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Business Observer Thursday, Jul. 2, 2009 12 years ago

Less Cloak, More Dagger

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A Gulf Coast technology company, courtesy of a major investment from a Swedish billionaire, saw its revenues grow more than 5,000% in one year. Now, after a decade lurking in the background, the company is going into attack mode.
by: Mark Gordon Managing Editor

A Gulf Coast technology company, courtesy of a major investment from a Swedish billionaire, saw its revenues grow more than 5,000% in one year. Now, after a decade lurking in the background, the company is going into attack mode.


Rick Mooers and Roger Branton have won the entrepreneurial equivalent of Powerball: Sales at their company, Sarasota-based xG Technology, jumped 5,366% last year, from $300,000 to $16.4 million — turning a $12 million loss into a $2 million profit in the process.

Growth like that — recession or boom time — is normally enough to set off a parade of cartwheels in the street.

But Mooers and Branton aren't back flipping just yet. The longtime business partners and merchant bankers are instead bracing for the biggest challenge ever for xG: Mass market acceptance for their product that aims to provide the world's first inexpensive way to provide mobile phone service over the Internet.

“Our biggest risk isn't technical, it isn't financial and it's not even people,” says Mooers, xG's chairman and chief executive officer. “Our biggest risk now is whether someone out there will get this technology and try to crush us.”

In many ways, it's an old story for Mooers and Branton, who have spent a large part of the past decade battling a triple-headed monster of negative press, lawsuits alleging fraud and reams of industry cynicism and doubts. The company, which has been publicly traded on the London Stock Exchange since 2006, has about 70 employees that work out of a downtown Sarasota corporate office and a research and development laboratory in Fort Lauderdale.

Its technology is based on several patented Wi-Fi related systems invented by Joe Bobier, who turned his ham radio hobby into what xG officials claim is the is the Holy Grail of wireless communications — using VoIP, Voice over
Internet Protocol, for cell phone calls, something the industry giants haven't been able to do.

Bobier, who studied electronics and satellite communications in the U.S. Navy, came upon the discovery in the late 1990s while building his own Internet Wi-Fi service business in his hometown of Parkersburg, W.V. Bobier found he could transmit large quantities of data through low frequency radio waves, as opposed to the common and more expensive practice of using higher frequencies. “It's cheaper and faster communications,” Branton says.

Bobier first teamed up with Branton and Mooers in 1999. Now he's xG's operations chief, where he oversees the company's development of both its own cell phones and base stations to augment the technology. The company's business model relies on utilizing what it calls its xMax network, a proprietary system that operates independently from legacy cellular networks such as Verizon or AT&T.

The xMax network, when paired with the xG phones and base stations, offers a new alternative in cell phone and Internet technology, the company claims. The key is in the frequencies xG uses: the low frequency radio waves
Bobier discovered are free, compared to the millions of dollars cell phone giants pay for high frequency waves, known as spectrum licensees.

To some, this all sounds too good to be true — a take shared by a few in the blogosphere and wireless communications industry who have resorted to posting attacks against both the company and Mooers, Branton and Bobier individually. A few of the anti-xG Web sites appear at or near the top of Google searches on the company. Some of the company's early supporters and investors have also sued the company under fraud allegations, suits that were settled in 2002 and 2003.

Says Mooers: “There's a lot of skepticism when you are doing something unconventional.”

A big boost
Swedish billionaire Johan Bohman, however, has embraced xG and its unconventional technology.

One of Bohman's companies, Zurich-based Treco International, signed a multi-year contract to buy 1,000 base stations from xG late last year at a cost of $75,000 each — a $75 million deal that made up the bulk of xG's 2008 revenues. The contract includes an option to buy 4,000 more base stations, adding $300 million to the deal.

Bohman lives part of the year in London, according to an October 2008 article in the Financial Times, which also stated that the somewhat secretive tycoon made his money in the international private equity market. Treco's U.S.-based CEO, Richard Kromka, handles the xG investment for Bohman; Kromka was recently appointed to xG's board of directors and splits his time now between Miami and Sarasota.

“We made a pretty educated decision to invest in this,” says Kromka, who ran a $200 million hedge fund for Deutsche Bank before going to work for Bohman a few years ago. “This is like no other company I've ever seen.”

Treco is essentially betting that xG's technology will be its entry point into the lucrative industry of cell phone networks.

Kromka says the plan for Treco, once xG's xMax is universally accepted in the marketplace, is to leverage its base station investment by becoming a service provider to a host of potential mammoth clients, from Google and
Apple to government entities to independent local phone companies known as ILECs. Treco can then charge those entities a lease fee for using its base stations.

Kromka realizes that for Treco's base station investment to pay off, xG has to convince the marketplace that its technology works. He says the company's top executives boost his confidence, as he was especially impressed by learning that Mooers and Branton built the company, protected the technology and survived the naysayers for nine years with little debt and without any outside venture capital.

Indeed, Mooers and Branton estimate that since 2001 they have spent between $5 million and $10 million of their own money through their merchant bank, Mooers Branton & Co., in developing xG and the xMax technology. They also raised tens of millions of dollars in investments from international investors prior to Bohman and Treco.

Bohman, Treco and xG's other shareholders are also betting that Branton and Mooers' long-range plans for xG will come to fruition. While mobile VoIP is the company's bull's eye for now, xG is aiming to leverage its xMax technology for several other users. That includes developing and selling a smart phone for mobile broadband use and creating a desktop modem.

'Unique and revolutionary'
Up to the Treco deal, Mooers and Branton spent much of the past few years trying to balance the delicate line of running a public company while trying to protect their technology from competitors. It was mostly uncharted territory for the business partners, who met as accountants while working in and around Philadelphia in the mid-1980s.

They both enjoyed the data side of the work, but weren't too keen on the rigid structure of a life in an accounting firm. Mooers suggested to Branton one day in the early 1990s that they start a merchant bank, which is similar to a venture capital operation, only with a lot more personal money at stake.
It all sounded great to Branton, except for one hiccup: “The only problem back then,” says Branton, “is Rick and I didn't have any money.”

But Mooers convinced Branton to dump his calculator and take the leap anyway. “We just wanted to prove we weren't only bean counters,” Mooers says. “We wanted to do something entrepreneurial.”

The pair set out to find business plans it could get passionate about and invest in through the merchant bank. For example, it worked with a telecommunications company in the mid 1990s, helping it go public. It later invested in a hospitality company and moved the merchant banks' headquarters to Sarasota.

Then, in a trip to West Virginia in 1999, Mooers and Branton met Bobier, as the merchant bankers had invested in a few small companies run by Bobier's family. Mooers and Branton were immediately wowed by Bobier's advance work in mobile communications. “We recognized that it was a unique and revolutionary idea and that we had to protect it,” says Branton.

By 2002, Bobier had moved to Sarasota, where Mooers and Branton staked him with $500,000 and gave him six months to turn the theories behind the technology into something substantial. Mooers and Branton took leadership roles in the company, while pushing the still-active merchant bank to the background.

The period from 2002 to 2008 was a fitful one for xG. The cell phone industry was rapidly maturing and the company was trying to innovate while simultaneously keeping up with the changes. But as word in the technology community got out about what xG was doing, the naysayers began to multiply. Some doubters were and remain skeptical purely on technology grounds, xG executives believe, while others have hidden competitive agendas.

The lawsuits against xG, including a highly publicized one filed by a European investor, were both costly and emotionally draining to defend. “At the time,” says Branton, “if you were a shareholder with us, you weren't looking too good.”

But with the Treco contract leading the way, the battles Mooers and Branton are fighting are about to become less cloak and more dagger. The company is projecting 2009 will be one of its best years ever. Says Branton: “We want to be to the wireless cell phone industry what Skype was to the landline industry.”

Mooers, in the company's 2008 annual report, also says xG is on the cusp of something big. “In our analysis, no alternative to the xMax Mobile VoIP solution exists,” says Mooers. “It's clear that the prospects for xG, its products and its technology have never been better.”

AT A GLANCE

xG Technology
Headquarters: Sarasota
CEO: Rick Mooers
FY 2008 Revenues: $16.4 million
Stock symbol: XGT (London Stock Exchange)
Patents: 10 granted, 37 pending
Recent stock price: $1.85
52-week stock-price range: $0.49 to $6
Price-earnings ratio (trailing 12 months): 1.45
Dividend: N/A
Market capitalization: $2.45 million
Source: Google Finance

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