As filed with the Securities and Exchange Commission on October 23, 2013

Registration No. 333-     

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

FORM S-1
 
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933



 

xG Technology, Inc.

(Exact name of registrant as specified in its charter)



 

   
Delaware   519100   20-585-6795
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)


 

John C. Coleman
xG Technology, Inc.
240 S. Pineapple Avenue, Suite 701
Sarasota, FL 34236
(941)-953-9035

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

The Company Corporation
2711 Centerville Road
Wilmington, DE 19808
(800)-474-8135

(Name, address, including zip code, and telephone number,
including area code, of agent for service)



 

Copy to:

 
David E. Danovitch, Esq.
Robinson Brog Leinwand Greene
Genovese & Gluck P.C.
875 Third Avenue — 9 th Floor
New York, New York 10022
(212) 603-6300
  Yvan-Claude Pierre, Esq.
William N. Haddad, Esq.
Reed Smith LLP
599 Lexington Avenue 22 nd Floor
New York, New York 10022
(212) 521-5400


 

Approximate date of commencement of proposed sale to the public: Upon after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 
Large Accelerated Filer o   Accelerated Filer o
Non-Accelerated Filer o   Smaller Reporting Company x
 

 


 
 

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CALCULATION OF REGISTRATION FEE

   
Title of Each Class of Securities to be Registered   Proposed Maximum Aggregate Offering Price (1) (2)   Amount of Registration Fee
Common Stock, $0.00001 par value per share (3)   $ 10,000,000     $ 1,288.00  
Underwriters’ Warrants to purchase common stock (4)   $ 0     $ 0  
Common Stock, underlying Underwriters’ Warrants (5)   $ 375,000     $ 48.30  
TOTAL   $ 10,375,000     $ 1,336.30  

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) In accordance with Rule 457(o) under the Securities Act, the number of shares being registered and the proposed maximum offering price per share are not included in this table. Includes the offering price of additional shares that the underwriters have the option to purchase from the Registrant to cover over-allotment, if any.
(3) Pursuant to Rule 416 under the Securities Act, the shares of common stock registered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of stock splits, stock dividends, recapitalizations or other similar transactions.
(4) In accordance with Rule 457(g) under the Securities Act, no separate registration fee is required with respect to the warrants registered hereby.
(5) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants are exercisable at a per share exercise price equal to 125% of the public offering price. The proposed maximum aggregate offering price of the underwriters’ warrants is $375,000, which is equal to 125% of $300,000 (3% of $10,000,000).

Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the commission, acting pursuant to said section 8(A), may determine.


 
 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

   
PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION   DATED OCTOBER 23, 2013

$[    ] Common Stock

[GRAPHIC MISSING]

This is a firm commitment public offering of $[    ] of common stock of xG Technology, Inc.

Currently, our common stock is traded on the NASDAQ Capital Market under the symbol “XGTI”. The closing price of our shares on NASDAQ on October 22, 2013 was $3.00 per share. At present, there is a very limited market for our common stock.

We effected a 1-for-25 reverse stock split on March 24, 2013 and a 1-for-1.4 reverse stock split on March 28, 2013. Unless we indicate otherwise, all references to share numbers in this prospectus reflect the effects of these reverse stock splits.

We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for future filings.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus for a discussion that should be considered in connection with an investment in our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

     
  Per Share   Per Warrant   Total
Public offering price   $          $          $       
Underwriting discounts and commissions (1)   $     $     $  
Offering proceeds to us, before expenses   $     $     $  

(1) The underwriters will receive compensation in addition to the discounts and commissions. See “Underwriting” for a full description of compensation payable to the underwriters.

We have granted a 45-day option to the underwriters to purchase up to [    ] additional shares of common stock, if any.

The underwriters expect to deliver our securities to purchasers in the offering on or about            , 2013.

Joint Book-Running Managers

 
Aegis Capital Corp   Feltl and Company

The date of this prospectus is [           ], 2013


 
 

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[GRAPHIC MISSING]


 
 

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TABLE OF CONTENTS

 
  Page
Summary     1  
The Offering     6  
Summary Financial Data     8  
Risk Factors     10  
Cautionary Note Regarding Forward-Looking Statements     27  
Use of Proceeds     28  
Dividend Policy     28  
Capitalization     29  
Market Price Information for Our Securities     30  
Dilution     31  
Management’s Discussion and Analysis of Financial Condition and Results of Operations     33  
Business     48  
Management     68  
Executive Compensation     74  
Related Party Transactions     83  
Principal Stockholders     89  
Description of Securities     91  
Shares Eligible for Future Sale     94  
Underwriting     97  
Legal Matters     104  
Experts     104  
Where You Can More Additional Information     104  
Index to Financial Statements     F-1  
Glossary     G-1  

You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information that is different. We are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, prospects, financial condition and results of operations may have changed since that date.

Information contained in, and that can be accessed through, our web site, www.xgtechnology.com , does not constitute part of this prospectus.

The xG logo is a trademark of xG Technology, Inc. All other trademarks and service marks appearing in this prospectus are the property of their respective holders.

This prospectus includes market and industry data that has been obtained from third party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management’s knowledge of such industries has been developed through its experience and participation in these industries. While our management believes the third party sources referred to in this prospectus are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this prospectus or ascertained the underlying economic assumptions relied upon by such sources. Internally prepared and third party market forecasts, in particular, are estimates only and may be inaccurate, especially over long periods of time. In addition, the underwriters have not independently verified any of the industry data prepared by management or ascertained the underlying estimates and assumptions relied upon by management. Furthermore, references in this prospectus to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this prospectus.

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SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully before making an investment decision, especially the “Risk Factors” and the financial statements and the related notes. Unless the context provides otherwise, all references herein to “xG”, the “Company”, we”, “our” and “us” refer to xG Technology, Inc.

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented on a pro forma basis to reflect the reverse stock split of our outstanding shares of common stock at a ratio of 1-for-25, that we effected on March 24, 2013, and the reverse stock split of our outstanding shares of common stock at a ratio of 1-for-1.4, that we effected on March 28, 2013.

Our Company

xG Technology, Inc. has developed a broad portfolio of innovative intellectual property that we believe will enhance wireless communications. Our intellectual property is embedded in proprietary software algorithms that offer cognitive interference mitigation and spectrum access solutions.

We have generated material revenues in 2008 and 2009 attributed to the Company’s BSN250 voice-only product line. Upon the introduction of various smartphones in 2007 (and later) which could handle both voice and data, the Company made the decision it was necessary to enhance its voice-only product line to include data services. Beginning in July 2009, the Company focused on enhancing its BSN250 and TX70 product line for data services and we delivered such a system to the US Army in 2011. The US Army subsequently requested our BSN250 should integrate with commercial off the shelf (COTS) smartphones. In 2013, the Company has introduced a new product line that can handle both voice and data services. These new products are called xAP (base station), xMod and xVM. The latter two are able to communicate to any COTS device. We have generated significant net losses for the past several years and we expect to continue to realize net losses for the immediate future. We estimate that we will begin to generate revenues again sufficient to cover the cost of our operations once our new voice and data products are delivered to customers in 2014.

Our Company was founded on the premise that the wireless communications industry is facing a spectrum crisis as demand for flexible, affordable voice and data access rapidly grows. We have developed frequency-agnostic cognitive radio solutions to address this increasing demand by eliminating the need to acquire scarce and expensive licensed radio spectrum and thus ideally lowering the total cost of ownership for wireless broadband access. With such fast growing demand straining network capacity, our intellectual property is also designed to help wireless broadband network operators make more efficient use of existing spectrum allocations. We are targeting numerous industries world-wide, such as telecommunications, cable, defense, and public safety, and markets ranging from rural to urban areas and expeditionary deployments.

The implementation of our cognitive radio intellectual property is xMax®. We believe the xMax® system, represents the only commercially available cognitive radio network system that is designed to include interference mitigation by using our patented spatial processing. xMax® implements our proprietary interference mitigation software that can increase capacity on already crowded airwaves by improving interference tolerance, enabling the delivery of a comparatively high Quality of Service where other technologies would not be able to cope with the interference. We believe that the xMax® system will also, when in a future development operating on more than one radio channel, deliver dynamic spectrum access by using our patented self-organizing network techniques in 2013.

Our system is frequency agnostic, although currently designed to operate within the 902 – 928 MHz unlicensed band. xMax® serves as a mobile voice over internet protocol (“VoIP”) and broadband data system that utilizes an end-to-end Internet Protocol (“IP”) system architecture. The xMax® product and service suite includes a line of access points, mobile switching centers, network management systems, deployment tools, and customer support. The xMax® system will allow mobile operators to utilize free, unlicensed 902 – 928 MHz ISM band spectrum (which spectrum is available in all of the Americas except French Guiana) instead of purchasing scarce expensive licensed spectrum. Our xMax® system will also enable enterprises to set up a mobile communications network in an expeditious and cost effective manner.

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In addition, we believe that our xMax® cognitive radio technology can also be used to provide additional capacity to licensed spectrum by identifying and utilizing unused bandwidth within the licensed spectrum.

Below is a diagram that provides a high-level overview of the xMax® network architecture:

[GRAPHIC MISSING]

We are executing on our sales and marketing strategy and have entered into agreements both direct with end-customers as well as with indirect channel network partners. These customer engagements primarily relate to two of our target markets in rural telecommunications and defense. Together, they comprise commitments to purchase xMax® cognitive radio networking equipment, engineering services and other hardware worth approximately $35.4 million. See further in the section entitled “Customers” below.

As of the date of this prospectus, 56.35% of the shares of our common stock are beneficially owned by MBTH. MBTH was co-founded in 2010 by Rick Mooers, Roger Branton and George Schmitt in order to invest in, and provide expertise and guidance to, and other support to xG Technology. Richard Mooers, Roger Branton, and George Schmitt are directors of MBTH. MBMG, a merchant bank owned by family entities or trusts related to Richard Mooers and Roger Branton, has a 45.20% interest in MBTH as of October 22, 2013. George Schmitt has a direct 36.32% ownership interest in MBTH as of October 22, 2013 and has been granted an option to purchase MBTH shares sufficient to give him an additional 5% of the equity ownership of MBTH shares. Since its founding, MBTH has provided xG Technology with significant financial and other support to us, including $7.8 million indebtedness under the promissory note issued by us to MBTH pursuant to a subscription agreement between us and MBTH dated January 16, 2013 (together, the “Bridge Loan”). On July 18, 2013, MBTH, along with other investors, converted the Bridge Loan in exchange for 2,187,529 shares of our common stock and warrants to purchase 1,093,778 shares of our common stock, in satisfaction of the Bridge Loan. In addition, after joining MBTH, George Schmitt, CEO of MBTH, became one of our directors and is now our Executive Chairman. For further details on the financial support given by MBTH to us and other transactions and arrangements between us and MBTH, please see the section entitled “ Related Party Transactions, Other Transactions”.

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Our Strategy

We are developing a broad portfolio of innovative intellectual property that we believe will enhance wireless communications. Leveraging elements of our intellectual property portfolio, we plan to introduce a range of spectrum agnostic, cognitive radio solutions that span numerous industries and applications. We believe that these products, together with our ability to leverage our patent portfolio, present us with an attractive revenue model. Our strategy is initially to commercialize our intellectual property portfolio by developing and selling network equipment using our proprietary software algorithms to offer cognitive interference mitigation and spectrum access solutions. In the future, our strategy is for our intellectual property to be embedded by partners in a semiconductor chip that could be sold to third party equipment manufacturers and inserted in their devices and to license our intellectual property to other customers in vertical markets world-wide. Our technology roadmap currently projects this transition to begin in 2015.

Recent Developments

On October 22, 2013, we entered into a term sheet with a private investor (the “Investor”) for the purchase of convertible promissory notes (the “Notes”) for a minimum amount of $1.5 million and a maximum amount of $3 million (the “Bridge Financing”). The Notes will mature 12 months from the execution date and will have an interest rate of 12%. The Notes will be convertible into shares of our common stock at the lower of $5.50 or, in the event we complete a qualified offering, at 85% of the price of such offering. We may redeem the outstanding principal and interest at 130%. In the event we complete a qualified offering, we will retire 50% of the then principal outstanding.

The Notes are subject to the completion of a definitive agreement (the “Definitive Agreement”) which will include customary closing conditions and other customary provisions including event of defaults and anti-dilution rights. Should we fail to enter into a Definitive Agreement because we chose alternative financing, we will pay the Investor $50,000 as a breakup fee.

Aegis Capital Corp., an underwriter on this Offering, is the Placement Agent for the Financing and will receive a cash commission of 8% of the funds raised.

On October 16, 2013, we announced that we had shipped our first comprehensive Cognitive Radio system for a sale of $155,000 to the Walnut Hill Telephone Company in Lewisville, Arkansas.

On September 30, 2013, disinterested directors of the Company authorized a onetime agreement, whereby we issued to MBTH 1,599,453 shares of our common stock and a warrant to purchase 1,363,636 shares of our common stock at an exercise price of $6.87 per share for the difference in price between the shares issued to them in March 2013 at a price of $13.30 per share in exchange for the conversion of its 2011 Convertible Note and the $5.50 purchase price for shares sold in our initial public offering in July 2013. Additionally, the Modified Strike Price, agreed upon between the Company and MBTH in January 2013, of $13.30 per share for the two options representing 571,428 underlying shares granted to MBTH in February 2011 was lowered to $5.50.

On September 5, 2013, the xMod went through additional FCC required testing, receiving certification. We received FCC equipment authorization for the xVM on September 24, 2013. The xVM is a vehicular mounted xMod. On September 26, 2013, the Company received a FCC grant of certification for the xAP. This completes all required FCC testing needed for xMax cognitive radio products.

On August 19, 2013, the underwriters exercised in full their over-allotment option to purchase an additional 200,668 shares of common stock and warrants to purchase 100,334 shares of common stock with an exercise price of $6.87, at a purchase price to the public of $5.50 per share and $0.01 per warrant, for net proceeds to the Company, after deducting underwriter discounts, of $1,027,349.

On July 24, 2013, the Company closed its initial public offering of 1,337,792 shares of common stock, par value $0.00001 per share, and warrants to purchase 668,896 shares of common stock, at a purchase price to the public of $5.50 per share and $0.01 per warrant, for net proceeds to the Company, after deducting underwriter discounts and offering expenses, of $6,750,673. The warrant is to purchase one share of our common stock and will have an exercise price of $6.87 per share. The warrants are exercisable immediately

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and will expire five years from the date of issuance. The Company intends to use the offering for working capital and general corporate purposes. Feltl and Company and Aegis Capital Corp acted as joint underwriters for the offering.

Risks That We Face

An investment in our common stock involves a high degree of risk. You should carefully consider the risks summarized below. The risks are discussed more fully in the “Risk Factor” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited to:

we are an early-stage company with a history of losses and we may never achieve sustained profitability;
our business depends upon our ability to generate sustained sales of our products and technology;
we need to establish and maintain effective distribution channels;
our business depends on our ability to continually develop and commercialize wireless technologies and technologies designed to mitigate interference within the wireless spectrum;
we need to obtain or maintain patents or other appropriate protection for the intellectual property utilized in our technologies;
we will need to compete with companies with larger resources than we have; and
we may require additional capital to develop new products.

Market Overview

Our management believes that we are witnessing rapidly increasing demand in the marketplace for mobile bandwidth. The surge in demand is attributable to the proliferation of smartphones, tablet PCs and other broadband-centric devices, as well as the shift to data and video-intensive services. A Cisco report (the Cisco Visual Networking Index, February 2012) indicates that in 2011 more than 50% of the data traffic on mobile networks was video, and they forecast video traffic to account for over 70% of total mobile data traffic by 2016.

There has also been an increase in mobile voice demand as more people unplug their wired phones and rely on wireless devices for all of their calling needs. According to Cisco’s report, as well as several studies undertaken by the Federal Communications Commission (“FCC”), the demand for wireless services will continue to grow in the coming years. Cisco predicts mobile data traffic will increase 18-fold between 2011 and 2016, a 78% compounded annual growth rate (“CAGR”), reaching 10.8 billion Gigabytes per month.

The FCC has pledged to “source” 500 MHz of additional spectrum within the next 10 years, 300 MHz of which is supposed to be identified and made available within the next five years (FCC Mobile Broadband Report, 2010). In July 2012, the US President’s Council of Advisors on Science and Technology (“PCAST”) reported to Congress with proposals on the next steps to respond to the mandate to clear the 500MHz of spectrum for commercial use. The report noted that simply clearing and reallocating spectrum would not be sustainable and pointed to a recent study by the National Telecommunications and Information Administration (NTIA) which found that clearing of just one 95 MHz band will take 10 years, cost $18 billion, and cause significant disruption. Among its key recommendations are to adopt new technologies, including cognitive radios, that could help use existing spectrum more efficiently, stating that “the use of new radio technologies, including cognitive radios, will be an important tool in helping increase spectrum capacity and utilization”. The PCAST authors stated that agile (cognitive) radio technologies that make it possible for computerized radio systems to share spectrum on a vastly more efficient basis would make it possible to move from an era of scarcity to one of abundance.

Recognizing the spectrum constraints on fast growing needs for wireless connectivity, in September 2012 the European Commission published a communication promoting the shared use of radio spectrum resources. A study conducted for the European Commission showed that finding additional shared spectrum resources for wireless broadband could create significant net economic benefits for the European Union. With an increase of between 200 to 400 MHz in shared access spectrum for wireless broadband, the scenarios evaluated in the

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study showed a net increase in the value to the European economy of the order of several hundred billion Euros by 2020. The Commission, therefore, proposed steps to foster the development of wireless innovations in the EU to ensure that the currently allocated spectrum is exploited to the fullest extent possible. This has been followed by Ofcom, the telecommunications regulator in the UK, moving to complete the process to release TV Whites Spaces for shared use.

The commercial cellular networks do not represent the only services that are running out of capacity due to spectrum limitations. Wireless users around the globe, such as industrial and enterprise users, public safety agencies and those who use unlicensed spectrum (such as Wi-Fi and TV White Spaces), are demanding more spectrum, but are not being allocated the necessary spectrum due to the fact that regulators are under pressure to dedicate more and more spectrum to commercial mobile carriers as the demand for both voice and broadband access continues to increase.

While the spectrum currently available cannot satisfy the future growth of wireless data, we believe that getting more use out of spectrum (both licensed and unlicensed) by sharing it will provide a more effective and efficient solution for the industry than merely demanding more spectrum. More effective utilization of the available spectrum can be accomplished in a number of different ways. Advancements in radio technology, such as the movement to the LTE standard from the previous 3G networks, for example, will allow for better spectrum utilization. This has been attributed to the incorporation of new advanced technologies such as multiple in, multiple out (“MIMO”) and Orthogonal Frequency-Division Multiple Access (“OFDMA”) to reduce multiuser interference.

We believe that deployment of cognitive radio networks offers the best solution to addressing the pressing need for more efficient use of spectrum.

Company Information

The Company was organized as a limited liability company under the laws of the State of Delaware on August 26, 2002 under the name JTS Acquisitions, LLC. On March 21, 2003, we changed our name to xG Technology, LLC. Pursuant to a certificate of conversion and a certificate of incorporation filed with the State of Delaware on November 8, 2006, xG Technology, LLC converted to a Delaware corporation under the name xG Technology, Inc. Our executive offices are located at 240 S. Pineapple Avenue, Suite 701, Sarasota, FL 34236, and our telephone number is (941) 953-9035. Our website address is www.xgtechnology.com . Information contained in our website does not form part of the prospectus and is intended for informational purposes only.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We will remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Pursuant to Section 102 of the JOBS Act, we have provided reduced executive compensation disclosure and have omitted a compensation discussion and analysis from this prospectus. Pursuant to Section 107 of the JOBS Act, we have elected to utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

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THE OFFERING

Common stock offered by us:    
    [    ] shares.
Over-allotment option:    
    We have offered the underwriters a 45-day option to purchase up to [    ] additional shares of our common stock from us at the public offering price, less underwriting discounts and commissions. The option may be exercised only to cover any over-allotments.
Common stock outstanding after this offering:    
    [    ] shares, assuming all shares offered have been issued and sold (including the over-allotment option)
Use of proceeds:    
    We estimate that the net proceeds from our sale of shares of our common stock in this offering will be approximately $[    ] million, or approximately $[    ] million if the underwriters exercise their over-allotment option in full, based upon an assumed public offering price of $3.00 per share, the closing price of our common stock as listed on NASDAQ on October 22, 2013, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
    We expect to use the net proceeds of this offering for general corporate purposes, including working capital, product development, marketing activities, expanding our internal sales organization and further developing sales channels, funding the set-up of contract manufacturing production lines and other capital expenditures and repaying certain indebtedness. In addition, we may use a portion of the net proceeds from this offering we receive for acquisitions of, or investments in, complementary businesses, products, technologies or other assets.
Risk Factors:    
    See the section entitled “Risk Factors” beginning on page 10 for a discussion of factors to consider carefully before deciding whether to purchase shares of our common stock.
NASDAQ Symbol:    
    Common Stock — “XGTI”

The number of shares of our common stock to be issued and outstanding after this offering is based on 12,645,138 shares of common stock issued and outstanding as of the date of this prospectus, which number gives effect to the 1-for-25 and 1-for-1.4 reverse stock splits described below, and excludes:

285,714 shares of common stock issuable upon the exercise of the option granted to MB Technology Holdings, LLC (“MBTH”) on February 7, 2011 (as amended by agreement between us and MBTH as of January 16, 2013) at an exercise price of $13.30 per share (the “Modified Exercise Price”), which was subsequently lowered to $5.50 on September 30, 2013;
285,714 shares of common stock issuable upon the exercise of the option granted to MBTH on February 7, 2011 (as amended by agreement between us and MBTH as of January 16, 2013) at the Modified Exercise Price per share, which was subsequently lowered to $5.50 on September 30, 2013;
57,142 shares of common stock issuable upon the exercise of the conversion rights granted to Treco International, S.A. (“Treco”) on October 6, 2011 at a conversion price of $35.00;

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16,474 shares of common stock issuable by way of compensation to MBTH for the difference between the interest payment of 8% that we paid MBTH under the uncommitted convertible loan facility in the principal amount of $15,000,000 (the “May 2011 Shareholder Loan”) and the interest of 9.5% that MBTH pays to its investors for monies raised by MBTH to fund advances by MBTH to us under the May 2011 Shareholder Loan;
Up to 42,857 shares of common stock issuable upon exercise of the rights to be granted to MBTH to subscribe to new shares at a subscription price of $0.35 per new share if the holders of warrants to subscribe for MBTH shares or exchange for existing shares in our common stock held by MBTH (the “MBTH Warrants”) are exercised by the holders thereof (the “Additional Warrants”). MBTH Warrants were granted by MBTH, on the basis of one warrant for every $350 invested in MBTH, to investors in MBTH of funds for MBTH to lend to us under the May 2011 Shareholder Loan. The actual number of Additional Warrants to be granted by us depends on the cost to MBTH resulting from the exercise of the MBTH Warrants;
1,363,636 shares of common stock issuable upon the exercise of the warrant issued to MBTH pursuant to the onetime agreement approved on September 30, 2013, exercisable at $6.87 per share.
1,093,778 warrants issued to MBTH and other investors pursuant to the conversion of the Bridge Loan, exercisable at $6.87 per share.
28,584 shares of common stock issuable upon exercise of the rights to be granted to investors as part of the Bridge Loan, which are exercisable at $0.35 per share;
142,857 shares of common stock issuable upon exercise of the options agreed to be granted to MBTH on January 16, 2013 at an exercise price of $8.75 per share in consideration for ongoing strategic and commercial advisory services provided by MBTH to us;
680,847 shares of common stock issuable upon exercise of stock options outstanding under the 2004, 2005, 2006, 2007, and 2009 Stock Incentive Plans;
Shares reserved for future issuances under our 2013 Long Term Stock Incentive Plan. As of the date of this prospectus, we will not issue any further options/shares pursuant to the 2004, 2005, 2006, 2007 and 2009 Plans. All future grants will be made pursuant to the 2013 Plan. The amount of shares reserved for future issuances under our 2013 Plan will be equal to 15% of the amount of shares outstanding, which calculation shall be made on the first trading day of a new fiscal year;
8,571 warrants issued to Secure Strategy Group exercisable at $35.00 per share;
14,285 shares of common stock issuable upon the exercise of warrants granted to Mats Wennberg which are exercisable at $7.87 per share;
769,230 shares of common stock issuable upon the exercise of warrants sold to investors as part of our initial public offering, including those issued as part of the over-allotment, which are exercisable at $6.87 per share; and
40,134 shares of common stock issuable upon the exercise of warrants granted to underwriters as part of our initial public offering, which are exercisable at $6.87 per share; and
Any shares issuable upon the exercise of the Underwriters’ warrants.

We effected a 1-for-25 reverse stock split on March 24, 2013 and a 1-for-1.4 reverse stock split on March 28, 2013. Unless we indicate otherwise, all references to share numbers in this prospectus reflect the effects of these reverse stock splits. Unless otherwise indicated, all information in this prospectus assumes a public offering price of $3.00 per share of common stock.

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SUMMARY FINANCIAL DATA

The following table presents a summary of certain historical financial information. Historical results are not necessarily indicative of future results and you should read the following summary financial data in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, all included elsewhere in this prospectus. The summary financial data for the years ended December 31, 2012 and 2011 were derived from our audited financial statements, which are included elsewhere in this prospectus. The summary financial data for the six months ended June 30, 2013 and 2012 were derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include, in the opinion of management, all adjustments, which consist only of normal recurring adjustments that management considers necessary for the fair statement of the financial information set forth in those statements. The summary financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and related notes included elsewhere in this prospectus.

xG TECHNOLOGY, INC.
BALANCE SHEETS
AS OF JUNE 30, 2013 AND DECEMBER 31, 2012
(IN THOUSANDS EXCEPT PER SHARE DATA)

   
  Unaudited
June 30, 2013
  December 31, 2012
ASSETS
                 
Current assets
                 
Cash   $ 25     $ 271  
Inventory     453        
Prepaid expenses and other current assets     640       16  
Total current assets     1,118       287  
Property and equipment, net     1,560       1,725  
Intangible assets, net     18,622       17,608  
Total assets   $ 21,300     $ 19,620  
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
                 
Current liabilities
                 
Accounts payable   $ 2,165     $ 655  
Accrued expenses     1,170       754  
Accrued bonuses     2,633       2,633  
Accrued interest and fees     79        
Accrued interest and fees to related parties     946       1,169  
Due to related party     2,316       1,098  
Convertible bridge loan payable     1,577        
Convertible bridge loan payable to related party     6,471        
Convertible notes payable to related party           17,198  
Total current liabilities     17,357       23,507  
Convertible notes payable to related party     2,000       2,000  
Total liabilities     19,357       25,507  
Commitments
                 
Stockholders’ equity (deficit)
                 
Series A Convertible Preferred Stock – $0.01 par value per share:
                 
25,000,000 shares authorized, none issued or outstanding as of June 30, 2013 and December 31, 2012            
Common stock – $0.00001 par value, 300,000,000 and 250,000,000 shares authorized at June 30, 2013 and December 31, 2012, respectively;
                 
7,321,836 and 6,041,946 shares issued at June 30, 2013 and December 31, 2012, respectively     —*       —*  
Additional paid in capital     133,828       118,247  
Accumulated deficit     (131,863 )       (124,112 )  
Treasury stock, at cost – 2,284 shares at June 30, 2013 and December 31, 2012, respectively     (22 )       (22 )  
Total stockholder’s equity (deficit)     1,943       (5,887 )  
Total liabilities and stockholders’ equity (deficit)   $ 21,300     $ 19,620  

* Less than $1

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xG TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT NET LOSS PER SHARE DATA)

       
  Years ended December 31,   Six months ended June 30,
               (Unaudited)
     2012   2011   2013   2012
Revenue   $     $ 150     $     $  
Cost of revenue and operating expenses
                                   
Cost of components and personnel           50              
General and administrative expenses     5,543       5,505       2,508       2,642  
Development     4,806       5,249       2,999       1,899  
Stock based compensation     554       1,020       336       108  
Amortization and depreciation     2,063       1,806       870       1,027  
Total cost of revenue and operating expenses     12,966       13,630       6,713       5,676  
Loss from operations     (12,966 )       (13,480 )       (6,713 )       (5,676 )  
Other income (expense)
                                   
Interest expense, net     (535 )       (1,847 )       (1,038 )       (194 )  
Impairment     (286 )       (341 )              
Total other income (expense)     (821 )       (2,188 )       (1,038 )       (194 )  
Loss before income tax provision     (13,787 )       (15,668 )       (7,751 )       (5,870 )  
Income tax provision                        
Net loss   $ (13,787 )     $ (15,668 )     $ (7,751 )     $ (5,870 )  
Basic and diluted net loss per share     (2.29 )       (3.05 )       (1.15 )       (0.97 )  
Weighted average number of shares outstanding basic and diluted     6,031       5,145       6,723       6,025  

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RISK FACTORS

Our business faces many risks and an investment in our securities involves significant risks. Prospective investors are strongly encouraged to consider carefully the risks described below, as well as other information contained herein before investing. Investors are further advised that the risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also negatively impact our business operations or financial results. If any of the events or circumstances described in this section occurs, our business, financial condition or results of operations could suffer. Prospective investors in our securities should consider the following risks before deciding whether to purchase shares of our common stock.

Risks Related to the Company and Our Business

We have a history of operating losses and we expect to continue to realize net losses for at least the next 12 months.

We have recorded a net loss in each reporting period since our inception. Our net loss in the year ended December 31, 2012 was approximately $13,787,000. Our net loss for the six months ended June 30, 2013 was approximately $7,751,000. Our accumulated deficit at June 30, 2013 was approximately $131,863,000. The Company began its research and development activities in 2002, and has had significant net losses and will likely continue to incur net losses until we can successfully commercialize our products and technology. The Company expects to continue to have development costs as it develops the next generation of products. We intend to invest significantly in our business before we expect cash flows from operations will be adequate to cover our anticipated expenses. In addition, at this stage of our development we are subject to the following risks:

our results of operations may fluctuate significantly, which may adversely affect the value of an investment in our common stock;
we may be unable to develop and commercialize our products; and
it may be difficult to forecast accurately our key operating and performance metrics because of our limited operating history.

Our operating expenses will increase as we make further expenditures to enhance and expand our operations in order to support additional growth in our business and public company reporting and compliance obligations.

Historically, we limited our investment in infrastructure, however, in the future we expect our infrastructure investments to increase substantially to support our anticipated growth and as a result of our becoming a public reporting company in the United States. We intend to make additional investments in systems and personnel in order to expand our business and continue to expand our operations to support anticipated growth in our business. In addition, we may determine the need in the future to make changes to our sales model, which changes may result in higher selling, general and administrative expenses as a percentage of our revenues. We also expect to incur additional operating costs as a public reporting company following the completion of this offering. As a result of these factors, we expect our operating expenses to increase.

We may require additional capital in the future to develop new products. If we do not obtain any such additional financing, if required, our business prospects, financial condition and results of operations will be adversely affected.

We may require additional capital in the future to develop new products. We believe that the proceeds of this offering and revenues from operations will be sufficient to satisfy our needs for at least the next 12 months. We may need to obtain significant additional financing, both in the near and long term, to make planned capital expenditures, cover operating expenses and fund our ongoing development. We may not be able to secure adequate additional financing when needed on acceptable terms, or at all. To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at a price lower than our public offering price or the market price of our common stock at the time of such issuance. If we cannot secure sufficient additional funding we may be forced to forego strategic opportunities or delay, scale back and eliminate future product development.

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Defects or errors in our products and services or in products made by our suppliers could harm our brand and relations with our customers and expose us to liability. If we experience product recalls, we may incur significant expenses and experience decreased demand for our products.

Our products are inherently complex and may contain defects and errors that are only detectable when the products are in use. Because our products are used for both personal and business purposes, such defects or errors could have a serious impact on our end customers, which could damage our reputation, harm our customer relationships and expose us to liability. Defects or impurities in our components, materials or software, equipment failures or other difficulties could adversely affect our ability, and that of our customers, to ship products on a timely basis as well as customer or licensee demand for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our ability to achieve or sustain desired levels of profitability. We and our customers may also experience component or software failures or defects that could require significant product recalls, rework and/or repairs that are not covered by warranty reserves.

We expect to base our inventory purchasing decisions on our forecasts of customers’ demand, and if our forecasts are inaccurate, our operating results could be materially harmed.

As our customer base increases, we expect to place orders with our contract manufacturers based on our forecasts of our customers’ demand. Our forecasts will be based on multiple assumptions, each of which may cause our estimates to be inaccurate, affecting our ability to provide products to our customers. When demand for our products increases significantly, we may not be able to meet demand on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs in order to rush the manufacture and delivery of additional products. If we underestimate customers’ demand, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, we may purchase more inventory than we are able to sell at any given time or at all. In addition, we grant our distributors stock rotation rights, which require us to accept stock back from a distributor’s inventory, including obsolete inventory. As a result of our failure properly to estimate demand for our products, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our costs of revenues and reduce our liquidity. Our failure to accurately manage inventory relative to demand would adversely affect our operating results.

Although certain technical problems experienced by users may not be caused by our products, our business and reputation may be harmed if users perceive our solution as the cause of a slow or unreliable network connection, or a high profile network failure.

We expect that our products will be in many different locations and user environments and will be capable of providing mobile broadband connectivity and interference mitigation, among other applications. The ability of our products to operate effectively can be negatively impacted by many different elements unrelated to our products. Although certain technical problems experienced by users may not be caused by our products, users often may perceive the underlying cause to be a result of poor performance of our technology. This perception, even if incorrect, could harm our business and reputation. Similarly, a high profile network failure may be caused by improper operation of the network or failure of a network component that we did not supply, but other service providers may perceive that our products were implicated, which, even if incorrect, could harm our business, operating results and financial condition.

We may fail to recruit and retain qualified personnel.

We expect to rapidly expand our operations and grow our sales, development and administrative operations. This expansion is expected to place a significant strain on our management and will require hiring a significant number of qualified personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our marketing and development activities, and this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

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We rely on key executive officers, and their knowledge of our business and technical expertise would be difficult to replace.

We are highly dependent on our executive officers because of their expertise and experience in the telecommunications industry. We have three year employment agreements with our executive officers containing customary non-disclosure, non-compete, confidentiality and assignment of inventions provisions. We do not have “key person” life insurance policies for any of our officers. The loss of the technical knowledge and management and industry expertise of any of our key personnel could result in delays in product development, loss of customers and sales and diversion of management resources, which could adversely affect our operating results.

We and our contract manufacturers purchase some components, subassemblies and products from a limited number of suppliers. The loss of any of these suppliers may substantially disrupt our ability to obtain orders and fulfill sales as we design in and qualify new components.

We rely on third party components and technology to build and operate our products, and we rely on our contract manufacturers to obtain the components, subassemblies and products necessary for the manufacture of our products. Shortages in components that we use in our products are possible, and our ability to predict the availability of such components is limited. While components and supplies are generally available from a variety of sources, we and our contract manufacturers currently depend on a single or limited number of suppliers for several components for our products. If our suppliers of these components or technology were to enter into exclusive relationships with other providers of wireless networking equipment or were to discontinue providing such components and technology to us and we were unable to replace them cost effectively, or at all, our ability to provide our products would be impaired. We and our contract manufacturers generally rely on purchase orders rather than long-term contracts with these suppliers. As a result, even if available, we and our contract manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable quality to build our products in a timely manner. Therefore, we may be unable to meet customer demand for our products, which would have a material adverse effect on our business, operating results and financial condition.

Our intellectual property protections may be insufficient to properly safeguard our technology.

Our success and ability to compete effectively are, in large part, dependent upon proprietary technology that we have developed internally. Given the rapid pace of innovation and technological change within the wireless and broadband industries, the technological and creative skill of our personnel, consultants and contractors and their ability to develop, enhance and market new products and upgrades to existing products are critical to our continued success. We rely primarily on patent laws to protect our proprietary rights. As of October 18, 2013, in the US, we have 47 patents granted, 11 patent applications pending, and 3 provisional applications pending. Internationally, we have 65 patents granted, 59 patent applications pending, and 11 Patent Cooperation Treaty (PCT) applications. There can be no assurance that patents pending or future patent applications will be issued, or that if issued, we would have the resources to protect any such issued patent from infringement. Further, we cannot patent much of the technology that is important to our business. To date, we have relied on copyright, trademark and trade secret laws, as well as confidentiality procedures, non-compete and/or work for hire invention assignment agreements and licensing arrangements with our employees, consultants, contractors, customers and vendors, to establish and protect our rights to this technology and, to the best extent possible, control the access to and distribution of our technology, software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. There can be no assurance that the steps we take or will take will prevent misappropriation of, or prevent an unauthorized third party from obtaining or using, the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions. Litigation may be necessary in the future to enforce or protect our rights.

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We may be subject to claims of intellectual property infringement or invalidity. Expenses incurred with respect to monitoring, protecting, and defending our intellectual property rights could adversely affect our business.

Competitors and others may infringe on our intellectual property rights, or may allege that we have infringed on theirs. Monitoring infringement and misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect infringement or misappropriation of our proprietary rights. We may also incur significant litigation expenses in protecting our intellectual property or defending our use of intellectual property, reducing our ability to fund product initiatives. These expenses could have an adverse effect on our future cash flows and results of operations. If we are found to infringe on the rights of others we could be required to discontinue offering certain products or systems, to pay damages, or purchase a license to use the intellectual property in question from its owner. Litigation can also distract management from the day-to-day operations of the business.

Enforcement of our intellectual property rights abroad, particularly in China, is limited and it is often difficult to protect and enforce such rights.

Patent protection outside the United States is generally not as comprehensive as in the United States and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Even if patents are granted outside the United States, effective enforcement in those countries may not be available. Many companies have encountered substantial intellectual property infringement in countries where we sell, or intend to sell, products or have our products manufactured.

In particular, the legal regime relating to intellectual property rights in China is limited and it is often difficult to protect and enforce such rights. The regulatory scheme for enforcing China’s intellectual property laws may not be as developed as regulatory schemes in other countries. Any advancement of an intellectual property enforcement claim through China’s regulatory scheme may require an extensive amount of time, allowing intellectual property infringers to continue largely unimpeded, to our commercial detriment in the Chinese and other export markets. In addition, rules of evidence may be unclear, inconsistent or difficult to comply with, making it difficult to prove infringement of our intellectual property rights. As a result, enforcement cases involving technology, such as copyright infringement of software code, or unauthorized manufacture or sale of products containing patented inventions, may be difficult or not possible to sustain.

These factors may make it increasingly complicated for us to enforce our intellectual property rights against parties misappropriating or copying our technology or products without our authorization, allowing competing enterprises to harm our business in the Chinese or other export markets by affecting the pricing for our products, reducing our own sales and diluting our brand or product quality reputation.

The intellectual property rights of others may prevent us from developing new products or entering new markets.

The telecommunications industry is characterized by the rapid development of new technologies, which requires us to continuously introduce new products and expand into new markets that may be created. Therefore, our success depends in part on our ability to continually adapt our products and systems to incorporate new technologies and to expand into markets that may be created by new technologies. If technologies are protected by the intellectual property rights of others, including our competitors, we may be prevented from introducing new products or expanding into new markets created by these technologies. If the intellectual property rights of others prevent us from taking advantage of innovative technologies, our financial condition, operating results or prospects may be harmed.

We rely on the availability of third-party licenses. If these licenses are available to us only on less favorable terms or not at all in the future, our business and operating results would be harmed.

We have incorporated third-party licensed technology into our products. It may be necessary in the future to renew licenses relating to various aspects of these products or to seek additional licenses for existing or new products. There can be no assurance that the necessary licenses will be available on acceptable terms or at all. The inability to obtain certain licenses or other rights, or to obtain those licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in product releases

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until such time, if ever, as equivalent technology could be identified, licensed or developed and integrated into our products and might have a material adverse effect on our business, operating results and financial condition. Moreover, the inclusion in our products of intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.

Our customers could also become the target of litigation relating to the patent and other intellectual property rights of others.

Any litigation relating to the intellectual property rights of others could trigger technical support and indemnification obligations in licenses or customer agreements that we may enter into. These obligations could result in substantial expenses, including the payment by us of costs and damages relating to claims of intellectual property infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, any such litigation could disrupt the businesses of our customers, which in turn could hurt our relationships with such customers and cause the sale of our products to decrease. No assurance can be given that claims for indemnification will not be made, or that if made, such claims would not have a material adverse effect on our business, operating results or financial conditions.

If our technology does not work as well as planned or if we are unsuccessful in developing and selling new products or in penetrating new markets, our business and operating results would suffer.

Our success and ability to compete are dependent on technology which we have developed or may develop in the future. There is a risk that the technology that we have developed or may develop may not work as intended, or that the marketing of the technology may not be as successful as anticipated. Further, the markets in which we and our customers compete or plan to compete are characterized by constantly and rapidly changing technologies and technological obsolescence. Our ability to compete successfully depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost effective basis to keep pace with market needs and satisfy the demands of customers. A fundamental shift in technologies in any of our target markets could harm our competitive position within these markets. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenue and a loss of customer wins to our competitors. The development of new technologies and products generally require substantial investment and can require long development and testing periods before they are commercially viable. We intend to continue to make substantial investments in developing new technologies and products and it is possible that that we may not successfully be able to develop or acquire new products or product enhancements that compete effectively within our target markets or differentiate our products based on functionality, performance or cost and that our new technologies and products will not result in meaningful revenue. Any delays in developing and releasing new or enhanced products could cause us to lose revenue opportunities and customers. Any technical flaws in product releases could diminish the innovative impact of our products and have a negative effect on customer adoption and our reputation. If we fail to introduce new products that meet the demands of our customers or target markets or do not achieve market acceptance, or if we fail to penetrate new markets, our revenue will not increase over time and our operating results and competitive position would suffer.

Computer malware, viruses, hacking and phishing attacks could harm our business and results of operations.

Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry, and may occur on our systems in the future. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security, and availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and our ability to attract and retain customers.

If we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.

Our ability to grow successfully requires an effective planning and management process. The expansion and growth of our business could place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully, we must continue to improve and expand our systems

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and infrastructure in a timely and efficient manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

If we are unable to expand our sales and marketing capabilities or enter into more agreements with third parties to sell and market any products we may develop, we may be unable to generate product revenue.

We are currently building our internal sales organization for the sales, marketing and distribution of our products. Part of the proceeds of the Offering is intended to be used to expand our internal sales organization and develop further our channels to market. In order to commercialize xMax® or any of our other products, we must build our sales, marketing, distribution, managerial and other non-technical capabilities or make arrangements with other parties to perform these services. The expansion of our own sales force to market any products we may develop will increase our operating costs and be time consuming. We cannot be certain that we would be able to successfully develop this capacity. If we are unable to expand our sales and marketing capability or any other non-technical capabilities necessary to commercialize any product we may develop, we will need to contract with other parties to market and sell any products we may develop. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with other parties, we may not be able to generate product revenue and may not become profitable.

If our estimates relating to our critical accounting policies are based on assumptions or judgments that change or prove to be incorrect, our operating results could fall below expectations of financial analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of financial analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our financial statements include those related to revenue recognition, inventory, product warranties, allowance for doubtful accounts, stock-based compensation expense and income taxes.

Our exposure to the credit risks of our customers may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.

In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. Economic conditions may impact some of our customers’ ability to pay their accounts payable. While we will attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur.

Demand for our defense-related products depends on government spending.

The U.S. military market is largely dependent upon government budgets, particularly the defense budget. The funding of government programs is subject to Congressional appropriation. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may be expected to continue for several years. Consequently, programs are often only partially funded and additional funds are committed only as Congress makes further appropriations. No assurance can be given that an increase in defense spending will be allocated to programs that would benefit our business. A decrease in levels of defense spending or the government’s termination of, or failure to fully fund, one or more of the contracts for which our products may be utilized could have a material adverse effect on our financial position and results of operations.

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Our failure to obtain and maintain required certifications could impair our ability to bid on defense contracts.

In order for us to participate in certain government programs we could be required to obtain and maintain quality certification and certain standards for Department of Defense wireless security such as certification by the Joint Interoperability and Test Command, (or “JITC”) and to meet production standards in order to be eligible to bid on government contracts. If we fail to maintain these certifications or any additional certification which may be required, we will be ineligible to bid for contracts which may impair our financial operations and consequently, our ability to continue in business.

Amounts included in our total backlog and order backlog may not result in actual billings or revenue or translate into profits.

Our total backlog represents future product and service billings that we expect to generate pursuant to contracts that we have entered into with our customers. Our total backlog includes our order backlog, which represents future billings for open purchase orders and other firm commitments. We anticipate that our total backlog and order backlog will fluctuate from period to period throughout our fiscal year 2013 and beyond.

As an emerging company our backlog is significant when compared to our historical revenue and the revenue we anticipate in the foreseeable future. We cannot guarantee that our total backlog or order backlog will result in actual billings in the originally anticipated period or at all. In addition, the purchase agreements and contracts reflected in our total backlog and order backlog may not generate margins that we anticipate. Given that we have only recently begun to market our current product and service offerings, we only recently began to track total backlog and order backlog on a consistent basis as performance measures and as a result, we do not have significant experience in determining the level of realization that we will actually achieve on our total backlog and order backlog.

Our customer contracts are typically structured as purchase and service agreements. The deployments called for under our agreements could extend for a number of years. Total backlog is an estimate based upon contractual terms, existing purchase orders and other available information regarding the amount and timing of expected future purchase orders to be placed by our customers and distributors, including non-binding forecasts.

No assurance can be made that firm purchase orders will yield revenues in the amounts we estimate, within the time period we expect, or at all. Total backlog is subject to adjustments due nature of our customer deployments. Adjustments can result from a variety of factors, including changes in the nature or scope of customer deployments, the impact of contingency provisions related to future delivery or performance, customer cancellations, market conditions, delayed regulatory approvals and customer defaults. If our total backlog or order backlog fails to materialize as expected, we could experience a material reduction in future billings, revenue, and operating results.

Regulation of the telecommunications industry could harm our operating results and future prospects.

The traditional telecommunications industry is highly regulated, and our business and financial condition could be adversely affected by changes in regulations relating to the Internet telecommunications industry.

Currently, there are few laws or regulations that apply directly to access to or commerce on IP networks, but future regulations could include sales taxes and tariffs in previously unregulated areas and provider access charges. We could be adversely affected by regulation of IP networks and commerce in any country where we market equipment and services to service or content providers. Regulations governing the range of services and business models that can be offered by service providers or content providers could adversely affect those customers’ needs for products designed to enable a wide range of such services or business models. For instance, the U.S. Federal Communications Commission has issued regulations governing aspects of fixed broadband networks and wireless networks. These regulations might impact service provider and content provider business models and as such, providers’ needs for Internet telecommunications equipment and services. In addition, many jurisdictions are evaluating or implementing regulations relating to cyber security, privacy and data protection, which could affect the market and requirements for networking and security equipment.

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In addition, environmental regulations relevant to electronic equipment manufacturing or operations may impact our business and financial condition adversely. For instance, the European Union has adopted regulations on Electronic waste, e-waste, e-scrap, or waste electrical and electronic equipment (“WEEE”), Restriction of the Use of certain Hazardous Substances (“ROHS”) and Registration, Evaluation, Authorisation and Restriction of Chemical substances (“REACH”). In addition, some governments have regulations prohibiting government entities from purchasing security products that do not meet specified indigenous certification criteria even though those criteria may be in conflict with accepted international standards. Similar regulations are in effect or under consideration in several jurisdictions where we do business.

The adoption and implementation of such regulations could decrease demand for our products, increase the cost of building and selling our products and impact our ability to ship products into affected areas and recognize revenue in a timely manner. Any of these impacts could have a material adverse effect on our business, financial condition, and results of operations.

To the extent that we subcontract work under our contracts, any failures by our subcontractors could impair our relations with the contracting agencies.

We may use subcontractors to perform work or provide materials for contracts that we may secure and we may become dependent upon the subcontractors to meet the quality and delivery requirements of the contracting agency. To the extent that the products or services provided by the subcontractors do not meet the required specifications or are delivered late, the contract may be terminated by the U.S. government for default. Such a default could result in our disqualification from bidding on contracts, which could adversely affect our financial operations.

Our ability to sell our products will be highly dependent on the quality of our support and services offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and results of operations.

Once our products are deployed, our channel partners and end-customers will depend on our support organization to resolve any issues relating to our products. A high level of support will be important for the successful marketing and sale of our products. In many cases, our channel partners will likely provide support directly to our end-customers. We will not have complete control over the level or quality of support provided by our channel partners. These channel partners may also provide support for other third-party products, which may potentially distract resources from support for our products. If we and our channel partners do not effectively assist our end-customers in deploying our products, succeed in helping our end-customers quickly resolve post-deployment issues or provide effective ongoing support, it would adversely affect our ability to sell our products to existing end-customers and could harm our reputation with potential end-customers. In some cases, we guarantee a certain level of performance to our channel partners and end-customers, which could prove to be resource-intensive and expensive for us to fulfill if unforeseen technical problems were to arise.

As an emerging growth company within the meaning of the Securities Act, we will utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our common stock less attractive to investors.

We are an emerging growth company within the meaning of the rules under the Securities Act. We have in this prospectus utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies, including reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a nonbinding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act, including the additional testing of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting, and we have elected to delay adoption of new or revised accounting standards applicable to public companies. As a result, our stockholders may not have access to certain information they may deem important.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or

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revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, material weaknesses may have been identified. For so long as we qualify as an “emerging growth company” under the JOBS Act, which may be up to five years following this offering, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. During the course of the evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify in a timely manner or at all as a result of the deferred implementation of this additional level of review.

Risks Relating to Our Industry

Our industry is subject to rapid technological change, and we must make substantial investments in new products, services and technologies to compete successfully.

New technological innovations generally require a substantial investment before they are commercially viable. We intend to continue to make substantial investments in developing new products and technologies, and it is possible that our development efforts will not be successful and that our new technologies will not result in meaningful revenues. Our future success will depend on our ability to continue to develop and introduce new products, technologies and enhancements on a timely basis. Our future success will also depend on our ability to keep pace with technological developments, protect our intellectual property, satisfy customer requirements, meet customer expectations, price our products and services competitively and achieve market acceptance. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products and technologies, and products and technologies currently under development, obsolete and unmarketable. If we fail to anticipate or respond adequately to technological developments or customer requirements, or experience any significant delays in development, introduction or shipment of our products and technologies in commercial quantities, demand for our products and our customers’ and licensees’ products that use our technologies could decrease, and our competitive position could be damaged.

We may be subject to infringement claims in the future.

We may be unaware of filed patent applications and issued patents that could include claims covering our products. Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to sell or supply our products or license our technology and could cause us to pay substantial royalties, licensing fees or damages. The defense of any lawsuit could divert management’s efforts and attention from ordinary business operations and result in time-consuming and expensive litigation, regardless of the merits of such claims. These outcomes may (i) stop us selling products or using technology that contains the allegedly infringing intellectual property; (ii) redesign those products that contain the

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allegedly infringing intellectual property; (iii) pay substantial damages to the party whose intellectual property rights we may be found to be infringing; (iv) result in the loss of existing customers or prohibit the acquisition of new customers; (v) cause us to attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all; (vi) materially and adversely affect our brand in the market place and cause a substantial loss of goodwill; (vii) cause our stock price to decline significantly; (viii) materially and adversely affect our liquidity, including our ability to pay debts and other obligations as they become due; or (ix) lead to our bankruptcy or liquidation.

Our industry is highly competitive and we may not be able to compete effectively.

The communications industry is highly competitive, rapidly evolving, and subject to constant technological change. We expect that new competitors are likely to join existing competitors. Many of our competitors may be larger and have greater financial, technical, operational, marketing and other resources and experience than we do. In the event that a competitor expends significant resources we may not be able to successfully compete. In addition, the pace of technological change makes it impossible for us to predict whether we will face new competitors using different technologies to provide products. If our competitors were to provide better and more cost effective products than our products we may not be able to capture any significant market share.

Regulation of Voice over Internet Protocol (“VoIP”) services is developing and therefore uncertain and future legislative, regulatory or judicial actions could adversely affect our business.

VoIP services have developed in an environment largely free from government regulation. However, the United States and other countries have begun to assert regulatory authority over VoIP and are continuing to evaluate how VoIP will be regulated in the future. Both the application of existing rules to us and our prospective customers and the effects of future regulatory developments are uncertain. Future legislative, judicial or other regulatory actions could have a negative effect on our business. In addition, future regulatory developments could increase our cost of doing business and limit its growth.

Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our products or otherwise harm our business.

Although our technology is designed to be frequency agnostic (i.e., capable of operating at any frequency) our current range of products is being designed to be optimized for operation in the 902 – 928 MHz band, which is presently a spectrum that is not licensed in the United States. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the usage of unlicensed spectrum may materially and adversely impact our future prospects, the viability of our current business model, and will negatively impact our expectation for future sales of our products and our business, financial condition and results of operations.

New regulations or standards or changes in existing regulations or standards in the United States or internationally related to our products may result in unanticipated costs or liabilities, which could have a material adverse effect on our business, results of operations and future sales, and could place additional burdens on the operations of our business.

Our products may be subject to governmental regulations in a variety of jurisdictions. In order to achieve and maintain market acceptance, our technology and products will have to comply with these regulations as well as a significant number of industry standards. In the United States, our technology and products will have to comply with various regulations defined by the Federal Communications Commission, or FCC, and others. We may also have to comply with similar international regulations. For example, our wireless communication products operate through the transmission of radio signals, and radio emissions are subject to regulation in the United States and in other countries in which we intend to do business. In the United States, various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the FCC, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of radio/electromagnetic emissions standards. Member countries of the European Union have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions, and chemical substances and use standards.

As these regulations and standards evolve, and if new regulations or standards are implemented, we may be required to modify our technology or products or develop and support new versions of our technology or

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products, and our compliance with these regulations and standards may become more burdensome. The failure of technology or our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our technology or products, which could harm our business. End-customer uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, channel partners or end-customers may require us, or we may otherwise deem it necessary or advisable, to alter our technology or products to address actual or anticipated changes in the regulatory environment. Our inability to alter our technology or products to address these requirements and any regulatory changes may have a material adverse effect on our business, operating results and financial condition.

Compliance with environmental, health and safety laws and regulations, including new regulations requiring higher standards, may increase our costs, limit our ability to utilize supply chains, and force design changes to our products.

Our operations are subject to a variety of environmental, health and safety laws and regulations and equivalent local, state, and regulatory agencies in each of the jurisdictions in which we currently operate or may operate in the future. The manufacturing of our products uses substances regulated under various federal, state, local laws and regulations governing the environment and worker health and safety. If we and our contract manufacturers do not comply with these laws including any new regulations, such non-compliance could reduce the net realizable value of our products, which would result in an immediate charge to our income statements. Our non-compliance with such laws could also negatively impact our operations and financial position as a result of fines, penalties that may be imposed on us, and the cost of mandated remediation or delays to our contract manufacturers, thus we may suffer a loss of revenues, be unable to sell our products in certain markets and/or countries, be subject to penalties and enforced fees and/or suffer a competitive disadvantage. Costs to comply with current laws and regulations and/or similar future laws and regulations, if applicable, could include costs associated with modifying our products, recycling and other waste processing costs, legal and regulatory costs and insurance costs. We cannot assure you that the costs to comply with these new laws or with current and future environmental and worker health and safety laws will not have a material adverse effect on our business, operating results and financial condition.

Governmental regulations affecting the import or export of products or affecting products containing encryption capabilities could negatively affect our revenues.

The United States and various foreign governments have imposed controls, export license requirements, and restrictions on the import or export of some technologies, especially encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring certification, notifications, review of source code, or the escrow and governmental recovery of private encryption keys. For example, Russia and China recently have implemented new requirements relating to products containing encryption and India has imposed special warranty and other obligations associated with technology deemed critical. Governmental regulation of encryption or IP networking technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international and domestic sales prospects and adversely affect our revenue expectation. In addition, failure to comply with such regulations could result in penalties, costs, and restrictions on import or export privileges or adversely affect sales to government agencies or government funded projects.

If wireless devices pose safety risks, we may be subject to new regulations, and demand for our products and those of our licensees and customers may decrease.

Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of wireless devices, which may decrease demand for our products and those of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless phones and other wireless devices. In addition, interest groups have requested that the FCC investigate claims that wireless communication technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also been expressed over the possibility of safety risks due to a lack of attention associated with the use of wireless devices while driving. Any legislation that may be adopted in

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response to these expressions of concern could reduce demand for our products and those of our licensees and customers in the United States as well as foreign countries.

Risks Related to the Market

Recent global economic trends could adversely affect our business, liquidity and financial results.

Recent global economic conditions, including a disruption of financial markets, could adversely affect us, primarily through limiting our access to capital. In addition, the continuation or worsening of general market conditions in economies important to our businesses may adversely affect our clients’ level of spending and ability to obtain financing, leading to us being unable to generate the levels of sales that we require. Current and continued disruption of financial markets could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

Risks Relating to This Offering and an Investment in Our Securities

Our insiders and affiliated parties beneficially own a significant portion of our stock.

As of October 22, 2013, our executive officers, directors and affiliated parties beneficially own approximately 75.98% of our outstanding common stock. As a result, our executive officers, directors and affiliated parties will have significant influence to:

elect or defeat the election of our directors;
amend or prevent amendment of our articles of incorporation or bylaws; and
effect or prevent a merger, sale of assets or other corporate transaction.

In addition, sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the valuation of our Company.

Exercise of options or warrants or conversion of convertible securities may have a dilutive effect on your percentage ownership, may result in a dilution of your voting power and an increase in the number of shares eligible for future resale in the public market which may negatively impact the trading price of our shares of common stock.

The exercise or conversion of some or all of our outstanding options, warrants, or convertible securities could result in significant dilution in the percentage of ownership of investors in this offering and in the percentage ownership interests of our existing common stockholders and in a significant dilution of voting rights and earnings per share.

At the effective date of this offering, we anticipate having outstanding options to purchase an aggregate of up to 714,285 shares of our common stock, including (i) the options to purchase 571,428 shares of common stock at an exercise price of $5.50 per share granted to MBTH and (ii) the options to purchase 142,857 shares of common stock at an exercise price of $8.75 per share granted to MBTH; outstanding warrants to purchase up to 3,418,217 shares of common stock, including (i) the warrants to subscribe up to 42,857 shares in our common stock at a subscription price of $0.35 per share granted to MBTH, (ii) the warrant to purchase 8,571 shares of our common stock issued to Secure Strategy Group exercisable at $35.00 per share, (iii) the warrant to purchase 14,285 shares of our common stock exercisable at $7.87 per share granted to Mats Wennberg, (iv) 769,230 shares of common stock issuable upon the exercise of warrants sold to investors as part of our initial public offering, including those issued as part of the over-allotment, which are exercisable at $6.87 per share, (v) the warrants to purchase 40,134 shares of common stock at an exercise price of $6.87 per share granted pursuant to our initial public offering to the Underwriters, (vi) the warrants to purchase 1,363,636 shares of common stock at an exercise price of $6.87 per share issued pursuant to a onetime agreement approved on September 30, 2013; (vii) the warrants to purchase 1,093,778 shares of common stock at an exercise price of $6.87 per share granted pursuant to the conversion of the Bridge Loan and outstanding securities convertible into 57,142 shares of our common stock issuable to Treco at a conversion price of $35.00 per share; and (viii) 28,584 shares of common stock issuable upon exercise of the rights to be granted to investors as part of the Bridge Loan, which are exercisable at $0.35 share. Also, 16,474 shares of common stock will be issued to MBTH in payment of the differential of the interest rates.

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Additionally, the issuance of up to 680,847 shares of common stock upon exercise of stock options outstanding under our stock incentive plans will further dilute our stockholders’ voting interests. To the extent options and/or warrants and/or conversion rights are exercised, additional shares of common stock will be issued, and such issuance will dilute stockholders.

In addition to the dilutive effects described above, the exercise of those securities would lead to an increase in the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our shares. Substantial dilution and/or a substantial increase in the number of common shares available for future resale may negatively impact the trading price of our shares of common stock.

We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing securities that would dilute your ownership. Depending on the terms available to us, if these activities result in significant dilution, it may negatively impact the trading price of our shares of common stock.

We have financed our operations, and we expect to continue to finance our operations, acquisitions, if any, and the development of strategic relationships by issuing equity and/or convertible securities, which could significantly reduce the percentage ownership of our existing stockholders. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to, or pari passu with, those of our common stock. Any issuances by us of equity securities may be at or below the prevailing market price of our stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of our stock to decline. We may also raise additional funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our common shares. The holders of any securities or instruments we may issue may have rights superior to the rights of our common stockholders. If we experience dilution from issuance of additional securities and we grant superior rights to new securities over common stockholders, it may negatively impact the trading price of our shares of common stock and you may lose all or part of your investment.

The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float, and lack of profits, which could lead to wide fluctuations in our share price. You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you.

The market for our common shares is characterized by significant price volatility when compared to the shares of larger, more established companies that trade on a national securities exchange and have large public floats, and we expect that our share price will continue to be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are, compared to the shares of such larger, more established companies, sporadically and thinly traded. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand. Secondly, we are a speculative or “risky” investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a larger, more established company that trades on a national securities exchange and has a large public float. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance.

If and when a larger trading market for our common stock develops, the market price of our common stock is still likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the price at which you acquired them.

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including, but not limited to:

variations in our revenues and operating expenses;

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actual or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally;
market conditions in our industry, the industries of our customers and the economy as a whole;
actual or expected changes in our growth rates or our competitors’ growth rates;
developments in the financial markets and worldwide or regional economies;
announcements of innovations or new products or services by us or our competitors;
announcements by the government relating to regulations that govern our industry;
sales of our common stock or other securities by us or in the open market; and
changes in the market valuations of other comparable companies.

In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price of our shares might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, operating results and financial condition.

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our common stock.

Our amended and restated certificate of incorporation and our amended and restated bylaws, contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

authorizing the board to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;
limiting the persons who may call special meetings of stockholders; and
requiring advance notification of stockholder nominations and proposals.

In addition, the provisions of Section 203 of the Delaware General Corporation Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of directors.

These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, and under Delaware law, could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions. See the section entitled “Description of Securities.”

Beneficial holders of common stock through the Depository Trust Company will not be legal shareholders of the Company and therefore will have no direct rights as shareholders and must act through their participating broker to exercise those rights.

The underwriters have designated that Cede & Co., as nominee for the Depository Trust Company, or DTC, to hold the shares of common stock in this offering on behalf of, and as nominee for, investors who purchase common stock. We and DTC have no contractual relationship. Investors who purchase the common shares (although recorded as owners within the DTC system) are legally considered holders of beneficial interests in those shares only and will have no direct rights against the Company. Investors who purchase

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common stock in this offering must look solely to their participating brokerage in the DTC system for payment of dividends, the exercise of voting rights attaching to the common stock and for all other rights arising with respect to the common stock.

Under our Bylaws, the minimum notice period required to convene a general meeting is 10 calendar days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your common stock from the DTC system to allow you to directly cast your vote with respect to any specific matter. In addition, a participating DTC brokerage firm may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We cannot assure you that you will receive voting materials in time to ensure that you can instruct your participating DTC brokerage, or its designee, to vote your shares. As a result, you may not be able to exercise your right to vote and you may lack recourse if your common stock are not voted as you requested. In addition, if you hold your shares indirectly through the DTC system, you will not be able to call a shareholder meeting.

Our common stock is listed on two separate stock markets and investors seeking to take advantage of price differences between such markets may create unexpected volatility in our share price; in addition, investors may not be able to easily move shares for trading between such markets.

Our common stock trades on AIM and on The NASDAQ Capital Market. Price levels for our common stock could fluctuate significantly on either market, independent of our share price on the other market. Investors could seek to sell or buy our shares to take advantage of any price differences between the two markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on either exchange and the volumes of shares available for trading on either exchange. In addition, holders of shares in either jurisdiction will not be immediately able to transfer such shares for trading on the other market without effecting necessary procedures with our transfer agent. This could result in time delays and additional cost for our shareholders. Further, if we are unable to continue to meet the regulatory requirements for listing on AIM or NASDAQ, we may lose our listing on AIM or NASDAQ, which could impair the liquidity of our shares.

If we are not able to comply with the applicable continued listing requirements or standards of the NASDAQ Capital Market, NASDAQ could delist our common stock.

Our common stock is currently listed on the NASDAQ Capital Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards. There can be no assurances that we will be able to comply with the applicable listing standards. In the event that our common stock is delisted from NASDAQ and is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by security analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.

In the event that our common stock is delisted from NASDAQ U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules.

The SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving stock which is deemed to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934, as amended. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our securities have in the past constituted, and may again in the future constitute, “penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.

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A U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny stock” regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock”, a disclosure schedule prepared in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing recent price information with respect to the “penny stock” held in a customer’s account and information with respect to the limited market in “penny stocks”.

Stockholders should be aware that, according to SEC, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section of this prospectus entitled “Use of Proceeds.” The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.

We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.

Non-U.S. investors may have difficulty effecting service of process against us or enforcing judgments against us in courts of non-U.S. jurisdictions.

We are a company incorporated under the laws of the State of Delaware. All of our directors and officers reside in the United States. It may not be possible for non-U.S. investors to effect service of process within their own jurisdictions upon our company and our directors and officers. In addition, it may not be possible for non-U.S. investors to collect from our company, its directors and officers, judgments obtained in courts in such non-U.S. jurisdictions predicated on non-U.S. legislation.

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If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

The requirements of being a U.S. public company may strain our resources and divert management’s attention.

As a U.S. public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of NASDAQ, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and current reports with respect to our business and operating results.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition is more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert resources of our management and harm our business and operating results.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”, contains forward-looking statements that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new products or services; our statements concerning litigation or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; trends affecting our financial condition, results of operations or future prospects; our financing plans or growth strategies; and other similar expressions concerning matters that are not historical facts. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from what is expressed in or suggested by the forward-looking statements.

Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of common stock offered by us will be approximately $[    ] million, based upon an assumed public offering price of $3.00 per share, the closing price of our common stock as listed on NASDAQ on October 22, 2013, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $[    ] million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, and increase our visibility in the marketplace. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds of this offering. However, we currently intend to use the net proceeds to us from this offering, together with existing cash, primarily for general corporate purposes, including working capital, product development, marketing activities, expanding our internal sales organization and further developing sales channels, funding the set-up of contract manufacturing production lines, and other capital expenditures and repaying certain indebtedness. We may also use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, technologies or other assets that complement our business, although we have no present commitments or agreements to enter into any material acquisitions or investments. We will have broad discretion over the uses of the net proceeds in this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared dividends on our equity securities, and currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2013:

on an actual basis;
on a pro forma basis as of June 30, 2013 to reflect on a pro forma basis as of June 30, 2013, the conversion of ninety-eight (98%), the repayment of the remaining two percent (2%) of $8,265,000 under the Bridge Loan, the sale of 1,538,460 shares of common stock and warrants for 769,230 shares of common stock and the conversion of $1,013,000 of liabilities included in due to related party refinanced through the Bridge Loan; and
on a pro forma as-adjusted basis to give effect to the sale of [    ] shares of the common stock we are offering based upon an assumed public offering price of $3.00 per share, the closing price of our common stock as listed on NASDAQ on October 22, 2013, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us of approximately $[    ] million. The pro forma as-adjusted column assumes no exercise by the underwriters of their over-allotment option.

The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public price. You should read this table together with the sections entitled “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our financial statements and the related notes, which appear elsewhere in this prospectus.

     
  As of June 30, 2013
     (unaudited)
     Actual   Pro Forma   Pro Forma
As Adjusted
($ in thousands)
                          
Cash and cash equivalents   $ 25     $ 7,678     $ [    ]  
Short term debt
                          
Accrued interest (related party $946)     1,025       45       45  
Due to related party     2,316       1,303       1,303  
Convertible bridge loan payable (related party – $6,471,
net of debt discount of $217)
    8,048              
Long term debt
                          
Convertible notes payable     2,000       2,000       2,000  
Total Debt and accrued interest     13,389       3,348       [    ]  
Equity
                          
Convertible preferred stock, Series A 25,000,000 shares authorized, none issued and outstanding                  
Common stock, additional paid-in capital and treasury stock 300,000,000 shares authorized, 7,321,836 shares issued and outstanding, actual 300,000,000 shares authorized, 10,799,626 shares issued and outstanding, pro forma, 300,000,000 shares authorized, [    ] shares issued and outstanding, pro forma as adjusted     133,828       151,522       [    ]  
Accumulated deficit     (131,863 )       (131,863 )       (131,863 )  
Treasury stock, 2,284 shares     (22 )       (22 )       (22 )  
Total stockholders’ equity (deficit)     1,943       19,637       [    ]  
Total capitalization   $ 15,332     $ 22,985     $ [    ]  

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MARKET PRICE INFORMATION FOR OUR SECURITIES

Our shares are currently listed on NASDAQ under the symbol “XGTI” and on AIM under the symbols “XGT” and “XGTU.” Our shares began trading on NASDAQ on July 19, 2013 and AIM in November 2006.

As of October 22, 2013, there were 12,645,138 shares outstanding and approximately 277 holders of record of our shares. Because shares of our common stock are held by depositories, brokers and other nominees, the number of beneficial holders of our shares is substantially larger than the number of stockholders of record.

On October 22, 2013, the closing price of our shares listed on NASDAQ was $3.00 per share and the closing price of our shares listed on AIM was $10.00 per share for XGT and $5.50 per share for XGTU.

The following table shows the high and low market prices for our shares for each fiscal quarter for the two most recent fiscal years. Market prices for our shares have fluctuated significantly since they were listed on AIM and trading volume on AIM have been very small in relation to the number of our total outstanding shares. As a result, the market prices shown in the following table may not be indicative of the market prices at which our shares will trade after this offering. These prices reflect our recently completed reverse split of our common stock.

           
  NASDAQ Share Price   XGTU Share Price   XGT Share Price
               (US Dollars)   (US Dollars)
     High   Low   High   Low   High   Low
Quarter
                                                     
Fourth Quarter 2013
(Through October 22, 2013)
  $ 5.10     $ 2.75       5.50       5.00       10.00       10.00  
Third Quarter 2013*   $ 7.15     $ 4.60       9.00       5.50       13.00       10.00  
Second Quarter 2013     N/A       N/A       10.01       6.75       13.00       13.00  
First Quarter 2013     N/A       N/A       13.13       7.88       15.75       14.00  
Fourth Quarter 2012     N/A       N/A       14.00       7.00       26.25       14.88  
Third Quarter 2012     N/A       N/A       17.50       5.25       26.25       15.75  
Second Quarter 2012     N/A       N/A       26.25       14.00       26.25       14.00  
First Quarter 2012     N/A       N/A       28.00       17.50       22.75       15.75  
Fourth Quarter 2011     N/A       N/A       31.50       10.50       42.00       10.50  
Third Quarter 2011     N/A       N/A       54.25       19.25       14.00       5.95  
Second Quarter 2011**     N/A       N/A       24.50       7.18       14.88       14.88  

* NASDAQ trading began on July 19, 2013
** XGTU began on May 11, 2011

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DILUTION

The historical net tangible book value of our common stock as of June 30, 2013 was approximately $(16.7) million, or $(2.28) per share based upon 7,321,836 shares of common stock outstanding on such date. Historical net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of common stock outstanding.

If you invest in shares in our common stock your interest will be diluted to the extent of the difference between the offering price per share of the shares in our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering. After giving effect to the receipt of the net proceeds from our sale in this offering of [    ] shares of common stock at an assumed public offering price of $3.00 per share, the closing price of our common stock as listed on NASDAQ on October 22, 2013, applying proceeds as set forth in Use of Proceeds and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been approximately $[    ] million, or $[    ] per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $[    ] per share to our existing stockholders and an immediate dilution of $[    ] per share to investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 
Assumed public offering price per share   $  
Pro forma as adjusted net tangible book value per share as of June 30, 2013 before giving effect to this offering         
Increase in pro forma as adjusted net tangible book value per share attributed to new investors purchasing shares from us in this offering   $  
Pro forma net tangible book value per share after giving effect to this offering           
Dilution in pro forma net tangible book value per share to new investors in this offering   $       

Each $1.00 increase (decrease) in the assumed public offering price of $3.00 per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $[    ] per share and the dilution to new investors by $[    ] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $[    ] per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering would be $[    ] per share of our common stock.

The table below summarizes as of June 30, 2013, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing shares in our common stock in this offering at an assumed public offering price of $3.00 per share, the closing price of our common stock as listed on NASDAQ on October 22, 2013, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

         
  Shares Purchased   Total Consideration   Average Price Per Share
     Number   Percent   Amount   Percent
Existing stockholders     7,321,836       [—]     $ 133,828       [—]     $ 18.28  
New investors     [—]       [—]       [—]       [—]       [—]  
Total     [—]       100.0 %       [—]       100.0 %       [—]  

(* Dollars in thousands, except per share data)

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The total number of shares of our common stock reflected in the discussion and tables above is based on 7,321,836 shares of our common stock outstanding, as of June 30, 2013, and excludes:

2,284 of treasury shares; and
exercise of the underwriters’ over-allotment option to purchase up to an additional [         ] shares of common stock; and
exercise of any options, warrants or conversion rights outstanding as of June 30, 2013; and
any securities, options, warrants or conversion rights issued subsequent to June 30, 2013.

To the extent that any outstanding options are exercised, new options are issued under our 2013 Long Term Incentive Plan or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2004, 2005, 2006, 2007 and 2009 Stock Incentive Plans and options/warrants issued outside of the stock incentive plans as of October 22, 2013 were exercised, then our existing stockholders, including the holders of these options, would own [ — ]% and our new investors would own [ — ]% of the total number of shares of our common stock outstanding upon the closing of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately {$ — ] million, or [ — ]%, the total consideration paid by our new investors would be [$ — ] million, or [ — ]%, the average price per share paid by our existing stockholders would be [$ — ] and the average price per share paid by our new investors would be [$ — ].

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.” The share numbers in the following discussion reflect a 1-for-25 reverse stock split that we effected March 24, 2013 as well as the 1-for-1.4 reverse stock split that we effected March 28, 2013 .

Overview

xG Technology, Inc. has developed a broad portfolio of innovative intellectual property that we believe will enhance wireless communications. Our intellectual property is embedded in proprietary software algorithms that offer cognitive interference mitigation and spectrum access solutions.

We have generated material revenues in 2008 and 2009 attributed to the Company’s BSN250 voice-only product line. Upon the introduction of various smartphones in 2007 (and later) which could handle both voice and data, the Company made the decision it was necessary to enhance its voice-only product line to include data services. Beginning in July 2009, the Company focused on enhancing its BSN250 and TX70 product line for data services and we delivered such a system to the US Army in 2011. The US Army subsequently requested our BSN250 should integrate with commercial off the shelf (COTS) smartphones. In 2013, the Company will introduce a new product line that can handle both voice and data services. These new products are called xAP (base station), xMod and xVM. The latter two are able to communicate to any COTS device. We have generated significant net losses for the past several years and we expect to continue to realize net losses for the immediate future. We will begin to generate revenues again sufficient to cover the cost of our operations once our new voice and data products are delivered to customers in the second half of 2013.

The implementation of our cognitive radio intellectual property is xMax®. We believe the xMax® system, represents the only commercially available cognitive radio network system that is designed to include interference mitigation by spatial processing. xMax® implements our proprietary interference mitigation software that can increase capacity on already crowded airwaves by improving interference tolerance, enabling the delivery of a comparatively high Quality of Service where other technologies would not be able to cope with the interference. We believe that the xMax® system will also, when in a future development operating on more than one radio channel, deliver dynamic spectrum access by scanning and finding unused or underused frequencies (unlicensed as well as licensed) and dynamically tuning to them, significantly increasing their usable capacity.

Our revenues in fiscal 2012 decreased to $0.0 million from $0.15 million in fiscal 2011. The $0.15 million was earned under a contract with the U.S. Army to trial the 1.1 voice and data version of our xMax® system.

We had net losses of $15.7 million and $13.8 million in fiscal 2011 and fiscal 2012, respectively. Fiscal 2012 reflected a stock–based compensation charge of $0.6 million, of which $0.4 million was for employees and $0.2 million was for non-employees. Excluding the impact of stock-based compensation expense, in fiscal 2012, we had a non-GAAP net loss attributable to common stockholders of $13.2 million. Our GAAP net loss in fiscal 2011 reflected a stock-based compensation charge of $1.0 million, of which $0.7 million was for employees and $0.3 million was for non-employees.

We are executing on our sales and marketing strategy and have entered into agreements both direct with end-customers as well as with indirect channel network partners. These customer engagements primarily relate to two of our target markets in rural telecommunications and defense. Together, they comprise commitments to purchase xMax® cognitive radio networking equipment, engineering services and other hardware worth approximately $35.4 million as described below.

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Purchase Agreements

The Company has announced that it has received purchase orders, for an estimated $19.5 million, from the following companies: Northeast Florida Communications (based in FL), Electra Telephone Company and Tatum Telephone Company (both based in Texas); Choctaw Telephone Company and MoKan Dial Telephone Company (both based in Kansas); Haxtun Telephone Company (based in Colorado); Walnut Hill Telephone Company (based in Arkansas); TelAtlantic Wireless (based in Virginia); Assist Wireless (based in Texas) and Carolina Satellite Networks (based in Virginia). The orders, in aggregate, consist of $16.6 million for xMax® cognitive radio networking equipment, including xMax® wireless access points, xMSC mobile switching centers, and xMod personal hotspots and xVM Vehicle Mounted Modems (capable of supporting existing smartphones, tablets and laptops) and an estimated $2.9 million for engineering services and other hardware.

Larry Townes, a director of the Company is a substantial shareholder of these companies. Many of these orders are with Townes Tele-Communications which is the parent company of Northeast Florida Communications, Electra Telephone Company, Tatum Telephone Company, Choctaw Telephone Company, MoKan Dial Telephone Company, Haxtun Telephone Company and Walnut Hill Telephone. Therefore the entry by the Company into the equipment purchase agreements and engineering services agreements is considered to be related party transactions for an estimate of $7.4 million.

On October 16, 2013, we shipped our first comprehensive Cognitive Radio system to the Walnut Hill Telephone Company in Lewisville, Arkansas.

Reseller agreements

Reseller agreements have been entered into with the following wireless solutions providers: PMC Associates (based in New Jersey), Communications Marketing Southeast (based in Georgia) and Mobile-One Communications (based in Florida) and Maverick Networks (based in California). Together, they provide for purchase commitments over the three year term of the agreements of a minimum of an aggregate of $8.4 million of xMax® cognitive radio networking equipment. We have also entered into a reseller agreement with Telemedicine MM Systems (based in New York) to resell $2.5 million worth of xMax® mobile broadband equipment over the two year term of the agreement, and with Cornet Technology, Inc. (based in North Virginia) to resell $5.0 million worth of xMax® mobile broadband equipment over the three year term of the agreement, subject to placing purchase orders.

Teaming Agreements have also been entered into with Force 3, Inc. (“Force 3”), SAIC and CACI, Inc. The Force 3 teaming agreement was made in connection with the U.S. Army ITES-3H (Information Technology Enterprise Solutions-3 Hardware) contract awards process under which, if Force 3 is awarded the ITES-3H contract, xG’s xMax® cognitive radio solutions and services will be used to fulfill the cellular wireless component of the award. The teaming agreement with CACI provides for the joint preparation of a response to the Request for Proposal entitled Technical, Administrative, and Operation Support Services (TAOSS) (formerly known as CERDEC S&TCD effort) to be issued by the CERDEC Space and Terrestrial Communications Directorate and the allocation of work to be performed under any resulting prime contract.

In addition to the sales backlog of $7.4 million that was outstanding at December 31, 2012, the Company has added $12.1 million of additional sales orders from January 1, 2013 through October 18, 2013. At October 18, 2013 the total backlog of reseller agreements was $15.9 million and the total backlog of purchase orders was $19.5 million for a total of $35.4 million. See further in the section entitled “Customers” below.

We anticipate being in a position to begin to fulfill orders by the end of 2013 as we implement our technology into software and equipment with features specified to our customers, and once we receive equipment authorization from the FCC. Revenues will be recognized over the respective lives of the agreements according to the delivery and transfer of ownership and risk of xMax® equipment and the provision of services.

As of the date of this prospectus, 56.35% of the shares of our common stock are beneficially owned by MBTH. MBTH was co-founded in 2010 by Rick Mooers, Roger Branton and George Schmitt in order to invest in, and provide expertise and guidance to, and other support to xG Technology. Richard Mooers, Roger Branton, and George Schmitt are directors of MBTH. MBMG, a merchant bank owned by family entities or trusts related to Richard Mooers and Roger Branton, has a 45.20% interest in MBTH as of October 22, 2013.

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George Schmitt has a direct 36.32% ownership interest in MBTH as of October 22, 2013 and has been granted an option to purchase MBTH shares sufficient to give him an additional 5% of the equity ownership of MBTH shares. Since its founding, MBTH has provided xG Technology with significant financial and other support to us, including the $7.8 million subscription to the Bridge Loan. In addition, after joining MBTH, George Schmitt, CEO of MBTH, became one of our directors is now our Executive Chairman. For further details on the financial support given by MBTH to us and other transactions and arrangements between us and MBTH, please see the section entitled “ Related Party Transactions, Other Transactions”.

Key Components of Our Results of Operations and Financial Condition

Revenues

We expect that our future revenues will be derived from the sale of wireless networking equipment and embedded software and the supply of deployment and support services.

In 2011, we earned revenues from the trial and evaluation of the 1.1 voice and data version of our xMax® system by the U.S. Army and the U.S. Army’s Communications-Electronics Research, Development and Engineering Center (“CERDEC”). Given our relationship with the U.S. Army at the time, these revenues were earned through direct business development and strategic sales efforts, although our contractual counterparty was a contractor already engaged by the U.S. Army and to whom a program budget had already been awarded. In the future, our plan is to sell our intellectual property, xMax® equipment and engineering services through a combination of an internal sales organization and a network of channel partners, such as prime contractors, in certain vertical markets. See further in the section entitled “Sales and Marketing”. In connection with such future sales of our products, we anticipate generating additional revenues from the provision of services, such as maintenance and support.

In the future, our strategy is for our technology to be embedded by partners in a semiconductor chip that could be sold to third party equipment manufacturing partners and inserted in their devices and to license our intellectual property to other customers in vertical markets world-wide. Our technology roadmap currently projects this transition to begin in 2015.

Cost of Revenue and Operating Expenses

Our cost of revenue and operating expenses is comprised primarily of the costs of components and personnel. In addition, it includes tooling, labor and other costs associated with engineering, testing and quality assurance and stock-based compensation.

Our strategy is to outsource our manufacturing and order fulfillment and utilize contract manufacturers (see further in the section entitled “Manufacturing and Suppliers”). We also evaluate and utilize other vendors for various portions of our supply chain from time to time. Our product organization consists of employees engaged in new product introduction and management activities, and engineering.

We classify our operating expenses as general and administrative, development, stock based compensation and amortization and depreciation expenses.

General and administrative expenses include salary and benefit expenses and payroll taxes, as well as the costs of trade shows, marketing programs, promotional materials, professional services, facilities, general liability insurance, and travel. As our technology and product portfolios and targeted markets expand, we will need to employ alternative sales models, such as building our direct sales force and channel partner network. These sales models would likely increase our costs. Over time, we expect our administrative expenses to increase in absolute dollars as we continue to actively promote our products and introduce new technologies, products and services. In addition, we expect expenses to increase as we make additional investments in information technology systems and personnel to support our anticipated revenue growth and to comply with our public company reporting obligations.
Development expenses consist primarily of salary and benefit expenses and payroll taxes, as well as costs for prototypes, facilities and travel. Over time, we expect our development costs to increase as we continue making significant investments in developing new products and developing new versions of our existing products.

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Stock-based compensation relates to the grant of stock options and warrants to directors, employees and contractors under the Company’s stock incentive plans.
Amortization of patents and licenses are measured initially at purchase cost and are amortized on a straight line basis over their useful lives which range between 18.5 to 20 years. Amortization of capitalized software development costs are amortized on a straight line basis over their useful lives which is estimated to be 5 years. Depreciation expenses is computed using the straight-line method over estimated useful asset lives, which range from 3 to 7 years commencing the month following the purchase.

Corporate Performance Bonus

In 2011, we established a corporate performance bonus matrix for eligible employees and contractors based on the achievement of certain milestones, including timely completion of engineering projects, adherence to operating budgets, and revenue produced by each vertical market.

The milestones were weighted according to importance for the current year as determined by the CEO and CFO. Eligible employees and contractors had the ability to earn up to 200% of their base compensation. The end of year evaluation of performance is made at the company level and not on the level of each individual. Bonuses may be paid in cash or in shares, at the discretion of the directors.

Specifically, for 2011, the Company incented engineering personnel for timely completion of engineering projects, which was weighted at 35%. Executive officers were incented to raise new capital based on a matrix, which was weighted at 30%. Business development and sales personnel were incented to obtain revenue produced by particular vertical market, which was weighted at 35%. For 2011, a 22.5% (of salary) corporate performance bonus was awarded related to an additional capital raise and the revenue achieved with the military vertical.

Specifically, for 2012, the Company incented engineering personnel to complete a full demo-mobile system and the production of commercial equipment by the end of the third quarter, which was weighted at 50%. Executive officers were incented to control spending by adherence to operating budgets, which was weighted at 20%. Business development and sales personnel were incented to reach a pre-determined level of revenue by vertical market, which was weighted at 30%. For 2012, a 20% (of salary) corporate performance bonus was awarded to all executive officers, employees and eligible contractors of the Company for controlling spending and adherence to operating budgets.

The bonuses awarded for 2011 and 2012 are allocated to general & administrative and development expenses.

Recently Issued Accounting Pronouncements

We are an emerging growth company within the meaning of the rules under the Securities Act, and we will utilize certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. For example, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. In addition, Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies.

Critical Accounting Policies and Estimates

We intend to utilize the extended transition period provided in Securities Act Section 7(a)(2)(B) as allowed by Section 107(b)(1) of the JOBS Act for the adoption of new or revised accounting standards as applicable to emerging growth companies. As part of the election, we will not be required to comply with any

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new or revised financial accounting standard until such time that a company that does not qualify as an “issuer” (as defined under Section 2(a) of the Sarbanes-Oxley Act of 2002) is required to comply with such new or revised accounting standards.

We prepare our financial statements in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs and expenses and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Intangible Assets

Capitalized software costs incurred in the design and development of software for sale to others as a separate product or embedded in a product and sold as part of the product as a whole are charged to expense until technological feasibility is established, and amortized on a straight-line basis over five years, beginning when the products are offered for sale or the enhancements are integrated into the products. Management is required to use its judgment in determining whether capitalized software costs meet the criteria for immediate expense or capitalization, in accordance with GAAP. The unamortized capitalized costs of a computer software product are compared to the net realizable value of that product and any excess is written off.

The significant estimates and assumptions involved in determining the net realizable value of our capitalized software costs are the estimated future cash flows from the product which are the estimated future gross revenues reduced by the estimated future costs of completing the product including the costs of maintenance. These estimates are based upon anticipated results and trends including customer demand for the Company’s products and the necessary skill level and man-hours needed to complete the products. The Company believes these estimates are reasonable under the current circumstances. The risk of material misstatement of these accounting estimates varies with the subjectivity associated with these estimates; including the assumption the Company has the know-how to create such products and the availability of relevant personnel to complete such products that customer’s desire. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from management’s estimates.

Patent and licenses are measured initially at purchase cost and are amortized on a straight line basis over their useful lives which range between 18.5 to 20 years.

Property, Plant and Equipment

Property, plant and equipment are presented at cost at the date of acquisition. Depreciation is computed using the straight-line method over estimated useful asset lives, which range from 3 to 7 years commencing the month following the purchase.

Impairment of Long-Lived Assets

Long lived assets including certain intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by that asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Impairment of intangible assets amounted to $18,000 and $0 for the years ended December 31, 2012 and 2011, respectively.

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Impairment of property and equipment amounted to $268,000 and $0 for the years ended December 31, 2012 and 2011, respectively. No impairment charge was recorded for the six months ended June 30, 2013 and 2012.

Revenue Recognition

The Company recognizes revenues when persuasive evidence of an arrangement exists, services have been rendered, the price is fixed and determinable, and collectability is reasonably assured. Revenues from management and consulting, time-and-materials service contracts, maintenance agreements and other services are recognized as the services are provided or at the time the goods are shipped and title has passed.

Income Taxes

The Company accounts for income taxes using the assets and liability method. Accordingly deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

The Company files U.S. federal and state income tax returns. The Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed by GAAP. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefits as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. The Company recognizes interest and penalties as incurred in finance income (expense), net in the Statements of Operations. There were no liabilities recorded for uncertain tax positions at December 31, 2012 or 2011.

Stock Based Compensation

The Company accounts for stock-based awards to employees in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options.

The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes” ) pricing model. For all employee stock options, the Company recognizes expense over the employee’s requisite service period (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.

Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable accounting principles. Such options are valued using the Black-Scholes option pricing model.

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Results of Operations

Three and Six Months Ended June 30, 2013 and 2012

The following table sets forth certain information concerning our results of operations for the periods shown:

xG TECHNOLOGY, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT NET LOSS PER SHARE DATA)

       
  For the Three Months Ended June 30,   For the Six Months Ended June 30,
     2013   2012   2013   2012
Revenue   $     $     $     $  
Cost of revenue and operating expenses                                    
General and administrative expenses     1,158       1,395       2,508       2,642  
Development     1,352       838       2,999       1,899  
Stock based compensation     201       134       336       108  
Amortization and depreciation     435       517       870       1,027  
Total cost of revenue and operating expenses     3,146       2,884       6,713       5,676  
Loss from operations     (3,146 )       (2,884 )       (6,713 )       (5,676 )  
Other (expense)                                    
Interest expense, net     (424 )       (107 )       (1,038 )       (194 )  
Loss before income tax provision     (3,570 )       (2,991 )       (7,751 )       (5,870 )  
Income tax provision                        
Net loss   $ (3,570 )     $ (2,991 )     $ (7,751 )     $ (5,870 )  
Basic and diluted net loss per share   $ (0.49 )     $ (0.50 )     $ (1.15 )     $ (0.97 )  
Weighted average number of shares outstanding basic and diluted     7,319       6,033       6,723       6,025  

Revenue

The Company did not record any revenue for the comparative periods shown.

Cost of Revenue and Operating Expenses

General and Administrative Expenses

General and administrative expenses are the expenses of operating the business on a daily basis and include salary and benefit expenses and payroll taxes, as well as the costs of trade shows, marketing programs, promotional materials, professional services, facilities, general liability insurance, and travel. For the three and six months ended June 30, 2013 the Company incurred aggregate expense of $1.2 million and $2.5 million, respectively, compared to $1.4 million and $2.6 million, respectively, for the three and six months ended June 30, 2012, a decrease of $0.2 million or 14% and $0.1 million or 4%, respectively. The majority of this decrease is related to a decrease in consulting fees of $0.2 million.

Development Expenses

Development expenses consist primarily of salary and benefit expenses and payroll taxes, as well as costs for prototypes, facilities and travel. Development expenses increased $0.6 million, or 75%, from $0.8 million in the three months ended June 30, 2012 to $1.4 million in the three months ended June 30, 2013. Development expenses increased $1.1 million or 58%, from $1.9 million in the six months ended June 30, 2012 to $3.0 million in the six months ended June 30, 2013. The increase is due to additional costs related to producing and testing equipment as the Company grows closer to launching its products.

Stock Based Compensation

Stock based compensation increased $0.07 million, from $0.13 million in the three months ended June 30, 2012 to $0.20 million in the three months ended June 30, 2013. Stock based compensation increased $0.23 million, from $0.11 million in the six months ended June 30, 2012 to $0.34 million in the six months

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ended June 30, 2013. The increase arose from the increase in the number of employees and directors of the Company who received option grants in fiscal 2013.

Amortization and Depreciation

Amortization and depreciation expenses decreased $0.1 million, or 20%, from $0.5 million in the three months ended June 30, 2012 to $0.4 million in the three months ended June 30, 2013, and $0.1 million, from $1.0 million in the six months ended June 30, 2012 to $0.9 million in the six months ended June 30, 2013. The decrease was primarily due to the decrease in the depreciation of our property and equipment as a portion of our assets became fully depreciated during 2012.

Other Expense

Other expense reflects interest expense (net of interest income) as discussed below:

Total interest expense for the three months ended June 30, 2013 was $0.4 million compared to $0.1 million for the three months ended June 30, 2012, an increase of $0.3 million or 300%. Total interest expense for the six months ended June 30, 2013 was $1.0 million compared to $0.2 million for the six months ended June 30, 2012, an increase of $0.8 million. The increase is attributable to the higher interest and fees incurred on the Bridge Loan for 2013 compared to the May 2011 Convertible note in 2012. Also the fee is being amortized over a shorter period of 1 year based on the contractual obligation of the Bridge Loan.

Net Loss

For the three months and six months ended June 30, 2013, the Company had a net loss of $3.6 million and $7.8 million, respectively, as compared to a net loss of $3.0 million and $5.9 million for the three and six months ended June 30, 2012, or an increase of $0.6 million and $1.9 million, respectively. The increase in net loss is due mainly to the increase in development expenses and interest expenses discussed above.

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Years Ended December 31, 2012 and 2011

The following table sets forth certain information concerning our results of operations for the periods shown:

xG TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT NET LOSS PER SHARE DATA)

   
  For the Year Ended December 31,
     2012   2011
Revenue   $     $ 150  
Cost of revenue and operating expenses
                 
Cost of components and personnel           50  
General and administrative expenses     5,543       5,505  
Development     4,806       5,249  
Stock based compensation     554       1,020  
Amortization and depreciation     2,063       1,806  
Total cost of revenue and operating expenses     12,966       13,630  
Loss from operations     (12,966 )       (13,480 )  
Other income (expense)
                 
Interest expense, net     (535 )       (1,847 )  
Impairment     (286 )       (341 )  
Total other income (expense)     (821 )       (2,188 )  
Loss before income tax provision     (13,787 )       (15,668 )  
Income tax provision            
Net loss   $ (13,787 )     $ (15,668 )  
Basic and diluted net loss per share     (2.29 )       (3.05 )  
Weighted average number of shares outstanding basic and diluted     6,031       5,145  

Revenue

Revenues decreased $0.15 million from $0.15 million for the year ended December 31, 2011 to $0.00 million for the year ended December 31, 2012. During the year ended December 31, 2011, the revenues were attributable to the trial and evaluation of the 1.1 voice and data version of our xMax® system by the U.S. Army and CERDEC.

Cost of Revenue and Operating Expenses

Cost of components and personnel

Cost of components and personnel decreased $0.05 million from $0.05 million in the year ended December 31, 2011 to $0.00 million in the year ended December 31, 2012 as equipment production costs were only incurred in 2011 in order to fulfill the contract with the US Army to deploy a trial xMax® cognitive cellular network as well as supplying xMax® equipment for trial and laboratory evaluation with CERDEC.

General and Administrative

General and administrative expenses remained the same at $5.5 million in the year ended December 31, 2011 and the year ended December 31, 2012. There was a slight increase of $0.2 million in payroll related costs, offset by approximately the same amount in facility expenses.

Average headcount in sales and administration was 18 in the year ended December 31, 2011 and 17 in the year ended December 31, 2012. Over time, we expect our administrative expenses to increase in absolute dollars due to continued growth in headcount to support our business and operations as a public company.

Development Expenses

Development expenses decreased $0.4 million, or 8.4%, from $5.2 million in the year ended December 31, 2011 to $4.8 million in the year ended December 31, 2012.

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There was a decrease of $0.9 million related to expenses incurred for the year ended December 31, 2011 for demonstrations at the US Army base in Fort Bliss, Texas, tower sites needed for our Fort Lauderdale network and costs incurred for demonstrations in Lewisville, Arkansas. This was offset by an increase in payroll, facility, and miscellaneous development expenses of $0.5 million.

The average headcount in development decreased slightly from 47 in the year ended December 31, 2011 and 46 in the year ended December 31, 2012.

Over time, we expect our development costs to increase as we continue making significant investments in developing new products and developing new versions of our existing products.

Stock Based Compensation

Stock based compensation decreased $0.5 million, or 45.7%, from $1.0 million in the year ended December 31, 2011 to $0.5 million in the year ended December 31, 2012. The decrease arose from the decrease in the number of employees who received option grants in fiscal 2012.

We had approximately $1.6 million of unrecognized stock-based compensation expense related to unvested stock options, net of estimated forfeitures, as of December 31, 2012, which we expect to be recognized over the next three years.

Pursuant to an agreement upon inception of engagement of a non-employee, a warrant to purchase 43,446 of our common shares had been granted to the non-employee, with vesting to be based upon the performance of services. By mutual agreement with us, on March 22, 2012, the non-employee agreed these warrants will not be exercised and they have been cancelled. The cumulative compensation expense of $194,000 recognized through December 31, 2011 was reversed during 2012 upon cancelation.

During the years ended December 31, 2011 and 2010, we recognized stock based compensation expense attributable to this warrant of $96,000 and $98,000 respectively for a total of $194,000 of cumulative compensation expense.

Amortization and Depreciation

Amortization and depreciation expenses increased $0.3 million, or 14.2%, from $1.8 million in the year ended December 31, 2011 to $2.1 million in the year ended December 31, 2012. The increase is attributed to a full year of amortization on products sold in 2011 and available for sale in 2012 as compared to a partial year of amortization in 2011.

Other Income (Expense)

Other expense was comprised of net interest expense and impairment charges. Net interest expense fell from $1.8 million in the year ended December 31, 2011 to $0.5 million in the year ended December 31, 2012.

While the indebtedness under our convertible shareholder loans with MBTH increased from $6.8 million at December 31, 2011 to $17.2 million at December 31, 2012, interest expense decreased $1.3 million due to minimum interest charges incurred in refinancing previous loans with MBTH in 2011 along with $0.5 million attributed to accretion of a debt discount on the $10 million loan with MBTH.

Impairment charges included $0.3 million in the year ended December 31, 2011 related to inventory. For the year ended December 31, 2012, $18,000 was related to intangible assets and $268,000 for property & equipment.

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Liquidity and Capital Resources

Our operations primarily have been funded through cash generated by financing. Cash comprises cash in hand and demand deposits. Our cash balances were as follows:

       
  December 31,   June 30,
     2012
$’000
  2011
$’000
  2013
$’000
  2012
$’000
               (Unaudited)
Cash     271       133       25       282  

In fiscal 2011, we repurchased 1,142 of our shares for an aggregate of $0.01 million and in fiscal 2012; we repurchased a further 1,142 of our shares for an aggregate of $0.01 million.

In March 2012, we issued 11,428 of our shares at a price of $35.00 per share for net proceeds of $0.4 million. We used the proceeds for working capital purposes.

In 2012, we received proceeds of $2,000 from 238 options exercised but did not receive any proceeds of option exercises in 2011 because all options exercised during 2011 were net settled through cashless exercises.

We drew down an additional $80,000 on the Bridge Loan with MBTH and $690,000 with the other non-related investors from July 1, 2013 through July 18, 2013 to finance our operating activities for a total of $6,768,000 with MBTH and $2,267,300 with the other investors. Additionally, we accrued additional interest and fees of $475,000 from July 1, 2013 through July 18, 2013.

On July 18, 2013, we exercised our right to force a conversion of 50% of the then outstanding principal balance under the Bridge Loan Agreement and received notification of intent to convert the remaining 50% of the principal balance under the Bridge Loan and all accrued interest and fees from MBTH and other non-related investors that investors holding a total principal balance under the Bridge Loan of $8,910,000 and accrued interest and fees of approximately $1,355,000.

On August 7, 2013, we repaid $125,000 to a non-related investor for investment into the Bridge Loan.

On August 22, 2013, we refinanced approximately $1,013,000 of liabilities previously paid by MBTH during 2013 on our behalf through the Bridge Loan and incurred an origination fee of approximately $50,000. We received notification from MBTH of their intent to convert the principal balance and accrued fees and interest of $101,000.

On August 22, 2013, we issued 2,187,529 common shares for the conversion of the balance of approximately $11,429,000 in principal and accrued interest and fees at a price per share of $5.225. Additionally, we issued warrants to purchase 1,093,778 underlying shares as additional consideration to the investors who exercised their conversion option. The warrants vested immediately and are exercisable into common shares at an exercise price of $6.87 per share and have a term of five years from the date of issuance. The Bridge Loan balance and accrued interest and fees were $0 as of August 29, 2013.

On September 30, 2013, disinterested directors of the Company authorized a onetime agreement, whereby we issued to MBTH 1,599,453 shares of our common stock and a warrant to purchase 1,363,636 shares of our common stock at an exercise price of $6.87 per share for the difference in price between the shares issued to them in March 2013 at a price of $13.30 per share in exchange for the conversion of its 2011 Convertible Note and the $5.50 purchase price for shares sold in our initial public offering in July 2013. Additionally, the Modified Strike Price, agreed upon between the Company and MBTH in January 2013, of $13.30 per share for the two options representing 571,428 underlying shares granted to MBTH in February 2011 has been lowered to $5.50.

On October 22, 2013, we entered into a term sheet with a private investor (the “Investor”) for the purchase of convertible promissory notes (the “Notes”) for a minimum amount of $1.5 million and a maximum amount of $3 million (the “Bridge Financing”). The Notes will mature 12 months from the execution date and will have an interest rate of 12%. The Notes will be convertible into shares of our common stock at the lower of $5.50 or, in the event we complete a qualified offering, at 85% of the price of

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such offering. We may redeem the outstanding principal and interest at 130%. In the event we complete a qualified offering, we will retire 50% of the then principal outstanding.

The Notes are subject to the completion of a definitive agreement (the “Definitive Agreement”) which will include customary closing conditions and other customary provisions including event of defaults and anti-dilution rights. Should we fail to enter into a Definitive Agreement because we chose alternative financing, we will pay the Investor $50,000 as a breakup fee.

Aegis Capital Corp., an underwriter on this Offering, is the Placement Agent for the Financing and will receive a cash commission of 8% of the funds raised.

Capital Resources

As a means for financing our operations, on January 16, 2013 we entered into a convertible Bridge Loan that matures in one year with MBTH and other investors for the Company to borrow principal advances in the amount of up to $10 million. MBTH has committed $5 million under the Bridge Loan.

The financial statements have been prepared assuming that the Company will continue as a going concern. We have incurred recurring operating losses including net losses of $13.8 million and $15.7 million in the years ended December 31, 2012 and 2011, respectively. We have incurred net losses of $7.8 million and $5.9 million in the six months ended June 30, 2013 and 2012, respectively. Additionally, we have incurred negative operating cash flows including cash used in operations of $5.6 million and $7.6 million in the years ended December 31, 2012 and 2011, respectively. For the six months ended June 30, 2013 and 2012, we have incurred negative operating cash flows including cash used in operations of $3.2 million and $2.9 million, respectively. We expect to incur further losses in the development of our business which casts a substantial doubt about our ability to continue as a going concern.

The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital and to fulfill its existing backlog. As of October 18, 2013 the Company has a total backlog of $35.4 million. The ability to recognize revenue and ultimately cash receipts, on the existing backlog is contingent upon, but not limited to, acceptable performance of the delivered equipment and services. The Company has begun to fulfill orders associated with its back log. We intend to meet our financial needs for operations through continued financing until we are able to begin recognizing revenue and ultimately cash receipts. However, there is no assurance additional funding will be available for the next twelve months from June 30, 2013 to continue as a going concern.

There can be no assurances that we will be successful in raising additional capital through equity or bridge loan financing, or on terms that would be favorable to the Company. New investors could cause substantial dilution to existing stockholders.

Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions.

The following table sets forth the major components of our statements of cash flows data for the periods presented.

       
  Six Months Ended June 30,
2013
$’000
  Year Ended December 31, 2012
$’000
  Six Months Ended June 30,
2012
$’000
  Year Ended December 31, 2011
$’000
Net cash used by operating activities     (3,201 )       (5,561 )       (2,858 )       (7,607 )  
Net cash used by investment activities     (1,719 )       (5,006 )       (2,510 )       (6,023 )  
Net cash inflow from financing activities     4,674       10,705       5,517       13,672  
Net (decrease) increase in cash     (246 )       138       149       42  

Cash Flows from Operating Activities

Net cash used in operating activities for the year ended December 31, 2012 was $5.6 million after a net loss of $13.8 million, which was partially offset by $1.5 million paid to personnel and other liabilities by

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MBTH and non-cash charges of $0.5 million in stock-based compensation and $0.1 million for share-based consulting and other services. Changes in operating assets and liabilities consisted primarily of a $1.1 million due MBTH for costs paid on behalf of the Company and $1.2 million in interest accrued under the May 2011 Shareholder Loan and $1.3 million accrued under our corporate performance-related bonus program for employees and contractors.

Net cash used in operating activities for the year ended December 31, 2011 was $7.6 million after a net loss of $15.7 million, which was partially offset by non-cash charges of $1.0 million in stock-based compensation and $0.2 million in share-based consulting and other services. Changes in operating assets and liabilities consisted primarily of a $1.9 million increase in accrued expenses, $1.4 million accrual for a corporate performance-related bonus accrued to be paid to employees and contractors in shares, and increases of $0.2 million in both accounts payable and inventory.

Net cash used in operating activities for the six months ended June 30, 2013 was $3.2 million after a net loss of $7.8 million and non-cash charges of $0.3 million in stock-based compensation, $0.03 million for share-based consulting services, $0.9 million in depreciation and amortization and $0.1 for accretion of financial instruments. Changes in operating assets and liabilities consisted primarily of a $1.2 million due to MBTH for costs paid on behalf of the Company and $1.1 million in interest accrued under the Bridge Loan and $1.7 million accounts payables and accrued expenses Also $0.5 million increase in inventory and $0.4 million in other current assets.

Cash Flows from Investing Activities

We have invested in product and technology development and our patent portfolio, with $4.8 million accounted for as investment in intangible assets in the year ended December 31, 2011, and $4.5 million in the year ended December 31, 2012. In addition, the Company’s investment in property and equipment, comprising the purchase of vehicles, externally purchased software for internal use and hardware development costs, of $1.2 million in the year ended December 31, 2011 fell by $0.7 million, or 56.1%, to $0.5 million in the year ended December 31, 2012.

For the six months ended June 30, 2013, we have continued to invest in product and technology development and our patent portfolio, with $1.7 million accounted for as investment in intangible assets.

Cash Flows from Financing Activities

During the year ended December 31, 2012, net financing activities consisted primarily of proceeds from further advances under the May 2011 Shareholder Loan. Proceeds from convertible promissory notes issued to MBTH under the May 2011 Shareholder Loan totaled $10.3 million. Proceeds from the issuance of new shares amounted to $0.4 million. This was partially offset by the repurchase of a further 1,142 of our shares for total consideration of $0.01 million.

In the year ended December 31, 2011, financing activities consisted primarily of proceeds from the issuance of convertible promissory notes. Proceeds from convertible promissory notes from MBTH, a related party, totaled $13.7 million, of which $10.0 million was converted into new shares during fiscal 2011.

During the six months ended June 30, 2013, net financing activities consisted primarily of proceeds from further advances under convertible promissory notes issued by the Company. Proceeds from convertible promissory notes issued to MBTH totaled $0.5 million. Also MBTH converted their promissory note of $15 million and issued additional proceeds of $4.2 million under the Bridge Loan.

Contractual Obligations

We lease our engineering headquarters in Sunrise, Florida, under an operating lease that expires on April 18, 2016. We also lease warehouse space and deployment sites under short term leases. The following table summarizes our contractual obligations as of June 30:

 
12 Months Ending  
2014   $ 309,000  
2015     307,000  
2016     280,000  
     $ 896,000  

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We currently assemble our products. During the normal course of business, we procure components based upon our design, development and production needs. Our plan is to retain one or more contract manufacturers for volume manufacture, testing, quality assurance and shipping of our products. In order for the contract manufacturers to set up their production lines, we will be required to fund certain expenditures, such as the provision to the manufacturers of production test equipment, which will be one of the use of proceeds of this offering (see further in the section entitled “Use of Proceeds”). We periodically review the potential liability and to date no accruals have been recorded. Our financial position and results of operations could be negatively impacted if we were required to compensate our suppliers for any future liabilities incurred.

Convertible Debt

Under a subscription agreement between us and MBTH dated January 16, 2013 and the promissory note issued by us to MBTH pursuant to such agreement, MBTH committed to advance to us $5 million as part of a new convertible bridge loan for up to an aggregate of $10 million. The Bridge Loan is to refinance advances by MBTH to us under the May 2011 Shareholder Loan in excess of $15 million and for general corporate purposes, including additional working capital and product development. The Bridge Loan is for a term of one year and is convertible, at each loan note holder’s option, into new shares at any time prior to final maturity at 95% of the price of any future equity financing completed by us (including this public offering). Interest is payable at 20%. per annum, semi-annually in cash or shares, at the option of each loan note holder. The Bridge Loan may be prepaid by us in whole (or in part), subject to payment of a minimum of six months’ interest if prepaid within the first six months. We may redeem 50% of the Bridge Loan without prepayment penalty by forcing a conversion into shares, provided that the shares are marginable and freely tradable on a liquid exchange, and provided further that, if such forced conversion is effected within six months from the date of the Bridge Loan, then we shall pay six months’ interest on the unpaid and unconverted principal balance of the Bridge Loan immediately before such forced conversion (such interest being payable in cash or shares, at the option of each loan note holder). For every $350 of principal amount of Bridge Loan advanced by a loan note holder, the loan note holder will be issued one warrant to subscribe one share at a subscription price of $0.35 per share. The warrants are exercisable for a period of five years from issue. We agreed to pay an origination fee of 5% to note holders.

On October 6, 2011, we entered into a convertible promissory note for $2 million in favor of Treco, a related party, as part of the settlement compensation to Treco for terminating the infrastructure agreement. The loan is payable on final maturity, October 6, 2018 and is convertible, at Treco’s option, into our shares at a price of $35.00 per share. Interest at the rate of 9% per year is payable semi-annually in cash or shares, at our option. As of December 31, 2011, $2 million of principal balance was outstanding under the $2 million Convertible Note. By way of payment of interest that had accrued and was due, on May 2, 2012, we issued to Treco 4,472 new shares, on October 8, 2012, we issued to Treco an additional 5,714 new shares, and on May 2, 2013, we issued to Treco 6,923 common shares.

Commitments and Contingencies

Except as otherwise disclosed elsewhere in this document, we have no material commitments or contingent liabilities. The Company has an employment contract with its CEO that would require a one-year severance payment in the event the Company terminates his services under certain circumstances.

Warranties and Indemnifications

We may in the future enter into standard indemnification agreements with many of our distributors and OEMs, as well as certain other business partners in the ordinary course of business. These agreements may include provisions for indemnifying the distributor, OEM or other business partner against any claim brought by a third party to the extent any such claim alleges that an xMax® product infringes a patent, copyright or trademark or violates any other proprietary rights of that third party. The maximum amount of potential future indemnification is unlimited. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not estimable.

Based upon our historical experience and information known as of October 18, 2013, we do not believe it is likely that we currently have significant liability for the above indemnities.

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Off-Balance Sheet Arrangements

As of December 31, 2012 and 2011 and June 30, 2013 and 2012 we had no off-balance sheet arrangements.

Quantitative and Qualitative Disclosure about Market Risk

Interest Rate Fluctuation Risk

We had cash of $0.3 million and $0.1 million as of December 31, 2012 and 2011, respectively and cash of $0.03 million and $0.3 million as of June 30, 2013 and 2012, respectively. Our cash consists of cash in hand and demand deposits.

Because our cash is immediately available, it is relatively insensitive to interest rate changes. In future periods, when the balances of our cash and cash equivalents increase, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives to preserve principal while maximizing income without significantly increasing risk.

The fair value of our cash would not be significantly affected by either a 10% increase or decrease in interest rates.

Foreign Currency Exchange Risk

We expect that our sales transactions will primarily be denominated in U.S. dollars and therefore substantially all of our revenue will not be subject to foreign currency risk. Furthermore, our operating expenses are currently substantially incurred inside the U.S. and are denominated in U.S. dollars and are not be subject to foreign currency risk. Accordingly, we do not believe that a change in exchange rates would have a material impact on our results of operations.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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BUSINESS

Overview

xG Technology, Inc. has developed a broad portfolio of innovative intellectual property that we believe will enhance wireless communications. Our intellectual property is embedded in proprietary software algorithms that offer cognitive interference mitigation and spectrum access solutions.

We have generated material revenues in 2008 and 2009 attributed to the Company’s BSN250 voice-only product line. Upon the introduction of various smartphones in 2007 (and later) which could handle both voice and data, the Company made the decision it was necessary to enhance its voice-only product line to include data services. Beginning in July 2009, the Company focused on enhancing its BSN250 and TX70 product line for data services and we delivered such a system to the US Army in 2011. The US Army subsequently requested our BSN250 should integrate with commercial off the shelf (COTS) smartphones. In 2013, the Company will introduce a new product line that can handle both voice and data services. These new products are called xAP (base station), xMod and xVM. The latter two are able to communicate to any COTS device. We have generated significant net losses for the past several years and we expect to continue to realize net losses for the immediate future. We anticipate generating revenues again sufficient to cover the cost of our operations once our new voice and data products are delivered to customers in the second half of 2013.

The wireless communications industry is facing a spectrum crisis as demand for flexible, affordable voice and data access rapidly grows. We developed frequency-agnostic cognitive radio solutions that are designed to address this increasing demand by eliminating the need to acquire scarce and expensive licensed radio spectrum and so lowering the total cost of ownership for wireless broadband access. With fast growing demand straining network capacity, our intellectual property is also designed to help wireless broadband network operators make more efficient use of existing spectrum allocations. We are targeting numerous industries world-wide, such as telecommunications, cable, defense, and public safety, and markets ranging from rural to urban areas and expeditionary deployments.

The implementation of our cognitive radio intellectual property is xMax®. We believe the xMax® system, represents the only commercially available cognitive radio network system that is designed to include interference mitigation by spatial processing. xMax® implements our proprietary interference mitigation software that can increase capacity on already crowded airwaves by improving interference tolerance, enabling the delivery of a comparatively high Quality of Service where other technologies would not be able to cope with the interference. We believe that the xMax® system will also, when in a future development operating on more than one radio channel, deliver dynamic spectrum access by scanning and finding unused or underused frequencies (unlicensed as well as licensed) and dynamically tuning to them, significantly increasing their usable capacity.

Our system is frequency agnostic although currently designed to operate within the 902 – 928 MHz license-free band. xMax® is intended to serve as a mobile voice over internet protocol (“VoIP”) and broadband data system that utilizes an end-to-end Internet Protocol (“IP”) system architecture. The xMax® product and service suite includes a line of access points, network bridges, mobile switching centers, network management systems, deployment tools, and customer support. The xMax® system will allow mobile operators to utilize free, unlicensed 902 – 928 MHz ISM band spectrum (which spectrum is available in most of the Americas) instead of purchasing scarce expensive licensed spectrum. Our xMax® system will also enable enterprises to set up a mobile communications network in an expeditious and cost effective manner. In addition, we believe that our xMax® cognitive radio technology can also be used to provide additional capacity to licensed spectrum by identifying and utilizing unused bandwidth within the licensed spectrum.

We are executing on our sales and marketing strategy and have entered into agreements both direct with end-customers as well as with indirect channel network partners. These customer engagements primarily relate to two of our target markets in rural telecommunications and defense. Together, they comprise commitments to purchase xMax® cognitive radio networking equipment, engineering services and other hardware worth approximately $35.4 million. See further in the section entitled “Customers” below.

On October 16, 2013, we shipped our first comprehensive Cognitive Radio system to the Walnut Hill Telephone Company in Lewisville, Arkansas.

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Company Background

The Company was organized as a Delaware limited liability company under the laws of the State of Delaware on August 26, 2002 under the name JTS Acquisitions, LLC. On March 21, 2003, we changed our name to xG Technology, LLC. Pursuant to a certificate of conversion and a certificate of incorporation filed with the State of Delaware on November 8, 2006, xG Technology, LLC converted to a Delaware corporation under the name xG Technology, Inc. Our executive offices are located at 240 S. Pineapple Avenue, Suite 701, Sarasota, FL 34236, and our telephone number is (941) 953-9035.

We are an emerging growth company within the meaning of the rules under the Securities Act. We have in this prospectus utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies, including reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a nonbinding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act, including the additional testing of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting, and we have elected to delay adoption of new or revised accounting standards applicable to public companies. As a result, our stockholders may not have access to certain information they may deem important.

Our Strategy

We have developed a broad portfolio of innovative intellectual property that we believe will enhance wireless communications. Leveraging elements of our intellectual property portfolio, we are introducing a range of spectrum agnostic, cognitive radio solutions that span numerous industries and applications. We believe that these products, together with our ability to leverage our patent portfolio, present us with an attractive revenue model. Our strategy is initially to commercialize our intellectual property portfolio by developing and selling network equipment using our proprietary software algorithms to offer cognitive interference mitigation and spectrum access solutions. In the future, our strategy is for our intellectual property to be embedded by partners in a semiconductor chip that could be sold to third party equipment manufacturers and inserted in their devices and to license our intellectual property to other customers in vertical markets world-wide. Our technology roadmap currently projects this transition to begin in 2015.

Market Overview

Our Market

We are witnessing rapidly increasing demand in the marketplace for mobile bandwidth. The surge in demand is attributable to the proliferation of smartphones, tablet PCs and other broadband-centric devices, as well as the shift to data and video-intensive services. A Cisco report (the Cisco Visual Networking Index, February 2012) indicates that in 2011 more than 50% of the data traffic on mobile networks was video, and they forecast video traffic to account for over 70% of total mobile data traffic by 2016.

There has also been an increase in mobile voice demand as more people unplug their wired phones and rely on wireless devices for all of their calling needs. According to Cisco’s report, as well as several studies undertaken by the Federal Communications Commission (“FCC”), the demand for wireless services will continue to grow in the coming years, as shown in the chart below. Cisco predicts mobile data traffic will increase 18-fold between 2011 and 2016, a 78% CAGR, reaching 10.8 billion Gigabytes per month.

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Source: Mobile Broadband: The Benefits of Additional Spectrum (FCC Report 10/2010)

In early 2009, Congress directed the Federal Communications Commission (FCC) to develop a National Broadband Plan to ensure every American has “access to broadband capability.” After conducting thirty-six public workshops and engaging in significant collaboration and conversations with other government agencies and Congress, the FCC released the National Broadband Plan in early 2010. Within the Plan the FCC acknowledges that “the current spectrum policy framework sometimes impedes the free flow of spectrum to its most highly valued uses.” The Plan states that “Wireless broadband is poised to become a key platform for innovation in the U.S. over the next decade. As a result, U.S. spectrum policy requires reform to accommodate the new ways that industry is delivering wireless services. These reforms include making more spectrum available on a flexible basis, including for unlicensed and opportunistic uses.”

Specific recommendations within the report that indicate a favorable regulatory environment for cognitive radio technology include: “Recommendation 5.13: The FCC should spur further development and deployment of opportunistic uses across more radio spectrum.” The Plan further states that, “the FCC and NTIA should take steps to expand the environment in which new, opportunistic technologies can be developed and improved. And “The FCC should allow opportunistic radios to operate on spectrum currently held by the FCC (such as in certain license areas where spectrum was not successfully auctioned).”

On March 27, 2012 the U.S. Department of Commerce, through the NTIA, released a report in which they announced, “In the past, the federal government has freed up spectrum for exclusive commercial use by clearing a spectrum band of federal users, who typically relocated to other bands. However, given the growing demand for spectrum by both industry and the federal agencies, it is increasingly difficult to find desirable spectrum that can be vacated by federal users as well as spectrum in which to relocate these federal users. Due to the scarcity of spectrum, the complexity of federal operations, and the time and cost of relocating federal users, the old approach alone is no longer feasible.”

The report further states “NTIA proposes a new path forward for spectrum repurposing that relies on a combination of relocating federal users and sharing spectrum between federal agencies and commercial users. Spectrum sharing will be a vital component to satisfying the growing demand for spectrum, and federal and non-federal users will need to adopt innovative spectrum-sharing techniques to accommodate this demand.”

In July 2012, The President’s Council of Advisors on Science and Technology (PCAST) issued a report to the US President titled “Realizing the Full Potential of Government-Held Spectrum to Spur Economic Growth” in which “It concludes that the traditional practice of clearing government-held spectrum of Federal users and auctioning it for commercial use is not sustainable. In light of changes made possible by modern technology, we recommend that you issue a new Memorandum that states it is the policy of the

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U.S. government to share underutilized spectrum to the maximum extent consistent with the Federal mission, and requires the Secretary of Commerce to identify 1,000 MHz of Federal spectrum in which to implement shared-use spectrum pilot projects.” The report noted that simply clearing and reallocating spectrum would not be sustainable and pointed to a recent study by the National Telecommunications and Information Administration (NTIA) which found that clearing of just one 95 MHz band will take 10 years, cost $18 billion, and cause significant disruption. Among its key recommendations are to adopt new technologies, including cognitive radios, that could help use existing spectrum more efficiently, stating that “the use of new radio technologies, including cognitive radios, will be an important tool in helping increase spectrum capacity and utilization”. The PCAST authors stated that agile (cognitive) radio technologies that make it possible for computerized radio systems to share spectrum on a vastly more efficient basis would make it possible to move from an era of scarcity to one of abundance.

Moreover, on July 6, 2012 a Presidential Executive Order was issued regarding the Assignment of National Security and Emergency Preparedness Communications Functions. The order establishes that the federal government must be able to communicate with the public, other agencies, other levels of government and businesses “at all times and circumstances” and in all locations, both domestically and internationally. To ensure this, the order mandates the establishment of emergency communications capabilities that are “survivable, resilient, enduring and effective”. These capabilities are not available in traditional public system networks, but the xMax® cognitive radio system has been designed from the ground up to meet the very survivability, redundancy, mobility, interoperability, and resiliency requirements specified by this Order.

Recognizing the spectrum constraints on fast growing needs for wireless connectivity, in September 2012 the European Commission published a communication promoting the shared use of radio spectrum resources. A study conducted for the European Commission showed that finding additional shared spectrum resources for wireless broadband could create significant net economic benefits for the European Union. With an increase of between 200 to 400 MHz in shared access spectrum for wireless broadband, the scenarios evaluated in the study showed a net increase in the value to the European economy of the order of several hundred billion Euros by 2020. The Commission, therefore, proposed steps to foster the development of wireless innovations in the EU to ensure that the currently allocated spectrum is exploited to the fullest extent possible. This has been followed by Ofcom, the telecommunications regulator in the UK, moving to complete the process to release TV Whites Spaces for shared use.

While it appears to management that spectrum regulation is developing in a favorable manner, we have, nonetheless, chosen to release the initial xMax® product line on the unlicensed 900 MHz ISM band (902 – 928 MHz) in order to minimize our exposure to regulatory risk (see further under the section entitled “Government Regulations, Regulators’ Role in spectrum”). The unlicensed bands are well established and although these bands are allocated for Industrial Scientific and Medical (ISM) use (e.g., microwave ovens and industrial equipment), a major use has been unlicensed (Part 15) systems such as Wi-Fi, Bluetooth, and ZigBee. In the period 1995 – 2005, most of the cordless phones marketed in the US were in the 902 – 928 MHz band, but conflicts with the other uses and availability of DECT equipment has greatly decreased sales of 902 – 928 MHz cordless phones.

The rules for these bands sprung from FCC Docket 81-413 which sought to end an implicit prohibition of spread spectrum/CDMA technology that resulted from a focus on FDMA spectrum uses. This resulted in rules adopted in 1985 that allow unlicensed spread spectrum systems to use these bands for almost any possible application subject to a 1W power limit. When wireless LAN use became of interest several years later, these time-tested rules allowed U.S. market access without FCC deliberations. The 2.4 and 5.8 GHz bands are used for Wi-Fi today. In a similar fashion, we are launching our initial software-defined product offering programmed to operate on unlicensed spectrum in order to speed commercialization of our intellectual property without requiring FCC or NTIA deliberations on opportunistic access. Because we have designed our core technology to be usable beyond the unlicensed band that its initial product offering operates on, we believes that we are well positioned to benefit from possible future regulatory reforms that support wider spread use of spectrum sharing and opportunistic access techniques.

The growth of wireless data over the past few years has made the subject of available spectrum a pressing priority. In fact, the current situation has been referred to as a “looming spectrum crisis”. (FCC

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Chairman Julius Genachowski, speech to CTIA, October 2009). Responses to this “crisis” have included lobbying efforts to persuade the FCC to find new sources of licensed spectrum and proposals to reallocate existing licensed spectrum. Demand for more spectrum and capacity has also been a key factor in industry consolidation. The rationale given for the AT&T/Cingular merger was based on the fact that AT&T had more spectrum than Cingular, and by combining the companies they could more efficiently serve their customers. Likewise, Verizon’s $3.6 billion bidding to buy unused wireless spectrum and AT&T’S $39 billion attempt to acquire T-Mobile was primarily driven by AT&T’s desire to secure additional spectrum and cell sites in order to provide more capacity across its network.

Our company and our technology and products are based on our belief that there is insufficient spectrum available to satisfy the current and future growth of wireless data. However, we also believe that this crisis is not solely a result of insufficient amounts of available spectrum, but also the result of inefficient use of the currently available spectrum. Rather than merely demanding more spectrum we believe that the more appropriate response to the call for increased bandwidth would be to shift the focus to getting more use out of spectrum that has already been allocated. More effective utilization of the available spectrum can be accomplished in a number of different ways. Advancements in radio technology, such as the movement to the LTE standard from the previous 3G networks, for example, have allowed for better spectrum utilization. This has been attributed to the incorporation of new advanced technologies such as multiple in, multiple out (“MIMO”) and Orthogonal Frequency-Division Multiple to reduce multiuser interference.

Other methods being employed by network operators to meet bandwidth requirements have included off-loading some of the demand to unlicensed Wi-Fi hotspots and selling in-building femtocells that make use of a customer’s own wired Internet connection. Another approach is to build more cell sites closer together. Each cell site would cover a smaller area, and thus offer the ability to reuse frequencies more times in a larger geographic coverage area. However, such would entail more costs, and is time consuming due to local permitting and other considerations. Many of these approaches have been driven by the need to receive more capacity out of limited spectrum.

While the spectrum currently available cannot satisfy the future growth of wireless data, the idea of getting better use out of spectrum (both licensed and unlicensed) by sharing it is receiving increased attention as a more effective and efficient solution for the industry than simply identifying new spectrum. This has led to industry and policy makers to consider technology-based approaches, such as cognitive radio and opportunistic (i.e. shared) spectrum use.

Users of commercial cellular networks are not the only users that are running out of capacity due to spectrum limitations. Wireless users around the globe such as industrial and enterprise users, public safety agencies and those who use unlicensed spectrum (such as Wi-Fi and White Spaces) are also lacking necessary spectrum, but are not being allocated the necessary spectrum due to the fact that regulators have historically prioritized commercial mobile carriers in the allocation of spectrum assets as the demand for both voice and broadband access continues to increase.

We believe that deployment of cognitive radio networks offers the best solution to addressing the pressing need for more efficient use of spectrum.

Radio Spectrum — A Primer

Radio spectrum is a finite resource. In order to utilize this limited radio spectrum better, we have essentially been limited to reallocating swaths held by existing users, who either have to lose some of their spectrum or have to move to other portions of the band.

The best spectrum for two-way radio or cellular types of communications is in lower frequencies. These frequencies are scarce due to technical, historical, and regulatory reasons. A large part of the spectrum (30MHz to 900MHz) that is well suited for cellular and land mobile radio (LMR) is occupied by existing business, industrial, public safety, and other license holders. Additionally, only a fraction of this spectrum is practical for mobile commercial consumption as the usage of lower frequencies requires antennas, filters and other components that do not fit into a portable handheld device. There are also many services that have long used valuable spectrum in frequencies that could be reassigned for mobile data and voice since those services could use some other spectrum efficiently.

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The availability of widespread high-speed wireless broadband has led to customer uptake that was far greater than the network operators, device manufacturers, and application developers had predicted. The introduction of the iPhone by Apple was a starting point for soaring broadband wireless service demand, and since that time, new applications, including streaming video for TV and movie services, have proliferated. Network operators are struggling with how to keep up with this demand. AT&T reported that 4% of its iPhone customers were accounting for more than 50% of the data traffic on its 3G network, and a Cisco report indicates that today more than 50% of the data traffic on mobile networks is video. This trend is expected to accelerate as network operators begin deploying 4G (fourth-generation cellular services). However, 4G does not fully address the current spectrum issues, and in fact may make it worse as new bandwidth and spectrum-intensive services are brought to market.

A report from the FCC’s Office of Broadband Development cites a technical paper showing the demand for broadband services outstripping spectrum capacity as early as the end of 2012.

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Source: Office of Broadband Development (FCC)

Cognitive Radio Networks — A primer

The industry definition of a cognitive radio is a device that, unlike a traditional radio, can dynamically find and use available frequency to improve throughput and connectivity. This can be done via real-time sensing that allows the radio to scan for unused frequencies and then instantly tune to such frequencies. Cognitive radios can also rely on a database that can tell it what channels are available (usually based on the radio’s location and known spectrum restrictions in that area).

Either or both of these techniques can be used to help the cognitive radio avoid interference and optimize its throughput and connection reliability on a dynamic basis. With detailed information about its local radio frequency (“RF”) environment, cognitive radios are able to change power output, frequency and receive or transmit parameters, in order to extract latent (unused) bandwidth and capacity from crowded unlicensed, as well as underutilized licensed, wireless spectrum.

The key elements of cognitive radio technology include spectrum sensing, spectrum management, spectrum mobility, spectrum sharing, and spatial processing:

Spectrum sensing may be defined as interference-based detection of transmitters with the ability to look at a portion of the spectrum to see if it contains any transmitters that could cause interference to the cognitive radio system. Making the end user devices and network infrastructure cognitive enables both to dynamically react to a wide range of conditions. In the xMax® system, the end user radio is used to inform the network of changes in the RF environment, core infrastructure and other relevant conditions. This allows the network

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itself, and not just the radios, to adapt dynamically. When only the radio itself is cognitive, each radio will individually optimize its parameters and throughput based on local conditions, without regard to overall system performance. What may be optimal for the radios on an individual basis may not lead to overall network optimization in terms of coverage, throughput or other measures.

Spectrum management is the ability of the system to capture the best available spectrum for use at any given point in time. It is based on the premise that both terminals and base stations can be directed to change their operating frequencies dynamically as needed to keep the communications from interfering with others in that portion of the spectrum, or of being interfered with by others in the same spectrum. By propagating and collecting data from individual radios across the network, a cognitive system approach can make the entire network smarter, and optimize total network throughput. This enables new and useful features such as self-RF planning that can simplify, and reduce the cost of, the deployment and operation of the network. After the RF data is collected, better utilization and performance can be achieved automatically and continuously. This makes the network vastly more adaptable, self-sustaining and self-optimizing in many ways. The ability for the network to provide a level of self-RF planning is only one example of what a cognitive network can offer. Because a cognitive radio network can self-optimize and self-configure, little-to-no frequency coordination between cognitive radio nodes or other radio networks operating in the same frequencies is needed. This leads to an often overlooked benefit of having a self-planning, self-optimizing network: it reduces or eliminates the need for skilled radio technicians. These cognitive radio networks use software, powerful on-board computing power and real-time RF sensing to supplant expensive and overburdened radio technicians. The smart network goes beyond self-frequency planning to also encompass dynamic capacity shifting. That is to say that when a cell is lightly loaded, it can automatically abandon one or more channels in any given sector, thus making those channels available for adjacent cells to use if loading at that cell justifies the need for more spectrum. In addition to the ability to shift spectrum resources around to other cells, it also makes the network as a whole a good neighbor to other systems that might be trying to use the same spectrum in a shared band (like TV White Spaces) by using the minimum amount of spectrum at any given time. Moreover, these capabilities will allow xMax® networks themselves to become mobile, adapting to new spectrum conditions and terrain “on-the-go”, which will make xMax® an excellent solution for expeditionary deployments by defense, public safety and emergency agencies.

Spectrum mobility refers to the ability to make use of spectrum dynamically, commonly called dynamic spectrum access (DSA). The system can decide to change bands or channels within the spectrum in which they are operating.

Spectrum sharing is the ability for a cognitive radio system to operate in shared spectrum (unlicensed spectrum, for example), detect stations that interfere with the transmissions, mitigate that interference if possible, or avoid it by changing operating frequencies or other system parameters. By enabling xMax® to tolerate high levels of interference before requiring the radios to switch channels, more “gray spectrum” (containing interference or jamming) can be used in place of white spectrum (clean and interference-free). This makes these white spectrum channels available for other radios that cannot mitigate the interference on their current channel. The overall capability increases the network’s total throughput and capacity greatly — without consuming additional scarce spectrum resources.

Spatial processing is the use of multiple integrated receiver chains known as MIMO systems that can provide another layer of resistance to interferers. MIMO processing allows better use of the radio channel to improve link budget and data rates. By employing advanced signal processing techniques, we believe that our system can also be used to track and mitigate interference from multiple mobile transmitters using sophisticated signal processing algorithms. The ability to mitigate, rather than simply run away from interference will be critical going forward. We believe that there will be no more “white spaces” and that all spectrum will be made up of “gray spaces” (interference laden frequencies) caused by a system’s own self-interface or that which is caused by other nearby systems.

We believe that a true cognitive or intelligent radio network will make use of most, if not all, of these capabilities in order to be able dynamically to keep the system operating by mitigating or avoiding interference that may show up in the frequencies the cognitive network is currently using. If the interference becomes too severe, an intelligent system will be able to locate other spectrum and shift the radio links to

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new frequencies nearly instantaneously. Using cognitive radio techniques, the cognitive network can intelligently share spectrum and extract more bandwidth via “opportunistic use” of shared spectrum resources.

Today’s cognitive radio systems are taking advantage of new antenna technology (such as MIMO) and digital signal processors (DSPs) with advanced, innovative software algorithms. This evolution has also yielded a class of DSPs that are incredibly powerful, yet still energy-efficient. These and other technologies are enabling a new generation of smart (i.e., cognitive) radios. In general, the limiting factor in high capacity wireless systems is interference. As stated above, there are a number of ways to deal with interference to keep the communications link up and running. Unlike traditional systems (such as 3G and 4G), cognitive systems can recognize and then deal with interference locally and in real-time, thus greatly increasing the capacity of new and existing spectrum.

Products

xMax® :  the first implementation of xG’s innovative cognitive radio intellectual property is xMax®. Operating initially within the 902 – 928 MHz license-free band, xMax® is a mobile voice over internet protocol (“VoIP”) and broadband data system that utilizes an end-to-end Internet Protocol (“IP”) system architecture. The xMax® technology we are developing is spectrum agnostic. In any spectrum band that xMax® will operate in, we will break the band into channels and sub channels. We will then use spatial processing and adaptive modulation to mitigate interference in that band. If the band becomes unusable because of overwhelming interference, we will then use dynamic spectrum access to change to another channel or band. The xMax® product suite we are currently developing is band specific due to the current limitations in RF technology that can be produced for a given size, cost and complexity. Multiband, small, portable devices today require custom developed integrated circuits, which are on our technology roadmap, but not currently available. The mid-term objective is to transition implementation of xMax® to a licensing and semiconductor chip business model, which is anticipated to begin in 2015.

The xMax® system design represents a turnkey network solution that will include rapid-deploy self-organizing access points (base stations), fixed and mobile personal Wi-Fi hotspots, mobile switching centers, as well as network management and deployment tools. A key feature of the xMax® system is the ability to leverage off-the-shelf commercial mobile devices (such as smartphones, laptops and tablets), resulting in reduced network infrastructure, maintenance and operational costs. The xMax® system will allow mobile operators to utilize free, unlicensed 902 – 928 MHz ISM band spectrum (available in most of the Americas) instead of having to purchase scarce licensed spectrum which can be prohibitively expensive. In addition, mobile network operators will be able to use xMax® cognitive radio technology to add additional capacity to licensed spectrum by identifying and utilizing unused bandwidth in those frequencies.

Our xMax® system is designed to utilize an advanced cognitive radio technology that incorporates OFDM and MIMO to increase interference tolerance, allow mobility, and improve resistance to fading. All xMax® products leverage an array of high-performance, low-cost digital signal processors (DSPs) that enable multidimensional signal processing that mitigates interference and dynamically optimizes available spectrum. xMax’s software defined radios (SDR) are designed to be inherently frequency-agile, which will allow network access points and user devices to automatically retune and operate on clearer channels within the band. This innovative signal processing will enable xMax® to deliver a licensed spectrum experience using unlicensed spectrum.

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Below is a diagram that provides a high-level overview of the xMax® network architecture:

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The product portfolio that we are creating by combining advanced computer processing power and novel wireless design means that a technology solution is becoming a viable alternative to past public and private spectrum acquisition policies. We employ a multifaceted cognitive radio approach that combines sophisticated interference mitigation capabilities with innovative dynamic spectrum access attributes. The former features MIMO smart antenna technologies. Employed in concert, these capabilities will help squeeze additional usable spectrum out of airwaves once considered unusable for advanced mobile communications.

xMod:

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The xMax® xMod is a device that allows users of Wi-Fi-enabled smartphones, tablets, notebooks and other devices to access the Internet through the xMax® cognitive radio network. The xMod acts as a transparent protocol bridge that connects end user devices to the wide-area xMax® network using secure Wi-Fi links, USB or Ethernet cables. It supports not only fixed users but will also supports mobile users and has been designed to provide exceptional QoS (Quality of Service) and MoS (Mean Opinion Score) while supporting calls, texting (SMS) and broadband data streams over the xMax® network.

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The xMod includes a Wi-Fi router chip that allows it to simultaneously support multiple external devices wirelessly. It will enable operators to deploy long-range xMax® networks that can integrate with the large installed base of Wi-Fi and Ethernet-capable devices. Subscribers will easily be able to install and set up an xMod to support any device having a Wi-Fi, USB or Ethernet connection. By incorporating xMax® radios and 2x4 MIMO technology, xMods can provide range and reliability that management believes is superior to Wi-Fi-based wide-area systems.

The xMod and xMax® system is designed to support nomadic and mobile connectivity (including high-speed handoffs) which will allow xMax® operators to offer on-the-go services that differ from those of fixed services, such as cable and DSL. It will be possible to deploy xMax® in fixed, mobile or nomadic configurations. When a planned later version of xMax® delivering higher data rates is deployed in a fixed manner rural telecommunications operators could recover the cost of the network via the Universal Service Fund (“USF”) subsidy mechanism. Recent regulatory reform has begun to transition USF support from telephone to broadband services. Because xMax® can carry both voice and data, we believe that xMax® is well suited for rural carriers to handle such a migration. As with all the components in the xMax® family of products, the xMod is designed to offer increased range, flexibility, throughput and reliability, while reducing network deployment and management costs. Management believes this will make xMax® an attractive solution for WISPs, mobile telecommunications operators and other service providers.

xVM:

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The xMax® xVM TM Vehicle Mounted Modem is an IP67-rated ruggedized subscriber device that is designed to be installed inside or outside vehicles. The xVM acts as a transparent protocol bridge, allowing users of WiFi-enabled smartphones, tablets, notebooks and other devices to seamlessly access the Internet through the xMax cognitive radio network.

The xVM is waterproof and made to withstand wide temperature ranges and challenging environmental conditions. It has been designed to meet the extreme demands characteristic of expeditionary environments, making it ideally suited for employment in the public safety, homeland security, and military market places.

While primarily developed for vehicle usage, the xVM may also be externally mounted in fixed locations like parks or other outdoor areas to provide WiFi access for use in monitoring, surveillance, machine-to-machine and other applications using the xMax backhaul link.

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xAP:

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The xMax® xAP is an all-IP wireless access point that will deliver wide area coverage and reliability even when there is significant interference. The xAP brings together innovative technologies including Software Defined Radio (SDR), cognitive networking and a 2x4 MIMO in a compact and affordable broadband access point. These capabilities will enable the xAP to deliver wide area coverage and broadband throughput for fixed, nomadic and mobile applications.

xMax® radios and 2x4 MIMO technologies give the xAP range and reliability surpassing Wi-Fi-based systems. The xAP (as well as all xMax® components) will support nomadic and fully mobile connectivity, including high-speed handoff that will allow xMax® operators to offer on-the-go services that differ from those of fixed services, such as cable and DSL. As part of the xMax® family of products, the xAP is designed to offer increased coverage, throughput and robustness while reducing network deployment and management costs, making it, we believe, an attractive solution for WISPs, mobile telecommunications operators and other service providers. When implemented, Self-Organizing Networking (SON) technology will simplify and speed deployment for commercial, private and tactical networks.

The xAP is a small, single channel device that will provide a data rate of up to 3 Mbps per channel and supports a range of 1 to 5 miles (non-line-of-sight) and up to 8 miles (line-of-sight), depending on conditions. The xMax® system is designed so that it will be possible to collocate multiple xAPs in order to increase system capacity. xAPs are GPS time-synchronized to avoid self-interference, which increases overall system capacity and load leveling. These features, along with deterministic Media Access Control (MAC) for high-quality voice calls, give the xMax® system improved scalability in real-world conditions.

Having numerous accessible channels will allow neighboring network nodes (made up of one or more xAPs) to utilize non-interfering channels automatically when employing the network self-planning features that are in our technology roadmap. This will allow the network to grow and scale more easily without the operator having to redesign the network RF plan each time a device moves, or when xAPs or users are added or removed from the network.

xMSC:

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The xMax® Mobile Switching Center (xMSC) is the backbone network element in the xMax® regional network. The xMSC bridges the delivery of the voice and data services, and manages all elements in the regional network (access points, xMods and xVMs).

The xMSC acts as an aggregation point for the connected xAPs. It performs routing and security functions. The xMSC is typically connected to the Global Information Grid (GIG) and one or more VoIP soft switches.

xMonitor/xDrive:

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These software tools provide integrated and comprehensive network and element management for the xMax® network, as well as mobile network throughput and coverage optimization.

xMonitor is a component of the xMSC that monitors the status and health of all xAPs, xMSC elements, and VoIP core elements. It provides end-to-end IP network management and monitoring services. xMonitor is a web-based application that will be installed at an operator’s Network Operation Center, enabling remote management of network status. The program runs as a live application that continuously collects data from the network, updating the aggregated information without user intervention. It can be programmed to display specific views around the clock — providing an at-a-glance heads-up display from which to survey the network.

xDrive is a drive mapping utility designed to gather, display and log performance statistics from the xMod and xVM. It will allow field technicians to map the coverage of a deployment of xAPs, as well as providing xMod/xVM to xAP to link statistics.

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Competition

The wireless technology sector is intensely competitive and is rapidly evolving. Several vendors have researched and experimented with cognitive radios. This research predominately falls under the traditional industry defined use of a cognitive radio where cognitive capabilities are restricted to dynamic spectrum access (“DSA”) within the radio device. However, we believe that only a few vendors are undertaking development across all the key elements of cognitive technology: spectrum sensing, spectrum management, spectrum mobility, spectrum sharing, and spatial processing.

As an example, both Spectrum Bridge and Microsoft have developed a database approach to frequency reuse. This method was developed specifically to enable unlicensed broadband systems to coexist with existing TV transmitters in the TV White Spaces band.

We not only face competition from other companies developing cognitive radio solutions but we are also competing for sales to end-user customers with companies offering solutions utilizing other technologies for access to licensed and unlicensed spectrum, such as LTE and Wi-Fi.

In the cognitive radio market, our competitors include, Neul Ltd., Shared Spectrum Corporation and Adaptrum.

End-customers in the rural broadband market are being offered a choice of solutions based on alternative technologies, such as LTE and Wi-Fi. Global communications networking equipment vendors such as Ericsson, Huawei, Alcatel-Lucent and others are actively selling and deploying LTE and, to a lesser extent, WiMax equipment with rural telecommunications operators that own, or can lease, appropriate licensed spectrum frequencies. We also face competition for equipment sales with Ruckus Wireless, Ubiquiti Networks and Cambium Networks, which have also targeted markets for communications systems around the world similar to our target markets. Although these companies are vastly larger than we are, with significantly greater resources, we believe that we or our channel partners will need to convince end users to consider our offerings as a viable alternative to these larger companies if we are to succeed.

It is not uncommon for a single rural operator to deploy a mix of technologies (such as LTE and Wi-Fi) to address differing applications, spectrum holdings and economics across their market areas. As new technologies are introduced and spectrum availability and costs increase, we anticipate that rural telecommunications operators will continue to deploy a growing range of innovative solutions that deliver voice and data communications to their customers.

The main vendor in the public safety market is Motorola Solutions, which is a global player that holds a highly dominant market share in the U.S. of over 80% in public safety and government wireless networks.

In the defense market, there are several large and significant companies that provide wireless communications systems to U.S. and international military agencies, including Harris Corporation, ITT Industries, Raytheon, Boeing, Thales Communications and Lockheed Martin. It is common for one competitor to be a subcontractor to another competitor who is the prime contractor and vice versa as programs of record ramp up and ramp down over time.

A number of our current or potential competitors have long operating histories, significant brand recognition, large customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. As an emerging technology company, our brand is not as well known as incumbents in those markets. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features.

Competitive Positioning

Regulatory risk  — we believe that our choice initially to develop our cognitive radio technology utilizing the unlicensed 902 – 928 band exposes us to less regulatory risk than companies building products upon newly available TV White Space frequencies. Whereas the 902 – 928 MHz band has withstood multiple attempts to redefine the rules regarding its use, newer frequency bands such as TV White Spaces have yet to demonstrate their permanence. Specific initiatives to license off TV White Space frequencies for cellular carrier use are being promoted by licensed spectrum stakeholders. While our core technology can be adapted for operation upon such newly available frequencies once their staying power has been demonstrated, we

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believe that we are not subject to the same make-or-break dependency upon the availability of TV White Spaces as are most other cognitive radio product companies.

Mobility — we are specifically developing our product line to support mobility. We believe that mobility is an important differentiator with regard to our offering in the marketplace. Designed to do its own RF planning automatically by utilizing an extended range of non-interfering channels without manual intervention, xMax® will offer the ability to make the entire network infrastructure mobile, with xAP base stations able to move in relation to each other as well as to xMods, xVMs and users. We believe this feature will be unique to xMax® and will address a major capability gap for defense, homeland security, and public safety agencies which all require “on the move” communications networks. These agencies currently have no equipment or capacity for this identified and urgently needed capability.

Supports both real-time VoIP and data sessions utilizing a single set of infrastructure  — Most IP systems do not carry large numbers of simultaneous voice conversations. We have focused on designing a core technology that is capable of carrying both mass-scale voice and data sessions on the same network.

Interference mitigation  — Whereas most efforts to date focus on interference avoidance, we have extended our core competency into the realm of interference mitigation. In a world where wireless demand is certain to result in more, not less, congested airwaves, we believe that our intellectual property that can help to ameliorate interference is a unique competitive advantage in the marketplace.

Strong engineering management team  — We maintain a strong, product-driven, engineering team with a track record within the Ad-Hoc wireless networking domain with Motorola Mesh Networks.

No federal government unlimited use licenses  — We have solely funded the development of our intellectual property, which is, accordingly, unencumbered by any federal government unlimited use licenses.

Strong Patent Portfolio  — We maintain a strong intellectual property portfolio that presents a barrier to entry to other firms that may attempt to develop cognitive radio network technology.

We believe we compete favorably on these factors. However, our industry is evolving rapidly and is becoming increasingly competitive. Other developers could develop alternative wireless cognitive networks and other technologies that may adversely affect our ability to attract and retain customers. These competitors may include companies of which we may not be currently aware.

Sales and Marketing

Our strategy is to sell intellectual property, and the equipment in which our intellectual property is initially implemented, globally direct and through an indirect channel network that we will leverage in order to upscale our selling efforts without the significant cost of a large direct sales force. Our channel partners will utilize their own internal and external sales representatives to provide lead generation among their established customer base and beyond, pre-sales support, product fulfillment and, in certain circumstances, post-sales customer service and support. In certain cases, service providers may also act as a channel partner for sales of our solutions to their existing customers or new enterprise accounts.

Our sales team currently is comprised of business development, relationship and account executives and a channel manager. This sales team is focused on supporting our current customers, as well as nurturing relationships with prospective customers in key domestic and international markets. Our relationship managers support the development of sales presentation materials and training of our channel partner sales personnel to assist them in marketing our services, either directly or indirectly to their customers. We also directly train and support selected key customers and technology providers in order to grow an active client base and solidify relationships. We are currently using the SalesLogix Customer Relationship Management (CRM) tool to manage our sales activity and manage these relationships.

We also have an exclusive relationship with one of the leading grant writing and funding specialist firms in the United States, Gilmore Tragus Strategies, LLC (“GTS”). GTS has written applications for, and their customers have been awarded, over $1 billion in local, state and federal funding initiatives over the past ten years. Having a partner like GTS gives our sales team and channel partners a competitive advantage by being able to assist customers with funding.

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As of October 18, 2013, our business development, sales and marketing team consisted of eight full-time employees or contractors, supported by outside marketing professionals.

Customers

Although still at an early stage, we have begun to implement our sales and marketing strategy, both through direct sales to end-customers and indirect sales to channel network partners and we have entered into a number of equipment purchase, reseller and teaming agreements as a result. These customer engagements span our target markets in rural telecommunications and defense.

Purchase Agreements

The Company has announced that it has received purchase orders, for an estimated $19.5 million, from the following companies: Northeast Florida Communications (based in FL), Electra Telephone Company and Tatum Telephone Company (both based in Texas); Choctaw Telephone Company and MoKan Dial Telephone Company (both based in Kansas); Haxtun Telephone Company (based in Colorado); Walnut Hill Telephone Company (based in Arkansas); TelAtlantic Wireless (based in Virginia); Assist Wireless (based in Texas) and Carolina Satellite Networks (based in Virginia). The orders, in aggregate, consist of $16.6 million for xMax® cognitive radio networking equipment, including xMax® wireless access points, xMSC mobile switching centers and xMod personal hotspots (capable of supporting existing smartphones, tablets and laptops) and an estimated $2.9 million for engineering services and other hardware.

Larry Townes, a director of the Company is a substantial shareholder of these companies. Many of these orders are with Townes Tele-Communications which is the parent company of Northeast Florida Communications, Electra Telephone Company, Tatum Telephone Company, Choctaw Telephone Company, MoKan Dial Telephone Company, Haxtun Telephone Company and Walnut Hill Telephone. Therefore the entry by the Company into the equipment purchase agreements and engineering services agreements is considered to be related party transactions for an estimate of $7.4 million.

On October 16, 2013, we shipped our first comprehensive Cognitive Radio system to the Walnut Hill Telephone Company in Lewisville, Arkansas.

Reseller Agreements

Reseller agreements have been entered into with the following wireless solutions providers: PMC Associates (based in New Jersey), Communications Marketing Southeast (based in Georgia), Mobile-One Communications (based in Florida) and Maverick Networks (based in California). Together, they provide for purchase commitments over the three year term of the agreements of a minimum of an aggregate of $8.4 million of xMax® cognitive radio networking equipment. We have also entered into a reseller agreement with Telemedicine MM Systems (based in New York) to resell $2.5 million worth of xMax® mobile broadband equipment over the two year term of the agreement, and with Cornet Technology, Inc. (based in North Virginia) to resell $5.0 million worth of xMax® mobile broadband equipment over the three year term of the agreement, subject to placing purchase orders.

Teaming Agreements have also been entered into with Force 3, Inc. (“Force 3”), SAIC and CACI, Inc. The Force 3 teaming agreement was made in connection with the U.S. Army ITES-3H (Information Technology Enterprise Solutions-3 Hardware) contract awards process under which, if Force 3 is awarded the ITES-3H contract, xG’s xMax® cognitive radio solutions and services will be used to fulfill the cellular wireless component of the award. The teaming agreement with CACI provides for the joint preparation of a response to the Request for Proposal entitled Technical, Administrative, and Operation Support Services (TAOSS) (formerly known as CERDEC S&TCD effort) to be issued by the CERDEC Space and Terrestrial Communications Directorate and the allocation of work to be performed under any resulting prime contract.

In addition to the sales backlog of $7.4 million that was outstanding at December 31, 2012, the Company has added $12.1 million of additional sales orders from January 1, 2013 through October 18, 2013. At October 18, 2013 the total backlog of reseller agreements was $15.9 million and the total backlog of purchase orders was $19.5 million for a total of $35.4 million.

These agreements contain certain conditions to payment to us, including (depending on the agreement) FCC equipment authorization, delivery of equipment and services, acceptable performance of equipment,

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delivery of purchase orders and favorable customer financing. In the event that the systems that we deliver to these potential customers do not satisfy certain technical expectations or requirements of those customers, we will not receive any revenue from these purchase orders.

We have begun to fulfill orders now that our equipment has been certificated by the FCC. Revenues will be recognized over the respective lives of the agreements according to the delivery and transfer of ownership and risk of xMax® equipment and the provision of services as well as specification of features required by our customers.

Manufacturing and Suppliers

Our strategy is to retain contract manufacturers to manufacture, test, assure the quality of, and ship our products. We will primarily utilize contract manufacturers located in the United States to ensure proximity between the manufacturer and our design and development engineers and with the initial customers we anticipate winning.

Our internal manufacturing organization will consist of a small number of supply chain managers, employees and contractors who will supervise the manufacture of our products at contract manufacturer sites. We will rely on our contract manufacturers, test engineers and our internal quality assurance resources to implement quality assurance programs designed to assure high product quality and reliability. Our plan is to pre-qualify for retention more than one contract manufacturer from time to time.

In the future, it is our strategy to focus on our core strengths, which are innovation and technology design and the development, creation and exploitation of our intellectual property. Accordingly, we ultimately plan to become a designer, developer and fabless supplier of xMax® integrated circuits and system software solutions for xMax® products where we would supply integrated circuits produced by third party manufacturing partners under license, software, reference designs, features, tools and technical support. We expect this transition to begin from 2015.

We rely on third party components and technology to build our products, and we procure components, subassemblies and products necessary for the manufacture of our products based upon our design, development and production needs. Once we have retained a contract manufacturer, they will be responsible for obtaining these components, subassemblies and products. While components and supplies are generally available from a variety of sources, we currently depend on a single or limited number of suppliers for several components for our products. We are using a single source digital signal processor that may be difficult to replace with an equivalent performance device. In the longer term, we are planning to adapt the xMax® system to run on multiple low cost platforms. We rely on purchase orders rather than long-term contracts with our suppliers. We do not currently stockpile enough components to mitigate any potential supply disruption if we are required to re-engineer our products to use alternative components.

Intellectual Property

Our business is significantly based on the creation, acquisition, use and protection of intellectual property. Some of this intellectual property is in the form of software code, patented technology and trade secrets that we use to develop our technologies, solutions and products. We have developed a broad portfolio of intellectual property that covers wired and wireless communications systems. As of October 18, 2013, in the U.S., we have 47 patents granted, 11 patent applications pending, and 3 provisional applications pending. Internationally, we have 65 patents granted, 59 patent applications pending, and 11 Patent Cooperation Treaty (PCT) applications.

Areas of our development activities for xMax® and beyond that have culminated in filings and/or awarded patents include:

Spatial Processing (MIMO);
Self-Organizing Networks;
RF Modulation;
Compression (protocols, payload, signaling, etc.);
Modulators/Demodulators;

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Antennas/Shielding;
Wired and Wireless Networks;
Media Access Control Protocols;
Interference Mitigation;
Cognition enabling over the air protocols (MAC layer);
Wireless data compression;
Dynamic Spectrum Access (DSA); and
Quality of Service.

We protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties. We also actively engage in monitoring activities with respect to infringing uses of our intellectual property by third parties.

In addition to these contractual arrangements, we also rely on a combination of trade secret, copyright, trademark, trade dress, domain name and patents to protect our products and other intellectual property. We typically own the copyright to our software code, as well as the brand or title name trademark under which our products are marketed. We pursue the registration of our domain names, trademarks, and service marks in the United States and in locations outside the United States. Our registered trademarks in the United States include “xG”, and “xMax®”, the names of our suite of products, among others.

Circumstances outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in the United States or other countries in which our products are sold or distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time-consuming. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business, thereby harming our operating results.

Companies in the mobile wireless communications technology and other industries may own large numbers of patents, copyrights and trademarks and may frequently request license agreements, threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights. We may face allegations by third parties, including our competitors and non-practicing entities, that we have infringed their trademarks, copyrights, patents and other intellectual property rights. As our business grows, we will likely face more claims of infringement.

Government Regulations

Regulators’ Role in Spectrum

In the past, all radios were designed with the assumption that they were operating in a spectrum band that was free of interference. There was no requirement to design radios with the ability to dynamically change channels or change spectrum bands in response to interference. These radios required pristine, dedicated licensed spectrum to operate. This led to the FCC and other regulators worldwide licensing spectrum to a particular network operator, for example, cellular paging or wireless service provider so that interference would be carefully controlled. Because of this past legacy, significant blocks of spectrum were underutilized. Even in spectrum bands that might be considered to be highly utilized, valuable spectrum can sit idle in sparsely populated areas or at certain hours of the day when network use dramatically drops.

There are also applications such as paging that have fallen out of favor and contribute to this underutilization. Despite the dramatic drop in the use of pagers, a large amount of spectrum is still dedicated to this application. This regulatory policy has led to inefficient use of spectrum and consequently the declaration of a spectrum crisis. While regulators are continuing to allocate spectrum based upon this

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assumption that radios do not have the ability to share spectrum, they are now starting to embrace the concept of shared spectrum and the opportunistic use of spectrum enabled by cognitive radio networks.

Regulators are starting to ease the rules relative to the allocation and access of spectrum. A good example of this is the shared use of TV broadcast spectrum via the creation of TV White Spaces (TVWS) for wireless broadband. The FCC and other spectrum regulatory agencies like the UK’s Ofcom have begun the process to allow cognitive radios to use freed-up spectrum resulting from the transition from analog to digital TV broadcasts. For example, TV white space continues to gain momentum in the US and Europe with multiple deployments and trials being supported by some of the world’s largest technology companies. Furthermore, a new group has been formed called AIR.U that is being funded by Microsoft, Google and others to utilize TV White Spaces to bring high-speed Internet services to rural campuses, schools and other institutions in the US. Similar initiatives are being undertaken in the UK with extensive trials being done in both urban and rural settings using TV White Spaces. In addition to two of the largest technology companies mentioned above, Nokia is also taking a leading role in the UK’s TV White Space trials. While there have been rumors circulating that the FCC was somehow taking back TV White Spaces, there appears to be no actual indication of this taking place. In fact, the FCC appears to be approving more TV White Space database administrators as well as certifying additional radio platforms for operation in TV White Spaces. It is possible, nonetheless, that over time, TV White Spaces could be reclaimed by Congress or the FCC and re-auctioned for licensed use. However, that is a risk any unlicensed spectrum faces and has never actually occurred in the US. Other countries globally are also seriously considering creating their own TV white space allocations. These countries include Canada, Brazil and the EU.

Operators and consumers are able to use available unlicensed spectrum bands for the delivery of new applications and inexpensive broadband capacity. An example of this is the data offload efforts of some carriers that use 802.11 Wi-Fi (in the 2.4 and 5.8 GHz unlicensed bands) in densely populated areas where their 3G network is congested. This allows carriers to continue supporting mobile voice and data services over their licensed spectrum, while data that can be consumed at a fixed location (airport, coffee shop, office, etc.) is forced over an unlicensed Wi-Fi link. However, the popularity of Wi-Fi and other devices that use these frequencies has resulted in crowded and noisy spectrum that not only has to support the carriers’ smartphone data, but all other applications from other devices in that band as well. The interference in these bands affects the capacity and efficiency of this spectrum for conventional radios. However, where conventional radios see “walls of interference”, cognitive radios can uncover “windows of opportunity” and recover up to 85% of the total unused bandwidth in these frequencies.

The FCC’s Part 15 rules that govern use of the 902 – 928 MHz ISM band and other unlicensed spectrum bands are well established and are considered responsible for creating an environment where technology and innovation has flourished. They are recognized as having helped create an industry that has generated tens of thousands of high technology jobs, added billions of dollars to the United States economy, and brought the benefits of a wide variety of convenient, economical communications devices to business, industry, education, health care providers and consumers alike. While there have been some attempts to challenge them, they have always been reaffirmed and we have every reason to believe they will remain so.

Even during the recent debates over spectrum policy, there have been no suggestions put forth by the FCC, the Congress or industry to repurpose the ISM unlicensed band to a licensed one that could be auctioned off. The reallocation of a band that is in active use by so many devices would be prohibitively disruptive. Given the long history and widespread use of the ISM band for such a wide array of communications, we feel very confident that it will remain open to use by technologies such as xMax® for the foreseeable future.

While devices operating upon unlicensed bands do not require FCC licensing, they are not unregulated and must meet the Federal Code of Regulation (CFR) FCC Part 15, which is a common testing standard for most electronic equipment. FCC Part 15 covers the regulations under which an intentional, unintentional, or incidental radiator that can be operated without an individual license. FCC Part 15 covers as well the technical specifications, administrative requirements and other conditions relating to the marketing of FCC Part 15 devices.

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In order to reduce regulatory risk and gain familiarity with the requirements we elected to obtain FCC equipment authorization on some of its pre-commercial prototype xMax® devices. FCC authorized testing laboratories were used to make measurements to ensure that the prototype equipment complied with the appropriate technical standards. Although not required unless specifically requested, we submitted a sample unit and representative data to the Commissions demonstrating compliance. Multiple briefings were also scheduled with the FCC Chief of the Office of Engineering Technology (OET) and staff, which is responsible for Equipment Certifications in an effort to inform them of our design approaches and objectives. While our commercial xMax® product offering will again require equipment authorization prior to sales, we believe that we are well positioned to meet such regulatory requirements, both from our prior experience certifying its prototype equipment and the fact that our engineering management team has specific prior experience obtaining FCC equipment authorization for other unlicensed devices.

Underserved and underpenetrated markets.   Wireless networks are emerging as an attractive alternative for addressing both the broadband access needs of underserved and underpenetrated markets and for offering a host of other services and solutions. According to a forecast by Gartner, fixed network household broadband penetration rates for 2009 and 2010 in emerging countries were a fifth of the broadband penetration in developed countries, whereas the aggregate number of households in emerging countries was approximately four times the aggregate number of households in developed countries. We believe this is due to the lack of an established network infrastructure and the high initial deployment costs of wired networks. Gartner also estimates that fixed network household broadband penetration in emerging markets will increase from 10% in 2008 to 19% in 2013. We believe this estimate understates the global penetration rates that could be achieved if carrier class wireless solutions were broadly available at a fraction of the established market costs.

Limitation of existing solutions .  Existing wireless networking technologies such as standard 802.11 based Wi-Fi, WiMAX and LTE have been designed to satisfy the increasing demand for broadband access and support mobility. According to a Gartner forecast in May 2011, aggregate end-user spending on wireless networking equipment for Enterprise WLAN, wireless broadband access, and LTE solutions, are expected to grow from $5.2 billion in 2010 to $22.5 billion in 2015, representing a CAGR of 34%. However, these existing alternative networking solutions often fail to meet the price-performance requirements of wireless networking in emerging markets, which in turn has led to low penetration and large populations of unaddressed users in these areas. As a result, there is a strong need for cost-effective solutions to deliver wireless networking solutions to consumers and enterprises in underserved and underpenetrated markets. These solutions must be robust and provide service equivalent to that of alternative wired and wireless solutions while simultaneously meeting the economic objectives of network operators and service providers in these markets.

Increasing use of the unlicensed spectrum .  Private industry in underserved and underpenetrated markets worldwide has responded to the lack of wired infrastructure by deploying wireless networks utilizing unlicensed RF spectrum. These network operators and service providers often cannot afford the capital outlay to acquire licenses for the licensed RF spectrum and have consequently designed their wireless networks for the unlicensed RF spectrum. In the absence of affordable broadband access in the licensed spectrum, the number of users of the unlicensed RF spectrum has increased for communications equipment, as well as consumer devices such as cordless phones, baby monitors and microwave ovens. As a result of high demand for the unlicensed RF spectrum, use of this spectrum to provide high quality wireless networking has become more challenging and congestion is limiting the growth of wireless networks.

Government incentives for broadband access .  Governments around the world are increasingly taking both regulatory and financial steps to expand access to broadband networks and increase availability of advanced broadband services to consumers and businesses. For example, in many countries, including the United States, the responsible regulatory agencies have released the spectrum previously used for broadcast TV, known as the TV White Space, to relieve some of the congestion. The United States and other countries have adopted stimulus plans to increase the delivery of robust broadband access in unserved and underserved areas. The World Bank has reported that 12 countries and the EU have committed an aggregate of $122.4 billion in broadband stimulus funds to date.

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Employees

As of October 18, 2013, we employed 81 full-time equivalent employees, contractors or consultants, which included 59 in development, 5 officers, 7 in general and administrative, 3 in business development, 2 in operations and 5 in sales and marketing. As of that date, we had 80 full-time equivalent employees, contractors or consultants, based in the United States. We also engage a number of temporary employees and consultants. None of our employees are represented by a labor union or is a party to a collective bargaining agreement. We believe that we have good relations with our employees.

Properties

Our corporate headquarters and marketing and business development office are located in Sarasota, Florida, in an office consisting of a total of 3,403 square feet. This office is made available to us under the MBC management contract. For our research and development, engineering, sales and support personnel we also have an office in Sunrise, Fort Lauderdale, Florida consisting of 12,832 square feet pursuant to a lease that expires on May 11, 2016. We believe our current facilities are sufficient for our current needs and will be adequate, or that suitable additional or substitute space will be available on commercially reasonable terms, for the foreseeable future.

Legal Proceedings

From time to time, we are a party to litigation and subject to claims incident to the ordinary course of business. Future litigation may be necessary to defend ourselves and our customers by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights.

As of October 18, 2013, the Company does not have any litigation matters pending.

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MANAGEMENT

Executive Officers and Directors

The following table sets forth the names, ages and positions of all of the directors and executive officers of the Company and the positions they hold as of the date hereof.

   
Name   Age   Position
George F. Schmitt   70   Executive Chairman of the Board and Director
John C. Coleman   59   Chief Executive Officer, Chief Operating Officer and Director
Roger G. Branton   46   Chief Financial Officer
Joseph Bobier   54   Chief Technology Officer
James Woodyatt   45   President
Belinda Marino   53   Secretary
Gary Cuccio   67   Director
Kenneth Hoffman   57   Director
Richard L. Mooers   50   Director
Raymond M. Sidney   43   Director
Larry C. Townes   64   Director

George F. Schmitt, Executive Chairman of the Board and Director

Mr. Schmitt has over 40 years of broad telecom experience in wireless and wireline companies and has built wireless networks in a dozen countries. He is a major investor in xG Technology through his holdings in MBTH and is currently serving a member of our board, having joined in March 2011. He also serves as the Chief Executive Officer of MBTH, a position he has held since December 2010. Mr. Schmitt currently sits on the board of directors of Kentrox and Calient. Mr. Schmitt previously served as a director of TeleAtlas, Objective Systems Integrators, Omnipoint and LHS Group. Mr. Schmitt is a principal of Sierra Sunset II, LLC and serves as a Trustee of St. Mary’s College. Previously, Mr. Schmitt was CEO and a director of Espire Communications which filed Chapter 11 bankruptcy 10 years ago. In addition, Mr. Schmitt has served as a director of many privately held companies including Voice Objects, Knowledge Adventure, Jungo and Cybergate, among others. Mr. Schmitt has also served as Financial Vice President of Pacific Telesis and chaired the Audit Committees of Objective Systems Integrations and TeleATLAS. Mr. Schmitt received an M.S. in Management from Stanford University, where he was a Sloan Fellow, and a B.A. in Political Science from Saint Mary’s College.

Mr. Schmitt was selected to serve on our board based on his extensive experience with technology and networking companies and broad experience in the telecommunications industry and his status as a significant investor in our company.

John C. Coleman, Chief Executive Officer, Chief Operating Officer and Director

Mr. Coleman brings to us 34 years of combined experience in expeditionary operations from both government service and the private sector. Since June 2010, he has served as the Chief Executive Officer and Chief Operating Officer of the Company. From January 2009 to June 2012, he was the Chief Executive Officer of Joint Command and Control Consulting (JC3), a consulting services firm he founded that is focused on the development, integration, and delivery of mature and emerging technologies in support of expeditionary operations, particularly as related to command, control, and communications. In conjunction with its strategic partners, JC3 provides C4ISR-related systems, service, training, and support to expeditionary responders, both civil and military. He also served as a Vice-President of Hunter Defense Technology, a position he held from July 2006 to December 2008. In the thirty years preceding private sector employment, Mr. Coleman served the United States as a U.S. Marine Officer. Defining the character of his service upon retirement, Mr. Coleman was awarded the nation’s Distinguished Service Medal, an honor very rarely and only under exceptional circumstance bestowed to Marines below the rank of General Officer. He retired from the U.S. Marine Corp as a Colonel. He possesses top secret clearance which gives him access to several of our major markets. Currently, Mr. Coleman serves as a member of the board of xG.

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Mr. Coleman was selected to serve on our board based on his extensive experience in the military and his top secret clearance, which are critical elements of our Company’s ability to conduct business with the segments of the government and Homeland Security that we have targeted.

Roger G. Branton, Chief Financial Officer

For the past 10 years he has served in a variety of positions with our company since its founding in August, 2002. Mr. Branton currently and has served as our Chief Financial Officer and Director since inception. He also serves in similar capacities at MBTH, a company he co-founded with Richard Mooers and George Schmitt in 2010. He graduated from West Chester University in Pennsylvania with a Bachelor of Science degree in accounting. He trained as a certified public accountant in 1989.

Joseph Bobier, Chief Technology Officer

Together with Richard Mooers and Roger Branton, Joseph Bobier co-founded xG Technology, Inc. in August, 2002. Mr. Bobier has served as our Chief Technology Officer since inception. He invented much of xG’s core technology, and holds several additional patents for wireless technology. Joe continues to advance the technology through patent filings. He received his initial training in the US Navy where he was schooled in advanced electronics and satellite communications. He qualified for and earned the highest licensing designation recognized by the FCC. He holds several US and foreign patents for electronic designs in the area of photovoltaics.

Mr. Bobier has lectured for organizations including NASA and British Petroleum in the areas of photovoltaic power systems, electronic power conversion and telemetry systems.

James Woodyatt, President

Mr. Woodyatt has served as our President since April 20, 2012. He also served as our Deputy Chief Executive Officer from June 2007 to April 20, 2012, at which time James assumed the President title, and as a Director from January 2007 through July 2013. From February 2006 until October 2011, James served as President of Veegoo Holding SA, a company he co-founded in 2006 and as a Managing Director of Veegoo Capital Services SA, a group which is active in business advisory and private equity.

Belinda Marino, Secretary

Mrs. Marino has served secretary since August 2013. Mrs. Marino is also an employee of the Company serving as the Director of Human Resources since 2006. In addition to the above, Mrs. Marino has ongoing responsibilities for functions that include corporate banking activities and corporate governance. Mrs. Marino earned a PHR (Professional in Human Resources) Certificate from the HR Certification Institute in 2009.

Gary Cuccio, Director

Gary Cuccio has over 35 years of broad operating experience in wireless, software, engineering, operations, sales and marketing. Mr. Cuccio currently serves as Chairman of Openet Telecom Ltd. Based in Dublin, Ireland, Openet Telecom is a venture-backed software company providing IP mediation to leading Telco’s on a global basis. Mr. Cuccio also serves on the board of mBlox as the chairman of its audit committee. mBlox is a venture-backed startup providing a service bureau for SMS messages in the wireless space. Headquartered in London and Sunnyvale, CA, mBlox operates in Europe, the U.S. and Asia. Previously, Mr. Cuccio was CEO of ATG, a CLEC based in California, Oregon, and Washington. Prior to ATG, Mr. Cuccio was CEO of LHS group (Nasdaq: LHSG), a Telco billing software supplier. LHS was acquired by Sema, a French software company, in Q3, 2000 for $6.8BB. Mr. Cuccio was also COO of Omnipoint, a PCS mobile wireless carrier. Mr. Cuccio’s experience also includes several positions held at Airtouch, most notably Vice President of Operations for Europe, Vice President, Asia and President of Airtouch Paging. The company was merged with Vodafone in 1999. He has also served as chairman of the board and audit committee chairman of privately held companies and has helped sell and merge several public and privately held companies. Mr. Cuccio started his career with 27+ years at Pacific Tel in Operations, Engineering, Customer Service and Sales & Marketing, ending his tenure there as VP/General Manager.

Mr. Cuccio received his AMP from Harvard University, his MBA from St. Mary’s College and his BA in Political Science from California State University Los Angeles.

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Mr. Cuccio was selected to serve on our board based on his 45 years of experience with technology and communications companies as well as his financial and audit committee background. Mr. Cuccio qualifies as an “audit committee financial expert” within the meaning of the SEC regulations.

Kenneth Hoffman, Director

Mr. Hoffman joined the Company in August 2010 as an advisor. Ken Hoffman is Vice President of Regulatory Affairs for Florida Power & Light Company, the rate-regulated subsidiary of NextEra Energy, Inc. (NYSE: NEE), one of the nation’s leading electricity-related services companies. He is responsible for providing assistance in the management and oversight of FPL’s regulatory activities before state regulators and the State Legislature on energy matters. Mr. Hoffman joined FPL in 2008 after a successful career in private law practice specializing in the representation of public utilities and telecommunications companies before the Florida Public Service Commission, the Florida Legislature and the Florida courts. He has over 25 years’ experience representing various types of telecommunications carriers including wireless before regulatory and legislative bodies. His expertise in regulatory proceedings in Florida will be helpful as we grow and face potential regulatory actions. Prior to joining FPL, he was a shareholder at Rutledge Ecenia Purnell & Hoffman, PA, in Tallahassee, Florida for 14 years.

Mr. Hoffman was selected to serve on our board based on his extensive experience in the utility industry, a key industry segment to utilize our products and services.

Richard L. Mooers, Director

Richard Mooers has been involved in telecommunications activities for over 20 years and has significant expertise in accounting, risk management, and controls. For the past 10 years he has served in a variety of positions with our company since its founding in August, 2002. Mr. Mooers has served as our Executive Chairman and a director of the board since inception. He also serves as Chairman and Director of MBTH a company he co-founded with Roger Branton and George Schmitt in 2010. Richard graduated summa cum laude from the University of Maine, with a Bachelor of Science degree in business administration in 1985. He remains one of the major investors in the Company.

Mr. Mooers was selected to serve on our board based on his extensive experience with technology and telecommunications companies, including as a founder, executive and investor.

Raymond M. Sidney, Director

Dr. Sidney has established several real estate investment ventures and been involved with a number of companies, including Covia Labs, Hemedex, Edison2 and Commuter Cars as an investor, board member or advisor. He also serves on the Vision Circle of the X PRIZE Foundation. Prior to this, Dr. Sidney was the second software engineer hired at Google, Inc. Previously, Dr. Sidney had worked as a security expert and software engineer at RSA Labs and D.E. Shaw & Co., among other companies. He provided the implementation expertise for RC6, RSA’s candidate cipher for NIST’s quest for AES, a successor to the Data Encryption Standard. Dr. Sidney attended Caltech and Harvard, and he received a bachelor’s degree in mathematics from Harvard in 1991. He then entered the graduate program in mathematics at MIT, where he specialized in cryptography and received a PhD in 1995. His higher mathematics knowledge will be helpful to our development team. Dr. Sidney’s business experience includes running and investing in startups through his venture capital company, Big George Ventures. In addition, he is active in many educational and environmental undertakings in the Lake Tahoe area.

Mr. Sidney was selected to serve on our board based on his extensive experience with technology companies and broad experience in the venture capital industry.

Larry C. Townes, Director

Mr. Townes currently serves as the Chief Executive Officer of Townes Tele-Communications, Inc., a position he has held since 1981. At Townes Tele-Communications, a holding company with widely diversified business interests, Mr. Townes directs the operations as Chairman of the board. These interests include eight incumbent rural telephone companies operating in seven states, wireless operations which include cellular radio service, petroleum exploration and production, and agricultural operations and related riparian rights in

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northern Texas. He is the owner of a bank in Arkansas and Texas. Mr. Townes also serves on the boards of a number of other privately held companies. He has relevant experience in business undertakings around the world.

Mr. Townes was selected to serve on our board based on his extensive experience with technology and networking companies and broad experience in the telecommunications industry.

Board Composition and Committees and Director Independence

Our board of directors currently consists of seven members: Richard L. Mooers, John C. Coleman, Gary Cuccio, Kenneth Hoffman, George F. Schmitt, Raymond M. Sidney and Larry C. Townes. All of our directors will serve until our next annual meeting and until their successors are duly elected and qualified.

In making the determination of whether a member of the board is independent, our board considers, among other things, transactions and relationships between each director and his immediate family and the Company, including those reported under the caption “Related Party Transactions”. The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent. On the basis of such review and its understanding of such relationships and transactions, our board affirmatively determined that Gary Cuccio, Kenneth Hoffman, Larry C. Townes and Ray Sidney, are “independent” directors, as that term is defined in the Nasdaq Stock Market Rules.

Board Committees

Our board of directors has an audit committee, a compensation committee and a governance and nominations committee. Each committee will has charter, which is available on our website at www.xgtechnology.com. Information contained on our website is not incorporated herein by reference. Each of the board committees has the composition and responsibilities described below.

Audit Committee

We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act of 1934, as amended (the Exchange Act”). The members of our Audit Committee are Gary Cuccio, Ken Hoffman and Larry Townes. Each of these Committee members is “independent” within the meaning of Rule 10A-3 under the Exchange Act and the NASDAQ Stock Market Rules. Our board has determined that Gary Cuccio shall serve as the “audit committee financial expert”, as such term is defined in Item 407(d)(5) of Regulation S-K. Gary Cuccio currently serves as Chairman of the Audit Committee of mBlox, Inc. and Openet Telecom Ltd. In the past he also served on the Audit Committee of Objective Systems Integration, Inc. and Affinity Internet, Inc. Gary Cuccio will serve as Chairman of our Audit Committee.

The Audit Committee oversees our accounting and financial reporting processes and oversees the audit of our financial statements and the effectiveness of our internal control over financial reporting. The specific functions of this Committee include:

selecting and recommending to our board of directors the appointment of an independent registered public accounting firm and overseeing the engagement of such firm;
approving the fees to be paid to the independent registered public accounting firm;
helping to ensure the independence of our independent registered public accounting firm;
overseeing the integrity of our financial statements;
preparing an audit committee report as required by the SEC to be included in our annual proxy statement;
reviewing major changes to our auditing and accounting principles and practices as suggested by our company’s independent registered public accounting firm, internal auditors (if any) or management;
reviewing and approving all related party transactions; and
overseeing our compliance with legal and regulatory requirements.

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Compensation Committee

The members of our Compensation Committee are Gary Cuccio, Ken Hoffman and Ray Sidney and Larry Townes. Each such member is “independent” within the meaning of the NASDAQ Stock Market Rules. In addition, each member of our Compensation Committee qualifies as a “non-employee director” under Rule 16b-3 of the Exchange Act. Our Compensation Committee assists the board of directors in the discharge of its responsibilities relating to the compensation of the board of directors and our executive officers. Larry Townes will serve as Chairman of our Compensation Committee.

The Committee’s compensation-related responsibilities include:

assisting our board of directors in developing and evaluating potential candidates for executive positions and overseeing the development of executive succession plans;
reviewing and approving on an annual basis the corporate goals and objectives with respect to compensation for our chief executive officer;
reviewing, approving and recommending to our board of directors on an annual basis the evaluation process and compensation structure for our other executive officers;
providing oversight of management’s decisions concerning the performance and compensation of other company officers, employees, consultants and advisors;
reviewing our incentive compensation and other stock-based plans and recommending changes in such plans to our board of directors as needed, and exercising all the authority of our board of directors with respect to the administration of such plans;
reviewing and recommending to our board of directors the compensation of independent directors, including incentive and equity-based compensation; and
selecting, retaining and terminating such compensation consultants, outside counsel and other advisors as it deems necessary or appropriate.

Governance and Nominations Committee

The members of our Governance and Nominations Committee are Gary Cuccio, Ken Hoffman, Ray Sidney and Larry Townes. Each such member is “independent” within the meaning of the NASDAQ Stock Market Rules. The purpose of the Governance and Nominations Committee is to recommend to the board nominees for election as directors and persons to be elected to fill any vacancies on the board, develop and recommend a set of corporate governance principles and oversee the performance of the board. Ken Hoffman will serve as chairman of our Governance and Nominations Committee.

The Committee’s responsibilities include:

Selecting director nominees. The governance and nominations committee recommends to the board of directors nominees for election as directors at any meeting of stockholders and nominees to fill vacancies on the board. The governance and nominations committee would consider candidates proposed by stockholders and will apply the same criteria and follow substantially the same process in considering such candidates as it does when considering other candidates. The governance and nominations committee may adopt, in its discretion, separate procedures regarding director candidates proposed by our stockholders. Director recommendations by stockholders must be in writing, include a resume of the candidate’s business and personal background and include a signed consent that the candidate would be willing to be considered as a nominee to the board and, if elected, would serve. Such recommendation must be sent to the Company’s Secretary at the Company’s executive offices. When it seeks nominees for directors, our governance and nominations committee takes into account a variety of factors including (a) ensuring that the board, as a whole, is diverse and consists of individuals with various and relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise (including expertise that could qualify a director as a “financial expert”, as that term is defined by the rules of the SEC), local or community ties and (b) minimum individual qualifications, including strength of character, mature judgment, familiarity with the Company’s business and industry, independence of thought and an

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ability to work collegially. The Company is of the view that the continuing service of qualified incumbents promotes stability and continuity in the board room, contributing to the ability of the board of directors to work as a collective body, while giving the Company the benefit of the familiarity and insight into the Company’s affairs that its directors have accumulated during their tenure. Accordingly, the process of the governance and nominations committee for identifying nominees reflects the Company’s practice of re-nominating incumbent directors who continue to satisfy the committee’s criteria for membership on the board of directors, whom the committee believes continue to make important contributions to the board of directors and who consent to continue their service on the board of directors. The board has not adopted a formal policy with respect to its consideration of diversity and does not follow any ratio or formula to determine the appropriate mix; rather, it uses its judgment to identify nominees whose backgrounds, attributes and experiences, taken as a whole, will contribute to the high standards of board service. The governance and nominations committee may adopt, and periodically review and revise as it deems appropriate, procedures regarding director candidates proposed by stockholders;
Reviewing requisite skills and criteria for new board members and board composition. The governance and nominations committee reviews with the entire board of directors, on an annual basis, the requisite skills and criteria for board candidates and the composition of the board as a whole;
Hiring of search firms to identify director nominees. The governance and nominations committee has the authority to retain search firms to assist in identifying board candidates, approve the terms of the search firm’s engagement, and cause the Company to pay the engaged search firm’s engagement fee;
Selection of committee members. The governance and nominations committee recommends to the board of directors on an annual basis the directors to be appointed to each committee of the board of directors;
Evaluation of the board of directors. The governance and nominations committee will oversee an annual self-evaluation of the board of directors and its committees to determine whether it and its committees are functioning effectively;
Evaluation of the board of directors. The governance and nominations committee will oversee an annual self-evaluation of the board of directors and its committees to determine whether it and its committees are functioning effectively; and
Development of Corporate Governance Guidelines. The governance and nominations committee will develop and recommend to the board a set of corporate governance guidelines applicable to the Company.

The governance and nominations committee may delegate any of its responsibilities to subcommittees as it deems appropriate. The governance and nominations committee is authorized to retain independent legal and other advisors, and conduct or authorize investigations into any matter within the scope of its duties.

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EXECUTIVE COMPENSATION

The compensation provided to our “named executive officers” for 2012 is set forth in detail in the 2012 Summary Compensation Table and other tables and the accompanying footnotes and narrative that follow this section. This section explains our executive compensation philosophy, objectives and design, our compensation-setting process, our executive compensation program components and the decisions made for compensation in respect of 2012 for each of our named executive officers.

Our named executive officers for 2012 who appear in the 2012 Summary Compensation Table are:

 
Richard L. Mooers   Executive Chairman and Director
John C. Coleman   Chief Executive Officer, Chief Operating Officer and Director
Roger G. Branton   Chief Financial Officer, Secretary and Director
James Woodyatt   President and Director
Joe Bobier   Chief Technology Officer

Summary Compensation Table

The following table summarizes information regarding the compensation awarded to, earned by or paid to, our Executive Chairman, Chief Executive Officer, Chief Financial Officer and our two other most highly compensated executive officers during 2012 and 2011. We refer to these individuals in this prospectus as our named executive officers.

             
Name and Principal Position   Year   Salary
($)
  Cash
Bonus
($)
  Stock
Awards
($) (1)
  Option Awards
($) (2)
  All Other Compensation
($) (3)
  Total
($)
Richard L. Mooers
Executive Chairman
    2011       357,500       0       80,440       0       9,250       447,190  
    2012       357,500       0       71,500       0       18,809       447,809  
John C. Coleman
Chief Executive Officer
    2011       250,000       0       58,050       216,500       47,300       571,850  
    2012       250,000       0       50,000                44,707       344,707  
Roger G. Branton
Chief Financial Officer
    2011       275,000       0       62,280       0       6,600       343,880  
    2012       275,000       0       55,000       0       10,780       340,780  
James Woodyatt
President
    2011       165,000       0       37,125       75,880       1,550       279,555