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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

December 31, 2011 For the fiscal year ended December 31, 2011

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            .

Commission File Number 001-32160

AXESSTEL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		91-1982205
(State of Incorporation)		(I.R.S. Employer Identification No.)
6815 Flanders Drive, Suite 210 San Diego, California		92121
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (858) 625-2100

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

 

Title of each class		Name of each exchange on which registered
None

Securities Registered under Section 12(g) of the Act:

Common Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

 

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

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

The aggregate market value of all of the common stock held by non-affiliates of the registrant, based upon the closing stock price of the common stock reported on the OTC market on June 30, 2011 was $2.1 million. Shares of common stock held by executive officers, directors and by persons who own 10% or more of the outstanding common stock of the registrant have been excluded for purposes of the foregoing calculation in that such persons may be deemed to be affiliates. This does not reflect a determination that such persons are affiliates for any other purpose.

The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of February 1, 2012, was 23,799,731.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after registrant’s fiscal year end December 31, 2011 are incorporated by reference into Part III of this report.

 

 

 

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AXESSTEL, INC.

FORM 10-K—ANNUAL REPORT

For the Fiscal Year Ended December 31, 2011

Table of Contents

 

				Page
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS					ii
PART I					1
ITEM 1.		BUSINESS			1
ITEM 1A.		RISK FACTORS			9
ITEM 1B.		UNRESOLVED STAFF COMMENTS			19
ITEM 2.		PROPERTIES			19
ITEM 3.		LEGAL PROCEEDINGS			20
ITEM 4.		MINE SAFETY DISCLOSURES			20
PART II					21
ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES			21
ITEM 6.		SELECTED FINANCIAL DATA			22
ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			23
ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			32
ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			33
ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES			33
ITEM 9A.		CONTROLS AND PROCEDURES			33
ITEM 9B.		OTHER INFORMATION			34
PART III					35
ITEM 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			35
ITEM 11.		EXECUTIVE COMPENSATION			35
ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			35
ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			35
ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES			35
ITEM 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			36

 

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In this report, unless the context otherwise requires, the terms “Axesstel,” “Company,” “we,” “us,” and “our” refer to Axesstel, Inc., a Nevada corporation, and our wholly owned subsidiaries, Axesstel Shanghai, Ltd. and Axesstel Korea, Inc. We sold all of our ownership interest in Axesstel Korea, Inc. in a transaction that was completed on November 15, 2009.

Special Note Regarding Forward Looking Statements

Certain statements in this report, including information incorporated by reference, are “forward-looking statements.” Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “may,” “should,” “could,” “would,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” or “projects,” or the negative or other variations of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, anticipated trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results and the development of our products, are forward-looking statements. Forward-looking statements in this report may include statements about:

 

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anticipated in results of operations including expected trends in revenues, gross margins, operating expenses and net income;

 

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the future actions of our competitors, including pricing decisions and new product introductions;

 

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the timing and success of our own new product launches;

 

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our ability to obtain future financing or funds when needed;

 

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our ability to successfully obtain a diverse customer base;

 

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our ability to protect our intellectual property through patents, trademarks, copyrights and confidentiality agreements;

 

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our ability to complete or achieve the anticipated benefits from acquisitions, business combinations, strategic partnerships, divestures, and other significant transactions which involve additional uncertainties; and

 

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our ability to formulate, update and execute a successful business strategy.

The forward-looking statements in this report speak only as of the date of this report and, except to the extent required by law, we do not undertake any obligation to update any forward looking statements. Forward-looking statements are subject to certain events, risks, and uncertainties that may be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this report as they identify certain important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These factors include, among others, the risks described under Item 1A and elsewhere in this report, as well as in other reports and documents we file with the SEC. Caution should be taken not to place undue reliance on any such forward-looking statements.

 

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PART I

 

ITEM 1.

BUSINESS

Overview

We provide fixed wireless voice and broadband access solutions for the worldwide telecommunications market. Our product portfolio includes fixed wireless phones, wire-line replacement terminals, and 3G and 4G broadband gateway devices used to access voice calling and high-speed data services.

Our fixed wireless phones and 3G and 4G gateway products have similar functionality to phones and modems that use traditional landline telecommunications networks; however, our products are wireless and can be substituted for wired phones and modems. Our wire-line replacement terminals act as communication devices in homes where conventional handsets and wireless handsets can be plugged into our wireless terminal and serviced on a wireless network, as opposed to connecting to the fixed line provided by the local telephone or cable operator. Our products are based on CDMA (Code Division Multiple Access), GSM (Global System for Mobile Communications), GPRS (General Packet Radio Service), WCDMA (Wideband Code Division Multiple Access), and HSPA (High-Speed Packet Access) technologies.

We sell our products to telephone network operators around the world. For 2011 our largest customers were telecommunications operators located in the United States, Poland, Scandinavia and Saudi Arabia. Historically, we have sold our products under our “Axesstel” brand. In 2011, we also commenced sales as an OEM supplier to Sprint in the United States, selling products under the Sprint name.

Market Opportunity

Wireless communications are growing in developed and developing countries worldwide. The transition to wireless communications is evident with the advent of mobile phones including 3G and 4G phones with increasing computing power and applications. Fixed wireless phones and broadband gateway devices have received much less attention, but still have many benefits over traditional wired solutions:

 

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Fixed wireless phones can be moved from office to office without changing phone extensions and without the need for a PBX.

 

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Broadband gateway devices provide high-speed data on the move with email and internet access universally at any time.

 

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Wireless devices are less costly to deploy, eliminating the need for wired infrastructure.

In developed countries, the convenience of wireless phones has caused some consumers to drop their “wired” telephone service and consolidate their phone services through a wireless telephone service provider. Tier one wireless carriers in North America, such as Sprint and Verizon, are initiating marketing efforts to “cut the cord,” in an effort to take market share from traditional landline telephone service providers or reduce the investment needed to maintain traditional landline infrastructure. Our wireless phone products provide standard phone features and functions, but with a wireless network connection. In addition, our gateways allow those carriers to offer broadband data packages to small office and home office users.

Developing countries in Asia, Europe, Latin America, and the Middle East and Africa (“MEA”) are among the world’s fastest growing emerging telecommunications markets. Within these areas, landline telecommunications networks typically are limited to densely populated urban areas because the cost of deploying landline telecommunications networks in developing areas has proven economically unfeasible. Changes in the worldwide telecommunications industry, and specifically in the wireless sector of the industry, have substantially increased the economic feasibility of deploying wireless telecommunications services to developing areas. These changes include:

 

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advances in wireless technology and manufacturing which have reduced infrastructure costs for network operators and equipment costs for consumers and increased the subscriber capacity on wireless networks;

 

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emergence of creative subscriber plans, such as pre-paid phone plans, which have driven rapid subscriber growth; and

 

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reduced government tariffs and increased government subsidies, which have encouraged the growth of wireless telecommunications networks.

As a result of these changes, the geographic reach of wireless networks has expanded. The governments of developing countries recognize that their populations need access to reliable voice and internet services in order to improve socioeconomic conditions. As a result, we expect the demand for voice and data services to continue to increase in these regions.

Wireless Transmission Standards

GSM is the world’s most popular standard for mobile phones. The ubiquity of the GSM standard facilitates international roaming between mobile phone operators, enabling subscribers to use their phones in many parts of the world. For network operators, the GSM standard provides the ability to deploy equipment from different vendors because the open standard allows easy inter-operability.

As the GSM standard has continued to develop, it has integrated data capabilities while retaining backward compatibility with the original GSM phones. The standard was enhanced to add packet data capabilities by means of GPRS. GPRS can be utilized for services such as Short Message Service and Multimedia Message Service, but also for Internet communication services such as email and web access.

An alternative wireless standard, CDMA technology has emerged as one of the leading standards for wireless wide area networks (WWAN). CDMA is a “spread spectrum” technology, which allows multiple users to simultaneously occupy and utilize the same frequency spectrum in a given band by assigning unique logical codes to each communication channel that differentiates it from others in the same spectrum. Given the finite wireless spectrum resources available, CDMA allows more efficient sharing of the airwaves among multiple users and more dynamic network system planning for the operators than some alternative technologies.

Newer versions of wireless network technologies, popularly known as 3G, include CDMA2000 1xEV-DO (Evolution Data Optimized). This technology improves the ability to deliver high-speed data access to wireless devices and has been designed to provide wireless access speeds comparable to a digital subscriber line, or DSL, and cable modems. Subscribers can attain wireless access to data at maximum speeds of up to 2.4Mbps (Rev.0) or 3.1Mbps (Rev.A) on CDMA2000 1xEV-DO networks.

Another widely deployed global 3G WWAN technology is WCDMA (Wideband CDMA). Even though WCDMA shares a lot of the similar underlying technologies as CDMA2000, WCDMA is a different WWAN technology that has primarily been adopted by GSM operators for improved spectral efficiency and more importantly, increased network capacity. WCDMA has also evolved from 384kbps to the much higher speed HSDPA (High Speed Downlink Packet Access) and HSUPA (High Speed Uplink Packet Access) capable of data speeds of up to 7.2Mbps downlink and 5.76 Mbps uplink.

Recently, higher speed data transmission from 4G technology has also been introduced by WiMAX (Worldwide Interoperability for Microwave Access), HSPA+, CDMA2000 1xEV-DO (Rev. B), and LTE (Long Term Evolution) technologies which provide for increased data transmission rates and improved data transmission reliability. The increased transmission capabilities, with data speeds of up to 100 Mbps downlink and 50 Mbps uplink, enable end users to send and receive email with large file attachments, play interactive games, and download high resolution pictures, videos and music content.

Broadband Data Applications

Telecommunications operators are continually seeking high-margin, high-growth opportunities to complement their voice-based product offerings. Providing high-speed data access to existing voice customers enables

 

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operators to increase their revenue by leveraging their current infrastructure and customer base. Historically, high-speed data access was limited to businesses that could afford to purchase expensive hardware and pay the usage charges. As network costs have declined and technology and manufacturing advancements have developed, high-speed data access has increasingly become available to residential customers. In order to implement objectives to rollout high-speed data access, carriers are seeking cost-effective technologies to allow users without existing landlines, DSL or cable connections access to high-speed data.

Telecommunications operators deploy wireless networks based on CDMA2000 1xEV-DO, HSUPA, HSPA+, or LTE in markets where DSL or cable modem services are not offered. Even in markets where DSL and cable modems are offered, CDMA2000 1xEV-DO, HSUPA, HSPA+, and LTE offer comparable or higher speeds to DSL and cable, and enable operators to capture markets with the added benefit of mobility. Utilizing the latest wireless transmission standards, these devices can quickly be connected with high-speed Internet access and provide a multitude of other horizontal and vertical data applications.

Our Strategy

Our objective is to establish ourselves as a profitable, leading provider of fixed wireless access solutions for both developed and developing countries. Elements of our business strategy for 2012 include:

 

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Continue growth in North America. During 2011, we launched our first OEM product with Sprint; a wireless terminal product that was released as part of Sprint’s “Sprint Phone Connect” wire-line replacement program. The product is being targeted to consumers looking to drop their wire-line service at home and replace it with a wireless package. We are currently working with Sprint on designs for successive generations of the terminal product. We are also evaluating other opportunities in the United States.

 

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Identify new significant customer opportunities. We have historically experienced high customer concentration with our top three customers each year regularly accounting for 50% or more of our revenues. Part of this concentration is the result of providing tailored solutions to meet the specific product or fulfillment demands of our customers. Going forward, we plan to retain strong customer focus with our existing customers and to aggressively identify select new customers or markets, with the potential to account for 10% or more of our revenues.

 

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Launch key new products. Our industry is characterized by frequent technology advancements and rapid product releases. Our products are designed to meet the requirements of our customers. In late 2011, we launched a 4G gateway device based on the 1xEV-DO (Rev. B) standard, and anticipate significant orders for that product in 2012. In addition, we are working with Sprint on the second generation of the wireless terminal. Finally, we are working on a dual-mode gateway device for our Europe market and a security alert device for our North America market that we expect to launch in the second half of 2012.

 

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Continue focus on product cost reductions. Through the redesign and re-launch of our core product lines, we were able to reduce the average cost of our products in 2011 by 30 to 40% over the comparable costs from 2010. As a result of reductions in product costs and a shift in product mix to sales in the United States, we were able to generate strong gross margins of 24% in 2011. We expect pricing pressure to continue in 2012, with the constant risk of erosion in average selling prices. As a result, we are continuing to evaluate opportunities with our contract manufacturers to reduce product costs.

 

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Reduce cost of capital and improve our working capital position. Based on our improving operating performance, including the increased volume of business we are conducting in the United States, we will look for opportunities in 2012 to reduce the cost of capital on our borrowings and improve our working capital position without significant dilution to our existing stockholders. Interest expense in 2011 was $1.5 million, resulting from borrowings under our term loan, and purchase order and account receivable financing facilities at interest rates between 7% and 28%. We are exploring alternatives to expand our term loan financing and reduce the interest rate on our account receivable financing. We will also look for opportunities to increase our working capital. Increased working capital would be expected to improve profitability through the elimination of short term finance charges for purchase

 

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order or account receivable credit facilities, reduced product costs through the ability to work with more vendors, and increased revenues with the ability to develop additional products and customers.

Products and Features

We offer products in three categories: fixed wireless phones, wire-line replacement terminals, and 3G and 4G broadband gateway devices.

Fixed Wireless Phones

 

Our fixed wireless desktop phones are designed for voice and data usage in homes, businesses and retail locations. Our phones are offered in standard and enhanced models, with both traditional and cordless models available. We offer CDMA phones that operate in three frequency bands: 450 MHz, 800 MHz, and 1900 MHz, and GSM phones that operate in quad-band (850/900/1800/1900 MHz).

Wire-line Replacement Terminals

 

Our wire-line replacement terminals offer an affordable voice alternative to a landline network. Users can plug conventional telephones and wireless handsets into our terminal using the terminal as a home communication hub to access the wireless network as a replacement to traditional landline service. These terminals are offered in both CDMA and GSM technologies.

3G and 4G Broadband Gateway Devices

 

We currently offer various lines of broadband gateway devices based on CDMA 1xEV-DO Rev. A and Rev. B, and HSPA technology. Our wireless broadband gateway products allow residential users and mobile professionals to maintain productivity with secure, high-speed access to email, the Internet, data intensive files and multi-media streaming from the home, office or while traveling.
Our gateway products seamlessly combine a modem, wireless wide area networking (WWAN), a Wi-Fi wireless local area network (WLAN) router and a four-port Ethernet switch to provide wireless broadband data access via a plug-and-play solution that enables users to network multiple desktops and laptops. Our gateway devices also offer VoIP (Voice over internet Protocol) as an optional feature to provide voice functionality.

 

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Customers

Our products are sold directly and indirectly to telecommunications operators in markets around the world. We sell through our direct sales team, and in some countries or regions we sell through agents and distributors. The following table shows the percentage of our total revenues derived from various geographic regions in each of the last three years:

 

		2011				2010				2009
Revenues
Europe		$	24,309,410			$	30,089,002			$	26,597,687
North America (United States and Canada)			17,966,732				3,533,902				2,992,777
Middle East and Africa			5,967,203				2,261,086				5,481,360
Latin America			5,691,409				9,244,730				15,520,989
Asia			192,988				301,723				226,080
Total revenues		$	54,127,742			$	45,430,443			$	50,818,893

Our principal customers in 2011 were Sprint (United States), Icenet (Scandinavia), Orange (Poland) and Saudi Telephone Company (Saudi Arabia), each of which accounted for more than 10% of our total revenues for the year. We supply products to these customers on a purchase order basis.

The following table shows the dollar amount of revenues and the percentage of our total revenues that were generated from the sale of data products and voice products in each of the last three years.

 

		2011				2010				2009
Revenues from data products		$	31,211,632			$	34,943,777			$	36,050,824
Data products as a percent of total revenue			58	%			77	%			71	%
Revenues from voice products		$	22,916,110			$	10,486,666			$	14,768,069
Voice products as a percent of total revenue			42	%			23	%			29	%

During any quarterly period, our product mix is subject to change based on the presence or absence of large orders for a particular type of product. In 2011, we commenced sales of our wireless terminal product with Sprint which resulted in an increased percentage of our revenues coming from voice products for the year.

Sales and Marketing

We sell our products, directly and indirectly, to telecommunications operators worldwide. Currently, we do not sell our products directly to consumers. Most of our products are sold around the world under the “Axesstel” brand name. We also sell products to Sprint in the United States which are sold to consumers under the Sprint brand name.

Our sales strategy is to “localize” our direct sales force, and put our sales team close to our customer—the telecommunications operator. We divide our sales group into four principal regions: North America, Europe, MEA and Latin America. At December 31, 2011 our sales and marketing team was comprised of eight employees and consultants located in the United States, England, Holland, Portugal and Spain.

In addition to our direct sales force, we supplement our presence in various geographic regions through the hiring of local sales representatives or agents. In some regions, we sell our products through distributors. Under these arrangements the distributors purchase the products from us, and resell the products to telecommunications operators in those regions.

Manufacturing

We use third party contract manufacturers to provide large scale product manufacturing for all of our products. Our contract manufacturers provide us with a variety of manufacturing services, including base product design, component procurement, product manufacturing, final assembly, testing, quality control, fulfillment and delivery services.

 

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Our contract manufacturers generally procure all raw materials and hold work-in-process and finished goods inventory for our products. We believe outsourcing our manufacturing provides us with flexibility and allows us to:

 

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focus on design, sales and marketing;

 

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realize economies of scale;

 

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access high-quality manufacturing resources and personnel;

 

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scale production rapidly;

 

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reduce working capital investment; and

 

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reduce capital equipment costs and equipment obsolescence risk.

Our manufacturing agreements are designed to allow us to fulfill high-volume orders with short lead-times. We manage our relationship with the contract manufacturers to focus on improvements in design-for-manufacturing, test procedures, quality, cost optimization and production scheduling. We work with our contract manufacturers to source components for our products in an effort to reduce costs, ensure the quality of the components we purchase, and mitigate against the risk that components are not available at the time we need the components to fulfill our customer orders.

Our contract manufacturing arrangements are a key element of our working capital financing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” below. Under the terms of our supply agreements, we submit purchase orders to our manufacturers for finished goods. Our manufacturers purchase and maintain inventories of components and subassemblies against a rolling forecast of orders that we provide to them on a monthly basis. Often the goods we order are shipped directly from the manufacturer to the customer, and we normally do not hold finished goods in inventory. Occasionally we experience a cancellation or delay of a customer order. We try to secure the right under the terms of our manufacturing agreements to defer delivery of goods for a period of time. During that time, we will attempt to sell the goods to another customer. If we are unsuccessful in selling the goods before the deferral period expires, the manufacturer can deliver the finished goods to us and we take the goods into inventory.

Historically, substantially all of our products were manufactured by a single contract manufacturer. Beginning in 2010, we established relationships with additional contract manufacturers in China and now work with several different contact manufacturers for our various product lines.

Research and Development

We focus our research and development efforts on developing innovative fixed wireless access solutions to address opportunities provided by next generation wireless networks.

During 2010, we launched re-engineered lines of our GSM and CDMA phones and modems that were designed for sale at more competitive price points. We also launched a new generation of our MV500 gateway products with enhanced features, including a VoIP application.

In 2011, our product development initiatives included:

 

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reengineering our 1xEV-DO Rev. A and HSPA gateway products to reduce product costs by 30 to 40%;

 

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launching our phone terminals in the United States with Sprint as part of their “Sprint Phone Connect” wire-line replacement program; and

 

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developing our next generation of MV600 series gateway products featuring 4G high-speed data rates based on CDMA 1xEV-DO Rev. B with new product designs and enhanced features including a VoIP application.

 

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For 2012, our research and development initiatives will be concentrated on the following projects:

 

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Launching of the second generation wire-line replacement terminal with Sprint.

 

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Developing a dual-mode gateway device for our Europe market.

 

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Developing a security alert device for our North American market.

We conduct our research and development through a combination of internal and outsourced development initiatives. Our internal research and development team focuses on development of our more complex products or features, such as our next generation gateways with integrated VoIP capabilities. Our internal team also reviews baseline products offered by third party manufacturers and develops product specifications or modifications to improve cost or performance of these products or add features and functions to meet our customers’ unique requirements. We generally enter into development and supply agreements with third party design and manufacturing firms for these products. In some arrangements, we pay for engineering services for the manufacturer to develop a customized version of a product design for us. In other cases, the costs of product customization are added to the per unit price that the manufacturer charges us for final products. We believe that this model provides several benefits, including:

 

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retention of high value engineering talent;

 

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creation and retention of strategic intellectual property rights;

 

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faster time to market for new product launches;

 

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access to a broader range of products than could be developed internally; and

 

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reduced research and development expenses.

As of December 31, 2011, we had 13 engineers, six based in the United States, five based in Korea, and two based in China. For the years ended December 31, 2011, 2010, and 2009, our research and development expenses were $2.3 million, $2.4 million, and $3.8 million, respectively. Prior to 2010, we performed comprehensive product design primarily with an internal research and development team. We subsequently transitioned to rely more heavily on outsourced engineering services. In the fourth quarter of 2009, we sold our Axesstel Korea subsidiary to reduce our research and development costs for certain product lines. In connection with the sale, we terminated our lease obligations for the real estate in Korea and the employment obligations for 37 of our former employees, including severance obligations under Korean law. We expect research and development expenses for 2012 to be consistent with the level of expenditures experienced in 2011.

Intellectual Property

We protect our intellectual property through a combination of patents, trademarks, trade secrets, licenses, non-disclosure agreements and contractual provisions. Generally, we enter into non-disclosure and confidentiality agreements with our employees, consultants and third parties that have access to our proprietary technology.

Licenses

In November 2000, we entered into a license agreement with Qualcomm under which we were granted a worldwide, nonexclusive, royalty-bearing license to Qualcomm’s CDMA technology to make, sell and lease fixed wireless CDMA-based products. In February 2005, we amended the license agreement to expand the scope of the license and to allow us to make, use and sell certain mobile CDMA based products in addition to fixed wireless CDMA based products. In October 2007, we further amended the license agreement to expand the scope of our license to include rights to make, use and sell products utilizing WCDMA (Wideband Code Division Multiple Access) technology. Qualcomm may terminate the license agreement if we materially breach the license agreement and such breach is not cured.

 

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We have also entered into various software agreements with Qualcomm to license its software to use with our products that incorporate Qualcomm’s CDMA technology. These agreements are effective so long as the license agreement discussed in the paragraph above is effective. We expect to purchase additional software from Qualcomm as needed to support development of products based on future chipsets.

We have also acquired licenses from other vendors where we use those vendors’ microprocessor chipsets in our products. In some cases, we rely on our contract manufacturers or third party component suppliers to procure the necessary licenses for the use of the chipsets. The wireless industry has experienced significant litigation in recent years concerning intellectual property rights to wireless chipset design and essential intellectual property rights for wireless communications. We attempt to secure all license rights we believe are necessary to properly manufacture and sell our products. However, given the fragmented nature of intellectual property rights in this area, it is impracticable to provide absolute assurance that we have all requisite license rights for our current or future products. Moreover, as we continue to develop additional products, and as standards in the wireless industry continue to evolve, we expect that we will need to acquire additional license rights.

Patents

We have filed patent applications and received patents in the United States and foreign jurisdictions covering certain aspects of our products. We cannot be certain that any patent application that we file will result in the issuance of a patent. Even if a patent is issued, we cannot be certain that it will be sufficiently broad as to permit us to effectively prohibit others from effectively competing against us. From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot guarantee that we will prevail in any intellectual property dispute.

Competition

The market for fixed wireless products is highly competitive. Over the past three years large telecommunications infrastructure providers from China, principally Huawei Technologies Co., Ltd., and ZTE Corporation, have used their scale and aggressive pricing to establish dominant market share in phone, modem and gateway space. We also face competition from smaller vendors such as C-motech Co. Ltd. and AnyData Corporation. In addition, there is always the potential for new competition to enter our target markets.

We compete principally on the basis of design, functionality, reliability, quality, price, and ease of deployment, installation and use. Historically our products have been recognized by consumers for their functionality, including superior durability and performance.

Over the past few years, the telecommunications market has been marked by decreasing average selling prices. The global economic recession in 2009 - 2010 decreased demand for telecommunications products and some of our competitors resorted to significant price cutting to retain or increase market share. We have revised our product development model to focus our development efforts through third party manufacturers in China. This approach has allowed us to offer products that are competitively priced. We constantly work to reduce our product costing, but recognize that some cost savings will be tied to economies of scale and our sales volumes will not always allow us to be the low cost provider. As a result, we continue to look for significant niche markets where our close attention to customer requirements and performance are valued.

Many of our current and future competitors may have significantly greater financial, technical and marketing resources as well as greater purchasing power than we do. These greater resources may allow these competitors to obtain better manufacturing prices and efficiencies than we have. Some of our competitors offer bundled packages, selling network operators wireless network infrastructure equipment, modems and phones in an integrated package. Some customers may prefer this single source solution. Remaining competitive will require us to continually develop innovative products at competitive price points. We cannot guarantee that we will be able to compete successfully.

 

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Employees

As of December 31, 2011, we had a total of 35 full-time employees, up from 34 at the beginning of the year. Of the 35 employees, 16 are located in the United States, 10 are located in China, eight are located in South Korea and one is located in Holland. We have a total of six employees involved in executive, general and administrative functions, four involved in sales and marketing, 13 involved in product design and development, and 12 involved in operations.

At December 31, 2011, we had a total of four consultants, down from six at the beginning of the year, all performing sales and marketing functions.

We have never had a work stoppage, and none of our employees are represented by a labor organization or under any collective bargaining arrangements. We believe our relationships with our employees are good.

Governmental Regulation

Our products are incorporated into commercial wireless communications systems that are subject to regulation domestically by the Federal Communications Commission, or FCC, and internationally by other government agencies.

In the United States, the FCC regulates many aspects of communications devices, including radiation of electromagnetic energy, biological safety, and rules for devices to be connected to telephone networks. In addition to the federal government regulations, certain states have adopted regulations applicable to our products. Radio frequency devices, which include our phones and gateways, must be approved under the above regulations by obtaining equipment authorization from the FCC prior to being offered for sale. Asia, Europe, Latin America, and MEA have their own regulatory requirements which require various approvals.

Our customers, the wireless network operators, are also subject to extensive government regulations in the markets in which they operate. Changes in regulations applicable to network operators, including changes in the allocation of available frequency spectrum, could negatively affect our business by restricting development efforts by our customers, making current products obsolete or increasing the opportunity for additional competition. In addition, the increasing demand for wireless telecommunications has exerted pressure on regulatory bodies worldwide to adopt new standards for these products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused and may in the future cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers.

Available Information

Our annual and quarterly reports, along with all other reports and amendments filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our website at www.axesstel.com as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our corporate governance policies, ethics code and board of directors’ committee charters are also posted within this section of the website. The information on our website is not part of this or any other report we file with, or furnish to, the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

 

ITEM 1A.

RISK FACTORS

Our ability to implement our business strategy and achieve our intended operating results is subject to a number of risks and uncertainties, including the ones identified below, and additional risks not currently known to us or that we currently believe are immaterial.

 

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If we cannot sustain profitable operations, we will need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment.

We generated net income of $1.1 million for the year ended December 31, 2011. However, we incurred a net loss for the year ended December 31, 2010, of $6.3 million and a net loss of $10.1 million for the year ended December 31, 2009. At December 31, 2011, we had a stockholders’ deficit of $11.6 million and a working capital deficit of $11.8 million.

We cannot guarantee that we will be successful in sustaining profitability and improving our working capital position over time. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations. We do not have any arrangements in place to provide additional funds. If needed, those funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in sustaining profitability and reducing our accumulated deficit, and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our operations.

We rely on a small number of customers for substantially all of our revenues and the loss of one or more of these customers would seriously harm our business.

For the year ended December 31, 2011, four of our customers and their affiliates accounted for approximately 76% of our revenues; orders from these customers comprised approximately 27%, 20%, 19% and 10% of revenues, respectively. For the year ended December 31, 2010, three of our customers and their affiliates accounted for approximately 77% of our revenues; orders from these customers comprised approximately 43%, 17% and 17% of revenues, respectively. For the year ended December 31, 2009, three of our customers and their affiliates accounted for approximately 58% of our revenues; orders from these customers comprised approximately 30%, 18% and 10% of revenues, respectively.

If we lose one or more of our significant customers or if one or more of our significant customers materially scales back its orders, and we are unable to replace the sales of our products to other customers, our revenues may decline significantly and our results of operations may be negatively impacted.

We are attempting to develop other geographic markets for our products and services, including other regions in North America, Latin America, Europe and MEA, while still maintaining and expanding our volume of sales to our existing significant customers. Our goal is to develop additional significant customers from which we can generate additional revenues, and reduce our risk associated with customer concentration. We can make no assurance, however, that we will succeed in diversifying our customer base, developing other geographic markets or in becoming less reliant on a small number of significant customers.

We purchase products from our manufacturers on a purchase order basis and they are not obligated to accept any purchase order on the terms we request or at all.

We currently purchase all of our products from third party manufacturers on a purchase order basis. The manufacturers are not obligated to accept any purchase order that we submit, and may elect not to supply products to us on the terms we request, including terms related to open credit terms, specific quantities, pricing or timing of deliveries. If a manufacturer were to refuse to fulfill our purchase orders on terms that we request or on terms that would enable us to recover our expenses and make a profit, we may lose sales or experience reduced margins, either of which would adversely affect our results of operations. Further, if a manufacturer were to cease manufacturing our products on acceptable terms, we might not be able to identify and secure the services of a new third-party manufacturer in a timely manner or on commercially reasonable terms.

 

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If we do not compete effectively in the fixed wireless telecommunications market, our revenues and market share will decline.

The markets for fixed wireless voice and broadband access devices are highly competitive. We face competition from larger and better capitalized competitors such as Huawei Technologies Co., Ltd. and ZTE Corporation which have significantly greater penetration in key markets than we do. Economies of scale allow these competitors to offer product pricing and related incentives that we may be unable to match. We also face competition from a number of smaller competitors. These competitors may be able to:

 

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more accurately predict the new or emerging technologies desired by the market;

 

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respond more rapidly than we can to new or emerging technologies;

 

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respond more rapidly than we can to changes in customer requirements;

 

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devote greater resources than we do to sales or research and development efforts;

 

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offer vendor financing for their products;

 

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promote their products more effectively, including selling their products at a loss in order to obtain market share or bundling their products with other products that we do not offer in order to promote an end-to-end solution for their customers that we cannot match;

 

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sell products at lower prices as a result of efficiencies of scale or purchasing power, thereby rendering our products non-competitive or forcing us to sell our products at reduced gross margins; and

 

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use dominance in certain key markets to subsidize expansion efforts in geographic areas in which we operate and in which we are substantially dependent for a significant portion of our revenue.

If we are not successful in continuing to win competitive bids, in enhancing our products and customer relationships and in managing our cost structure so that we can provide competitive prices, we may experience reduced sales and our market share may decline.

The global economic slowdown has impacted demand for our products and intensified competition for sales of wireless products, and a protracted recession could impose additional risks to our business.

Prior to 2009 we sold a significant portion of our products to telecommunications operators in developing countries in conjunction with network rollouts to new territories and upgrades to network infrastructure. The recent economic recession has impacted consumer demand as well as the ability of the telecommunications operators to finance network expansions and upgrades.

A substantial portion of our sales are derived from customers in developing countries, including customers located in Eastern Europe and MEA. If the current economic climate persists, or worsens, then we may experience a decline in customer orders. A protracted economic slowdown may also impact the ability of our customers to provide credit security for their orders. We rely on that credit security, usually in the form of credit insurance or a letter of credit, to immediately finance the account receivable from the customer. We then use the proceeds from the account receivable financing to pay our contract manufacturers within the terms of their open credit policy. If our customers are unable to secure credit insurance or a letter of credit to secure their account with us, we may be unable to fill purchase orders submitted to us and our sales and results of operations may decline.

The global economic climate has also intensified price competition in the fixed wireless space. Consumers and telecommunications operators, particularly in developing markets, are increasingly focused on price in their buying decision. The declining customer demand has triggered intense price competition as Chinese competitors have taken advantage of scale to establish significant market penetration, particularly in Asia and Latin America.

 

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Because of our relative size, we do not expect to be the low cost provider for our wireless products. We compete on the basis of our attention to customer needs and product quality and performance. However, if the economic environment were to deteriorate, customers may be drawn to the lowest cost alternative and demand for our products may decline.

If we cannot extend or renew our current bank term loan, we may default on repayment or be compelled to allocate significant cash resources to repayment which would further impair our working capital position.

We have a $1.6 million term loan outstanding to a commercial bank located in China. That loan matures by its terms on April 1, 2012. We intend to seek a renewal or replacement of that loan, but do not have definitive arrangements in place at this time. Since 2008, we have operated with limited capital resources and a significant working capital deficit. If we are unable to renew this loan, we may not have the financial resources to repay the loan when it is due and may be compelled to default. Even if we are able to repay the loan, repayment would require allocation of a substantial portion of our working capital. Any such expenditure may impair our ability to execute our current business plan, and require us to curtail or alter our operating plans.

Our auditors have expressed substantial doubt regarding our ability to continue as a going concern. If we are unable to continue as a going concern, we may be required to substantially revise our business plan or cease operations.

As of December 31, 2011, we had cash and cash equivalents of $850,000 and a working capital deficit of $11.8 million. We generated net income of $1.1 million in 2011, but incurred substantial losses in 2010 and 2009. As a result, our auditors have expressed substantial doubt about our ability to continue as a going concern. We cannot assure you that we will be able to obtain sufficient funds from our operating or financing activities to support our continued operations. If we cannot continue as a going concern, we may need to substantially revise our business plan or cease operations, which may reduce or negate the value of your investment.

Our international sales and operations subject us to various risks associated with, among other things, foreign laws, policies, economies and exchange rate fluctuations.

All of our international sales and operations are subject to inherent risks, which could have a material adverse effect on our financial condition or results of operations. These risks include:

 

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longer payment cycles and greater difficulty in collecting accounts receivable;

 

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changes in a specific country’s or region’s political or economic conditions, particularly in developing countries, where a significant portion of our customers are located;

 

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difficulties in complying with foreign regulatory requirements applicable to our operations and products;

 

•

difficulties in obtaining domestic and foreign export, import and other governmental approvals, permits and licenses and compliance with foreign laws, including employment laws;

 

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difficulties in staffing and managing foreign operations, including work stoppages or strikes and cultural differences in the conduct of business, labor and other workforce requirements and inadequate local infrastructure;

 

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trade restrictions or higher tariffs, quotas, taxes and other market barriers;

 

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transportation delays and difficulties of managing international distribution channels;

 

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political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions; and

 

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public health emergencies such as SARS and avian bird flu.

 

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These international risks make our ability to meet the demand for wireless products unpredictable. In addition, because the majority of our sales are denominated in United States dollars, changes in foreign currency exchange rates affect the market price for our products in countries in which they are sold. If the currency of a particular country weakens against the United States dollar, the cost of our products in that country may increase to the service provider and end user, which may result in the service provider or end user choosing to purchase the products of one of our competitors instead of our products.

We expect our operating results to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.

We believe that our operating results may fluctuate substantially from quarter-to-quarter and year-to-year for a variety of reasons, many of which are beyond our control. Factors that could affect our quarterly and annual operating results include those listed below as well as others listed in this “Risk Factors” section:

 

•

Our current reliance on large-volume orders from only a few customers.

 

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The propensity of our customers to order on a purchase order basis.

 

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Variability in customer and product mix during any particular quarter.

 

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Changes in our pricing policies or those of our competitors.

 

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The introduction of new products or product enhancements by us or our competitors.

 

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Changes in the terms of our arrangements with customers or suppliers.

 

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The ability of our customers to accurately forecast demand for our products by their end users.

 

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General economic conditions in developing countries which are in our target markets.

 

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The timing of final product approvals from any major customer.

 

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Delays or failures to fulfill orders for our products on a timely basis.

 

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The ability of our customers to obtain letters of credit or credit that are satisfactory to us and our ability to confirm them in a timely manner.

 

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Our inability to forecast our manufacturing needs.

 

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Delays in the introduction of new or enhanced products by us or market acceptance of these products.

 

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Our ability to finance our working capital needs.

 

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Changes in the financial position of our manufacturers.

 

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The availability and cost of raw materials and components for our products.

 

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An increase in product warranty returns or in our allowance for doubtful accounts.

 

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Operational disruptions, such as transportation delays or failures of our order processing system.

Our results for any particular quarter or year may be positively or negatively impacted by the timing or occurrence of any of these events. Consequently, period-to-period comparisons of our operating results may not be a meaningful indication of the condition or trend of our business, and you should not rely on them as an indication of our future performance. Because our business is subject to variability, at any point in time our operating results may fall below the expectations of public market analysts or investors. In this event, our stock price could decline significantly.

We sell our product to telecommunications operators in developing countries, which may create difficulties in the collection of our accounts receivable.

We customarily accept customer orders based on prepayment terms or require security in the form of letters of credit or credit insurance. In some instances, we make sales to customers on open credit terms. We have experienced some collection issues in the past. In 2010 and 2009 we incurred $1.0 million and $1.6 million of

 

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bad debt expense, respectively, because of our customers’ inability or refusal to pay. Many of our customers are telecommunications operators in developing countries. This makes collection efforts more difficult and expensive. Often these countries do not have well established legal systems to secure and enforce judgments for unpaid accounts. Because of our limited working capital, any inability to collect on open accounts may have a significant impact on our financial position.

We depend on third party manufacturers to produce all of our products.

We rely on a limited number of third-party manufacturers to produce our products. Our reliance on third party manufacturers exposes us to a number of risks that are beyond our control, including:

 

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unexpected increases in manufacturing costs;

 

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interruptions in shipments if a third-party manufacturer is unable to complete production in a timely manner;

 

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interruptions in shipments for an extended period of time due to acts of God, war, terrorism, earthquakes, tsunamis, typhoons, damaging winds or floods or a recurrence of widespread pandemic;

 

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interruptions in manufacturing and shipments for an extended period of time due to, among other reasons, shortages of electricity or water;

 

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inability to control quality of finished products, or control the remediation of any product defects;

 

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inability to control production levels and to meet minimum volume commitments to our customers;

 

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inability to maintain adequate manufacturing capacity;

 

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inability to secure adequate volumes of components in a timely fashion or at expected prices;

 

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unwillingness of our current or future manufacturing suppliers to provide sufficient credit to support our sales;

 

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manufacturing delays due to lack of financing, availability of parts, labor stoppages, disruptions or political instability in the region; and

 

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scarcity of shipping containers.

In addition, we are subject to risks affecting the business of our contract manufacturers and their ability to produce our products in sufficient volume and quality on a timely basis. Such risks include delays in manufacturing process, disruptions in its workforce or manufacturing capabilities, capacity constraints, quality control problems and compliance with import and export restrictions of the United States and foreign countries. In addition, if demand for any of our products increases, these manufacturers could need to make additional capital expenditures in order to expand capacity, which they may choose not to do. Any of these risks could result in a delay of quality products being shipped to our customers, which could negatively impact our revenues, our reputation and our competitive position in our industry.

As we work with new manufacturing partners, we may experience higher levels of product warranty claims, or defect rates which could negatively impact our financial position or impair our brand’s reputation for quality. We may not be able to respond to customer demands as quickly as we have through our internal research and development resources. Working with third party designers and manufacturers may limit our ability to develop unique or protected intellectual property rights in the products. Finally, we will be dependent on the financial stability and effective operations of our design and manufacturing partners. A financial or operational setback with one of our manufacturers may impact our ability to procure product necessary to meet customer orders or to service customer requests. If we do not choose our design and manufacturing partners carefully we may experience significant damages to our operations, our reputation and ultimately our financial position.

 

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We may experience delays in manufacturing and our costs may increase if we are unable to accurately forecast all of our needs.

We utilize a rolling forecast of demand, which our manufacturers use to determine our component requirements. Lead times for ordering components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand for and availability of a component at a given time. If our forecasts are less than our actual requirements, the third-party manufacturer may not be able to manufacture products in a timely manner. If we cannot acquire our products in a timely manner, we may lose sales. If our forecasts are too high, we and our manufacturer may build excess inventory. In addition, we may be unable to use the components that were purchased based on our forecasts. The cost of the components tends to drop rapidly as volumes increase and technologies mature. Therefore, if our manufacturers are unable to use components purchased based on our forecasts, our cost of producing products may be higher than our competitors due to an oversupply of higher priced components. Excess components or inventory will tie up working capital and cause us to incur storage and other carrying costs, which may cause us to borrow additional funds that may not be available on commercially reasonable terms. Further, excess components or inventory not used or sold in a timely manner may become obsolete causing write-offs or write-downs, which could seriously harm our results of operations.

A substantial portion of our sales are on a purchase order basis. Although these purchase orders are generally not cancelable, customers may decide to delay or cancel orders, which could negatively impact our revenues.

Our customers generally purchase products from us on a purchase order basis. As a result, we generally carry little backlog and have limited visibility into the long term purchasing plans of our customers. Orders covered by firm purchase orders are generally not cancelable; however, customers may decide to delay or cancel orders. In the event that we experience any delays or cancellations, we may have difficulty enforcing the provisions of the purchase order and our revenues could decline substantially. Any such decline could result in us incurring net losses, increasing our accumulated deficit and needing to raise additional capital to fund our operations.

We will need to develop new products and features to meet rapidly evolving industry standards and the changing needs of our customers in order to be successful.

The wireless telecommunications market is characterized by rapid technological advances, evolving industry standards, changing customer needs and frequent new product introductions and enhancements. Manufacturers of wireless communications microprocessor chipsets, which we use in our products, frequently introduce new chipsets that provide enhanced functionality at lower price points. The introduction of new chipsets often requires that we design and release new products to take advantage of the enhanced features or lower cost in order to remain competitive. To maintain and increase our revenues, we must continually develop and market new products and enhancements to existing products that keep pace with advancing technological developments and industry standards and that address the needs of our customers and their end users. The process of developing new technology and products is complex, uncertain and expensive, and success depends on a number of factors, including:

 

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predicting market acceptance of new technology platforms;

 

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proper product definition;

 

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managing supply chains and component costs;

 

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resolving technical hurdles and obtaining appropriate product certifications as required by our customers;

 

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timely completion and introduction to the market;

 

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differentiation from the products of our competitors; and

 

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market acceptance of our products.

 

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We commit significant resources for research and development of new products, in many instances, before knowing whether our investments will result in products the fixed wireless telecommunications market will accept. Further, we may be required to purchase licenses from third parties in connection with the development of new products and these licenses may not be available on commercially reasonable terms, or at all. Even if we successfully introduce new products and technologies, our products may not be accepted by the market or we may be unable to sell our products at prices that are sufficient to recover our investment in developing those new products. Many of the end users in our target markets have low incomes and rely on subsidies from telecommunications operators in order to purchase our products. If we fail to introduce new products at prices that are competitive and allow us to generate a profit, we will lose customers and market share and the value of our company will decline.

Our failure to predict and comply with evolving wireless industry standards, including 3G and 4G standards, could reduce our ability to introduce and sell new products.

We must accurately anticipate evolving wireless technology standards and offer products that comply with such standards. We engineer and manufacture products that comply with several different 3G wireless standards and we released a 4G product line in late 2011. If our products fail to comply with any one of these or future applicable standards, our ability to introduce and sell new products could be reduced or we could be required to make costly and time-consuming engineering changes. Additionally, wireless standards for communication are evolving rapidly. If we develop products for a new wireless standard and a significant number of wireless operators do not adopt the standard to which our products are engineered, then sales of such new products could be materially harmed.

From time to time we evaluate potential acquisitions which, if consummated, may subject us to additional risks and uncertainties, and may result in substantial dilution to our stockholders.

We will, from time to time, consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our stockholders could be diluted.

Evaluating potential acquisitions can be expensive and require significant management resources without significant return unless the acquisitions are completed successfully. Acquisitions and strategic investments involve numerous risks, including:

 

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problems assimilating the purchased technologies, products or business operations;

 

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problems maintaining uniform standards, procedures, controls and policies;

 

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unanticipated costs associated with the acquisition;

 

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failure to adequately integrate operations or obtain anticipated operative efficiencies;

 

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diversion of management’s attention from our core business;

 

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adverse effects on existing business relationships with suppliers and customers;

 

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risks associated with entering new markets in which we have no or limited prior experience;

 

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potential loss of key employees of acquired businesses; and

 

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increased legal and accounting costs as a result of the rules and regulations related to the Sarbanes-Oxley Act of 2002.

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted and our operating results may suffer.

 

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We depend on third party agents to provide sales and after-market support for our products in some markets, and the loss of these relationships may harm our business.

We sell products to our customers through our direct sales force with significant involvement from senior management and, when desirable or required by the laws of a particular jurisdiction or a prospective customer, through local agents and a network of other third parties, such as resellers, distributors and manufacturers of complementary technologies. We rely on these agents and third parties to assist us in providing customer contacts and marketing our products directly to potential customers. When working with agents, we may enter into exclusive arrangements that preclude us from using another agent or making sales directly in a particular territory, which could harm our ability to develop new customer relationships. Certain agents and other third parties are not obligated to continue selling our products, and they may terminate their arrangements with us at any time. Our ability to increase our revenues in the future may depend in large part on our success in developing and maintaining relationships with these agents, distributors and other third parties. Any failure to develop or maintain our relationships with these third parties and any failure of these third parties to effectively market our products could harm our business, financial condition and results of operations.

If we are unable to attract and retain key personnel necessary to operate our business, our ability to develop and market our products successfully could be harmed.

We have a small employee base and depend substantially on our current executive officers and management. The loss of key employees or the inability to attract or retain qualified personnel, including engineering, sales, and marketing personnel, could delay product development and harm our ability to sell our products. Our success depends on our ability to identify, attract and retain qualified management, engineering, sales, and marketing personnel.

Our competitive position could be seriously damaged and we may incur substantial expenses if we become party to lawsuits alleging that our products infringe the intellectual property rights of others.

Other companies, including our competitors, may currently own or obtain patents or other proprietary rights that might prevent, limit, or interfere with our ability to make, use, or sell our products. The technology around wireless communications is complex and numerous operating companies and patent “trolls” claim to hold essential intellectual property rights in the space. Our products may be found to infringe the intellectual property rights of others. In the event of a successful claim of infringement against us, and if we are unable to license the infringed technology or our current licenses do not contain adequate indemnification or warranties to cover the claim, our business and operating results could be adversely affected, resulting in reduced or negative gross margins, harm to our reputation if we are unable to provide remedies to our customers and general harm to our competitive position in the marketplace.

Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources. An adverse result from intellectual property litigation could force us to do one or more of the following:

 

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cease selling, incorporating or using products that incorporate the challenged intellectual property;

 

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obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and

 

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redesign products that incorporate the disputed technology.

If we are forced to take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or be adequate to indemnify us for all liability that may be imposed.

In addition, it is possible that our customers or end users may seek indemnity from us in the event that our products are found or alleged to infringe upon the intellectual property rights of others. Any such claim for indemnity could result in substantial expenses to us that could harm our operating results.

 

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Failure to adequately protect our trademark rights could cause us to lose market share and cause our sales to decline.

We sell certain of our products under our brand name, Axesstel. We use our brand name to compete in the fixed wireless telecommunications market. We have expended significant resources promoting our brand name, and we have three registered trademarks in the United States and have applied for and received a number of trademarks in developing countries where we sell our products. However, registration of our brand name trademark will not necessarily deter or prevent unauthorized use by others. If other companies use our brand name, consumers may not recognize us as the source of our products. This would reduce the value of goodwill associated with our brand name. This consumer confusion and the resulting reduction in goodwill could cause us to lose market share and cause our sales to decline. Even if we identify an infringement of our brand or trademarks, asserting a claim may be costly and time consuming.

We may face litigation that could significantly damage our business and financial condition.

In the telecommunications equipment industry, litigation is being used increasingly as a competitive tactic by both established companies seeking to protect their position in the market and by emerging companies attempting to gain access to the market. In this type of litigation, complaints may be filed on various grounds, such as antitrust, breach of contract, trade secret, copyright or patent infringement, patent or copyright invalidity, and unfair business practices. If we are required to defend ourselves against one or more of these claims, whether or not they have any merit, we are likely to incur substantial expense and management’s attention will be diverted from operations. This type of litigation also may cause confusion in the market and make our customers reluctant to purchase our products. Any of these effects could harm our business.

We may not be able to develop products that comply with applicable government regulations.

Our products must comply with government regulations. For example, in the United States, the Federal Communications Commission, or FCC, regulates many aspects of communications devices, including radiation of electromagnetic energy, biological safety, and rules for devices to be connected to telephone networks. In addition to the federal government regulations, certain states have adopted regulations applicable to our products. Radio frequency devices, which include our modems, must be approved under the above regulations by obtaining equipment authorization from the FCC prior to being offered for sale. Because we sell our products worldwide we must also meet the regulatory requirements in our global markets including Europe, MEA, Latin America and Asia. Additionally, we cannot anticipate the effect that changes in domestic or foreign government regulations may have on our ability to develop and sell products in the future. Failure to comply with existing or evolving government regulations or to obtain timely regulatory approvals or certificates for our products could materially adversely affect our business, financial condition and results of operations or cash flows.

Our common stock is quoted on the OTC QB over the counter market, which may be detrimental to investors.

Our common stock is currently quoted on the OTC QB over the counter market. Stocks quoted on the OTC QB generally have limited trading volume and exhibit a wider spread between the bid and ask quotations as compared to stocks traded on national exchanges. Accordingly, you may not be able to sell your shares quickly or at the market price if trading in our stock is not active.

Our common stock is subject to penny stock rules.

Our common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 (or $300,000 together with their spouse). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser.

 

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Nevada law and provisions in our charter documents may delay or prevent a potential takeover bid that would be beneficial to common stockholders.

Our articles of incorporation and our bylaws contain provisions that enable our board of directors to discourage, delay or prevent a change in our ownership or in our management. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. These provisions include the following:

 

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our directors may fill vacancies on our board of directors;

 

•

our stockholders are permitted to remove members of our board of directors only upon the vote of at least two-thirds of the outstanding shares of stock entitled to vote at a meeting called for such purpose;

 

•

stockholder proposals and nominations for directors to be brought before an annual meeting of our stockholders must comply with advance notice procedures, which require that all such proposals and nominations must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year;

 

•

a special meeting of stockholders may be called only by our chief executive officer, president or secretary, or by resolution of our board of directors; and

 

•

our board of directors is expressly authorized to make, alter or repeal our bylaws.

In addition, provisions of the Nevada Revised Statutes provide that a person acquiring a controlling interest in an issuing corporation, and those acting in association with such person, obtain only such voting rights in the control shares as are conferred by stockholders (excluding such acquiring and associated persons) holding a majority of the voting power of the issuing corporation. For purposes of these provisions, “issuing corporation” means a corporation organized in Nevada which has 200 or more stockholders of record, at least 100 of whom have addresses in Nevada on the corporation’s stock ledger, and does business in Nevada directly or through an affiliate, and “controlling interest” means the ownership of outstanding voting shares enabling the acquiring person to exercise (either directly or in association with others) one-fifth or more but less than one-third, one-third but less than a majority, or a majority or more of the voting power of the issuing corporation in the election of directors. Accordingly, the provisions could require multiple votes with respect to voting rights in share acquisitions effected in separate stages, and the effect of these provisions may be to discourage, delay or prevent a change in control of our company.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.

PROPERTIES

We do not own any real property. Our corporate headquarters is located in San Diego, California. During 2009 and 2010, we leased approximately 17,100 square feet of office space for our corporate headquarters. In 2011, we renewed this lease agreement, but reduced the size of the leased premises to approximately 5,900 square feet of office space, pursuant to an amended lease agreement that expires in April 2014.

We lease additional commercial properties in China and Korea for our operations and research and development teams. The China facility is approximately 1,600 square feet and the lease term is based on a two year agreement that expires in November 2013. The Korea facility is 900 square feet and the lease term is based on an annual agreement.

Our facilities are covered by insurance and we believe them to be suitable for their respective uses and adequate for our present needs. Our requirements for facilities are not unique, and we believe that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our operations.

 

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ITEM 3.

LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business, including claims of alleged infringement, misuse or misappropriation of intellectual property rights of third parties. As of the date of this report, we are not a party to any such litigation which we believe would have a material adverse effect on us.

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES

Market Information.

Our common stock is quoted on OTC QB Market under the symbol “AXST”. From July 30, 2009 until December 4, 2010 our common stock was quoted on the Over the Counter Bulletin Board. By rule, our stock was removed from the Bulletin Board when no market maker posted a quote for a specified number of trading days. At that time, our stock began trading on the OTC QB Market. The following table sets forth the high and low bid information for our stock for the periods in which our stock was quoted on the OTC Bulletin Board or OTC QB Market.

 

		High				Low
2011
Fourth Quarter		$	0.37			$	0.15
Third Quarter			0.22				0.09
Second Quarter			0.15				0.05
First Quarter			0.10				0.04
2010
Fourth Quarter		$	0.12			$	0.05
Third Quarter			0.15				0.06
Second Quarter			0.12				0.05
First Quarter			0.13				0.08

Quotations for the OTC QB are market quotations, based on calendar quarters, that reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Holders.

As of February 1, 2012, the stockholders list for our common stock showed 1,144 registered stockholders and 23,799,731 shares of common stock issued and outstanding.

Dividends.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain future earnings, if any, to finance the growth and development of our business. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.

Sales of Unregistered Securities.

We did not sell any unregistered shares of our common stock during the year ended December 31, 2011.

Repurchases of Equity Securities.

We did not repurchase any shares of our common stock during the year ended December 31, 2011.

Equity Compensation Plans Information.

The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 2012 annual meeting of stockholders, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2011, and is incorporated in this report by reference.

 

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ITEM 6.

SELECTED FINANCIAL DATA

The following selected financial information has been derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below.

 

		Year Ended December 31, (in thousands, except earnings (loss) per share)
		2011				2010				2009				2008				2007
STATEMENT OF OPERATIONS DATA:
Revenues		$	54,128			$	45,430			$	50,819			$	109,592			$	82,435
Gross margin		$	12,926			$	7,507			$	8,285			$	26,271			$	17,586
Total operating expenses		$	10,301			$	12,625			$	17,092			$	23,065			$	26,327
Operating income (loss)		$	2,625			$	(5,118	)		$	(8,807	)		$	3,206			$	(8,741	)
Net income (loss)		$	1,100			$	(6,311	)		$	(10,131	)		$	1,419			$	(9,024	)
SHARE DATA:
Basic earnings (loss) per share		$	0.05			$	(0.27	)		$	(0.43	)		$	0.06			$	(0.39	)
Diluted earnings (loss) per share		$	0.05			$	(0.27	)		$	(0.43	)		$	0.06			$	(0.39	)
Shares used in basic per share calculation			23,698				23,579				23,352				23,229				22,932
Shares used in diluted per share calculation			23,698				23,579				23,352				23,555				22,932
BALANCE SHEET DATA:
Cash and cash equivalents		$	850			$	77			$	602			$	1,662			$	555
Working capital		$	(11,804	)		$	(13,140	)		$	(7,602	)		$	241			$	(2,899	)
Total assets		$	11,497			$	9,374			$	16,189			$	34,931			$	29,363
Total stockholders’ equity (deficit)		$	(11,631	)		$	(12,764	)		$	(6,622	)		$	2,784			$	1,276

 

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ITEM 7.

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

Forward-Looking Statements

Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described under Item 1A “Risk Factors.” We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. Please see “Special Note Regarding Forward Looking Statements” at the beginning of this report.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this report.

Overview

We develop fixed wireless voice and broadband access solutions for the worldwide telecommunications market. Our product portfolio includes fixed wireless phones, wire-line replacement terminals, and 3G and 4G broadband gateway devices used to access voice calling and high-speed data services.

Our fixed wireless phones and 3G and 4G gateway products have similar functionality to phones and modems that use traditional landline telecommunications networks; however, our products are wireless and can be substituted for wired phones and modems. Our wire-line replacement terminals act as communication devices in homes where conventional handsets and wireless handsets can be plugged into our wireless terminal and serviced on a wireless network, as opposed to connecting to the fixed line provided by the local telephone or cable operator. Our products are based on CDMA (Code Division Multiple Access), GSM (Global System for Mobile Communications), GPRS (General Packet Radio Service), WCDMA (Wideband Code Division Multiple Access), and HSPA (High-Speed Packet Access) technologies.

We develop and manufacture our products with third party engineering and manufacturing suppliers, particularly in China. Our design team works with these manufacturers to develop and customize products to incorporate our design and functional requirements on their baseline designs. We strive to retain intellectual property rights in key areas, while outsourcing commoditized work. We use this approach to reduce research and development expenses, shorten time to market for new products, and leverage supply chains and economies of scale to reduce product costs.

We sell our products to telecommunications operators worldwide. We sell our products into developing countries where large segments of the population do not have telephone or internet service. In those markets, telecommunications operators deploy wireless networks as a more cost effective alternative to traditional wired communications. We also sell into developed countries where telecommunications operators are using wireless networks to augment or supplant existing wire-line infrastructure. Currently, our largest customers are located in the United States, Poland, Scandinavia and Saudi Arabia.

Recent Developments

We spent the last two years transitioning our business to address challenges imposed by the global economic recession and increased competition from large competitors based in China. We undertook a program to

 

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re-design our products to be more price competitive, increase sales in markets that support better margins, and aggressively reduce operating costs. These initiatives began producing results in the second half of 2011, allowing us to achieve record profitability for any six month period in our company history.

Our industry is characterized by price pressure and declining average selling prices year over year. This trend accelerated beginning in 2009. In an effort to reduce our costs of goods and maintain more competitive product pricing, we established an operating subsidiary in China in the beginning of 2010 to manage our supply chain and manufacturing operations. Through that entity, we established relationships with contract manufacturers that assisted us in the development of a re-engineered product line. These redesigned products use the same Axesstel design, interface and functionality as our past products, but are manufactured at substantial discounts to our previous pricing. We began delivering our lower cost products to network operators late in 2010.

We also took steps beginning in 2009 to introduce our products into carriers in the North American market. During 2010 we were approached by Sprint in the United States to design an OEM version of our terminal product that could be sold as part of a “wire-line replacement” strategy. The terminal acts as a communication device in the home where conventional handsets and wireless handsets can be plugged into our wireless terminal, as opposed to connecting to the fixed line provided by the local telephone operator. We are manufacturing the terminal to Sprint’s specifications and the terminal is sold under the Sprint name. We generated our first significant revenues from our wire-line replacement terminals in the second half of 2011, receiving orders and completing sales of $14.4 million. We are currently working with Sprint engineers on the second generation of the terminal product which is expected to be released in 2012.

Revenues for 2011 were $54.1 million, an increase of 19% over the same period last year. The increased revenue was mainly attributable to the launch of our wire-line replacement terminals in North America and a new significant customer in MEA, offset by decreased demand in Latin America and Europe. Revenues by geographic region based on customer locations were as follows:

 

		2011				2010				2009
Revenues
Europe		$	24,309,410			$	30,089,002			$	26,597,687
North America (United States and Canada)			17,966,732				3,533,902				2,992,777
MEA			5,967,203				2,261,086				5,481,360
Latin America			5,691,409				9,244,730				15,520,989
Asia			192,988				301,723				226,080
Total revenues		$	54,127,742			$	45,430,443			$	50,818,893

The launch of our re-engineered products and newly introduced products boosted gross margins. Additionally, gross margin improved as a result of a change in customer mix, as we generated a larger portion of our revenues in North America where we have historically experienced higher sales prices. Gross margin was 24% in 2011 compared to 17% in 2010 and 16% in 2009. Gross margin had also been negatively impacted in 2010 and 2009 by the sale of aged inventory at nominal margins and the write-off of excess and obsolete inventory.

We have continued to aggressively manage operating expenditures. Operating expenses were $10.3 million for 2011 compared to $12.6 million for 2010 and $17.1 million for 2009. These reductions were attributable to the sale of our Korean operations in late 2009 as well as decreased selling expenses as less of our revenue was generated in Latin America where we traditionally paid sales commissions to third party agents.

We have now largely completed our transition, and 2011 marked a return to profitability. Through a combination of the launch of our new line of low-cost products, increased revenues from sales of our wire-line replacement terminals in North America, and tight control over operating expenses, we generated net income of $1.1 million for the year.

 

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At December 31, 2011, we had cash and cash equivalents of $850,000 and negative working capital of $11.8 million. The net income we generated in the second half of 2011 is beginning to improve our capital position. Nonetheless, we do not currently have significant cash reserves or credit facilities available to us. If we were to incur a significant operating loss, we may not generate sufficient capital to fund our operations. In addition, we rely on a combination of open credit terms from our manufacturers and the ability to finance our accounts receivable to minimize our working capital requirements. If our contract manufacturers restrict our credit terms or we are unable to secure financing for our accounts receivables on terms acceptable to us, it would have a significant impact on our ability to fund our operations.

Outlook

In order to achieve profitability under our current business model, we need to reach revenues of approximately $50 to $60 million annually with gross margins in the mid to low twenty percent range.

We believe we have developed a significant base of customers and key products, and will continue to work closely with new and current customers to launch additional products in 2012. Our primary goal for 2012 is to achieve consistent quarterly profitability and year over year revenue growth.

The economic and competitive climate remains challenging and price competition in our markets remains intense. We anticipate continued erosion in the average selling prices for our products in 2012. This will require us to sell more units in order to achieve revenue growth. We are targeting gross margins in the mid to low twenty percent range. Any significant reduction of average selling prices could push gross margins to the low end of that range.

We reduced operating expenses to $10.3 million in 2011 and expect them to remain consistent for 2012 , subject to fluctuating certification and test fees from the launch of new products and variable selling and operating expenses based on revenue levels and customer mix experienced during the year. We expect our restructured operations can support higher revenues, and as we scale our revenues we expect to reduce operating expenses as a percentage of revenue. We also expect to reduce our cost of borrowing in 2012.

Revenues

We sell our products directly and through third party distributors to telecommunications operators worldwide. Revenues are recorded at the prices charged to the telecommunications operator or, in the case of sales to distributors, at the price to the distributor. Our products are sold on a fixed price-per-unit basis. The telecommunications operators resell our products to end users as part of the end users’ service activation.

All of our sales are based on purchase orders or other short-term arrangements. We negotiate the pricing of our products based on the quantity and the length of the time for which deliveries are to be made. For orders involving a significant number of units, or which involve deliveries over a long period of time, we typically receive rolling forecasts or a predetermined quantity for a fixed period of time from our customers, which in turn allows us to forecast internal volume and component requirements for manufacturing. In order to minimize our collection risks, we attempt to sell to our international customers under guaranteed letters of credit or open terms secured by credit insurance. At times, we extend credit based on our evaluation of the customer’s financial condition. In order to minimize foreign exchange risk, we have made all sales to date in United States dollars.

Cost of Goods Sold

Cost of goods sold consists of direct materials, manufacturing expense, freight expense, warranty expense, royalty fees, and the cost of obsolete inventory. The wireless communications industry has been characterized by declining average selling prices, particularly over the past three years. We expect this trend to continue. We actively manage our costs of goods sold through the following initiatives: outsourcing manufacturing to larger contract manufacturers who can achieve economies of scale; increasing our purchasing power through increased volume; using standardized parts across our product lines; contracting with manufacturing partners in low cost regions; engineering our products with new technologies and expertise to decrease the number of components; and increasing reliance on software based applications rather than hardware.

 

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Research and Development

Research and development expenses consist primarily of salaries and related payroll expenses for engineering personnel, facility expenses, employee travel, contract engineering fees, prototype development costs, test fees and depreciation of developmental test equipment for software, mechanical and hardware product development. We expense research and development costs as they are incurred.

We conduct our research and development activities through a combination of internal and external development initiatives. Our third party development agreements generally provide for one of two types of payments. In some agreements we pay a non-recurring engineering fee for the development services against performance of specified milestones. Under these agreements, we expense the non-recurring engineering fee to research and development expense as it is incurred. In other agreements, we pay a royalty to the third party developer in connection with product sales. This may be in addition to, or in lieu of, any non-recurring engineering fee. In these cases, the royalty payments are charged to cost of goods sold in the period in which the revenue from the sale of the product is recognized.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of salaries and related payroll expenses for executive and operational management, finance, human resources, information technology, sales and marketing, program management and administrative personnel. Other costs include facility expenses, employee travel, bank and financing fees, insurance, legal expense, internal and external commissions, collection fees, accounting, consulting and professional service providers, board of director expense, stockholder relations, amortization of intangible assets, depreciation expense of software and other fixed assets, and bad debt expense.

Critical Accounting Policies and Estimates

Management believes that the most critical accounting policies important to understanding our financial statements and financial condition are our policies concerning Revenue Recognition, Accounts Receivable, Inventories, and Warranty Costs.

Revenue Recognition

Our Revenue Recognition policy calls for us to recognize revenue on sales when ownership and title pass to the customer. We generally sell our products either FCA (Free Carrier) shipping port, or DDU (Delivery Duty Unpaid). When we ship FCA shipping port, title and risk of loss pass when product is received by the customer’s freight forwarder. When we ship DDU, title and risk of loss pass when product is received at the customer’s warehouse. Because our sales are characterized by large orders, the timing of when the revenue is recognized may have a significant impact on results of operations.

Accounts Receivable—Allowance for Doubtful Accounts

Under our Accounts Receivable policy, our management exercises judgment in establishing allowances for doubtful accounts based on information collected from individual customers. Several factors make these allowances significant to our financial position. We have traditionally experienced high customer concentration, resulting in large accounts receivable from individual customers. The determination of the credit worthiness of these customers and whether or not an allowance is appropriate could have a significant impact on our results of operations.

Inventories—Provision for Excess and Obsolete

Inventories are stated at the lower of cost (first-in, first-out method) or market. We review the components of our inventory and our inventory purchase commitments on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value or losses on inventory purchase commitments depend on various items, including factors related to customer demand, economic and competitive conditions, and technological advances or new product introductions by us or our customers that vary from our current expectations. The determination of the provision for excess and obsolete inventories requires significant management judgment and can have a significant impact on our results of operations.

 

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Warranty Costs

Our standard terms of sale provide a limited warranty, generally for a period of one to two years from purchase or initialization of the product. We establish a warranty reserve based on management’s estimates of anticipated service and replacement costs over the term of outstanding warranties. Management’s estimates are based on historical warranty experience. However, we frequently introduce new products to the market. In addition, our products are purchased from third party design and manufacturing firms, or are comprised of components acquired from third party suppliers, which are manufactured and assembled to our specifications by contract manufacturers. As a result, we may have limited experience from which to establish an estimate for an applicable warranty reserve for a specific product. Any significant change in warranty expense may have a substantial impact on our results of operations.

Accounting Policies and Estimates

Please see “Note 3—Significant Accounting Policies” to our financial statements for a more complete discussion of the accounting policies we have identified as the most important to an understanding of our current financial condition and results of operations.

The preparation of financial statements in conformity with United States generally accepted accounting principles, or “GAAP,” requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex.

Annual Results of Operations

The following table sets forth, for the periods indicated, the consolidated statements of operations data and the percentages of total revenues.

 

		($ in thousands) Year Ended December 31,
		2011								2010								2009
Revenues		$	54,128				100.0	%		$	45,430				100.0	%		$	50,819				100.0	%
Cost of goods sold			41,202				76.1				37,923				83.5				42,534				83.7
Gross margin			12,926				23.9				7,507				16.5				8,285				16.3
Operating expenses
Research and development			2,288				4.3				2,449				5.4				3,825				7.5
Selling, general and administrative			8,013				14.8				10,176				22.4				13,267				26.1
Total operating expenses			10,301				19.1				12,625				27.8				17,092				33.6
Operating income (loss)			2,625				4.8				(5,118	)			(11.3	)			(8,807	)			(17.3	)
Other income (expense), net			(1,461	)			(2.7	)			(1,181	)			(2.6	)			(1,324	)			(2.6	)
Income (loss) before income taxes			1,164				2.1				(6,299	)			(13.9	)			(10,131	)			(19.9	)
Income tax provision			64				0.1				12				—				—				—
Net income (loss)		$	1,100				2.0	%		$	(6,311	)			(13.9	)%		$	(10,131	)			(19.9	)%

Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

Revenues

For the year ended December 31, 2011, which we refer to as 2011, revenues were $54.1 million compared to $45.4 million for the year ended December 31, 2010, which we refer to as 2010, representing a 19% increase.

 

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Sales grew in our North America region in connection with the roll-out of our wire-line replacement terminals and in our MEA region in connection with our lower cost phones and modems. The gains in these markets were offset by lower sales in Europe, principally due to a decline in the average selling prices for our products, and in Latin America, where we have lost market share due to intense price competition from larger Chinese competitors.

In 2011, our revenues were derived principally from four customers, which together represented 76% of revenues, and individually represented 27%, 20%, 19% and 10% of revenues, respectively. In 2010, our revenues were derived principally from three customers, which together represented 77% of revenues, and individually represented 43%, 17% and 17% of revenues, respectively. Our revenues for 2011 consisted of 42% for voice products and 58% for data products. For 2010, our revenues consisted of 23% for voice products and 77% for data products. The increase in voice products, as a percentage of total revenue, was attributable to the sale of our terminal products in North America in 2011.

Our objective is to increase revenues through maintaining close relationships with our core customers and helping them expand their markets. At the same time, we are actively seeking opportunities where we have the ability to deliver products that address unique customer requirements with the potential to lead to significant sales.

Cost of Goods Sold

For 2011, cost of goods sold was $41.2 million compared to $37.9 million for 2010, an increase of 9%. This increase is mainly attributable to the 19% increase of revenues from the comparative periods partially offset by reductions in the average cost of our products.

Gross Margin

For 2011, gross margin as a percentage of revenues was 24% compared to 17% for 2010. The increased gross margin from the comparative periods was mainly attributable to product mix, the successful roll-out of our low cost gateway products, and the launch of our wire-line replacement units. In addition, gross margin was negatively affected in 2010 as a result of sales of aged inventory at low margins to avoid further obsolescence and as a result of intense price competition. In 2010, we expensed $721,000 of excess and obsolete inventory and aggressively priced certain aged inventory to generate cash and reduce the potential for additional obsolescence.

We do not expect any significant inventory write offs or non-recurring transactions in 2012. We are targeting gross margins from the mid-twenties to the low twenties. However, intense price competition and aggressive new product releases by our competitors could put additional pressure on gross margins.

Research and Development

For 2011, research and development expenses were $2.3 million compared to $2.4 million for 2010, a decrease of 7%. The decrease in expenses for 2011 compared to 2010 was mainly attributable to reduced outside engineering service expense. We incurred $608,000 for outside engineering service expense during 2010 to provide legacy product development support needed after the sale of our Axesstel Korea subsidiary in late 2009. The decrease in 2011 was partially offset by increased salary expense and development fees associated with the completion of our wire-line replacement unit and the launch of the MV600 product line—our 4G gateway device.

We anticipate that 2012 research and development expenses will remain at 2011 levels, with the exception of fluctuating certification and test fees from the launch of new products that we may incur.

Selling, General and Administrative

For 2011, selling, general and administrative expenses were $8.0 million compared to $10.2 million for 2010, a decrease of 21%. This decrease is mainly attributable to decreased bad debt expenses, decreased third party sales commissions, and lower amortization and depreciation cost from the comparative periods.

 

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We expect selling, general and administrative expenses to remain stable in 2012, with the exception of fluctuating selling and operating expenses based on the revenue levels and the customer mix experienced during the year.

Other Income (Expense), net

For 2011, other income (expense) was a net expense of $1.5 million. Substantially all of the expense resulted from interest expense associated with debt and financing activities.

For 2010, other income (expense) was a net expense of $1.2 million. This amount was comprised of interest expense of $1.3 million associated with debt and financing activities, offset by other income of $150,000 from a gain on the sale of a patent.

Provision for Income Taxes

For the year ended December 31, 2011, we recorded an income tax provision of $64,000 for foreign income taxes. Currently, we have established a full reserve against all deferred tax assets.

For the year ended December 31, 2010, we recorded an income tax provision of $12,000 for foreign income taxes.

Net Income (Loss)

For the year ended December 31, 2011, net income was $1.1 million compared to net loss of $6.3 million for the year ended December 31, 2010.

Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009

Revenues

For the year ended December 31, 2010, which we refer to as 2010, revenues were $45.4 million compared to $50.8 million for the year ended December 31, 2009, which we refer to as 2009, representing a 11% decrease. The decrease in revenues is attributable to a decrease in sales in the Latin America region, which went from $15.5 million in 2009 to $9.2 million in 2010. Of this decline, approximately $5.2 million was attributable to business lost within our Puerto Rico market as the network operator in that market was acquired and changed network infrastructure. We attribute the additional decline to the decline in average selling prices for our products as compared to 2009, as well as general economic conditions within our markets in Latin America.

In 2010, our revenues were derived principally from three customers, which together represented 77% of revenues, and individually represented 43%, 17% and 17% of revenues, respectively. In 2009, our revenues were derived principally from three customers, which together represented 58% of revenues, and individually represented 30%, 18% and 10% of revenues, respectively. Our revenues for 2010 consisted of 23% for voice products and 77% for data products. For 2009, our revenues consisted of 29% for voice products and 71% for data products.

Cost of Goods Sold

For 2010, cost of goods sold was $37.9 million compared to $42.5 million for 2009, a decrease of 11%. This decrease in cost of goods sold was attributable to reduced revenues as compared to the prior year.

Gross Margin

For 2010, gross margin as a percentage of revenues was 17% compared to 16% for 2009. Gross margin was impacted in both 2010 and 2009 as a result of competitive pricing pressures, but also because of inventory write-offs and liquidations. We incurred some write-off of excess and obsolete inventory in connection with the

 

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introduction of our re-engineered product lines. In addition, we have aggressively priced certain aged inventory to generate cash and reduce the potential for additional obsolescence.

Research and Development

For 2010, research and development expenses were $2.4 million compared to $3.8 million for 2009, a decrease of 37%.

The decrease is the result of our transition to an outsourced development model for some of our non-strategic development processes that has allowed us to reduce research and development expenses. In the fourth quarter of 2009, we sold our Axesstel Korea subsidiary in order, to lower our investment in research and development for our internally developed products. Axesstel Korea was mainly responsible for the development of our phone based product line, which we have transitioned to Chinese-based engineering partners. In connection with the sale, we terminated our lease obligations for the real estate in Korea and the employment obligations for 37 of our former employees, including severance obligations under Korean law.

Selling, General and Administrative

For 2010, selling, general and administrative expenses were $10.1 million compared to $13.3 million for 2009, a decrease of 24%. This decrease was mainly attributable to reduced wage and decreased bad debt expense. As a percentage of revenue, selling, general and administration expenses decreased to 22% in 2010 from 26% in 2009.

Other Income (Expense), net

For 2010, other income (expense) was a net expense of $1.2 million. This amount was comprised of interest expense of $1.3 million associated from debt and financing activities, offset by other income of $150,000 from a gain on the sale of a patent.

For 2009, other income (expense) was a net expense of $1.3 million. This amount was comprised of interest expense of $1.1 million associated from debt and financing activities, and other expenses of $244,000, mainly associated with the sale of our Axesstel Korea subsidiary.

Provision for Income Taxes

For 2010, we recorded an income tax provision of $12,000 for foreign income taxes. Currently, we have established a full reserve against all deferred tax assets.

For 2009, no income tax provisions were recorded.

Net Loss

For 2010, net loss was $6.3 million compared to net loss of $10.1 million for 2009.

Liquidity and Capital Resources

Liquidity

At December 31, 2011, cash and cash equivalents was $850,000 compared to $77,000 at December 31, 2010. In addition, at December 31, 2011, accounts receivable were $8.9 million, compared to $7.7 million at December 31, 2010. At December 31, 2011, we had negative working capital of $11.8 million compared to negative working capital of $13.1 million at December 31, 2010. At December 31, 2011, we had bank financings of $6.1 million compared to $7.5 million at December 31, 2010.

 

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For the year ended December 31, 2011, we generated $2.3 million of cash from operations which was derived from the cash net income of $1.5 million (net income adjusted for depreciation and amortization expense, stock based compensation, receivable and inventory provisions) and changes in operating assets and liabilities of $761,000. During the year ended December 31, 2011, we consumed $45,000 of cash from investing activities, and as of December 31, 2011, we did not have any significant commitments for capital expenditures. Financing activities used $1.4 million of cash during the year ended December 31, 2011, as cash collected from accounts receivable was used to repay bank financings.

Credit Terms with Manufacturers

We rely on a combination of accounts receivable financing and open credit terms from our manufacturing partners to fund our operating requirements. Generally, we order products from our contract manufacturers only upon receipt of a purchase order from a customer. Often, we can finance our accounts receivable and use the proceeds from that borrowing to pay our manufacturers. However, our contract manufacturers order certain parts with long lead times based on rolling sales forecasts that we provide. If our forecasts are inaccurate and our contract manufacturers do not use the long lead time parts, or if we have a customer notify us of their cancellation or inability to pay for a purchase order, our contract manufacturers have the right, after a specified period of time, to deliver the parts or finished goods inventory to us and demand payment.

We do not have any firm commitment from any of our contract manufacturers to extend open credit terms for any specific period of time. As we have diversified our manufacturing base, new manufacturers have generally required partial or full payments on initial orders before extending substantial credit to us. We expect to rely on credit terms from new contract manufacturers to support our working capital requirements. If our contract manufacturers restrict their credit terms with us, we may need to identify alternative manufacturers or secure additional capital in order to finance the production of our products.

We are currently past due in payments to one of our contract manufacturers. At December 31, 2011 we owed this manufacturer $8.8 million of which $7.2 million was past due under our open credit terms with this manufacturer. We entered into an arrangement with this manufacturer for 2011 in which we agreed to pay for products (along with a premium to bring down the past due amount) within three days of shipment. We complied with this agreement during 2011, but it has now expired. We are continuing to make payments to bring down the amount owed to this manufacturer, but do not have any formal plan or standstill agreement in place. We do not currently expect to place significant orders for products with this manufacturer in 2012.

Bank Financing

We have two bank financing arrangements. We maintain accounts receivable credit facilities that permits us to factor, on a recourse basis, certain credit insured accounts receivable. The factors under these facilities have the discretion to accept or reject any individual account receivable for factoring. The factors advance us 75% to 80% of the amount of the receivable. In some cases, the factors advance us funds upon the receipt of a customer purchase order prior to the product shipment and creation of the receivable. Borrowings for the amounts advanced bear interest ranging from 7% to 28% per annum and are secured by a lien on all of our receivables. At December 31, 2011, we had borrowings of $4.5 million under these facilities. We repay the amounts borrowed under these facilities as the underlying accounts receivable are paid. The lenders have indicated that they will allow us to borrow up to $14.0 million under these facilities, subject to their approval of the underlying account receivable.

In March 2011, we entered into a one year term loan with a commercial bank in China, totaling 10,000,000 Chinese Yuan (equivalent to $1.6 million at December 31, 2011). This loan bears interest based on the People’s Bank of China twelve month adjustable rate, which was 7% per annum at December 31, 2011 and is due and payable on April 1, 2012.

We have approached our existing lenders and others to replace our accounts receivable credit facilities and enter into new facilities with lower borrowing costs. In addition, we are actively seeking to identify a source for term

 

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debt that would augment our working capital and reduce our dependency on the accounts receivable credit facilities. To date, we have received nonbinding indications of interest for providing funding, subject to the continuation of improved operating results. Except as described above, we do not have any other bank financing or credit facilities currently available to us.

Contractual Obligations and Commitments

The following summarizes our contractual obligations at December 31, 2011 and the effect those obligations are expected to have on our liquidity and cash flow in future periods:

 

		Payments Due by Period (in thousands)
Contractual Obligations		Total				Less than 1 year				1 to 3 years				More than 4 years
Short-term bank financings		$	6,100			$	6,100			$	—			$	—
Employment contracts			802				802				—				—
Operating leases (facilities)			287				131				156				—
Total		$	7,189			$	7,033			$	156			$	—

Our short-term bank financings include borrowings under our account receivable credit facilities and under our term loan with the commercial bank in China.

We have entered into employment agreements with our executive management personnel that provide severance payments upon termination without cause. Consequently, if we had released our executive management personnel without cause as of December 31, 2011, the severance expense due would be $802,000, plus payments equal to twelve months of continuing healthcare coverage under COBRA.

Our operating leases relate to our facilities leases. We occupy our corporate headquarters in the United States, comprising approximately 5,900 square feet of office space, pursuant to an amended lease agreement that expires in April 2014. The China facility is approximately 1,600 square feet and the lease term is based on a two year agreement that expires in November 2013. The Korea facility is 900 square feet and the lease term is based on an annual agreement.

Recent Accounting Pronouncements

Please see the sections entitled “Recent Accounting Pronouncements” contained in “Note 3—Significant Accounting Policies” to our financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our investment portfolio is maintained in accordance with our investment policy that defines allowable investments, specifies credit quality standards and limits our credit exposure to any single issuer. The fair value of our cash equivalents is subject to change as a result of changes in market interest rates and investment risk related to the issuers’ creditworthiness. At December 31, 2011, we had $850,000 in cash and cash equivalents, all of which are stated at fair value. Changes in market interest rates would not be expected to have a material impact on the fair value of our cash and cash equivalents at December 31, 2011, as these consisted of securities with maturities of less than three months.

 

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Interest rates for our current bank debt agreements are based at rates ranging from 7% to 28% per annum. We do not utilize financial contracts to manage our exposure in our investment portfolio to changes in interest rates. A one percent increase in the interest rates that we pay under our bank debt would have resulted in additional interest expense of $17,000 for the three-month period ended December 31, 2011.

Foreign Currency Exchange Rate Risk

During the year ended December 31, 2011, the majority of our revenue was generated outside the United States. In addition, most of our products were purchased from manufacturers in China. To mitigate the effects of currency fluctuations on our results of operations, all revenue from our international transactions and all products purchased from our contract manufacturers were denominated in United States dollars.

We maintain operations in China and Korea for which expenses are paid in the Chinese Yuan and Korean Won, respectively. Accordingly, we have currency risk resulting from fluctuations between the Chinese Yuan and the Korean Won and the United States Dollar. At the present time, we do not have any foreign exchange currency contracts to mitigate this risk. Fluctuations in foreign exchange rates could impact future operating results. A one percent improvement in the exchange rate for the Chinese Yuan and the Korean Won versus the United States Dollar would have resulted in additional expense of $6,000 for the three-month period ended December 31, 2011.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The index to our Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm appears in Part III of this Form 10-K.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

There have been no disagreements with our Independent Registered Public Accounting Firm on any matter of accounting principles or financial disclosures.

 

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

Our disclosure controls and procedures are designed to provide reasonable assurances that material information related to our company is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have determined that as of December 31, 2011, our disclosure controls were effective at that “reasonable assurance” level.

Management’s Annual Report on Internal Controls over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to SEC rules pertaining to smaller reporting companies that permit the company to provide only management’s report in this annual report.

 

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Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes In Internal Controls over Financial Reporting.

No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that have materially affected, or is likely to materially affect, our internal control over financial reporting.

 

ITEM 9B.

OTHER INFORMATION

None.

 

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PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Identification of Directors.

The information under the caption “Election of Directors,” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

Identification of Executive Officers.

The information under the caption “Certain Information with Respect to Executive Officers,” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

Compliance with Section 16(a) of the Exchange Act.

The information under the caption “Compliance with Section 16(a) of the Exchange Act,” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

Code of Ethics.

The information under the caption “Code of Ethics” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

Audit Committee.

The information under the caption “Information Regarding the Board and its Standing Committees,” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

 

ITEM 11.

EXECUTIVE COMPENSATION

The information under the heading “Executive Compensation and Other Information” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information under the heading “Certain Relationships and Related Transactions and Director Independence,” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information under the heading “Principal Accountant Fees and Services,” appearing in the Proxy Statement to be filed for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

 

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ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)	1. Index to Consolidated Financial Statements

See Index to Consolidated Financial Statements and financial statement schedules immediately following the signature page to this report on Form 10-K.

 

2. Index to Financial Statement Schedules

The following Financial Statement Schedules for the years ended December 31, 2011, 2010 and 2009 should be read in conjunction with the Consolidated Financial Statements, and related notes thereto.

 

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SCHEDULE II

AXESSTEL, INC.

Valuation and Qualifying Accounts

For the Years Ended December 31, 2011, 2010 and 2009 (in thousands):

 

		Balance At Beginning of Year				Additions Charged to Operations				Deductions From Reserves				Balance At End of Year
Allowance for Doubtful Accounts:
December 31, 2011		$	930			$	(157	)		$	253			$	520
December 31, 2010			1,200				1,261				1,531				930
December 31, 2009			900				1,595				1,295				1,200
Reserve for Excess and Obsolete Inventories:
December 31, 2011			1,300				244				634				910
December 31, 2010			1,750				721				1,171				1,300
December 31, 2009			550				1,550				350				1,750
Warranty Reserve:
December 31, 2011			350				532				246				636
December 31, 2010			375				234				259				350
December 31, 2009			460				223				308				375

Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto.

 

(b)

Exhibits

See exhibit index at the end of this report.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 17, 2012

 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints H. Clark Hickock and Patrick Gray, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant in the capacities and on the dates indicated.

 

Signature		Title		Date
/S/    H. CLARK HICKOCK H. Clark Hickock		Chief Executive Officer and Director (Principal Executive Officer)		February 17, 2012
/S/    PATRICK GRAY		Chief Financial Officer and Director (Principal Financial and Accounting Officer)		February 17, 2012
Patrick Gray
/S/    OSMO A. HAUTANEN		Chairman		February 17, 2012
Osmo A. Hautanen
/S/    MARK D. FRUEHAN		Director		February 17, 2012
Mark Fruehan
/S/    RICHARD M. GOZIA		Director		February 17, 2012
Richard M. Gozia

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Page
Consolidated Financial Statements For The Fiscal Year Ended December 31, 2011
Report of Independent Registered Public Accounting Firm of Gumbiner Savett Inc.			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Operations			F-4
Consolidated Statements of Stockholders’ Equity (Deficit)			F-5
Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements			F-7

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

of Axesstel, Inc.

We have audited the consolidated balance sheets of Axesstel, Inc. (a Nevada corporation) and its wholly owned subsidiary (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years ended December 31, 2011, 2010 and 2009. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts for the years ended December 31, 2011, 2010 and 2009, as listed in the accompanying index under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Axesstel, Inc. and its wholly subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years ended December 31, 2011, 2010 and 2009 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2 to the financial statements, although the Company generated net income in 2011, the Company has historically incurred substantial losses from operations and the Company may not have sufficient working capital or outside financing available to meet its planned operating activities over the next twelve months. Additionally, there is uncertainty as to the impact that the worldwide economic downturn may have on the Company’s operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Gumbiner Savett Inc.

GUMBINER SAVETT INC.

February 15, 2012

Santa Monica, California

 

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AXESSTEL, INC.

CONSOLIDATED BALANCE SHEETS

 

		As of December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	849,510			$	77,099
Accounts receivable, less allowance for doubtful accounts of $520,000 and $930,000 at December 31, 2011 and 2010, respectively			8,900,508				7,716,953
Inventories, net			534,000				1,044,422
Supplier advances			843,076				316,240
Prepayments and other current assets			197,688				219,541
Total current assets			11,324,782				9,374,255
Property and equipment, net			61,578				119,531
Other assets:
Licenses, net			90,000				210,000
Other, net			20,952				46,523
Total other assets			110,952				256,523
Total assets		$	11,497,312			$	9,750,309
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	12,466,142			$	10,792,595
Bank financings			6,100,435				7,487,274
Accrued commissions			474,455				870,000
Accrued royalties			1,424,000				1,311,000
Accrued warranties			636,000				350,000
Other accrued expenses and current liabilities			2,027,482				1,703,516
Total current liabilities			23,128,514				22,514,385
Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.0001 par value; 250,000,000 shares authorized; 23,799,731 and 23,683,482 shares issued and outstanding at December 31, 2011 and 2010, respectively			2,380				2,368
Additional paid-in capital			40,079,137				39,952,249
Accumulated other comprehensive loss			(117,011	)			(23,100	)
Accumulated deficit			(51,595,708	)			(52,695,593	)
Total stockholders’ deficit			(11,631,202	)			(12,764,076	)
Total liabilities and stockholders’ deficit		$	11,497,312			$	9,750,309

The accompanying notes are an integral part of these consolidated financial statements.

 

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AXESSTEL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Year Ended December 31,
		2011				2010				2009
Revenues		$	54,127,742			$	45,430,443			$	50,818,893
Cost of goods sold			41,201,806				37,923,470				42,534,373
Gross margin			12,925,936				7,506,973				8,284,520
Operating expenses
Research and development			2,287,898				2,448,385				3,824,884
Selling, general and administrative			8,013,118				10,176,266				13,267,317
Total operating expenses			10,301,016				12,624,651				17,092,201
Operating income (loss)			2,624,920				(5,117,678	)			(8,807,681	)
Other income (expense)
Interest expense, net			(1,460,930	)			(1,331,464	)			(1,079,822	)
Other, net			0				149,755				(243,961	)
Total other income (expense)			(1,460,930	)			(1,181,709	)			(1,323,783	)
Income (loss) before income tax provision			1,163,990				(6,299,387	)			(10,131,464	)
Income tax provision			64,105				11,947				0
Net income (loss)		$	1,099,885			$	(6,311,334	)		$	(10,131,464	)
Earnings (loss) per share
Basic		$	0.05			$	(0.27	)		$	(0.43	)
Diluted		$	0.05			$	(0.27	)		$	(0.43	)
Weighted average shares outstanding
Basic			23,698,013				23,579,326				23,352,076
Diluted			23,698,013				23,579,326				23,352,076

The accompanying notes are an integral part of these consolidated financial statements.

 

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AXESSTEL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

		Common Stock								Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total Stockholders’ Equity (Deficit)
		Shares				Amount
Balances at December 31, 2008			23,228,982			$	2,323			$	39,344,303			$	(309,445	)		$	(36,252,795	)		$	2,784,386
Stock issued to Board of Directors			227,250				23				43,723				0				0				43,746
Stock-based compensation			0				0				372,000				0				0				372,000
Cumulative translation adjustment			0				0				0				309,445				0				309,445
Net loss			0				0				0				0				(10,131,464	)			(10,131,464	)
Balances at December 31, 2009			23,456,232				2,346				39,760,026				0				(46,384,259	)			(6,621,887	)
Stock issued to Board of Directors			227,250				22				56,223				0				0				56,245
Stock-based compensation			0				0				136,000				0				0				136,000
Cumulative translation adjustment			0				0				0				(23,100	)			0				(23,100	)
Net loss			0				0				0				0				(6,311,334	)			(6,311,334	)
Balances at December 31, 2010			23,683,482				2,368				39,952,249				(23,100	)			(52,695,593	)			(12,764,076	)
Stock issued to Board of Directors			116,249				12				27,888				0				0				27,900
Stock-based compensation			0				0				99,000				0				0				99,000
Cumulative translation adjustment			0				0				0				(93,911	)			0				(93,911	)
Net income			0				0				0				0				1,099,885				1,099,885
Balances at December 31, 2011			23,799,731			$	2,380			$	40,079,137			$	(117,011	)		$	(51,595,708	)		$	(11,631,202	)

The accompanying notes are an integral part of these consolidated financial statements.

 

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AXESSTEL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Year Ended December 31,
		2011				2010				2009
Cash flows from operating activities:
Net income (loss)		$	1,099,885			$	(6,311,334	)		$	(10,131,464	)
Adjustments to reconcile net income (loss) to net cash provided by ( used in) operating activities:
Depreciation and amortization			222,861				676,314				1,276,641
(Gain) loss on sale of assets			0				(150,000	)			276,879
Stock-based compensation			126,900				192,245				415,746
Provision for losses on accounts receivable			(156,700	)			1,260,792				1,595,058
Provision for inventory obsolescence			243,750				721,111				1,550,000
(Increase) decrease in:
Accounts receivable			(1,026,855	)			2,180,547				14,692,914
Inventories			266,672				1,159,855				(3,157,812	)
Supplier advances			(526,836	)			(248,740	)			1,119,825
Prepayments and other current assets			21,853				235,995				309,294
Other assets			25,571				(52,150	)			7,723
Increase (decrease) in:
Accounts payable			1,673,547				(1,836,518	)			(6,694,621	)
Accrued expenses and other liabilities			327,421				(1,462,279	)			(1,735,228	)
Total adjustments			1,198,184				2,677,172				9,656,419
Net cash provided by (used in) operating activities			2,298,069				(3,634,162	)			(475,045	)
Cash flows from investing activities:
Proceeds from sale of assets			0				150,000				250,000
Proceeds from note receivable			0				0				241,976
Acquisition of property and equipment			(44,908	)			(19,701	)			(235,459	)
Net cash provided by (used in) investing activities			(44,908	)			130,299				256,517
Cash flows from financing activities:
Net proceeds (payments) of bank financing			(1,386,839	)			3,001,956				(906,024	)
Net cash provided by (used in) financing activities			(1,386,839	)			3,001,956				(906,024	)
Cumulative translation adjustment			(93,911	)			(23,100	)			64,347
Net increase (decrease) in cash and cash equivalents			772,411				(525,007	)			(1,060,205	)
Cash and cash equivalents at beginning of year			77,099				602,106				1,662,311
Cash and cash equivalents at end of year		$	849,510			$	77,099			$	602,106
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	1,460,930			$	1,327,028			$	989,258
Income tax		$	36,757			$	0			$	0

The accompanying notes are an integral part of these consolidated financial statements.

 

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AXESSTEL, INC.

Notes to Consolidated Financial Statements

December 31, 2011

1. THE COMPANY

Axesstel, Inc. (“we”, “Axesstel” or the “Company”) provides fixed wireless voice and broadband data access products for worldwide telecommunications. Our product portfolio includes fixed wireless phones, wire-line replacement terminals, and 3G and 4G broadband gateway devices used to access voice calling and high-speed data services.

Axesstel was originally formed in July 2000 as a California corporation (“Axesstel California”) and through a reverse merger in August 2002 became Axesstel, Inc., a Nevada corporation.

2. LIQUIDITY AND GOING CONCERN

Although we generated net income of $1.1 million for the year ended December 31, 2011, we have experienced significant net losses to date from operations. At December 31, 2011, we had cash and cash equivalents of $850,000, negative working capital of $11.8 million, and stockholders’ deficit of $11.6 million.

We incurred losses in 2009 and 2010 which reduced our working capital position from $241,000 at December 31, 2008 to a deficit of $11.8 million at December 31, 2011. While we generated net income in the year ended December 31, 2011 and improved our working capital position, because of our limited cash position, any significant reduction in cash flow from operations could have an impact on our ability to fund operations.

Other than cash provided by operations, our primary source of working capital is borrowings which are secured by our accounts receivable. We rely on a combination of financing our accounts receivable and open credit terms from our manufacturing partners to facilitate our working capital requirements.

Our accounts receivable financing arrangements have generally taken one of two forms. For customers that qualify for credit insurance, we can factor their accounts receivable to financial institutions. For other accounts, we generally require the customer or distributor to provide a letter of credit to secure the payment obligation under the purchase order. In those instances, we can immediately discount and sell the letter of credit, generally back to the issuing bank.

We currently maintain accounts receivable credit facilities that permit us to factor, on a limited recourse basis, certain credit insured accounts receivable. The lenders have the discretion to accept or reject any individual account receivable for factoring. For accepted accounts, the lenders advance us 75% to 80% of the amount of the receivable. The amounts advanced bear interest at rates ranging from 7% to 28% per annum and are secured by a lien on all of our receivables. We repay the amounts borrowed under the facilities as the underlying accounts receivable are paid. At December 31, 2011, we had borrowings of $4.5 million under these credit facilities. The lenders have indicated that they will allow us to borrow up to $14.0 million under these facilities, subject to their approval of the underlying account receivable.

In March 2011, we entered into a one year term loan with a commercial bank in China, totaling 10,000,000 Chinese Yuan (equivalent to $1.6 million at December 31, 2011). This loan bears interest based on the People’s Bank of China twelve month adjustable rate, which was 7% per annum at December 31, 2011.

 

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In addition to credit facilities, we have relied on open credit terms with our manufacturing partners to fund our operating requirements. We are currently past due in payments to one of our contract manufacturers. At December 31, 2011, we owed this manufacturer $8.8 million of which $7.2 million was past due under our open credit terms with this manufacturer. We entered into an arrangement with this manufacturer for 2011 in which we agreed to pay for products (along with a premium to bring down the past due amount) within three days of shipment. We complied with this agreement during 2011, but it has now expired. We are continuing to make payments to bring down the amount owed to this manufacturer, but do not have any formal plan or standstill agreement in place. We do not currently expect to place significant orders for products with this manufacturer in 2012. A change in open credit terms from this contract manufacturer, or any change in credit terms from our other contract manufacturers, could disrupt our ability to accept and fulfill purchase orders and negatively impact our results of operations.

We are also working with contract manufacturers where we do not have a substantial payment history. These manufacturers currently require payment of some portion of the purchase price upon order, with the balance due on open credit terms or upon shipment. In some instances we are using purchase order financing to provide the capital for these orders. We are evaluating additional manufacturing and financing arrangements to increase our available working capital and to allow us to grow our business without the sale of additional debt or equity securities.

If we can grow our business and secure products from our contract manufacturers in sufficient quantities, we believe that we will be able to generate cash from operations and will be able to secure accounts receivable and other financing to provide sufficient cash to finance our operations. However, if we fail to generate sufficient product sales, we will not generate sufficient cash to cover our operating expenses. If needed, we intend to secure additional working capital through the sale of debt or equity securities. No arrangements or commitments for any such financing are in place at this time, and we cannot give any assurances about the availability or terms of any future financing.

Because of our historic net losses and negative working capital position, our independent auditors, in their report on our financial statements for the year ended December 31, 2011, expressed substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.

3. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the assets, liabilities and operating results of Axesstel and its wholly-owned subsidiaries Axesstel Shanghai, LTD. and Axesstel Korea, Inc. We sold all of our ownership interest in Axesstel Korea, Inc. in a transaction that was completed on November 15, 2009 (See Note #16). All significant intercompany accounts and transactions have been eliminated in consolidation.

Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

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Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. We maintain cash and cash equivalents with various commercial banks. These bank accounts are generally guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times, cash balances at any single bank may be in excess of the FDIC insurance limit. The deposits are made with reputable financial institutions and we do not anticipate realizing any losses from these deposits.

Accounts Receivable

We extend credit based on an evaluation of a customer’s financial condition and payment history. Obligations from our foreign customers are typically secured either by letters of credit or credit insurance. Significant management judgment is required to determine the allowance for doubtful accounts. Management determines the adequacy of the allowance based on information collected from individual customers. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. At December 31, 2011 and 2010, the allowance for doubtful accounts was $520,000 and $930,000, respectively.

Inventories

Inventories are stated at the lower of cost (first in, first out method), based on actual cost charged by the supplier, or market. We review the components of inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. At December 31, 2011 and 2010, the reserve for excess and obsolete inventory was $910,000 and $1.3 million, respectively.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, as follows:

 

Machinery and equipment		3 to 7 years
Office furniture and equipment		3 to 7 years
Software		3 years
Leasehold improvements		Life of lease, or useful life if shorter

Licenses

Licenses include the cost of two non-exclusive worldwide software technology licenses which allow us to manufacture both fixed wireless and certain mobile CDMA, WCDMA, and HSPA based products and to sell and/or distribute them worldwide, and the cost of one license that provides software technology that allows us to incorporate VoIP applications into certain of our products. The licenses have no fixed termination date. License costs are amortized on a straight-line basis over the estimated economic lives of the licenses, which management has estimated range from two to ten years.

Patents and Trademarks

Patents and trademarks are recorded at cost. Amortization is provided using the straight-line method over the estimated useful lives of the assets, which is estimated at approximately four years.

Impairment of Long-Lived Assets

We account for the impairment of long-lived assets, such as fixed assets, licenses, patents and trademarks, under the provisions of Financial Accounting Standards Board Accounting Standards Codification, (“FASB ASC”) 360, “Property, Plant, and Equipment” which establishes the accounting for impairment of long-lived tangible and intangible assets other than goodwill and for the disposal of a business. Pursuant to FASB ASC 360,

 

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we review for impairment when facts or circumstances indicate that the carrying value of long-lived assets to be held and used may not be recoverable. If such facts or circumstances are determined to exist, an estimate of the undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on various valuation techniques, including a discounted value of estimated future cash flows. We report impairment cost as a charge to operations at the time it is identified.

FASB ASC 350-30, “General Intangibles Other Than Goodwill”, requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. FASB ASC 350-30 requires other indefinite-lived assets to be tested for impairment at least on an annual basis and more often under certain circumstances, and written down by a charge to operations when impaired. An interim impairment test is required if an event occurs or conditions change that would indicate that the carrying value of the assets may not be recoverable.

During the years ended December 31, 2011 and 2010, we determined that there was no impairment to long-lived assets.

Fair Value of Financial Instruments

We measure our financial assets and liabilities in accordance with the requirements of FASB ASC 825 “Financial Instruments”. The carrying values of our accounts receivable, accounts payable, bank financing, accrued expenses, and other liabilities approximate fair value due to the short-term maturities of these instruments.

Revenue Recognition

Revenues from product sales are recognized when the risks of ownership and title pass to the customer, as specified in (1) the respective sales agreements and (2) other revenue recognition criteria as prescribed by Staff Accounting Bulletin (“SAB”) No. 101 (SAB 101), “Revenue Recognition in Financial Statements,” as amended by SAB No. 104. We generally sell our products either FCA (Free Carrier) shipping port, or DDU (Delivery Duty Unpaid). When we ship FCA shipping port, title and risk of loss pass when product is received by the customer’s freight forwarder. When we ship DDU, title and risk of loss pass when product is received at the customer’s warehouse. If and when defective products are returned, we normally exchange them or provide a credit to the customer. The returned products are shipped back to the supplier and we are issued a credit or exchange from the supplier. At December 31, 2011 and 2010, there was no allowance for sales returns.

Warranty Costs

All products are inspected for quality prior to shipment and we have historically experienced a minimal level of defective units.

Our standard terms of sale provide a limited warranty, generally for a period of one to two years from date of purchase or initialization of the product. We establish warranty reserves based on management’s estimates of anticipated service and replacement costs over the term of outstanding warranties for any given period.

On some orders we provide warranty replacement units equal to one or two percent of the total units ordered. We may provide these units in addition to or in lieu of our limited warranty. If replacement units are provided in addition to our limited warranty, then our warranty covers claims in excess of the warranty replacement units. The costs related to these warranty replacement units are included in cost of goods sold at the time that the revenue for the shipment is recognized.

In some countries we contract with third parties in the region to operate service centers providing after-market and warranty support to our customers. The costs that we incur related to these service centers are recorded to cost of goods sold when revenue is recognized.

 

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During the years ended December 31, 2011, 2010 and 2009, warranty costs amounted to $532,000, $234,000, and $223,000, respectively. At December 31, 2011 and 2010, we established a warranty reserve of $636,000 and $350,000, respectively, to cover service costs over the remaining lives of the warranties.

Research and Development

Costs incurred in research and development activities are expensed as incurred.

Stock-Based Compensation

Compensation Costs

Results of operations for the years ended December 31, 2011, 2010 and 2009 include stock-based compensation costs of $127,000, $192,000, and $416,000, respectively. Following is a summary of stock-based compensation costs by income statement classification:

 

		Years ended December 31,
		2011				2010				2009
Research and development		$	13,000			$	16,000			$	96,000
Selling, general and administrative			114,000				176,000				320,000
Total			127,000				192,000				416,000
Tax effect on share-based compensation			0				0				0
Net effect on net income (loss)		$	127,000			$	192,000			$	416,000
Effect on earnings per share:
Basic		$	0.01			$	0.01			$	0.02
Diluted		$	0.01			$	0.01			$	0.02

Valuation of Stock Option Awards

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. All options granted have a maximum term of ten years. As permitted by SAB 107, due to our insufficient history of option activity, we utilized the “simplified approach” to estimate the options’ expected term, which represents the period of time that options granted are expected to be outstanding. Expected volatilities are based on historical volatility of our stock. We estimated the forfeiture rate based on historical data for forfeitures and we recognize compensation costs only for those equity awards expected to vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. We have never declared or paid dividends and have no plans to do so in the foreseeable future.

The following weighted-average assumptions were utilized for the calculations during each period:

 

		Years ended December 31,
		2011				2010				2009
Expected life (in years)			6.0				6.0				6.0
Weighted average volatility			100	%			100	%			98	%
Forfeiture rate			0	%			0	%			0	%
Weighted average risk-free interest rate			1.49	%			2.65	%			1.89	%
Expected dividend yield			0	%			0	%			0	%

 

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Stock Option Exchange Program

On May 12, 2010, the compensation committee of our board of directors approved a one-time stock option exchange program (the “Exchange Program”) with respect to options that had been issued under various option plans. Under the Exchange Program, our current employees were offered the opportunity to exchange certain outstanding options to purchase common stock for a lesser number of new options (as determined in accordance with the exchange ratios below).

Eligible options under the Exchange Program consisted of grants held by existing employees with exercise prices of $0.28 or higher. Eligible options were exchanged for new options on the basis of two, three, or four eligible options for each new option granted. The new options were issued at an exercise price of $0.08 per share, the closing price on the exchange date of May 12, 2010.

In establishing the exchange ratios, our compensation committee considered the value of the eligible options being surrendered versus the value of the new options. At these exchange ratios, the value of the eligible options surrendered exceeds the value of the new options being granted on the exchange date. These valuations are based on a Black Scholes model of the weighted average exercise price for the eligible options within a given exercise range versus the value of the new options. The Black Scholes calculation was conducted using an estimated term of 5 or 6 years, annualized volatility of 100%, no anticipated dividend yield and a risk free rate of 2.29%.

The following table summarizes the eligible options that were exchanged under the Exchange Program:

 

Prior exercise price		Exchanged Options				Exchange Ratio				New Options
$0.28 - $0.99			602,500				2 : 1				301,250
$1.00 - $1.99			415,000				3 : 1				138,333
$2.00 and above			510,000				4 : 1				127,500
Total			1,527,500								567,083

Valuation of Stock Grants

The fair value of stock grants is based on the market price at the date the grants were issued. The expense related to the grants is recognized over the vesting period.

Income Taxes

We account for income taxes in accordance with FASB ASC 740 “Income Taxes”. Under FASB ASC 740, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial statement reported amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. The provision for income taxes represents the tax expense for the period, if any, and the change during the period in deferred tax assets and liabilities.

FASB ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. Under FASB ASC 740, the impact of an uncertain tax position on the income tax return may only be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. At December 31, 2011, 2010 and 2009, we have no unrecognized tax benefits.

Earnings (loss) per Share

We utilize FASB ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares

 

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outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional common shares available upon exercise of stock options and warrants using the treasury stock method, except for periods for which no common share equivalents are included because their effect would be anti-dilutive. For the years ended December 31, 2011, 2010 and 2009, 3,907,557, 3,450,558 and 3,776,945 potentially dilutive shares, respectively, are excluded from the computation because they are anti-dilutive.

 

		Years Ended December 31,
		2011				2010				2009
Numerator:
Net income (loss) attributable to common stockholders		$	1,099,885			$	(6,311,334	)		$	(10,131,464	)
Denominator:
Basic earnings per share—weighted average shares			23,698,013				23,579,326				23,352,076
Effect of dilutive securities:
Stock options and warrants			0				0				0
Diluted earnings per share—adjusted weighted average shares			23,698,013				23,579,326				23,352,076
Basic earnings (loss) per share		$	0.05			$	(0.27	)		$	(0.43	)
Diluted earnings (loss) per share		$	0.05			$	(0.27	)		$	(0.43	)

Foreign Currency Exchange Gains and Losses

Our reporting currency is the U.S. dollar. The functional currency of our foreign subsidiary is the Chinese Yuan. During 2009, the functional currency of our foreign subsidiary was the Korean Won. Our subsidiary’s assets and liabilities are translated into United States dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the weighted average rate of exchange prevailing during the period. The resulting cumulative translation adjustments are disclosed as a component of cumulative other comprehensive income (loss) in stockholders’ equity (deficit). Foreign currency transaction gains and losses are recorded in the statements of operations as a component of other income (expense).

Comprehensive Income

FASB ASC 220, “Comprehensive Income” establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from transactions and other events and circumstances from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Comprehensive income is as follows:

 

		Years Ended December 31,
		2011				2010				2009
Net income (loss)		$	1,099,885			$	(6,311,334	)		$	(10,131,464	)
Other comprehensive income (loss):
Foreign currency translation adjustment			(93,911	)			(23,100	)			309,445
Comprehensive income (loss)		$	1,005,974			$	(6,334,434	)		$	(9,822,019	)

Certain Risks and Concentrations

We extend credit based on an evaluation of a customer’s financial condition and payment history. Obligations from our foreign customers and distributors are typically secured either by letters of credit or by credit insurance.

 

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Significant management judgment is required to determine the allowances for sales returns and doubtful accounts.

Our products include components subject to rapid technological change. Significant technological change could adversely affect our operating results and subject us to product obsolescence. Under our supply agreements with our contract manufacturers we generally do not take product into inventory. We typically order product only when we have received a binding purchase order from a customer. Our contract manufacturers then manufacture the product, which is shipped directly to the customer. However, our contract manufacturers order certain parts with long lead times based on rolling sales forecasts that we provide. In the event that our forecasts are incorrect and our contract manufacturers do not use the long lead time parts, or if we have a customer notify us of their cancellation or inability to pay for a purchase order, our contract manufacturers have the right, after a specified period of time, to deliver the raw material or finished goods inventory to us and demand payment. To the extent that the products have become obsolete, we may not be able to use the raw materials or to sell the finished goods inventory at prices sufficient to cover our costs or at all.

During 2011, 76% of our revenues were from four customers, comprised of 27%, 20%, 19% and 10%. Those customers were located in The United States, Poland, Scandinavia, and Saudi Arabia, respectively. At December 31, 2011, the amounts due from such customers were $2.5 million, $3.6 million, $828,000, and $963,000, respectively, which were included in accounts receivable.

During 2010, 77% of our revenues were from three customers, comprised of 43%, 17% and 17%. Those customers were located in Poland, Venezuela, and Scandinavia, respectively. At December 31, 2010, the amounts due from such customers were $6.5 million, zero, and $360,000, respectively, which were included in accounts receivable.

During 2009, 58% of our revenues were from three customers, comprised of 30%, 18% and 10%. Those customers were located in Poland, Venezuela, and Puerto Rico, respectively. At December 31, 2009, the amounts due from such customers were $3.2 million, zero, and zero, respectively, which were included in accounts receivable.

As of December 31, 2011, we maintained inventory of $494,000 in China. In addition, the majority of our $8.9 million of accounts receivable at December 31, 2011 are with customers in foreign countries. If any of these countries become politically or economically unstable, then our operations could be disrupted.

Shipping and handling expenses

We record all shipping and handling billings to a customer as revenue earned in accordance with FASB ASC 605-45-45-19, “Shipping and Handling Fees and Costs”. We include shipping and handling expenses in cost of goods sold. Shipping and handling fees amounted to $1.4 million, $1.4 million, and $1.3 million for the years ended December 31, 2011, 2010, and 2009, respectively.

Reclassifications

Certain reclassifications have been made to the 2010 and 2009 financial statements to conform to the 2011 presentation.

Recent Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on our financial statements.

 

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4. INVENTORIES

Inventories consisted of the following:

 

		December 31, 2011				December 31, 2010
Raw materials		$	68,566			$	18,084
Finished goods			1,375,434				2,326,338
			1,444,000				2,344,422
Less reserves for excess and obsolete inventories			(910,000	)			(1,300,000	)
		$	534,000			$	1,044,422

5. PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consisted of the following:

 

		December 31, 2011				December 31, 2010
Prepaid taxes		$	24,810			$	0
Prepaid insurance			99,885				127,738
Other			72,993				91,803
		$	197,688			$	219,541

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

 

		December 31, 2011				December 31, 2010
Machinery and equipment		$	317,923			$	317,923
Office furniture and equipment			249,004				473,686
Software			2,948,714				2,916,002
Leasehold improvements			0				30,085
			3,515,641				3,737,696
Accumulated depreciation and amortization			(3,454,063	)			(3,618,165	)
		$	61,578			$	119,531

7. LICENSES

We have entered into Subscriber Unit License Agreements pursuant to which we obtained non-exclusive licenses of CDMA (Code Division Multiple Access) and WCDMA (Wideband Code Division Multiple Access) technologies, which have enabled us to manufacture and sell certain fixed wireless products and to purchase certain components and equipment from time to time. The license fees capitalized under these agreements were $3,500,000. We have additionally entered into a License Agreement which has enabled us to incorporate VoIP (Voice over Internet Protocol) applications into certain products. The license fee capitalized under this agreement was $40,000.

 

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All of our licenses have no fixed termination dates and we have assigned estimated lives ranging from two to ten years. The licenses consisted of the following:

 

		December 31, 2011				December 31, 2010
Licenses		$	3,540,000			$	3,540,000
Accumulated amortization			(3,450,000	)			(3,330,000	)
		$	90,000			$	210,000

Amortization expense related to these licenses amounted to $120,000, $385,000, and $610,000 for the years ended December 31, 2011, 2010, and 2009, respectively. Estimated amortization expense for 2012 is $90,000.

8. OTHER ASSETS

Other assets consisted of the following:

 

		December 31, 2011				December 31, 2010
Deposits		$	20,952			$	46,523
Patents and trademarks, net			0				0
		$	20,952			$	46,523

9. BANK FINANCINGS

As of December 31, 2011 and December 31, 2010, we had outstanding loans of $6.1 million and $7.5 million, respectively. We currently have two active types of bank financing arrangements—accounts receivable financings and a term loan. In addition, we entered into a short-term loan agreement to purchase inventory during the second quarter of 2011 which has since been repaid.

Our principal credit arrangements provide factoring for certain credit insured accounts receivable and are collateralized by all of our accounts receivable. The factors, in their sole discretion, determine whether or not they will accept each receivable based upon the credit risk of each individual receivable or account. Once a receivable is approved, we sell the receivable to these factors on a limited recourse basis. The factors advance us 75% to 80% of the amount of the receivable. In some cases, the factors advance us funds upon the receipt of a customer purchase order prior to the product shipment and creation of the receivable. The factors charge us interest at rates ranging from 7% to 28% per annum on the amount advanced and withhold the interest from the final payment to us on collection. In the event of a commercial dispute on the receivable, the factors have the right to demand that we repurchase the receivable and refund any advances to these factors. During the year ended December 31, 2011, the factors purchased $28.1 million of gross receivables. Since the factors acquire the receivables with recourse, we record the gross receivables and record a liability to the factors for funds advanced to us from these factors. At December 31, 2011, accounts receivable included $5.7 million of gross factored receivables of which $4.5 million was owed to the factors and recorded as bank financings.

In March 2011, we entered into a one year term loan with a commercial bank in China, totaling 10,000,000 Chinese Yuan (equivalent to $1.6 million at December 31, 2011). This loan bears interest based on the People’s Bank of China twelve month adjustable rate, which was 7% per annum at December 31, 2011.

In May 2011, we entered into a loan transaction whereby we borrowed $804,000 to purchase inventory under a special auction process. This inventory was purchased and subsequently used in the production of our products. The loan agreement had a 40 day repayment term with a fixed interest payment of $100,000. This loan was repaid in June 2011.

 

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10. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

Other accrued expenses and current liabilities consisted of the following:

 

		December 31, 2011				December 31, 2010
Customer advances		$	149,860			$	335,348
Accrued payroll, taxes and benefits			991,011				270,980
Accrued foreign sales tax			282,400				557,000
Accrued income taxes			65,201				0
Accrued interest			66,660				123,223
Accrued legal and professional fees			100,000				100,000
Accrued operating expenses			372,350				316,965
		$	2,027,482			$	1,703,516

11. INCOME TAXES

The following table presents the current and deferred income tax provision (benefit) for federal, state and foreign income taxes:

 

		2011				2010				2009
Current tax provision:
Federal		$	0			$	0			$	0
State			0				0				0
Foreign			64,105				11,947				0
			64,105				11,947				0
Deferred tax provision (benefit):
Federal			230,000				(2,806,000	)			(3,796,000	)
State			98,000				(303,000	)			(750,000	)
Valuation allowance			(328,000	)			3,109,000				4,546,000
			0				0				0
Income tax provision :		$	64,105			$	11,947			$	0

Current tax provisions are based upon each year’s income taxable for federal and state reporting purposes. Deferred tax provisions (benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes.

Deferred tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income.

Our policy is not to record deferred income taxes on the undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations.

 

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Significant components of our net deferred tax asset or liability at December 31, 2011 and 2010 are as follows:

 

		2011				2010
Net operating loss		$	19,516,000			$	19,203,000
Compensation			178,000				260,000
Legal reserve			20,000				20,000
Accrued warranty			253,000				140,000
Inventory			362,000				518,000
Bad debt reserve			207,000				370,000
Accumulated depreciation			718,000				674,000
Capital loss			986,000				995,000
SFAS 123R			128,000				623,000
Contributions			0				0
State tax			0				0
Credits			767,000				660,000
Total gross deferred tax assets			23,135,000				23,463,000
Valuation allowance			(23,135,000	)			(23,463,000	)
Net deferred tax assets		$	0			$	0

In assessing the realizability of deferred tax assets at December 31, 2011 and 2010, management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. Based on our analysis, we concluded not to retain a deferred tax asset since it is uncertain whether we can utilize this asset in future periods. Therefore, we have established a full reserve against this asset. The valuation allowance was $23,135,000 and $23,463,000 for the years ended December 31, 2011 and 2010.

A reconciliation of the expected tax computed at the U.S. statutory federal income tax rate to the total benefit for income taxes at December 31, 2011, 2010 and 2009 follows:

 

		2011				2010				2009
Expected tax at 34%		$	373,961			$	(2,145,854	)		$	(3,444,698	)
Change in valuation allowance			(328,000	)			3,109,000				4,546,000
Deferred true ups, not benefited			60,000				(728,000	)			0
State income tax, net of federal tax			86,628				(207,612	)			(491,192	)
Non-deductible expenses			19,917				27,989				129,427
Foreign income differential			(79,731	)			2,579				23,696
Research credits			(67,783	)			(44,613	)			0
Capital loss			0				0				(764,100	)
Other			(887	)			(1,542	)			867
Provision (benefit) for income taxes		$	64,105			$	11,947			$	0

At December 31, 2011, we had federal and state net operating loss carryforwards of approximately $53,226,000 and $24,315,000, respectively. The federal and state loss carryforwards begin to expire in 2023 and 2015 respectively, unless previously utilized. We also had federal and state research credit carryforwards of $412,000 and $537,000, respectively. The federal research credit carryforwards will begin expiring in 2024, unless previously utilized. The state research credit will carry forward indefinitely.

 

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At December 31, 2011, we had federal and state capital loss carryforwards of $2,475,000 and $2,475,000, respectively. The capital loss carryforwards will expire in 2014 unless previously utilized.

Pursuant to Internal Revenue Code Section 382, the use of our net operating loss carryforwards will be limited if a cumulative change in ownership of more than 50% has occurred within a three-year period.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2011 and 2010, we have no accrued interest and penalties related to uncertain tax positions.

We are subject to taxation in the U.S., California, Korea and China. Our tax years for 2007 and forward are subject to examination by our tax authorities. We are not currently under examination by any tax authority.

12. STOCKHOLDERS’ DEFICIT

Common Stock - 2011 Activity

During the year ended December 31, 2011, we granted 116,249 shares of our common stock to our non-employee directors as part of their annual compensation package. The fair value of these grants was $0.24 per share based on the market price at the date the grants were issued. These stock grants vest monthly over a period of twelve months.

Common Stock - 2010 Activity

During the year ended December 31, 2010, we granted 227,250 shares of our common stock to our non-employee directors as part of their annual compensation package. The fair value of these grants was $0.11 per share based on the market price at the date the grants were issued. These stock grants vested monthly over a period of twelve months.

Common Stock - 2009 Activity

During the year ended December 31, 2009, we granted 227,250 shares of our common stock to our non-employee directors as part of their annual compensation package. The fair value of these grants was $0.33 per share based on the market price at the date the grants were issued. These stock grants vested monthly over a period of twelve months.

Stock Option Activity

Prior to the adoption of the 2004 Equity Plan, we adopted three stock option plans which were approved by the Board of Directors, reserving a total of 2,893,842 shares, which are referred to as the Prior Plans. The Prior Plans were adopted on September 16, 2002 (911,671 shares), March 5, 2003 (982,171 shares) and September 29, 2003 (1,000,000 shares), of which options to purchase 2,857,000 shares of common stock had been granted under these plans. Each of these plans provided for the issuance of non-statutory stock options to employees, directors and consultants, with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. All options granted under the Prior Plans vested quarterly over three years. As of September 2004, no additional options may be granted under the Prior Plans. Options with respect to 521,167 shares are outstanding under the Prior Plans as of December 31, 2011.

In September 2004, the Board of Directors adopted the 2004 Equity Incentive Plan (the “2004 Equity Plan”). The stockholders approved the plan in October 2004 with an effective date for such approval in November 2004. Under the 2004 Equity Plan, we had initially reserved for issuance an aggregate of 4,093,842 shares. The Company’s Prior Plans are no longer available for new grants, and the initial share reserve under the 2004 Equity Plan will adjust downward to the extent that shares are issued upon exercise of options under the

 

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Prior Plans. Subject to a maximum of 11,593,842 shares that can be subject to the 2004 Equity Plan in the aggregate, the number of shares subject to the 2004 Equity Plan will increase each year by the least of:

 

•

three percent of the then outstanding shares;

 

•

750,000 shares; or

 

•

a number of shares determined by the Board.

Awards under the 2004 Equity Plan may be granted to any of our employees, directors or consultants or those of our affiliates. Awards may consist of stock options (both incentive stock options and non-statutory stock options), stock awards, stock appreciation rights, and cash awards. We granted to certain of our employees and directors options to purchase 975,000 shares of common stock under the plan in 2011, 980,000 in 2010, and 958,000 in 2009.

On May 12, 2010, the compensation committee of our board of directors approved a one-time stock option exchange program (the “Exchange Program”) with respect to options that have been issued under various option plans. Under the Exchange Program, our current employees were offered the opportunity to exchange certain outstanding options to purchase common stock for a lesser number of new options. Under this program, employees exchanged 1,527,500 of previously issued stock options for 567,083 of newly issued stock options at an exercise price of $.08 per share, the closing price on the exchange date of May 12, 2010. These newly issued options vest quarterly over a period ranging from one to three years.

As of December 31, 2011, we have 3,320,416 outstanding options under the 2004 Equity Plan.

A summary of our stock option activity and related information is as follows:

 

		2011								2010								2009
Option Summary		Options				Weighted Average Exercise Price ($)				Options				Weighted Average Exercise Price ($)				Options				Weighted Average Exercise Price ($)
Outstanding-beginning of year			3,251,250				0.64				3,622,637				1.40				2,786,557				1.77
Granted			975,000				0.17				1,547,083				0.09				958,000				0.29
Exercised			0				0.00				0				0.00				0				0.00
Forfeited/Expired/Exchanged			(384,667	)			0.19				(1,918,470	)			1.66				(121,920	)			1.05
Outstanding-end of year			3,841,583				0.56				3,251,250				0.64				3,622,637				1.40

The weighted-average grant-date fair value of options granted during the year ended December 31, 2011, was $0.13.

The following table summarizes the number of option shares, the weighted average exercise price, and weighted average life (by years) by price range for both total outstanding options and total exercisable options as of December 31, 2011.

 

		Total Outstanding												Total Exercisable
Price Range		# of Options				Weighted Average Exercise Price ($)				Life				# of Options				Weighted Average Exercise Price ($)
$0.08 to $0.99			3,269,916				0.20				8.0				1,863,041				0.24
$1.00 to $1.99			10,000				1.44				4.7				10,000				1.44
$2.00 to $2.99			461,667				2.49				2.2				461,667				2.49
$3.00 to $3.41			100,000				3.41				3.5				100,000				3.41
			3,841,583				0.56				7.2				2,434,708				0.80

 

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The intrinsic value of exercisable options at December 31, 2011 was $193,000.

A summary of the status of the Company’s nonvested options as of December 31, 2011, and changes during the year ended December 31, 2011, is presented below:

 

Nonvested Options		Options				Weighted-Average Grant-Date Fair Value ($)
Nonvested at January 1, 2011			1,650,937				0.10
Granted			975,000				0.17
Vested			(1,025,561	)			0.10
Forfeited/Expired/Exchanged			(193,501	)			0.09
Nonvested at December 31, 2011			1,406,875				0.15

As of December 31, 2011, there was $162,000 of total unrecognized compensation cost related to nonvested option-based compensation arrangements granted under the 2004 Equity Plan. That cost is expected to be recognized over a weighted-average period of 1.5 years. The recognized compensation cost for the year ended December 31, 2011 was $99,000.

Stock Warrant Activity

We did not issue any warrants in 2011, 2010 or 2009. A summary of our warrant activity and related information is as follows:

 

		2011								2010								2009
Warrant Summary		Warrants				Wt Average Exercise Price ($)				Warrant				Wt Average Exercise Price ($)				Warrants				Wt Average Exercise Price ($)
Outstanding-beginning of year			199,308				2.38				199,308				2.38				259,275				2.56
Granted			0				0.00				0				0.00				0				0.00
Exercised			0				0.00				0				0.00				0				0.00
Forfeited/Expired			(133,334	)			3.53				0				0.00				(59,967	)			3.16
Outstanding-end of year			65,974				0.07				199,308				2.38				199,308				2.38

The intrinsic value of exercisable warrants at December 31, 2011 was $16,000 and have an expiration date of May 1, 2012.

13. SEGMENT INFORMATION

We operate and track our results in one operating segment, wireless access products. We track revenues and assets by geographic region and by product line, but do not manage operations by region.

Revenues by geographic region based on customer locations for the years ended December 31, 2011, 2010 and 2009 were as follows:

 

		2011				2010				2009
Revenues
Europe		$	24,309,410			$	30,089,002			$	26,597,687
North America (United States and Canada)			17,966,732				3,533,902				2,992,777
MEA			5,967,203				2,261,086				5,481,360
Latin America			5,691,409				9,244,730				15,520,989
Asia			192,988				301,723				226,080
Total revenues		$	54,127,742			$	45,430,443			$	50,818,893

 

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Our data product line consists of 3G and 4G broadband modems and gateway devices. Our voice product line consists of fixed wireless phones and wire-line replacement terminals. Revenues by product line for the years ended December 31, 2011, 2010 and 2009 were as follows:

 

		2011				2010				2009
Revenues
Data Products		$	31,211,632			$	34,943,777			$	36,050,824
Voice Products			22,916,110				10,486,666				14,768,069
Total revenues		$	54,127,742			$	45,430,443			$	50,818,893

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

The summary quarterly financial data for 2011 and 2010 consists of the following:

 

		1st Quarter				2nd Quarter				3rd Quarter				4th Quarter
2011
Revenues		$	12,637,030			$	7,539,886			$	17,061,864			$	16,888,962
Gross margin			2,547,087				1,866,908				4,174,318				4,337,623
Net income (loss)			(538,753	)			(687,264	)			1,306,633				1,019,269
Basic earnings ( loss) per share		$	(0.02	)		$	(0.03	)		$	0.06			$	0.04
Diluted earnings (loss) per share		$	(0.02	)		$	(0.03	)		$	0.05			$	0.04
2010
Revenues		$	15,476,489			$	11,201,874			$	9,079,429			$	9,672,651
Gross margin			2,591,043				2,047,651				1,619,062				1,249,217
Net loss			(1,407,079	)			(1,360,139	)			(1,124,505	)			(2,419,611	)
Basic loss per share		$	(0.06	)		$	(0.06	)		$	(0.05	)		$	(0.10	)
Diluted loss per share		$	(0.06	)		$	(0.06	)		$	(0.05	)		$	(0.10	)

15. COMMITMENTS AND CONTINGENCIES

Operating Leases

During 2009 and 2010 we leased approximately 17,100 square feet of office space for our corporate headquarters and United States operations. The premise is located at 6815 Flanders Drive, San Diego, California. In 2011 we renewed this lease agreement, but reduced the size of the leased premises to approximately 5,900 square feet of office space, pursuant to an amended lease agreement that expires in April 2014. The average basic monthly rent of the renewed lease agreement is approximately $8,000.

We lease additional commercial properties in China and Korea for our operations and research and development teams. The China facility is approximately 1,600 square feet and the lease term is based on a two year agreement that expires in November 2013. The Korea facility is 900 square feet and the lease term is based on an annual agreement. The average basic monthly rent is approximately $3,000 during the lease periods for both of these two facilities.

Minimum annual lease payments are as follows:

 

Year Ending December 31,		Total Amount
2012		$	131,000
2013			123,000
2014			33,000
		$	287,000

 

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Rent expense is charged ratably over the lives of the leases using the straight line method. In addition to long-term facility leases, we incur additional rent expense for equipment and other short-term operating leases. Rent expense incurred for short-term and long-term obligations for each of the years ended December 31, 2011, 2010 and 2009 amounted to $158,000, $456,000, and $639,000, respectively.

Employment and Separation Agreements

We have entered into employment agreements with our executive management personnel that provide severance payments upon termination without cause. Consequently, if we had released our executive management personnel without cause as of December 31, 2011, the severance expense due would be $802,000, plus payments equal to twelve month’s of continuing healthcare coverage under COBRA.

Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business, including claims of alleged infringement, misuse or misappropriation of intellectual property rights of third parties. At December 31, 2011, we were not a party to any such litigation which management believes would have a material adverse effect on our financial position or results of operations.

16. SALE OF AXESSTEL KOREA

Effective November 15, 2009, we sold our Axesstel Korea subsidiary to Gtelcomm Co. Ltd., a Korean corporation. The transaction was structured as a stock sale, in which we transferred all of the issued and outstanding shares of Axesstel Korea to Gtelcomm. The sale price was $500,000, with $250,000 paid in 2009. The remaining $250,000 has not been paid, and we have engaged counsel in Korea to bring an action against Gtelcomm for payment of that installment. Pending resolution of that action we had established a full reserve against the final $250,000 payment in 2010. The net book value of the assets held by Axesstel Korea was $777,000 at the time of sale. The corresponding net loss resulting from the sale of Axesstel Korea was recorded to other income (expense) in our 2009 consolidated statement of operations outlined as follows:

 

Prepayments and other current assets		$	18,000
Property and Equipment, net			443,000
Other Assets, net			71,000
Realized translation loss			245,000
Total Book Value			777,000
Less Selling Price			(500,000	)
Loss on Sale		$	277,000

 

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EXHIBIT INDEX

 

Exhibit No.		Document Description
3.1		Articles of Incorporation of the registrant, as amended (incorporated by reference to exhibits to registrant’s Form 10-QSB for the period ending July 1, 2005, filed on August 15, 2005)
3.2		Amended and Restated Bylaws of the registrant (incorporated by reference to exhibits to registrant’s Form 10-QSB for the period ending July 1, 2005, filed on August 15, 2005)
4.1		Specimen Common Stock Certificate (incorporated by reference to exhibits to registrant’s Form SB-2 filed on February 4, 2005)
4.2		Form of Warrant Agreement to Mike H.P. Kwon and Satori Yukie (incorporated by reference to exhibits to registrant’s Form SB-2/A filed on October 29, 2004)
10.1		Centerpark Plaza Office Lease with Mullrock Umbrella, LLC, dated May 28, 2004 (incorporated by reference to exhibits to registrant’s Form 10-QSB for the period ending June 30, 2004 filed on August 16, 2004)
10.2		First Amendment to Office Lease dated June 2, 2005 between the registrant and R&D Portfolio Holdings LLC (incorporated by reference to exhibits to registrant’s Form 10-QSB for the period ending July 1, 2005, filed on August 15, 2005)
10.3		Second Amendment to Lease dated January 24, 2011 between the registrant and IPERS Centerpark Plaza I&H, Inc. (incorporated by reference to exhibits to registrant’s Form 10-K for the year ended December 31, 2010 filed on March 29, 2011).
10.4		Form of Indemnity Agreement for directors and executive officers of the registrant (incorporated by reference to exhibits to registrant’s Form SB-2/A filed on October 29, 2004)
10.5		Employment Agreement with Clark Hickock dated March 13, 2008* (incorporated by reference to exhibits to registrant’s Form 8-K filed on March 17, 2008)
10.6		Letter Agreement with Patrick Gray dated February 11, 2004* (incorporated by reference to exhibits to registrant’s Form 10-QSB/A for the period ending March 31, 2004, filed on September 7, 2004)
10.7		Employment Agreement with Stephen Sek dated October 20, 2006* (incorporated by reference to exhibits to registrant’s Form 8-K filed on October 26, 2006)
10.8		Severance Compensation Agreement dated February 26, 2010 between the registrant and Patrick Gray* (incorporated by reference to exhibits to registrant’s Form 8-K filed on February 28, 2010).
10.9		Severance Compensation Agreement dated February 26, 2010 between the registrant and Stephen Sek* (incorporated by reference to exhibits to registrant’s Form 8-K filed on February 28, 2010).
10.10		Form Notice of Grant of Stock Option (September 2002, March 2003 and September 2003 Option Pools)* (incorporated by reference to exhibits to registrant’s Form SB-2/A filed on October 29, 2004)
10.11		Form Stock Option Agreement (September 2002, March 2003 and September 2003 Option Pools)* (incorporated by reference to exhibits to registrant’s Form SB-2/A filed on October 29, 2004)
10.12		2004 Equity Incentive Plan* (incorporated by reference to exhibits to registrant’s Form SB-2/A filed on October 29, 2004)
10.13		Form of Stock Option Agreement (2004 Equity Incentive Plan)* (incorporated by reference to exhibits to registrant’s Form 8-K filed on January 12, 2005)
10.14		Form of Stock Award Agreement (2004 Equity Incentive Plan)* (incorporated by reference to exhibits to registrant’s Form 8-K filed on January 12, 2005)
10.15		Subscriber Unit License Agreement between Axesstel California and Qualcomm Incorporated dated November 14, 2000, as amended+ (incorporated by reference to exhibits to registrant’s Form 10-KSB/A for the period ending December 31, 2003, filed on August 16, 2004)

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Exhibit No.		Document Description
10.16		Component Supply Agreement between QUALCOMM CDMA Technologies Asia-Pacific PTE LTD. and Axesstel-California, dated February 28, 2001, as amended+ (incorporated by reference to exhibits to registrant’s Form SB-2 filed on February 4, 2005)
10.17		Translation of Working Capital Loan Contract between Axesstel (Shanghai) Ltd. and Bank of Communications Company Ltd. dated March 31, 2011 (incorporated by reference to exhibits to registrant’s Form 10-Q for the period ending March 31, 2011, filed on May 12, 2011)
21.1		Subsidiaries of the registrant
23.1		Consent of Gumbiner Savett Inc.
24.1		Power of Attorney (included on signature page)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1		Press release issued on February 16, 2012 reporting financial results for the quarter and year ended December 31, 2011 (incorporated by reference to exhibits to registrant’s Form 8-K filed on February 16, 2012).
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Management contract, or compensatory plan or arrangement.

+	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission and are marked by an asterisk.