UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017

March 31, 2019

or

For the transition period from ______________to _______________.

Commission File Number:001-35988

xG Technology,Vislink Technologies, Inc.

(Exact name of registrant as specified in its charter)

240 S. Pineapple Avenue, Suite 701

Sarasota, FL 34236

(Address of principal executive offices) (Zip Code)

(941) 953-9035

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x[X] No ¨[  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x[X] No ¨[  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨ [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨[  ] No x[X]

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [  ] No [X]

Securities registered pursuant to Section 12(b) of the Act:

The number of shares of the Registrant’s common stock outstanding as of November 14, 2017May 15, 2019 is 14,690,121.1,929,537.

xG TECHNOLOGY,VISLINK TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

For the quarterthree months ended September 30, 2017March 31, 2019

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Index to Condensed Consolidated Financial Statements

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

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

The overarching strategy of xG Technology,Vislink Technologies, Inc. (“xG”,Vislink Technologies,” the “Company,” “we,” “our” or the “Company”“us”) is to design, develop and deliver advanced wireless communications solutions that provide customers in our target markets with enhanced levels of reliability, mobility, performance and efficiency in their business operations and missions. xG’sVislink Technologies’ business lines include the main brands of Integrated Microwave Technologies LLC (“IMT”), and Vislink CommunicationCommunications Systems (“Vislink” or “VCS”), and xMax.. There is considerable brand interaction, owingdue to complementary market focus, compatible product and technology development roadmaps, and solution integration opportunities. In addition to these brands, xG has a dedicated Federal Sector Group focused on providing next-generation spectrum sharing solutions to national defense, scientific research and other federal organizations.

IMT:

On January 29, 2016, xG completed the acquisition of the net assets that constituted the business of IMT pursuant to an Asset Purchase Agreement by and between xG and Skyview Capital, LLC. The IMT business develops, manufactures and sells microwave communications equipment utilizing COFDM (Coded Orthogonal Frequency Division Multiplexing) technology. COFDM is a transmission technique that combines encoding technology with OFDM (Orthogonal Frequency Division Multiplexing) modulation to provide the low latency and high image clarity required for real-time live broadcasting video transmissions. IMT has extensive experience in ultra-compact COFDM wireless technology, which has allowed IMT to develop integrated solutions over the past 20 years that deliver reliable video footage captured from both aerial and ground-based sources to fixed and mobile receiver locations.

Vislink:

On February 2, 2017, the Company completed the acquisition of certain assets and liabilities related to the hardware segment of Vislink International Limited, an England and Wales registered limited company (the ‘‘UK Seller’’), and Vislink Inc., a Delaware corporation (the ‘‘US Seller’’, and together with the UK Seller, the ‘‘Sellers’’), pursuant to a Business Purchase Agreement, dated December 16, 2016, as amended on January 16, 2017, by and among the Company, the Sellers and Vislink PLC, an England and Wales registered limited company, as guarantor. The Company refers to the hardware segment acquired as Vislink Communications Systems (“Vislink” or ‘‘VCS’’). VislinkVCS specializes in the wireless capture, delivery and management of secure, high-quality, live video from the field to the point of usage. VislinkVCS designs and manufactures products encompassing microwave radio components, satellite communication, cellular and wireless camera systems, and associated amplifier items. VislinkVCS serves two core markets: broadcast and media and law enforcement, public safety and surveillance. In the broadcast and media market, VislinkVCS provides broadcast communication links for the collection of live news and sports and entertainment events. Vislink’sVCS’ customers in the broadcast and media market include national broadcasters, multi-channel broadcasters, network owners and station groups, sports and live broadcasters and hosted service providers. In the law enforcement, public safety and surveillance market, VislinkVCS provides secure video communications and mission-critical solutions for law enforcement, defense and homeland security applications. Vislink’sVCS’ customers in the law enforcement, public safety and surveillance market include metropolitan, regional and national law enforcement agencies as well as domestic and international defense agencies and organizations.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared using U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principlesGAAP for annual financial statements and should be read in conjunction with the consolidated financial statements as filed on the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016, as amended.2018, filed with the United States Securities and Exchange Commission (the “SEC”) on April 1, 2019. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company'sCompany’s consolidated financial position as of September 30, 2017,March 31, 2019, the results of its operations for the three and nine months ended September 30, 2017 and 2016, the results of its cash flows for the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2017March 31, 2019 may not be indicative of results for the year ending December 31, 2017.

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)2019.

Principles of Consolidation

The condensedaccompanying consolidated financial statements which have beenand related notes thereto were prepared in accordanceconformity with accounting principles generally accepted in the United States of America (“GAAP”)GAAP include the accounts of xGVislink Technologies and its wholly-owned subsidiaries, IMT and Vislink, since the date the acquisitionacquisitions of IMT and Vislink were completed. All material intercompany balances and transactions and balances have beenare eliminated in the consolidation.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the operating decision makers, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s decision-making group is the senior executive management team. The Company and the decision-making group view the Company’s operations and manage its business as one operating segment. All long-lived assets of the Company reside in the U.S. and U.K.

Stock Options

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and non-employee directors, including employee stock options. Compensation expense based on the grant date fair value is generally amortized over the requisite service period of the award on a straight-line basis. The fair value of options is calculated using the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant based on key assumptions such as stock price, expected volatility and expected term. The Company’s estimates of these assumptions are primarily based on historical data, judgment regarding future trends and factors.

Use of Estimates

Management makes estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include reserves and write-downs related to receivables and inventories, the recoverability of long-lived assets, the valuation allowance relating to the Company’s deferred tax assets, valuation of equity and derivative instruments, and debt discounts and the valuation of the assets and liabilities acquired in the acquisitionsacquisition of IMT and Vislink.

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Leases

Change in accounting principle

In February 2016, the Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases on the balance sheet. We have adopted ASU 2016-02 on January 1, 2019 using a modified retrospective transition approach which applies the new standard to all leases existing at the date of initial application. We have also elected to adopt the transitional package of practical expedients as prescribed by Accounting Standards Codification (“ASC”) 842. Accordingly, we are continuing to account for our existing operating leases as operating leases under the new guidance, without reassessing whether the contracts contain a lease under ASC 842 or whether the classification of the operating leases would be different under ASC 842. All our rentals at the adoption date were operating leases for facilities and did not include any non-lease components.

As a result of the adoption of ASU 2016-02, on January 1, 2019, we recognized a lease liability of approximately $3.0 million, with corresponding right-of- use (“ROU”) assets of $2.9 million, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases, less accrued rent of approximately $0.06 million. There are no changes to our previously reported results before January 1, 2019. Lease expense is not expected to change materially as a result of the adoption of ASU 2016-02.

Inventories

Inventory is recorded at the lower of cost, on a first-in, first-out basis, or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Inventory valuation adjustments are included on the face of the unaudited condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018.

Revenue Recognition

Change in accounting principle

We transitioned to the FASB ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) from ASC Topic 605, Revenue Recognition on January 1, 2019. Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services. We adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2019. Under the modified retrospective transition method, an entity compares the revenue recognized from contract inception up to the date of initial application to the amount that would have been recognized if it had applied ASC 606 since contract inception. The difference between those two amounts would be accounted for as a cumulative effect adjustment and recognized on the date of initial application. The adoption of ASC 606 did not have an impact on the recognition of revenue and no cumulative effect adjustment was recorded.

The Company generates all its revenue from contracts with customers. The Company recognizes revenuesrevenue when persuasive evidencewe satisfy a performance obligation by transferring control of the promised goods or services to a customer in an arrangement exists,amount that reflects the consideration that we expect to receive in exchange for those services.

The Company determines revenue recognition through the following steps:

At contract inception, the Company assesses the goods and services have been rendered,promised in our contracts with customers and identifies a performance obligation for each. To determine the priceperformance obligations, the Company considers all the products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is fixednot subject to significant judgment. We measure revenue as the amount of consideration we expect to receive in exchange for transferring goods and determinable, and collectability is reasonably assured. Revenuesservices. Excluded from management and consulting, time-and-materials service contracts, maintenance agreementsincome are the sales value added taxes, and other servicescharges we collect concurrent with revenue-producing activities.

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based Compensation

Effective January 1, 2019, the Company adopted ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to non-employees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to non-employees under Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The adoption of ASU 2018-07 did not have a material impact on the Company’s condensed consolidated financial statements.

Convertible Debt Instruments

The Company records debt net of debt discounts for beneficial conversion features and warrants, on either a relative fair value or fair value basis depending on the respective accounting treatment of each instrument. Beneficial conversion features are recorded pursuant to the Beneficial Conversion (“BCF”) and Debt Topics of the FASB ASC. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discounts with corresponding entries to derivative liability and additional paid-in-capital. Costs paid to third parties (e.g., legal fees, printing costs, placement agent fees) that are directly related to issuing the debt and that otherwise wouldn’t be incurred, are treated as a direct deduction of the debt liability. Debt discount and issuance costs are generally amortized and recognized as additional interest expense in the services are providedstatement of operations over the life of the debt instrument using the effective interest method.

The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. If the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the time the goods are shippedconversion date and title has passed.then that fair value is reclassified to stockholders’ equity.

Earnings (Loss)Loss Per Share

The Company reports earningsloss per share in accordance with ASC Topic 260, “Earnings Per Share,” which establishes standards for computing and presenting earnings per share. Basic earningsloss per share of common stock is computedcalculated by dividing net income availableloss allocable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.period, without consideration of common stock equivalents. Diluted earningsloss per share is computedcalculated by dividing net income available to common stockholders byadjusting the weighted-average number of shares of common stock andoutstanding for the dilutive effect of common stock equivalents, then outstanding.including stock options and warrants, outstanding for the period as determined using the treasury stock method. For purposes of the threediluted net loss per share calculation, common stock equivalents are excluded from the calculation because their effect would be anti-dilutive. Therefore, basic and nine month period ended September 30, 2017,diluted net loss per share applicable to common stockholders is the same for periods with a net loss.

The following table illustrates the anti-dilutive potential common stock equivalents consistexcluded from the calculation of 8,695,273 common stock warrants issuable upon their exercise and 6,270,500 common stock options. Under the treasury stock method, unexercised “in-the-money” stock options and warrants are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common stock at the average market price during the period and the excess number of options over the number of shares assumed to be repurchased is included in the total dilutive shares outstanding. There were 6,270,500 “in-the-money” stock options outstanding during the three and nine month period ended September 30, 2017 but were not exercisable and such shares were excluded for the three and nine months ended September 30, 2017 since they had an anti-dilutive effect. The common stock warrants were excluded as they were out of the money and had an anti-dilutive effect. There were no such participating securities outstanding during the nine month period ended September 30, 2017.loss per share (in thousands):

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Value of Financial Instruments

GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the consolidated balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including accounts receivable and accounts payable, the Company estimated that the carrying amount approximated fair value because of the short maturities of these instruments. All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputsconsist of items that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

Foreign Currency and Other Comprehensive (Loss)/Income (Loss)

The functional currency of our foreign subsidiariessubsidiary is typically the applicable local currency.currency which is British Pounds. The translation from the respective foreign currenciescurrency to United States Dollars (U.S. Dollars)(“US Dollars”) is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weightedan average exchange rate during the period. Gains or losses resulting from such translation are included as a separate component of accumulated other comprehensive (loss)/income. Gains or losses resulting from foreign currency transactions are included in foreign currency income or loss except for the effect of exchange rates on long-term inter-company transactions considered to be a long-term investment, which are accumulated and credited or charged to other comprehensive income.

Transaction gains and losses are recognized in the Company’sour results of operations based on the difference between the foreign exchange rates on the transaction date and on the reporting date. The Company recognized a net foreign exchange loss of approximately $7,000 and $245,000, respectively, for the three and nine months ended September 30, 2017. The foreign currency exchange gains and losses are included as a component of general and administrative expenses, in the accompanying Unaudited Condensed Consolidated Statements of Operations. For the three

The Company has recognized foreign exchanges gains and nine months ended September 30, 2017, the increaselosses and changes in accumulated comprehensive gain wasincome approximately $114,000 and $462,000, respectfully.as follows:

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)

The exchange raterates adopted for the foreign exchange transactions are the rates of exchange as quoted on OANDA, a Canadian-based foreign exchange company and internet website providing currency conversion, online retail foreign exchange trading, online foreign currency transfers, and forex information and website.information. Translation of amounts from British Pounds into U.S.US Dollars was made at the following exchange rates for the respective periods:

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued and determined that no events or transactions are required to be disclosed herein, except as disclosed.

Recently Issued Accounting Standards

The Company has considered additional new relevant accounting standards that are in effect through the date of these financial statements. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting standards that have been issued that might have a material impact on our financial position or results of operations.

In September 2017, the FASB issued Accounting Standard Update (“ASU”) 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” (“ASU 2017-13”). ASU 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU 2014-09 and ASU 2016-02. In preparation for the adoption of the new standard in the fiscal year beginning January 1, 2019, the Company continues to evaluate contract terms and potential impacts of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contract, that is, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. The Company anticipates adopting the standard using the modified retrospective approach at adoption. The Company is currently evaluating individual customer contracts and will document changes, as needed, to our accounting policies and controls as we continue to evaluate the impact of the adoption of this standard. The results of our procedures to date indicate that the adoption of this standard will not have a material impact on our net income; however, the Company continues to evaluate the impact of the adoption on related financial statement disclosures.

In August 2017, ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued amending hedge accounting recognition and presentation requirements, including elimination of the requirement to separately measure and report hedge ineffectiveness, and eases certain documentation and assessment requirements. This standard has an effective date of January 1, 2019. We do not expect adoption of this standard to have a material impact on our financial condition, results of operations or cash flows.

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Subsequent Events

The Company has evaluated subsequent events in accordance with ASC 855, Subsequent Events, through the filing date of this Quarterly Report, and determined that no events have occurred that have not been disclosed elsewhere in the notes to the condensed consolidated financial statements (unaudited) that would require adjustments to disclosures in the condensed consolidated financial statements (unaudited), except as disclosed herein (see Note 12).

Recently Issued Accounting Standards

In July 2017,March 2019, the FASB issued ASU No. 2017-11, Earnings per Share2019-01 “Leases (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815)842) Codification Improvements” (“ASU No. 2017-11”2019-01”). ASU No. 2017-11 consistsThis update amends the following items brought to the FASB’s attention through those interactions with stakeholders:

The effective date of two parts. Thethose amendments in Part I of ASU No. 2017-11e change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument2019-01 is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of ASU No. 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of ASU No. 2017-11 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2018.for any of the following: (1) a public business entity, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) an employee benefit plan that files financial statements with the SEC. For all other entities, the amendments in Part I of ASU No. 2017-11 are effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoptionapplication is permitted for all entities, includingpermitted. The adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of ASU No. 2017-11 do2019-01 is not require any transition guidance because those amendments do notexpected to have an accounting effect. Management is currently assessing the applicabilitya material impact on our results of ASU No. 2017-11 and has not determined the impact of the adoption, if any, as of September 30, 2017.operations, financial position or liquidity or our related financial statement disclosures.

On May 16, 2017,Other recent accounting standards issued by the FASB, issued ASU 2017-10,Determining the Customer of the Operation Services — a consensus of the FASBincluding its Emerging Issues Task Force,(“ASU 2017-10”). The ASU clarifies the “diversity in practice in how an operating entity determinesAmerican Institute of Certified Public Accountants, and the customer of the operation services for transactions within the scope of [ASC] 853, Service Concession Arrangements”SEC did not or are not believed by “clarifying that the grantor is the customer of the operation services in all cases for those arrangements.” The amendments also allow for a “more consistent application of other aspects of the revenue guidance, which are affected by this customer determination.” For most entities that have adopted ASC 606, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We do not expect this standardmanagement to have a material impact on the Company’s reported results of operationspresent or future condensed consolidated financial position.statements.

On May 10, 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting(“ASU 2017-09”), which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, ASU 2017-09 is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.

In 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and related amendments. ASU 2016-02 provides a comprehensive new lease model that requires lessees to recognize assets and liabilities for most leases and would change certain aspects of lessor accounting. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. A modified retrospective adoption approach is required. The Company is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

NOTE2 — LIQUIDITY AND FINANCIAL CONDITION

The Company’saccompanying unaudited condensed consolidated financial statements arehave been prepared assuming the Company can continue as a going concern, which contemplates continuity of operations through the realization of assets, and the settling of liabilities in the normalordinary course of business. Previously,The Company had $0.3 million in cash on the balance sheet at March 31, 2019. The Company had working capital and an accumulated deficit of $6.7 million and $237.6 million, respectively, at March 31, 2019. Additionally, the Company had disclosed management’s conclusion that substantial doubt existed as ita loss from operations in the amount of approximately $2.7 million and cash used in operating activities of $1.6 million for the three months ended March 31, 2019

In fiscal year 2018, the Company implemented a cost reduction initiative which resulted in approximately $8.2 million in annual savings. The Company affected these reductions by phasing out a business division which scaled down payroll and associated benefits and other supporting expenses. The Company realized an additional $1.3 million of savings primarily related to facilities consolidation and severance. During fiscal year 2018, the Company’s abilityCompany procured a secured financing arrangement which netted $5.6 million in net proceeds to secure its cash position for current and future operating expenses. The Company has historically experienced lower first-quarter revenues usually offset by high one-time costs. The Company disbursed cash received from fourth quarter 2018 revenue to pay suppliers during the three months ended March 31, 2019. The Company incurred costs of $100,000 for the balance of costs incurred as a result of the elimination of the xMax and Federal divisions in fiscal year 2018, $65,000 in audit fees, and $60,000 for a special stockholder meeting that was abandoned during the three months ended March 31, 2019. 

The Company is attempting to expand operations and increase revenues. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. WithThe Company believes it can raise additional working capital through equity or debt offerings; however, no assurance is provided that the acquisition of Vislink, substantial doubt has been remediated by increased revenuesCompany will be successful in such capital raising efforts. The Company is actively continuing to look for longer-term financing sources to complete its financial turnaround and a reduction of expenses which improvedproperly position it for long-term growth and profitability. There is no assurance that we will be able to identify such capital and if we do on terms that will be in the cash flow from operations for the period ended September 30, 2017. Company’s and shareholders’ long-term interests.

The Company believes it will have sufficient cash flowenough working capital to fund operations to continue as going concern for at least the next twelve months.

As reflected inmonths from the condensed consolidateddate of issuance of these financial statements, the Company had an accumulated deficit at September 30, 2017 of $208 million and a loss from operations of approximately $16.8 million for the nine months ended September 30, 2017. The Company historically had been funding its business principally through debt and equity financings and advances from related parties. Cash flows from operating activities for the nine months ended September 30, 2017 were positively affected as a result of the acquisition of Vislink in February 2017 (See Note 3), along with management’s continual cost containment.

statements. The ability to recognize revenue and ultimately cash receipts is contingent upon, but not limited to, acceptable performance of the delivered equipment and services. If the CompanyThe Company’s asset carrying value may be materially impacted if it is unable to close on some of its revenue producingrevenue-producing opportunities in the near term, the carrying value its assets may be materially impacted. The condensed consolidated financial statements do not include any adjustments related to the recovery and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

NOTE 3 — ACQUISITION OF VISLINK

Acquisition of Vislink International Limited

On February 2, 2017, the Company completed the acquisition of certain assets and liabilities related to the hardware segment of Vislink International Limited, an England and Wales registered limited company (the ‘‘UK Seller’’), and Vislink Inc., a Delaware corporation (the ‘‘US Seller’’, and together with the UK Seller, the ‘‘Sellers’’), pursuant to a Business Purchase Agreement, dated December 16, 2016, as amended on January 16, 2017, by and among the Company, the Sellers and Vislink PLC, an England and Wales registered limited company, as guarantor. The purchase price paid for the transaction was an aggregate of $16 million consisting of (i) $6.5 million in cash consideration and (ii) promissory notes in the aggregate principal amount of $9.5 million (the ‘‘Notes’’). In connection with the Notes, the Company entered into a Security Agreement, dated February 2, 2017, with each of the Sellers (the ‘‘Security Agreements’’). The Notes were originally due to mature on March 20, 2017 (the ‘‘Maturity Date’’). Interest on the Notes was payable in cash on the Maturity Date at a rate per annum equal to LIBOR plus 1.9%. Pursuant to the Security Agreements, as collateral security for the Company’s obligations under the Notes, the Company granted the Sellers a security interest in certain assets purchased from the Sellers in connection with the transaction.

The fair value of the purchase consideration issued to the sellers of Vislink was allocated to the net tangible assets acquired. The Company accounted for the Vislink acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date at their respective fair values and consolidated with those of the Company. The fair value of the net assets acquired was approximately $31.5 million. The excess of the aggregate fair value of the net tangible assets has been treated as a gain on bargain purchase in accordance with ASC 805. The purchase price allocation was based, in part, on management’s knowledge of Vislink’s business and the results of a third party appraisal commissioned by management. The third party appraisal commissioned by management was finalized during the second quarter which resulted in the modification of the fair values estimated of certain assets acquired as compared to the preliminary amounts previously reported.

The Company utilized the services of an independent appraisal company to assist it in assessing the fair value of the assets and liabilities acquired. This assessment included an evaluation of the fair value of inventory, fixed assets and the fair value of the intangible assets acquired based upon the expected cash flows from the assets acquired. Additionally, the Company incorporated the carrying value of the remaining working capital as Vislink’s management represented that the carrying value of these assets and liabilities served as a reasonable proxy for fair value. The valuation process included discussion with management regarding the history and business operations of Vislink, a study of the economic and industry conditions in which Vislink competes and an analysis of the historical and projected financial statements and other records and documents.term.

NOTE 3 — ACQUISITION OF VISLINK (continued)

When it became apparent there was a potential for a bargain purchase gain, management reviewed the Vislink assets and liabilities acquired and the assumptions utilized in estimating their fair values. Further revisions to the estimates were not deemed necessary and after identifying and valuing all assets and liabilities of the business, the Company concluded that recording a bargain purchase gain with respect to Vislink was appropriate and required under GAAP.

The Company then undertook a review to determine what factors might contribute to a bargain purchase and if it was reasonable for a bargain purchase to occur. Factors that contributed to the bargain purchase price were:

Based upon these factors, the Company concluded that the occurrence of a bargain purchase was reasonable.

NOTE 4 — INTANGIBLE ASSETS

Intangible assets consist of the following:following finite assets:

Software Development CostsPatents and Licenses:

At September 30, 2017March 31, 2019 and December 31, 2016,2018, the Company hashad net software capitalized costs of $0.7 million and $1.4 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company recognized amortization of software development costs of $0.7 million and $2.5 million, respectively. During the three months ended September 30, 2017 and 2016, the Company recognized amortization of software development costs of $0.2 million and $0.7 million, respectively.

NOTE 4 — INTANGIBLE ASSETS (continued)

Patents and Licenses

At September 30, 2017 and December 31, 2016, the Company has net capitalized patents and licenses of $3.4$2.4 million and $3.9$2.5 million, respectively. The Company amortizes patents and licenses that have been filed over their useful lives which range between 18.5 to 20 years. The Company recognized $0.5 millioncosts of amortization expense related toprovisional patents and licenses forpending applications is not amortized until the nine months ended September 30, 2017patent is filed and 2016 and $0.2 million foris reviewed each reporting period to determine if it is likely that the three months ended September 30, 2017 and 2016.patent will be successfully filed.

Other Intangible AssetsAssets:

The Company’s remaining intangible assets include the trade names, technology and customer lists acquired in its acquisition of VislinkIMT and IMT. The Company amortizes trade names, technology and customer relationshipsVislink. These intangible assets are amortized over their estimated useful lives which range betweenof 3 to 15 years.

EstimatedFor the three months ended March 31, 2019 and 2018, the amortization of intangible assets amounted to $436,000 and $577,000, respectively. The weighted average remaining life of the amortization of the Company’s intangible assets is approximately 3.8 years.

The following table represents the estimated amortization expense for total intangible assets for the succeeding five years is as follows:years:

NOTE 54 — CONVERTIBLE NOTES PAYABLE

TrecoMay 2018 Financing

On October 6, 2011,May 29, 2018, the Company entered intocompleted a convertible promissory noteprivate placement of $4 million in principal of 6% Senior Secured Convertible Debentures (the “$2 Million Convertible Note”“Debentures”) in favor of Treco International, S.A. (“Treco”), as part of the settlement compensationand warrants to Treco for terminating an infrastructure agreement. The $2 Million Convertible Note is payable on its maturity date, October 6, 2018 and is convertible, at Treco’s option, intopurchase 300,000 shares of the Company’s common stock, par value $0.00001 per share, by executing certain agreements with accredited institutional investors (the “May 2018 Financing”). The Company received $3,636,760 net of debt issuance costs consisting of legal and placement fees totaling $363,240. The Debentures have a maturity date of May 29, 2019, with a conversion rate of $10.00 per share. If held beyond maturity, the conversion rate shall equal the lesser of (i) the then conversion price and (ii) 85% of the volume-weighted average price for the trading day immediately before the applicable conversion date. The Company shall pay interest to the holders on the aggregate and unconverted and outstanding principal amount on January 1, April 1, July 1 and October 1, with the remaining principal balance due at amaturity. The warrants mature on May 29, 2023 and have an exercise price of $35.00$10.00 per share. InterestThe warrants met the definition of a derivative as noted in ASC 815-10-15-83 and ASC 815-10-15-88. We allocated the proceeds from the issuance of this note and the warrants based on the fair value for each item. The Company determined the value of the warrants using the binomial model simulation and recorded a debt discount in the amount of $1,788,171 that was immediately expensed to interest, with an offset to derivative liabilities. The assumptions used in the binomial model style simulation at the date the funds were received are as follows: (1) dividend yield of 0%; (2) expected volatility of 163.50%; (3) risk-free interest rate of 9% per year is payable semi-annually in cash or shares0.27%; and (4) expected life of 5.00 years. We also determined that the convertible promissory notes contained BCF and calculated the relative fair value and assigned $193,877 to the BCF.

NOTE 4 — CONVERTIBLE NOTES PAYABLE (continued)

Debt Modification of the Company’s common stock, at the Company’s option. The accrued interest at September 30, 2017 was $87,000. May 2018 Financing executed on October 9, 2018

On January 10, 2017,October 9, 2018, the Company issued 24,397 sharesagreed to modify the May 2018 Financing with two of common stock as the semi-annual paymentoriginal four noteholders (the “Majority Holders”) issuing amended and restated agreements. These modifications principally provide for:

For the modification of interest of $90,000, which is alsothe conversion option to $4.50 from $10.00, the Company applied ASC 470-50-40-10(a) and calculated the difference between the fair value of the common stock onembedded conversion option immediately before and after the issuance date. On July 7, 2017, themodification. The Company issued 60,403 sharesconcluded this is not a debt extinguishment. The Company recorded an additional debt discount upon determination of common stock as the semi-annual payment of interest of $90,000, which is alsoan increase in the fair value of the common stock onconversion option amounting to $90,050 with an offset to equity. The amount calculated will be amortized as interest expense over the issuance date. Interest expense was $45,000 and $135,000, respectively,remaining term of the debt instrument using the interest method.

The Company considered ASC 470-50-40-17(b) to determine the proper accounting to apply for the three30,266 compensatory shares for the Majority Holders. Since the modification is not to be accounted for in the same manner as a debt extinguishment, the Company assigned a fair market value of $160,407 to the compensatory shares and nine months ended September 30, 2017 and 2016.recorded a debt discount amortized as interest expense over the remaining term of the debt instrument using the interest method

NOTE 6 — DEBT ASSIGNMENTDebt Modification of the May 2018 Financing executed on December 3, 2018

On January 13, 2017,December 3, 2018, the Asset Purchase Modification Agreement dated April 16, 2016 (the “Modification Agreement”), with a total obligationCompany entered into another modification agreement which led to an extinguishment of $1,038,000 was assigned to new holdersdebt of the accredited institutional investors of the May 2018 Financing and created new debt (the “New Holders”) and in full settlement of that agreement the previous note holder was paid in full. Simultaneously, the New Holders executed a new agreement on the sameobligations with revised terms and conditions available to the previous note holder plus $312,000 in issuance costs and $122,000 in guaranteed interest at 9% for a total obligation of $1,472,000. The Company recorded the $1,472,000 as a current liability on the condensed consolidated balance sheet, recognized the guaranteed interest of $122,000 in the condensed consolidated statement of operations, recorded the $312,000 as a contra liability account and amortized $312,000 as interest expense for the nine months ended September 30, 2017.amounts. These modifications principally provide for:

NOTE 6 — DEBT ASSIGNMENT (continued)

In determining the appropriate accountingThe Company considered ASC 470-50-40-6 to 40-23 for the foregoing debt exchange,proper accounting guidance for the Company considered many elementsDecember 31, 2018 modification of the transaction, including whether or notMay 2018 Financing. After the exchange resulted in a debt modification or extinguishment; the resulting accounting for transaction costs; the derecognition of the extinguished debt; and the appropriate recording of the newly issued debt instrument. The Company referred to the guidance in ASC 470 which indicateschange, it was concluded that from the debtor's perspective, an exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a non-troubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument isinstruments differ by at least ten percent different10% from the present value of the remaining cash flows under the terms of the original instrument. It is also noteddebt instruments (commonly referred to as the “10% cash flow test”). The Company concludes that these modified terms are considered substantially different from the original terms thus requiring extinguishment accounting. Following ASC 470-50-40-17(a), the Company determined the new debt instrument’s value exceeded the extinguishment of the old debt instrument plus fees paid associated with the modification and recognized a loss on debt extinguishment in the literature that transactions between or among creditors do not resultamount of $1,059,870. Additionally, the Company paid issuance costs related to the debt modifications in a modification or exchangethe amount of $70,000 recorded as an additional debt discount and is amortized as interest expense over the remaining term of the original debt instrument betweenusing the debtor and creditor. Accordingly, those transactions do not affect the accounting by the debtor, the carrying amount of the new note is not adjusted and the effects of the changes are to be reflected in future periods.interest method.

NOTE 4 — CONVERTIBLE NOTES PAYABLE (continued)

Series D Convertible Preferred Stock Leak-Out AgreementThe Company has listed a summary of the modified and non-modified debt as follows:

Items charged to interest expense for the three months ending March 31, 2019 and 2018 are:

NOTE5 — LEASES

On February 2, 2017,At lease inception, we determine if an arrangement is a lease and if it includes options to extend or terminate the New Holders agreedlease if it is reasonably certain that any sales of common stock underlying the Series D Convertible Preferred Stock, $0.00001 par value per share (the “Series D Preferred Stock”), would not,options will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are recognized as ROU assets included as operating lease ROU assets, net and operating lease liability obligations in the aggregate, exceed 2.75% of that day’s dollar volumeother current liabilities and other liabilities in our unaudited condensed consolidated balance sheet as of the Company’s common stock traded, provided thatcommencement date and at March 31, 2019. ROU assets represent our right to use an underlying asset for the New Holders shall be entitledlease term, and lease liabilities represent our obligation to sell no less than an aggregate of $27,500 each trading day.

Duringmake lease payments arising from the nine months ended September 30, 2017,lease. We recognize operating lease ROU assets and liabilities on the Company issued 5,000,000 shares of Series D Preferred Stock to the New Holders, which were simultaneously converted into 416,667 shares of common stock valued at approximately $648,000. The value of the common stock issued wascommencement date based on the fairpresent value of lease payments over the stock upon executionlease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the New Holders selling their respective shares. Duringinformation available on the ninecommencement date in determining the present value of lease payments.

As of March 31, 2019, ROU assets and lease liabilities were approximately $2.67 million, net and 2.74 million ($1.02 million of which is current), respectively. The weighted-average remaining term for lease contracts was 3.61 years at March 31, 2019, with maturity dates ranging from April 2020 to May 2025. The weighted-average discount rate was 9.2% at March 31, 2019.

For the three months ended September 30, 2017,March 31, 2019, the Company made cash payments of $824,000 as full satisfaction of the remaining amount due. Interest expenseCompany’s leasing arrangements include agreements for the nine months ended September 30, 2017 and 2016 was $434,000 and $0, respectively.

NOTE 7 — COMMITMENTS AND CONTINGENCIES

Leases

The Company's office rental,space, deployment sites and warehouse facility expenses equaledstorage warehouses, both domestically and internationally. The operating leases contain various lease terms and provisions with remaining lease commitments of approximately 2 months and 6 years as of March 31, 2019. During the three months ended March 31, 2019 and 2018, the Company sublet a portion of its space under operating leases at The Fairways and Hemel locations

Certain individual leases contain rent escalation clauses and lease concessions that require additional rental payments in aggregatethe later years of the term. We recognize rent expense for these types of contracts on a straight-line basis over the minimum lease term. We incurred approximately $180,000$297,000 and $163,000$359,000 of rental fees net of rental income of $35,000 and $38,000, respectively, under operating leases for the three months ended September 30, 2017March 31, 2019 and 2016, respectively, and $733,000 and $493,0002018, respectively. Adjustments for straight-line rental expense for the nine months ended September 30, 2017respective periods was not material, and 2016. The leasesas such, most of the cost recognized is reflected in connection with these facilities will expire on different dates from 2017 through 2025.

In connection with the acquisition of IMT, the Company assumed the lease obligations relating to IMT’s warehouse and office spacecash used in Mt. Olive, New Jersey. Payments under the Mt. Olive, New Jersey lease are $35,000operating activities for the year ending December 31, 2017 asrespective periods. This expense consisted primarily of payments for base rent on office and warehouse leases. Amounts related to short-term lease costs and taxes and variable service charges on leased properties were immaterial. We have the lease expired in February 2017. In January 2017, IMT signed a new leaseright, but no obligation, to renew individual leases for warehouse and office space in Hackettstown, New Jersey which runs through April 29, 2020. Future payments under such lease will amount to $232,000, of which $22,000 is the balance due for the remainder of 2017.various renewal terms.

In connection with the acquisition of Vislink, the Company assumed the lease obligations relating to Vislink office space in Colchester, U.K. which runs through March 2025. Future payments under such lease will amount to approximately $3,728,000, of which $173,000 is the balance due for the remainder of 2017.

In connection with the acquisition of Vislink, the Company assumed the lease obligations relating to Vislink office space in Dubai, United Arab Emirates. which runs through July 2018. Future payments under such lease will amount to approximately $40,000, of which $12,000 is the balance due for the remainder of 2017.

In connection with the acquisition of Vislink, the Company assumed the lease obligations relating to Vislink office space in Singapore which runs through August 2018. Future payments under such lease will amount to approximately $99,000, of which $9,000 is the balance due for the remainder of 2017.NOTE 5 — LEASES (continued)

The Company signed a newtable below lists location and lease for office space in Hemel, U.K. in May 2017 which runsexpiration dates from 2020 through April 2023. Future payments under such lease will amount to approximately $1,237,000, of which $58,000 is the balance due for the remainder of 2017.2025:

NOTE 7 — COMMITMENTS AND CONTINGENCIES (continued)

The Company’s total obligation underof minimum future annual rentals, exclusive of real estate taxes and related costs, areis approximately as follows:

The following table illustrates specific operating lease data as of March 31, 2019:

NOTE 6 — RELATED PARTY TRANSACTIONS

On January 1, 2019, a new related party agreement (the “MBMG Agreement”) became effective between the Company and MB Merchant Group, LLC (“MBMG”). The MBMG Agreement supersedes the previous agreement with MB Technology Holdings, LLC (“MBTH”). MBMG, the founding entity of MBTH, agrees to provide services in connection with, and Vislink Technologies agrees to compensate MBMG for both consulting services via a retainer and, on a success basis, for future mergers and acquisitions beginning January 1, 2019.

NOTE 6 — RELATED PARTY TRANSACTIONS (continued)

Legal

The following directors of MBMG have significant influence with the Company:

For the three months ended March 31, 2019 and 2018, the Company:

The Company is subject, from time to time, to claims by third parties under various legal theories. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition and cash flows. For the nine months ended September 30, 2017, the Company did not have any material legal actions pending.

NOTE 8 — STOCKHOLDERS’ EQUITY

August 2017 Financing

On August 18, 2017, the Company closed a financing for 1,560,978 shares of common stock and warrants to purchase 780,489 shares of common stock (the “August 2017 Warrants”).  The Company received gross proceeds of $3,200,000 from the offering, before deducting placement agentrecorded these fees and other offering expenses payable by the Company.  Aegis Capital Corp. acted as the sole placement agent for the offering.   The common stock was sold in a registered direct offering by means of a prospectus supplement to our then-existing shelf registration statement, while the August 2017 Warrants were sold privately to the same investors by means of an exemption from registration.  The August 2017 Warrants are exercisable immediately on the date of issuance at an exercise price of $2.50 per share and will expire five (5) years after the initial date of issuance.

Lincoln Park Purchase Agreement

On May 19, 2017, the Company entered into a purchase agreement (the “Lincoln Park Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“Lincoln Park”). Under the terms and subject to the conditions of the Lincoln Park Purchase Agreement, the Company has the right to sell to Lincoln Park, and Lincoln Park is obligated to purchase, up to $15,000,000 in shares of common stock, subject to certain limitations, from time to time over the 30-month period commencing on the date that a registration statement covering the resale of shares of common stock issuable under the Lincoln Park Purchase Agreement is declared effective by the Securities and Exchange Commission (the “SEC”) and a final prospectus in connection therewith is filed. Pursuant to the Registration Rights Agreement, the Company agreed to file such registration statement with the SEC within sixty (60) business days of the execution of the Lincoln Park Purchase Agreement.

NOTE 8 — STOCKHOLDERS’ EQUITY (continued)

Pursuant to the Lincoln Park Purchase Agreement, the Company may, at its sole discretion and subject to certain conditions, direct Lincoln Park to purchase up to 125,000 shares of common stock on any business day (such purchases, “Regular Purchases”), provided that at least one (1) business day has passed since the most recent Regular Purchase was completed, and in no event will the amount of a single Regular Purchase exceed $1.0 million. The purchase price of Regular Purchases will be based on the prevailing market prices of the common stock, which shall be equal to the lesser of the lowest sale price of the common stock during the purchase date and the average of the three (3) lowest closing sale prices of the common stock during the ten (10) business days prior to the purchase date. The Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or additional purchases if the closing sale price of the common stock is not below the threshold prices as set forth in the Lincoln Park Purchase Agreement. There is no upper limit on the price per share that Lincoln Park must pay for common stock under a Regular Purchase or an accelerated purchase.

In connection with its 2017 Annual Meeting of Stockholders held on June 15, 2017, the Company did not receive stockholder approval, as required pursuant to Nasdaq Marketplace Rule 5635(d), to issue shares of common stock under the Lincoln Park Purchase Agreement in an amount equal to 20% or more of the Company’s outstanding shares of common stock. As such, the Company will not be permitted to draw down the full $15,000,000 in shares of common stock under the Lincoln Park Purchase Agreement unless and until the Company receives such stockholder approval.

Under the Lincoln Park Purchase Agreement, the Company is required to issue to Lincoln Park 192,431 shares of common stock as commitment shares in consideration for entering into the Lincoln Park Purchase Agreement. The 192,431 shares of common stock were issued on September 11, 2017 with a fair market value of $302,000, which was included in general and administrative expenses foron the threeaccompanying Unaudited Condensed Consolidated Statements of Operations and nine months ended September 30, 2017.included such fees in due to related parties on the Unaudited Condensed Consolidated Balance Sheet. The balances outstanding to MBMG at March 31, 2019 and December 31, 2018 were $276,000 and $361,000, respectively.

As of September 30, 2017, the Company has not sold any shares of common stock under the Lincoln Park Purchase Agreement. 

February 2017 Financing

On February 14, 2017, the Company completed a public underwritten offering of 1,750,000 shares of its common stock and five year warrants to purchase up to an aggregate of 1,312,500 shares of its common stock at an exercise price of $2.00 per share. The Company received $3,500,000 in gross proceeds from the offering, before deducting the associated underwriting discount and estimated offering expenses payable by the Company. Aegis Capital Corp. acted as sole book-running manager for the offering.

Exercises of Warrants

From January 1, 2017 to September 30, 2017, warrants issued in connection with the December 2016 financing were exercised into 1,062,113 shares of common stock. The Company received $2,124,000 in gross proceeds from the exercise of such warrants.

NOTE 8 — STOCKHOLDERS’ EQUITY (continued)

Other Common Stock Issuances

During the nine months ended September 30, 2017, the Company issued:

Warrants and Options

During the three and nine months ended September 30, 2017, the Company recorded approximately $795,000 and $1,397,000, respectively, as stock compensation expense from the amortization of stock options issued in prior periods. During the three and nine months ended September 30, 2016, the Company recorded $39,000 and $264,000, respectively, as stock compensation expense from the amortization of stock options issued in prior periods.

On February 16, 2017, the Board of Directors of the Company (the “Board”) approved a motion to cancel all outstanding stock options as the options were all out of the money in all previous stock option plans, thereby cancelling the 1,844 options that were outstanding on December 31, 2016.

On March 16, 2017, the Board passed a motion to grant options to certain directors, employees and advisors of the Company, and the Company issued 3,555,500 ten (10)-year options with an exercise price of $1.55 per share on March 24, 2017. The fair value of the options granted on March 24, 2017 was $1.549 per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 1.90%, dividend yield of -0-%, volatility factor of 286.51% and the expected life of options of 6.00 years. The options vest at one third on March 24, 2018, one third on March 24, 2019 and one third on March 24, 2020.

On July 1, 2017, the Company issued 2,810,000 ten (10)-year options to employees with an exercise price of $1.62 per share. The fair value of the options granted on July 1, 2017 was $1.629 per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 1.84%, dividend yield of -0-%, volatility factor of 283.93% and the expected life of options is 6.00 years. The options vest at one third on July 1, 2018, one third on July 1, 2019 and one third on July 1, 2020.

NOTE 8 — STOCKHOLDERS’ EQUITY (continued)

As of September 30, 2017, the weighted average remaining contractual life was 9.6 years for options outstanding and -0- years for options exercisable. The intrinsic value of options exercisable at September 30, 2017 and 2016 was $0.04 per share and $0, respectively. As of September 30, 2017, the remaining expense is approximately $8.0 million over the remaining amortization period which is 2.75 years. The Company estimates forfeiture and volatility using historical information.  The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues over the equivalent lives of the options. The expected life of the options represents the estimated period of time using the simplified method. The Company has not paid dividends on common stock and no assumption of dividend payment is made in the model.

A summary of the Company’s warrant and option activity is as follows:

Warrants

NOTE 97 — DERIVATIVE LIABILITIES

Each of the warrants issued in connection with ourthe August 2015 May 2016 and July 2016 underwritten offerings andoffering, the February 2016 Series B Preferred Stock Offering, the May 2016 financing, the July 2016 financing, the August 2017 underwritten offering, and the May 2018 Financing have been accounted for as derivative liabilities as each of the warrants contain a net cash settlement provision whereby, upon certain fundamental events, the holders could put the warrants back to the Company for cash.

The following are the key assumptions that were used in connection with the valuation of the warrants exercisable into common stock on September 30, 2017:as of March 31, 2019 and 2018:

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who reportwhich reports to the Chief Financial Officer, determinedetermines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. The Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments. In accordance with ASC Topic 480,Distinguishing Liabilities from Equity,U.S. GAAP the fair value of these warrants is classified as a liability on the Company’s Condensed Consolidated Balance Sheetsconsolidated balance sheets because, according to the terms of the warrants, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders. Such instruments do not have fixed settlement provisions and have also been recorded as derivative liabilities. Corresponding changes in the fair value of the derivative liabilities are recognized in earnings on the Company’s Condensed Consolidated Statementsconsolidated statements of Operationsoperations in each subsequent period.

NOTE 7 — DERIVATIVE LIABILITIES (continued)

The Company’s derivative liabilities are carried at fair value and arewere classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs. In order to calculate fair value, the Company uses a binomial model style simulation, as the value of certain features of the warrant derivative liabilities would not be captured by the standard Black-Scholes model.

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis: