreciation and amortization was $480,000. The net loss was $519,000 while EBITDA income for the quarter was $59,000. All of this excludes the stock option expenses, one-time charges, and discontinued operations.
As of September 30th, we ended the quarter with $1.2 million in cash although we received an additional single $1 million deposit on August 5th.
Accounts receivable was $5.2 million. Inventory was $14.2 million. Total current assets $21.8 million. Current liabilities excluding short-term debt, deferred revenue and derivative liabilities was $10.1 million, so roughly $11.7 million in working capital. xG's debt including short term obligations stood at $5.6 million.
Some of the things we expect to achieve as we look ahead. We have a quality backlog to deliver in Q4. We are actively recruiting senior staff in key areas of the business. We also are going to complete our consolidation of our repair operations to our Hackettstown facility in New Jersey. We're going to continue to pursue new independent board members. We are also looking at more effective ways to articulate our key business values and we also plan to complete our global growth strategy taking us into 2019 and beyond.
So in Q3, we've made significant progress to our goal of achieving profitability. We are confident that our business or businesses have the right products and technology to meet the growing need for on-demand live video content to the broadcast, to be broadcast reliable and in superior resolution. This need does cut across all key sports entertainment, public safety, law enforcement, and military markets. We see ongoing potential for future growth in these sectors.
We also are continuing to investigate promising subsectors of our traditional markets. One example is the spectator video game competition. This is also known as Esports. This has emerged simply from a hobby for bored teenagers into a real market opportunity. It will actually be a medal event in the 2022 Asian Games and the worldwide Esports market is forecast to be nearly worth $900 million by 2021.
So like traditional sports, Esports are demanding similar live product environments that require the same proven video technologies that IMT Vislink has been providing for decades. We do intend to be a significant player in this market as well.
So in summary, our ongoing focus will be on an organic growth and profitability. We will align ourselves with key partners to expand our sales reach into new markets. We will evaluate strategic M&A opportunities making sure we are buying right with a focus on streaming and other services that complement our existing solutions. Our brands will maintain their leadership as innovators in live video communications in order to keep delivering the products and services the industry and the audiences demand. So thank you for supporting our company.
With that, I will turn it back over to the operator for Q&A.
Ladies and gentlemen, this will end the question-and-answer session.
The conference is now concluded. We'd like to thank you all for attending today's presentation. You may now disconnect from the call.