AXESSTEL INC - FORM 10-Q

AXESSTEL INC - FORM 10-Q - May 14, 2013

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EX-31.2 - EX-31.2 - AXESSTEL INC	d500666dex312.htm
EX-10.1 - EX-10.1 - AXESSTEL INC	d500666dex101.htm
EX-31.1 - EX-31.1 - AXESSTEL INC	d500666dex311.htm
EXCEL - IDEA: XBRL DOCUMENT - AXESSTEL INC	Financial_Report.xls
EX-32.1 - EX-32.1 - AXESSTEL INC	d500666dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

¨	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 or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6815 Flanders Drive, Suite 210 San Diego, California		92121
(Address of principal executive offices)		(Zip Code)

(858) 625-2100

(Issuer’s telephone number, including area code)

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 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 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. (Check one):

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:


Class		Outstanding at May 10, 2013
Common Stock, $0.0001 per share		24,455,698 shares

Axesstel, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2013

TABLE OF CONTENTS


		Page

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS			ii

PART I—FINANCIAL INFORMATION			1

Item 1.	FINANCIAL STATEMENTS		1

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		20

Item 4.	CONTROLS AND PROCEDURES		20

PART II—OTHER INFORMATION			21

Item 1.	LEGAL PROCEEDINGS		21

Item 1A.	RISK FACTORS		21

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		22

Item 3.	DEFAULTS UPON SENIOR SECURITIES		22

Item 4.	MINE SAFETY DISCLOSURES		22

Item 5.	OTHER INFORMATION		22

Item 6.	EXHIBITS		22

SIGNATURES			23

EXHIBIT INDEX			24

-i-

EXPLANATORY NOTE

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 subsidiary, Axesstel Shanghai, Ltd.

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,” “targets,” or “projects,” or the negative or other variation 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:

•

our expectations concerning the activities of our competitors or the entry of new competitors in the market;

•

anticipated developments or trends in technology relating to the wireless communications industry;

•

our anticipated future operating expenses;

•

our ability to obtain future financing or funds when needed;

•

the anticipated timing of new product releases;

•

continuing market acceptance for our existing products and anticipated acceptance for new products;

•

the expected receipt or timing of customer orders;

•

expectations concerning our ability to secure new customers;

•

the anticipated efficacy of efforts to protect our intellectual property rights;

•

the timing or anticipated benefits of any acquisitions, business combinations, strategic partnerships, or divestures; and

•

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 caution should be taken not to place undue reliance on any such 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 and in our 2012 Annual Report on Form 10-K, as well as in other reports and documents we file with the SEC.

-ii-

PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS.

Axesstel, Inc.

Condensed Consolidated Balance Sheets


	March 31, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,179,035		$	1,875,487
Accounts receivable, less allowance for doubtful accounts of $820,000 and $620,000 at March 31, 2013 and December 31, 2012, respectively		21,911,627			15,198,752
Inventories, net		230,414			330,000
Prepayments and other current assets		510,953			460,726

Total current assets		24,832,029			17,864,965

Property and equipment, net		202,138			225,021
Other assets, net		411,264			74,076

Total assets	$	25,445,431		$	18,164,062

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	12,449,689		$	10,203,148
Note payable-current, net of discount		2,180,000			1,850,000
Bank financings-current		8,013,823			3,477,007
Accrued commissions		692,000			633,000
Accrued royalties		1,318,000			1,389,000
Accrued warranties		390,000			350,000
Other accrued expenses and current liabilities		1,857,325			2,127,013

Total current liabilities		26,900,837			20,029,168

Long-term liabilities:
Note payable-long term, net of discount		3,118,000			5,096,000
Bank financings-long term		1,826,000			0

Total long-term liabilities		4,944,000			5,096,000

Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.0001 par value; 250,000,000 shares authorized; 24,455,698 and 24,145,355 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		2,445			2,414
Additional paid-in capital		40,950,449			40,458,483
Accumulated other comprehensive loss		(154,719	)		(140,596	)
Accumulated deficit		(47,197,581	)		(47,281,407	)

Total stockholders’ deficit		(6,399,406	)		(6,961,106	)

Total liabilities and stockholders’ deficit	$	25,445,431		$	18,164,062

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

Axesstel, Inc.

Condensed Consolidated Statements of Operations

(unaudited)


	Three Months Ended
	March 31, 2013			March 31, 2012
Revenues	$	10,124,432		$	12,032,001
Cost of goods sold		7,157,613			8,855,130

Gross margin		2,966,819			3,176,871

Operating expenses
Research and development		696,559			576,059
Sales and marketing		659,112			737,725
General and administrative		1,311,797			1,002,168

Total operating expenses		2,667,468			2,315,952

Operating income		299,351			860,919

Interest expense, net		211,525			363,651

Income before income tax provision		87,826			497,268
Income tax provision		4,000			25,000

Net income	$	83,826		$	472,268

Earnings per share
Basic	$	0.00		$	0.02

Diluted	$	0.00		$	0.02

Weighted average shares outstanding
Basic		24,197,079			23,799,731
Diluted		27,264,797			25,597,976

Comprehensive income
Net income	$	83,826		$	472,268
Foreign currency translation adjustment		(14,122	)		(17,136	)

Comprehensive income	$	69,704		$	455,132

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

Axesstel, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Three Months Ended
	March 31, 2013			March 31, 2012
Cash flows from operating activities:
Net income	$	83,826		$	472,268

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		32,030			38,104
Stock-based compensation		85,547			28,000
Provision (recoveries) for losses on accounts receivable		200,000			(48,000	)
Note payable discount amortization		109,000			0
(Increase) decrease in:
Accounts receivable		(6,912,875	)		(688,193	)
Inventories		99,586			379,000
Other assets		11,223			(93,923	)
Increase (decrease) in:
Accounts payable		2,246,541			290,516
Accrued expenses and other liabilities		(241,688	)		152,455

Total adjustments		(4,370,636	)		57,959

Net cash provided by (used in) operating activities		(4,286,810	)		530,227

Cash flows from investing activities:
Acquisition of property and equipment		(1,335	)		(16,702	)

Net cash used in investing activities		(1,335	)		(16,702	)

Cash flows from financing activities:
Repayments of note payable		(1,757,000	)		0
Net proceeds of bank financing		6,362,816			595,104

Net cash provided by financing activities		4,605,816			595,104

Cumulative translation adjustment		(14,123	)		(17,136	)

Net increase in cash and cash equivalents		303,548			1,091,493
Cash and cash equivalents at beginning of year		1,875,487			849,510

Cash and cash equivalents at end of period	$	2,179,035		$	1,941,003


Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	45,787		$	147,911
Income tax	$	36,514		$	31,865

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

AXESSTEL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Axesstel, Inc., a Nevada corporation, and its wholly-owned subsidiary (“Axesstel,” “us,” “our,” “we,” or the “Company”), have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, these financial statements reflect all normal recurring and other adjustments necessary for a fair presentation, and to make the financial statements not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.

2. LIQUIDITY

At March 31, 2013, we had cash and cash equivalents of $2.2 million, negative working capital of $2.1 million, and stockholders’ deficit of $6.4 million.

At March 31, 2013, we had a note payable with a face value of $5.8 million and a discounted value of $5.3 million. The note obligates us to make payments of $50,000 each month. In addition, we are required to make a payment on or before March 31 each year equal to 50% of the prior year’s net income less $600,000. See Note 7.

We currently have three bank credit facilities. In April 2012, 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 March 31, 2013). In September 2012, we entered into a one year $7.0 million working capital based credit facility with Silicon Valley Bank (“SVB”). In March 2013, we entered into a three year $2.3 million term loan with SVB. See Note 8.

In addition to credit facilities, we rely on open credit terms with our manufacturing partners to fund our working capital requirements. We rely on those open credit terms to support our working capital requirements and reduce our borrowing costs. 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.

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 financings are in place at this time, and we cannot give any assurances about the availability or terms of any future financing.

3. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the assets, liabilities and operating results of Axesstel and its wholly-owned subsidiary. 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.

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. 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 sometimes 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 March 31, 2013 and December 31, 2012, the allowance for doubtful accounts was $820,000 and $620,000, respectively.

Inventories

Inventories are stated at the lower of cost (first in, first out method), based on the 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 March 31, 2013 and December 31, 2012, the reserve for excess and obsolete inventory was $292,000.

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 non-exclusive software technology licenses which allow us to manufacture, sell and/or distribute certain products worldwide. 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 one to ten years.

We have entered into Subscriber Unit License Agreements pursuant to which we obtained non-exclusive licenses of CDMA (Code Division Multiple Access), WCDMA (Wideband Code Division Multiple Access) and OFDMA (Orthogonal Frequency Division Multiple Access Technology) 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 $3,525,000. We have additionally entered into other License Agreements which have enabled us to incorporate customized applications into certain products. The license fees capitalized under these agreements were $102,500.

The licenses consisted of the following:


	March 31, 2013			December 31, 2012
Licenses	$	3,627,500		$	3,627,500
Accumulated amortization		(3,582,188	)		(3,574,376	)

	$	45,312		$	53,124

Amortization expense related to these licenses amounted to $8,000 and $31,000 for the three months ended March 31, 2013 and 2012, respectively. Estimated future amortization expense related to licenses at March 31, 2013 is as follows:


	Amount
2013	$	44,274
2014		1,038

Total	$	45,312

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. At March 31, 2013 and December 31, 2012, patent and trademark cost of $729,000 has been fully amortized.

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, 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 the 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 three months ended March 31, 2013 and 2012, 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, note payable (current portion), bank financing (current portion), accrued expenses, and other current liabilities approximate fair value due to the short-term maturities of these instruments. The carrying value of our note payable (long term portion) and bank financings (long term portion) approximate fair value as the interest rate used to discount the note approximates current market rates.

Revenue Recognition

Revenue from product sales is recognized when the risks of loss 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, “Revenue Recognition”.

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 to the customer when the product is received by the customer’s freight forwarder. When we ship DDU, title and risk of loss pass to the customer when the 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 March 31, 2013 and December 31, 2012, 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.

In some countries we contract with third parties 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.

During the three months ended March 31, 2013 and 2012, warranty costs amounted to $40,000 and $84,000, respectively. At March 31, 2013 and December 31, 2012, we established a warranty reserve of $390,000 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 include stock-based compensation costs. The following is a summary of stock-based compensation costs, by income statement classification:


	Three Months Ended
	March 31, 2013		March 31, 2012
Research and development	$	17,299	$	4,000
Sales and marketing		13,000		9,000
General and administrative		55,248		15,000

Total		85,547		28,000
Tax effect on share-based compensation		0		0

Net effect on net income	$	85,547	$	28,000

Effect on earnings per share:
Basic	$	0.00	$	0.00
Diluted	$	0.00	$	0.00

Valuation of Stock Option Awards

We have one stock option plan under which stock options are granted to our employees and directors. 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 and vest over one to three years. During the three months ended March 31, 2013 and 2012 we did not grant any stock options.

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. During the three months ended March 31, 2013, we issued 310,343 shares of our common stock to our executive employees as part of their annual compensation package. During the three months ended March 31, 2012 we did not issue any stock grants.

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 March 31, 2013 and 2012 we have no unrecognized tax benefits.

Earnings per Share

We utilize FASB ASC 260, “Earnings per Share.” Basic earnings per share is computed by dividing earnings attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include additional common share equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share price for each period using the treasury stock method, excluding any common share equivalents if their effect would be anti-dilutive. For the three months ended March 31, 2013 and 2012, 561,667 and 596,667 potentially dilutive securities are excluded from the computation because they are anti-dilutive.


	Three Months Ended
	March 31, 2013		March 31, 2012
Numerator for basic and diluted earnings per share:
Net income	$	83,826	$	472,268

Denominator:
Weighted average basic common shares outstanding		24,197,079		23,799,731
Assumed conversion of dilutive securities:
Stock options		3,067,718		1,798,245

Diluted earnings per share—adjusted weighted average shares		27,264,797		25,597,976

Basic earnings per share	$	0.00	$	0.02

Diluted earnings per share	$	0.00	$	0.02

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. 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’ 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.

Certain Risks and Concentrations

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 and payment history. In order to minimize foreign exchange risk, we have made all sales to date in United States dollars. Significant management judgment is required to determine the allowances for sales returns and doubtful accounts.

Our products include components that are subject to rapid technological change. Significant technological change could adversely affect our operating results and subject us to the risk of rapid 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 the three months ended March 31, 2013, 97% of our revenues were from four customers, comprised of 43%, 24%, 16% and 14%. Those customers were located in Poland, South Africa, the United States and South Africa, respectively. At March 31, 2013, the amounts due from such customers were $4.6 million, $2.5 million, $903,000 and $1.4 million, respectively, which were included in accounts receivable.

During the three months ended March 31, 2012, 88% of our revenues were from four customers, comprised of 34%, 21%, 20% and 13%. Those customers were located in Poland, Scandinavia, the United States and the United States, respectively. At March 31, 2012, the amounts due from such customers were $5.0 million, $1.3 million, $2.4 million and zero, respectively, which were included in accounts receivable.

As of March 31, 2013, we maintained inventory of $230,000 in China. In addition, a significant portion of our $21.9 million of accounts receivable at March 31, 2013 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 $582,000 and $209,000 for the three months ended March 31, 2013 and March 31, 2012, respectively.

Reclassifications

Certain reclassifications have been made to the 2012 financial statements to conform to the 2013 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.

4. INVENTORIES

Inventories consisted of the following:


	March 31, 2013			December 31, 2012
Raw materials	$	216,134		$	0
Finished goods		306,280			622,000

		522,414			622,000
Less reserves for excess and obsolete inventories		(292,000	)		(292,000	)

	$	230,414		$	330,000

5. PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consisted of the following:


	March 31, 2013		December 31, 2012
Prepaid insurance	$	123,799	$	143,751
Prepaid taxes		18,792		18,792
Other		368,362		298,183

	$	510,953	$	460,726

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	March 31, 2013			December 31, 2012
Machinery and equipment	$	326,311		$	326,311
Office furniture and equipment		302,100			300,800
Software		3,111,811			3,111,776

		3,740,222			3,738,887
Accumulated depreciation and amortization		(3,538,084	)		(3,513,866	)

	$	202,138		$	225,021

7. NOTE PAYABLE

On September 7, 2012, we entered into a Payment Confirmation Agreement with Wistron Neweb Corporation (“WNC”), which settled all disputes with WNC arising out of our prior manufacturing relationship, including restructure of an $8.2 million account payable which was past due. In connection with the Payment Confirmation Agreement we paid WNC $458,000 in cash and issued WNC a Promissory Note (“Note”) with a face value of $7.7 million and a discounted value of $6.9 million. The Note obligates us to make payments of $50,000 each month. In addition, we are required to make a payment on or before March 31 each year equal to 50% of the prior year’s net income less $600,000. In the event we were to become delinquent on payments, the Note would become payable on demand. The Note does not accrue interest and has no prepayment penalty. Since the Note does not accrue interest, we have computed imputed interest on the Note over an estimated repayment term of approximately three years and recorded a corresponding discount of $791,000. The interest rate used to calculate the imputed interest is 6.25%.

The balance on this Note consisted of the following:


	March 31, 2013			December 31, 2012
Note payable—face value	$	5,807,000		$	7,564,000
Less: unamortized imputed interest		(509,000	)		(618,000	)

Note payable, net of discount		5,298,000			6,946,000
Less: current portion		(2,180,000	)		(1,850,000	)

Noncurrent portion	$	3,118,000		$	5,096,000

Estimated future maturities of the Note payable at March 31, 2013, including current portion, are as follows:


2013	$	210,000
2014		2,283,000
2015		2,805,000

Note payable, net of discount	$	5,298,000

8. BANK FINANCINGS

As of March 31, 2013 and December 31, 2012, we had outstanding loans of $9.8 million and $3.5 million, respectively. We currently have two active types of bank financing arrangements—accounts receivable financings and term loans.

In September 2012, we entered into a one year $7.0 million credit facility with Silicon Valley Bank (“SVB”). The facility is a working capital based revolving line of credit where SVB, in its discretion, will make advances in an amount up to 80% of the value of (i) eligible accounts receivable and (ii) eligible purchase orders for inventory in transit to a customer. For each account receivable or purchase order financed, we pay interest based on SVB’s prime rate, plus a specified margin, multiplied by the face amount of the eligible account receivable or purchase order. For eligible accounts receivable, the specified margin is 1.0% and for eligible purchase orders the margin is 1.4%. However, if our EBITDA for any trailing six month period falls below $1.0 million, the specified margins increase to 3.0% and 3.2%, respectively. On March 28, 2013, we entered into an amendment to the credit facility that reduced the specified margin for eligible accounts receivable to 0.75% (down from 1.00%) and if our EBITDA for any trailing six month period falls below $1.0 million, the specified margin for eligible accounts receivable increases to 2.50% (down from 3.00%). At March 31, 2013, we had borrowings of $6.0 million under this credit facility and the effective interest rate on the borrowed funds was 6% per annum.

In April 2012, 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 March 31, 2013). This loan bore interest based on the People’s Bank of China twelve month adjustable rate, which was 7% per annum at March 31, 2013. This loan was repaid in April 2013 and we entered into a new working capital loan with the same commercial bank in China on the same basic terms as the previous loan. The term of the new loan expires on April 8, 2014.

In March 2013, we entered into a three year term loan with SVB, totaling $2.3 million, with monthly payments of interest only during the first six months, and equal monthly payments of interest and principal, amortizing the principal over the remaining 30 months of the loan. Interest on the term loan accrues at 6.00% per annum. In addition, we are required to make a one-time final payment of $45,000 at the time the loan is repaid. At March 31, 2013, we had borrowings of $2.3 million under this facility.

9. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

Other accrued expenses and current liabilities consisted of the following:


	March 31, 2013		December 31, 2012
Customer advances	$	32,840	$	32,840
Accrued payroll, taxes and benefits		1,201,850		1,391,761
Accrued foreign sales tax		157,400		182,400
Accrued income taxes		13,439		45,953
Accrued interest		59,298		2,560
Accrued legal and professional fees		87,500		100,000
Accrued license fees		25,000		25,000
Accrued operating expenses		279,998		346,499

	$	1,857,325	$	2,127,013

10. 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 were as follows:


	Three Months Ended
	March 31, 2013		March 31, 2012
Revenues
Europe	$	4,318,780	$	6,650,010
MEA		4,011,500		929,000
North America (United States and Canada)		1,640,752		3,950,976
Latin America		153,400		367,600
Asia		0		134,415

Total revenues	$	10,124,432	$	12,032,001

Our product lines consist of broadband gateway devices, security alert systems, wireline replacement terminals and phones. Revenues by product line were as follows:


	Three Months Ended
	March 31, 2013		March 31, 2012
Revenues
Broadband gateways	$	4,318,780	$	9,020,529
Security alert systems		4,011,500		0
Wireline replacement terminals		1,640,752		2,643,512
Phones		153,400		367,960

Total revenues	$	10,124,432	$	12,032,001

11. COMMITMENTS AND CONTINGENCIES

Operating Leases

Our corporate headquarters and U.S. operations are located at 6815 Flanders Drive, San Diego, California, where we lease approximately 5,900 square feet of office space. The lease agreement provides for average base monthly rent of approximately $8,000 and expires in April 2014.

We lease additional commercial properties in China and Korea for our operations and research and development teams. The China facilities are comprised of two locations totaling 2,600 square feet and have lease agreements that expire in November 2013 and January 2014. The Korea facility is 1,600 square feet and the lease term expires in July 2013. The average basic monthly rent is approximately $6,000 during the lease periods for these three facilities.

Future estimated lease payments at March 31, 2013 are as follows:


Year Ending December 31,	Total Amount
2013	$	111,000
2014		33,000

	$	144,000

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 the three months ended March 31, 2013 and 2012 amounted to $62,000, and $37,000, 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 at March 31, 2013, the severance expense due would have been $1.1 million, plus any pro-rated bonuses earned, plus payments equal to twelve months 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 March 31, 2013, 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.

Item 2.

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”. 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 provide wireless voice, broadband access and connected home solutions for the worldwide telecommunications market. Our product portfolio includes phones, wireline replacement terminals, 3G and 4G broadband gateway devices, and security alert systems used to access voice calling, high-speed data and connected home management services.

Our wireless phones, 3G and 4G gateway devices, and security alert systems have similar functionality to phones, modems and alarm systems that use traditional wireline telecommunications and cable networks; however, our products are wireless and can be substituted for wired devices. 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, principally based in China. Our internal 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. In developing countries where large segments of the population do not have telephone or internet service, telecommunications operators deploy wireless networks as a more cost effective alternative to traditional wired communications. In developed countries telecommunications operators are using wireless networks to augment or supplant existing wire-line infrastructure. Currently, our largest customers are located in Poland, South Africa and the United States.

Recent Developments

We experienced mixed results in the first quarter of 2013, with some revenue and cash flow challenges, but also some positive trends with respect to our new Home Alert product line, gross margin percentage, and working capital. Our business is subject to volatility quarter to quarter, based on the timing of large customer orders and the impact of new product releases. Those factors impacted the first quarter, but underlying the top-line results, we made significant progress on a number of key initiatives during the quarter.

Challenges for the first quarter included:

•

Revenue of $10.1 million

•

No orders for gateway products from our largest customer in Europe

•

No orders for wireline replacement terminals from our largest customer in North America

•

Delays in account receivable collection as a result of delayed collection from a customer in Europe and minor testing and warranty issues in MEA

Despite these setbacks, highlights for the first quarter included:

•

Strong sales of our Home Alert product line to new customers in the MEA region

•

Gross margins of 29% due to strong margins on the Home Alert product line

•

Net income of $84,000 on lower than expected revenue

•

New $2.3 million term loan from Silicon Valley Bank

•

Improvement in working capital by $95,000

Revenues were $10.1 million for the first quarter of 2013, down from $12.0 million in the first quarter of last year. The decline in revenues resulted primarily from slower sales of our top-selling gateway product, which were $4.3 million in the first quarter of 2013, down from $9.0 million in the prior year. In Europe, our most significant customer in Scandinavia did not place orders during the first quarter as it worked though accumulated inventory. The customer plans to conduct a marketing campaign to bolster demand for its wireless broadband service and our gateway devices during the second quarter, and we expect to receive additional orders either late in the second quarter or in the third quarter. We are also bringing our new dual mode gateway device to market in Europe. That device supports both GSM and CDMA technologies and is designed for use on the edge of network coverage, allowing wireless carriers with rural coverage areas to expand their addressable market. Customers in Scandinavia and Poland conducted homologation and testing on the new dual mode gateway during the first quarter. We have completed testing with one customer and expect testing for the second customer to be completed in the second quarter with orders following shortly thereafter. Based on discussions with these customers, we expect overall sales for our gateway products to pick up again in the late second or early third quarter.

Sales of our wireline replacement terminals were also down from the prior year. Terminal sales were $1.6 million for the quarter, down from $2.6 million in the prior year. Sprint was our principal customer for terminals in North America in 2012. We did not receive any orders for terminals from Sprint during the first quarter of 2013, as it bought its requirements from another vendor. We did have strong sales of terminals to regional wireless carriers. Our regional customers in North America purchased $1.6 million of terminals during the first quarter of 2013, compared to $553,000 for all of 2012. We are completing development of the second generation of our wireline replacement terminal, which is targeted for the North American market. We are continuing to work with Sprint and other national vendors in North America to be a second source for their wireline replacement terminal opportunities. Finally, we are developing an upgraded wireline replacement terminal product which integrates our Home Alert product features. This product is scheduled to launch in the second half of 2013.

Offsetting the lower gateway and terminal sales were strong numbers from the launch of our new Axesstel Home Alert product line. We sold $4.0 million of our new security alert devices in the first quarter of 2013, primarily to new customers in the MEA region. In the first two quarters following its release, we have sold $7.5 million of our alert devices to five new customers in Africa. As these customers initiate their marketing campaigns and sell through initial inventories, we expect to receive follow-on orders. We are also receiving interest from other carriers in that region. Wireless carriers in North America are conducting homologation and testing of our alert devices for launch later in 2013, and we are continuing to receive interest in the product line from carriers in other markets as well. We have multiple product releases scheduled for our Axesstel Home Alert product line throughout 2013 that are targeted to address the requirements of specific geographic regions or customers.

Overall, revenues in the first quarter of 2013 by geographic region based on customer locations were as follows:


	Three Months Ended
	March 31, 2013		March 31, 2012
Revenues
Europe	$	4,318,780	$	6,650,010
MEA		4,011,500		929,000
North America (United States and Canada)		1,640,752		3,950,976
Latin America		153,400		367,600
Asia		0		134,415

Total revenues	$	10,124,432	$	12,032,001

Revenues by product line for the first quarter of 2013 were as follows:


	Three Months Ended
	March 31, 2013		March 31, 2012
Revenues
Broadband gateways	$	4,318,780	$	9,020,529
Security alert systems		4,011,500		0
Wireline replacement terminals		1,640,752		2,643,512
Phones		153,400		367,960

Total revenues	$	10,124,432	$	12,032,001

Sales of our Home Alert product lines boosted gross margin for the first quarter to a record 29%, compared to 26% in the first quarter of 2012.

We also kept operating expenses near historic lows. Operating expenses during the quarter were $2.7 million compared to $2.3 million for the first quarter of 2012.

Through the combination of improved gross margin percentage and tight control over operating expenses, we were able to generate net income of $84,000 for the three months ended March 31, 2013 on $10.1 million of revenue. This compares to net income of $472,000 for the three months ended March 31, 2012, generated on $12.0 million of revenue.

We continued to see improvement in working capital in the first quarter. In addition to our Q1 2013 net income of $84,000, in March 2013, we entered into a $2.3 million three year term loan with Silicon Valley Bank. The term loan bolstered our cash position, reduced our short-term borrowing requirements, and further improved our working capital position. Payments on the term loan are interest only during the first six months and then require equal fixed monthly payments of principal and interest over the remaining 30 months of the loan. In addition, a one-time payment of $45,000 is due at the time the loan is repaid. Interest on the Silicon Valley Bank term loan accrues at 6% per annum.

In September 2012, we entered into a $7.7 million promissory note with WNC as part of a settlement of all amounts arising out of our past manufacturing relationship. The WNC Note obligates us to make payments of $50,000 per month, plus a payment by March 31 each year equal to 50% of the prior years net income less $600,000. In the first quarter of 2013, we made payments of $1.8 million on the Note. At March 31, 2013, the aggregate amount outstanding under the Note was $5.8 million.

Against these positive trends, we experienced delayed collections of accounts receivable which resulted in higher loan balances under our bank credit facilities. In Europe, a significant customer has been slow to pay for fourth quarter 2012 shipments. We collected a significant portion of this account following the end of the quarter and expect the balance to be paid shortly. In MEA, we had two testing and warranty events on our new phone and Home Alert products that caused a delay in collection in our accounts receivables out of that region. In one situation, the wireless carrier used the wrong version of the software in its acceptance testing for the product.

Once the testing software was replaced, the products were accepted, but the retesting delayed the wireless carrier’s launch of the

products to its customers and payment of our account. In the second event, a minor repair was required to replace a capacitor on an order of security alert devices. The aggregate repair cost was only $30,000 for the quarter, but the turn-around time for the repair delayed collection from the wireless carrier. Because of these events, our accounts receivable balance increased during the first quarter by $6.7 million to $21.9 million. We increased borrowings under our working capital based credit line to manage our accounts payable to our key vendors. At March 31, 2013, we had borrowings of $6.0 million under our $7.0 million credit line. We expect to collect the accounts and pay down our working capital based credit line to more normal levels over the next several months.

Subsequent to the end of the first quarter, we renewed our 10 million Yuan ($1.6 million) term loan with the commercial bank in China on the same basic terms as the previous loan. The new term loan matures on April 8, 2014.

Outlook

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

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 2013. We are looking to maintain our market share in Europe with our broadband gateway devices and expand our addressable market with the launch of our dual-mode gateway device. We are looking to add functionality in our next generation wireline replacement terminals and look for additional OEM opportunities in North America. However, that market has become more challenging with larger Chinese competitors offering significant price reductions for a base model terminal. We have launched the initial products in our Axesstel Home Alert product line with new key customers in the MEA region. Based on initial discussions with wireless network operators in North America and globally, we expect that product line will be well received in a number of other markets as well and has the potential to be one of our largest selling product lines.

Our primary operating goals for 2013 are to maintain consistent profitability and to increase revenue by ten to fifteen percent year over year. First quarter 2013 revenues were lower than first quarter 2012. We now anticipate that first half revenue will be lower than planned due to a slower rollout of our new products in 2013 and delays in customer testing and customer acceptance. We are releasing the next generation of our core products, as well as additions to our Home Alert products. Initial customer feedback suggests that these products will be well received, but the precise timing and success of these product introductions will have a material impact on our full year results. The slower first half of the year will make it more difficult to meet our goal for annual revenue growth. However, we believe we will be very well positioned for growth in the second half of the year and beyond.

For the year, we are targeting gross margins in the mid twenty percent range. The economic and competitive climate remains challenging and price competition in our markets remains intense. We anticipate erosion in the average selling prices for our products in 2013. Any significant shift in product mix or reduction of average selling prices that are not offset by cost reductions will negatively impact gross margins.

We believe that our current operating infrastructure can support higher revenues, and if we can successfully scale our revenues, we expect to reduce operating expenses as a percentage of revenue.

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.

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.

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, 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.

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.

Quarterly 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) Three Months Ended March 31,
	2013				2012
Revenues	$	10,124	100.00	%	$	12,032	100.00	%
Cost of goods sold		7,157	70.70			8,855	73.60

Gross margin		2,967	29.30			3,177	26.40

Operating expenses
Research and development		697	6.88			576	4.79
Sales and marketing		659	6.51			738	6.13
General and administrative		1,312	12.95			1,002	8.33

Total operating expenses		2,668	26.34			2,316	19.25

Operating income		299	2.96			861	7.15
Interest expense, net		211	2.09			364	3.02

Income before income taxes		88	0.87			497	4.13
Income tax provision		4	0.04			25	0.21

Net income	$	84	0.83	%	$	472	3.92	%

Comparison of the Three Months Ended March 31, 2013 to the Three Months Ended March 31, 2012

Revenues

For the three months ended March 31, 2013, which we refer to as “Q1 2013”, revenues were $10.1 million compared to $12.0 million for the three months ended March 31, 2012, which we refer to as “Q1 2012”, representing a 16% decrease. The decreased revenue was primarily attributable to lower sales of our gateway products, as our primary customer in Scandanavia did not order during the quarter as it worked through existing inventory. In addition, sales of our wireline replacement terminals were lower during the quarter as Sprint in North America did not place orders, fulfilling its requirements from a Chinese vendor. These decreases were partially offset by sales of our new Home Alert security alert devices to new customers in the MEA region.

In Q1 2013, our revenues were derived principally from four customers, which together represented 97% of revenues, and individually represented 43%, 24%, 16% and 14% of revenues. In Q1 2012, our revenues were derived principally from four customers, which together represented 88% of revenues, and individually represented 34%, 21%, 20% and 13% of revenues. Our revenues for Q1 2013 consisted of 43% for gateway devices, 40% for security alert systems, 16% for wireline replacement terminals and 1% for phone products. For Q1 2012, our revenues consisted of 75% for gateway devices, 22% for wireline replacement terminals and 3% for phone products.

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 at attractive margins.

Cost of Goods Sold

For Q1 2013, cost of goods sold was $7.2 million compared to $8.9 million for Q1 2012, a decrease of 19%. This decrease is mainly attributable to the 16% decrease of revenues from the comparative periods combined with reductions in the average cost of our products.

Gross Margin

For Q1 2013, gross margin as a percentage of revenues was 29% compared to 26% for Q1 2012. The increased gross margin percentage from the comparative period was mainly attributable to product mix, including the sale of our new Home Alert products which currently support higher margins than our gateway and wireline replacement terminals.

We do not expect any significant inventory write offs or non-recurring transactions in 2013 that would impact gross margins. We are targeting gross margins in the mid-twenties. However, intense price competition and aggressive new product releases by our competitors could put additional pressure on gross margins.

Research and Development

For Q1 2013, research and development expenses were $697,000 compared to $576,000 for Q1 2012, an increase of 21%. As a percentage of revenues, research and development expenses for Q1 2013 were 7% compared to 5% for Q1 2012. The increase from the comparable period is mainly attributable to increased development expense associated with third party fees and certification of the initial products in our Home Alert product line.

We anticipate that 2013 research and development expenses will increase over 2012 levels due to increased certification and test fees from the anticipated launch of our second generation wireline replacement terminal and additional products in our Home Alert product line.

Sales and Marketing

For Q1 2013, sales and marketing expenses were $659,000 compared to $738,000 for Q1 2012, a decrease of 11%. As a percentage of revenue, sales and marketing expenses were 7% in Q1 2013 compared to 6% in Q1 2012. The decrease was mainly due to a decrease in the commission accrued of $267,000 due to a change in estimate.

We expect sales and marketing expenses to remain stable in 2013, with the exception of fluctuating selling expenses based on the revenue levels and the customer mix experienced during the year.

General and Administrative

For Q1 2013, general and administrative expenses were $1.3 million compared to $1.0 million for Q1 2012, an increase of 31%. As a percentage of revenue, general and administration expenses were 13% in Q1 2013 compared to 8% in Q1 2012. The change from the comparable period is primarily attributable to an increase of $200,000 in the bad debt reserve in Q1 2013 for certain aged receivables compared to a recovery of bad debt expense of $48,000 in Q1 2012.

We expect 2013 general and administrative expenses to remain at similar levels as experienced during 2012.

Interest Expense, net

For Q1 2013, interest expense was a net expense of $211,000. This amount was comprised of interest expense of $102,000 associated with debt and financing activities and non-cash imputed interest amortization of $109,000 associated with the note payable discount on the promissory note issued to WNC.

For Q1 2012, interest expense was $364,000. Substantially all of the expense resulted from interest expense associated with debt and financing activities.

Provision for Income Taxes

For Q1 2013 and 2012, we recorded income tax provisions of $4,000 and $25,000, respectively. Currently, we have established a full reserve against all deferred tax assets.

Net Income

For Q1 2013, net income was $84,000 compared to net income of $472,000 for Q1 2012.

Liquidity and Capital Resources

Liquidity

Because of slow customer collections from sales generated late in the fourth quarter of 2012, our accounts receivable balance increased significantly by $6.7 million to $21.9 million at March 31, 2013. The delay in collections caused us to draw down heavily on our working capital based credit facility in order to manage our account payable balances with key vendors. Borrowings under our line of credit were $6.0 million at March 31, 2013, against an aggregate borrowing limit of $7.0 million. We expect that we will collect the accounts and that our receivables balance, and corresponding bank loan balances will return to more historic levels over the next several months.

The following table summarizes key items affecting liquidity at March 31, 2013 and December 31, 2012:


	($ in thousands)
	March 31, 2013			December 31, 2012
Cash and cash equivalents	$	2,179		$	1,875
Accounts receivable	$	21,912		$	15,199
Accounts payable	$	12,450		$	10,203
Working capital (deficit)	$	(2,069	)	$	(2,164	)
Bank financings	$	9,840		$	3,477
Note payable, net of discount	$	5,298		$	6,946

For the three months ended March 31, 2013, we used $4.3 million of cash from operations which was derived from changes in operating assets and liabilities of $4.8 million less the cash net income of $510,000 (net income adjusted for depreciation and amortization expense, stock based compensation, provisions for losses on accounts receivable, note payable discount and imputed interest). During the three months ended March 31, 2013, we consumed $1,000 of cash for investing activities, and at March 31, 2013, we did not have any significant commitments for capital expenditures. Financing activities generated $4.6 million of cash during the three months ended March 31, 2013, including $6.4 million for net bank financings offset by $1.8 million for repayments to the Note payable to WNC.

Bank Financing

We currently have three bank financing arrangements.

In September 2012, we entered into a one year $7.0 million credit facility with Silicon Valley Bank or “SVB”. The facility is a working capital based revolving line of credit where SVB, in its discretion, will make advances in the amount of up to 80% of the value of (i) eligible accounts receivable and (ii) eligible purchase orders for inventory in transit to a customer. For each account receivable or purchase order financed, we pay interest based on SVB’s prime rate, plus a specified margin, multiplied by the face amount of the eligible account receivable or purchase order. For eligible accounts receivable, the specified margin is 1.0% and for eligible purchase orders the margin is 1.4%. However, if our EBITDA for any trailing six month period falls below $1.0 million, the specified margins increase to 3.0% and 3.2%, respectively. On March 28, 2013, we entered into an amendment to the credit facility that reduced the specified margin for eligible accounts receivable to 0.75% (down from 1.00%) and if our EBITDA for any trailing six month period falls below $1.0 million, the specified margin for eligible accounts receivable increases to 2.50% (down from 3.00%). At March 31, 2013, we had borrowings of $6.0 million under this credit facility and the effective interest rate on the borrowed funds was 6% per annum.

In March 2013, we entered into a three year term loan with SVB, totaling $2.3 million, with monthly payments of interest only during the first six months, and then equal monthly payments of principal and interest over the remaining 30 months of the loan. In addition, we are required to make a one-time final payment of $45,000 at the time the loan is repaid. At March 31, 2013, we had borrowings of $2.3 million under this facility. Interest on the term loan accrues at 6.00% per annum.

Note Payable

In September 2012, we entered into a Payment Confirmation Agreement with Wistron NeWeb Corporation. In connection with the Payment Confirmation Agreement we settled all disputes with our former contract manufacturer, including an $8.2 million account payable, in exchange for payment of $458,000 in cash and the issuance of a promissory note with a face value of $7.7 million. The Note obligates us to make payments of $50,000 each month. In addition, we are required to make a payment on or before March 31 each year equal to 50% of the prior year’s net income less $600,000. The Note does not bear interest. Therefore, we discounted the Note based on an imputed interest rate of 6.25% over an estimated repayment term of three years, resulting in a Note payable discount of $791,000 at the time of issuance. The discount is being charged to interest expense during the term of the Note. During the first quarter we made payments against the Note aggregating to $1.8 million. At March 31, 2013, the balance of the Note payable had a face value of $5.8 million and a discounted value of $5.3 million.

Credit Terms with Manufacturers

In addition to credit facilities, we rely on open credit terms with our manufacturing partners to help fund our working capital 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 rely on those open credit terms to support our working capital requirements and reduce our borrowing costs. 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.

Based on our current operating projections, we expect to generate positive cash from operations over the next twelve month period, and believe that our existing capital resources will be sufficient to fund our working capital needs during that time. However, if we experience a substantial decline in product sales or our bank lenders or contract manufacturers refuse to extend us credit under their current terms, we may 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 financings are in place at this time, and we cannot give any assurances about the availability or terms of any future financing.

Recent Accounting Pronouncements

Our 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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.

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 March 31, 2013, we had $2.2 million 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 March 31, 2013, as these consisted of securities with maturities of less than three months.

Interest rates for our current bank debt agreements are based at rates ranging from 6% to 7% per annum. We do not utilize financial contracts to manage our exposure in our investment portfolio to changes in interest rates. A hypothetical 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 March 31, 2013.

Foreign Currency Exchange Rate Risk

During the three months ended March 31, 2013, 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 hypothetical 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 $21,000 for the three-month period ended March 31, 2013.

Item 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, on a timely basis; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934, as amended.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013. Based on such evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective for their intended purpose described above.

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 are reasonably likely to materially affect, our internal control over financial reporting.

Limitations On Disclosure Controls And Procedures.

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.

PART II—OTHER INFORMATION

Item 1.

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 litigation which we believe would have a material adverse effect on our business operations or financial condition.

Item 1A.

RISK FACTORS.

The risk factors set forth below update the risk factors in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012. In addition to the risk factors below, you should carefully consider the other risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial position and results of operations.

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 $4.3 million for the year ended December 31, 2012 and generated further net income in the first quarter of 2013 of 84,000. However, we incurred net losses in two of the four previous years, including a net loss of $6.3 million for the year ended December 31, 2010 and a net loss of $10.1 million for the year ended December 31, 2009. At March 31, 2013, we had a stockholders’ deficit of $6.4 million and a working capital deficit of $2.1 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.

We rely on a small number of customers for the majority of our revenues. The table below shows the percentage of revenue contribution from each customer that accounted for more than 10% of our revenues in the prior three years:


Year ended	10% customers		% of revenues			Aggregate % of revenues
December 31, 2012		3		34%, 28% and 13	%		75	%
December 31, 2011		4		27%, 20%, 19% and 10	%		76	%
December 31, 2010		3		43%, 17% and 17	%		77	%

For the first quarter of 2013, four customers accounted for 97% of our revenues, and individually accounted for 43%, 24%, 16% and 14%.

If we lose one or more of our significant customers or if one or more of our significant customers materially scales back its orders, 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 markets in North America, Latin America, Europe and MEA, while still maintaining and expanding our volume of sales to our existing significant customers. We are looking for opportunities to generate additional significant customers to 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 sell our products to telecommunications operators in developing countries, which may create difficulties in the collection of our accounts receivable.

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 and payment history. We have experienced some collection issues in the past and have incurred bad debt expense because of our customers’ inability or refusal to pay. Many of our customers are located in developing countries which can make collection efforts more difficult and expensive. Often these countries do not have well established legal systems to secure and enforce judgments for unpaid accounts.

During the first quarter of 2013, we experienced a significant increase in our accounts receivable, including a significant amount of receivables to new customers located in Africa. Because of our limited working capital, any inability to collect on open accounts may have a significant impact on our financial position.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4.

MINE SAFETY DISCLOSURES.

Not Applicable.

Item 5.

OTHER INFORMATION.

None.

Item 6.

EXHIBITS.

See the Exhibit Index immediately following the signature page of this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				AXESSTEL, INC.

Date: May 14, 2013				/s/ Patrick Gray
				Patrick Gray, Chief Financial Officer
				(Principal Accounting Officer)

EXHIBIT INDEX


Exhibit Number		Description of Exhibit

10.1*		Translation of Working Capital Loan Contract dated April 7, 2013 between Axesstel and China Communications Bank Co. Ltd.

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C, Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

*	Filed herewith.

**	Furnished herewith.

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company