AXESSTEL INC - FORM 10-Q - November 19, 2013

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EXCEL - IDEA: XBRL DOCUMENT - AXESSTEL INC	Financial_Report.xls
EX-31.1 - EX-31.1 - AXESSTEL INC	d606380dex311.htm
EX-31.2 - EX-31.2 - AXESSTEL INC	d606380dex312.htm
EX-32.1 - EX-32.1 - AXESSTEL INC	d606380dex321.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 September 30, 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 November 1, 2013
Common Stock, $0.0001 per share		24,645,253 shares

Axesstel, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2013

TABLE OF CONTENTS


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	21

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	23
Item 3.	DEFAULTS UPON SENIOR SECURITIES	23
Item 4.	MINE SAFETY DISCLOSURES	23
Item 5.	OTHER INFORMATION	23
Item 6.	EXHIBITS	23

SIGNATURES		24

EXHIBIT INDEX		25

- 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.

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PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS.

Axesstel, Inc.

Condensed Consolidated Balance Sheets


	September 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	70,315		$	1,875,487
Accounts receivable, less allowance for doubtful accounts of $3,665,000 and $620,000 at September 30, 2013 and December 31, 2012, respectively		8,178,612			15,198,752
Inventories, net		216,000			330,000
Prepayments and other current assets		442,222			460,726

Total current assets		8,907,149			17,864,965

Property and equipment, net		157,368			225,021
Other assets, net		168,640			74,076

Total assets	$	9,233,157		$	18,164,062

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	10,216,611		$	10,203,148
Note payable-current, net of discount		303,000			1,850,000
Bank financings-current		3,875,646			3,477,007
Accrued commissions		290,000			633,000
Accrued royalties		1,374,000			1,389,000
Accrued warranties		350,000			350,000
Other accrued expenses and current liabilities		2,315,100			2,127,013

Total current liabilities		18,724,357			20,029,168

Long-term liabilities:
Note payable-long term, net of discount		4,611,000			5,096,000

Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.0001 par value; 250,000,000 shares authorized; 24,645,253 and 24,145,355 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		2,464			2,414
Additional paid-in capital		40,855,031			40,458,483
Accumulated other comprehensive loss		(198,991	)		(140,596	)
Accumulated deficit		(54,760,704	)		(47,281,407	)

Total stockholders’ deficit		(14,102,200	)		(6,961,106	)

Total liabilities and stockholders’ deficit	$	9,233,157		$	18,164,062

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

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Axesstel, Inc.

Condensed Consolidated Statements of Operations

(unaudited)


	For the three months ended						For the nine months ended
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Revenues	$	299,001		$	16,327,643		$	11,641,493		$	43,891,422
Cost of goods sold		215,075			11,802,316			8,255,496			32,559,456

Gross margin		83,926			4,525,327			3,385,997			11,331,966

Operating expenses
Research and development		773,875			705,563			2,211,012			1,777,397
Sales and marketing		251,426			880,314			1,507,608			2,265,405
General and administrative		3,959,010			1,291,721			6,826,958			3,476,110

Total operating expenses		4,984,311			2,877,598			10,545,578			7,518,912

Operating income (loss)		(4,900,385	)		1,647,729			(7,159,581	)		3,813,054

Interest expense, net		(133,320	)		(204,333	)		(534,716	)		(929,879	)
Other income		0			791,000			215,000			791,000

Income (loss) before income tax provision		(5,033,705	)		2,234,396			(7,479,297	)		3,674,175
Income tax provision		0			112,000			0			184,000

Net income (loss)	$	(5,033,705	)	$	2,122,396		$	(7,479,297	)	$	3,490,175

Earnings (loss) per share
Basic	$	(0.20	)	$	0.09		$	(0.31	)	$	0.15

Diluted	$	(0.20	)	$	0.08		$	(0.31	)	$	0.13

Weighted average shares outstanding
Basic		24,708,691			24,084,939			24,463,291			23,928,446
Diluted		24,708,691			26,896,633			24,463,291			26,341,667
Comprehensive income (loss)
Net income (loss)	$	(5,033,705	)	$	2,122,396		$	(7,479,297	)	$	3,490,175
Foreign currency translation adjustment		(12,822	)		3,647			(58,395	)		(14,722	)

Comprehensive income (loss)	$	(5,046,527	)	$	2,126,043		$	(7,537,692	)	$	3,475,453

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

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Axesstel, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)


	For the nine months ended
	September 30, 2013			September 30, 2012
Cash flows from operating activities:
Net income (loss)	$	(7,479,297	)	$	3,490,175

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		94,941			129,426
Stock-based compensation		246,495			161,072
Provision for (recoveries from) losses on accounts receivable		3,882,235			(120,000	)
Note payable discount		(215,000	)		(791,000	)
Note payable discount amortization		240,000			0
(Increase) decrease in:
Accounts receivable		3,137,905			(2,688,422	)
Inventories		114,000			233,000
Other assets		27,857			192,126
Increase (decrease) in:
Accounts payable		13,463			1,446,519
Accrued expenses and other liabilities		(169,913	)		42,303

Total adjustments		7,371,983			(1,394,976	)

Net cash provided by (used in) operating activities		(107,314	)		2,095,199

Cash flows from investing activities:
Acquisition of property and equipment		(3,852	)		(200,628	)

Net cash used in investing activities		(3,852	)		(200,628	)

Cash flows from financing activities:
Proceeds from issuance of common stock		22,750			7,800
Repayments of note payable		(2,057,000	)		0
Net proceeds (repayments) of bank financings		398,639			(1,118,774	)

Net cash used in financing activities		(1,635,611	)		(1,110,974	)

Cumulative translation adjustment		(58,395	)		(14,722	)

Net increase (decrease) in cash and cash equivalents		(1,805,172	)		768,875
Cash and cash equivalents at beginning of year		1,875,487			849,510

Cash and cash equivalents at end of period	$	70,315		$	1,618,385

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	297,276		$	977,539
Income tax	$	45,953		$	64,468

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

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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 AND GOING CONCERN

At September 30, 2013, we had cash and cash equivalents of $70,000, negative working capital of $9.8 million, and stockholders’ deficit of $14.1 million. Our revenues for the nine months ended September 30, 2013 were significantly lower than the nine months ended September 30, 2012, and well below our original expectations. Our net loss for the nine months ended September 30, 2013 was $7.5 million. As a consequence of the net loss, and the lack of significant collections on past due receivables in the third quarter, we are delinquent in payments on many of our current financial obligations.

Other than cash provided by operations, our primary source of working capital is bank borrowing. We currently have two bank credit facilities. In March 2013, we entered into a three year $2.3 million term loan with Silicon Valley Bank (“SVB”). In April 2013, 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 September 30, 2013). Our net loss for the nine months ended September 30, 2013 caused an event of default under our term loan with SVB, and we are working with the bank on a forbearance and repayment arrangement. As a result, we have reclassified all long-term amounts due under the SVB term loan to current liabilities. See Note 8.

In addition to credit facilities, we rely on open credit terms with our manufacturing partners to support our working capital requirements and reduce our borrowing costs. We are delinquent in making payments to our contract manufacturers and they have restricted their credit terms with us. If we are unable to regain these credit terms, we may need to identify alternative manufacturers or secure additional capital in order to finance the production of our products.

If we are unable generate sufficient revenues to pay our expenses and service our debt, and our other existing sources of cash are insufficient to fund our activities, we will need to raise additional funds to continue our operations. We do not currently 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 will likely 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 achieving and sustaining profitability, and cannot obtain additional funds on commercially reasonable terms or at all, we will likely be required to curtail significantly or cease our operations.

These factors raise substantial doubt about our ability to continue as a going concern. The accompanying condensed 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 condensed 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 subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

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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 September 30, 2013 and December 31, 2012, the allowance for doubtful accounts was $3.7 million and $620,000, respectively.

Bad debt expense amounted to $3.0 million and $3.9 million for the three and nine months ended September 30, 2013, respectively, primarily related to significantly past due accounts receivable from African customers. Recovery of bad debt expense amounted to $36,000 and $120,000 for the three and nine months ended September 30, 2012, 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 September 30, 2013 and December 31, 2012, the reserve for excess and obsolete inventory was $0 and $292,000, 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 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:


	September 30, 2013			December 31, 2012
Licenses	$	3,627,500		$	3,627,500
Accumulated amortization		(3,597,812	)		(3,574,376	)

	$	29,688		$	53,124

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Amortization expense related to these licenses amounted to $8,000 and $32,000 for the three months ended September 30, 2013 and 2012, respectively. Amortization expense was $24,000 and $94,000 for the nine months ended September 30, 2013 and 2012, respectively. Estimated future amortization expense related to licenses at September 30, 2013 is as follows:


	Amount
2013	$	28,650
2014		1,038

Total	$	29,688

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 September 30, 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 nine months ended September 30, 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 CIP (Carriage and Insurance Paid To), or DDU (Delivery Duty Unpaid). When we ship CIP, 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 September 30, 2013 and December 31, 2012, there was no allowance for sales returns.

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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 nine months ended September 30, 2013 and 2012, warranty costs amounted to $230,000 and $433,000, respectively. At September 30, 2013 and December 31, 2012, we established a warranty reserve of $350,000, to cover 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				Nine Months ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Research and development	$	23,000	$	15,254	$	63,723	$	25,254
Sales and marketing		6,000		15,000		26,000		35,000
General and administrative		35,500		50,023		156,772		100,818

Total		64,500		80,277		246,495		161,072
Tax effect on share-based compensation		0		0		0		0

Net effect on net income (loss)	$	64,500	$	80,277	$	246,495	$	161,072

Effect on earnings (loss) per share:
Basic	$	0.00	$	0.00	$	0.01	$	0.01
Diluted	$	0.00	$	0.00	$	0.01	$	0.01

Valuation of Stock Option Awards

We have two stock option plans under which stock options have been granted to our employees and directors. Through the period covered by this report, all options were granted under the 2004 Equity Incentive Plan. On July 28, 2013 our shareholder approved the adoption of the 2013 Equity Incentive Plan. Upon the adoption of the 2013 Equity Incentive Plan, we stopped issuing any additional equity awards under the 2004 Equity Incentive Plan, although previously issued awards under the 2004 Equity Incentive Plan remain outstanding in accordance with their terms.

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 nine months ended September 30, 2013, we did not grant any stock options. During the nine months ended September 30, 2012, we granted to certain of our employees options to purchase an aggregate of 547,500 shares of our common stock at exercise prices ranging from $0.66 to $0.67 per share based on the closing stock price on the date the options were issued.

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 a one to three year vesting period. During the nine months ended September 30, 2013, we issued 429,392 shares of our common stock to our executive employees and directors as part of their annual compensation package. The fair value of these grants ranged from $0.63 to $1.45 per share. During the nine months ended September 30, 2012, we granted 285,624 shares of our common stock to our executive employees and directors as part of their annual compensation package. The fair value of these grants ranged from $0.66 to $1.20 per share.

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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 September 30, 2013 and 2012 we have no unrecognized tax benefits.

Earnings (loss) 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 and nine months ended September 30, 2013 there was 3,777,083 potentially dilutive securities excluded from the computation because their effect was anti-dilutive. For the three and nine months ended September 30, 2012 there was 571,667 potentially dilutive securities excluded from the computation.


	Three Months Ended					Nine Months Ended
	September 30, 2013			September 30, 2012		September 30, 2013			September 30, 2012
Numerator for basic and diluted earnings per share:
Net income (loss)	$	(5,033,705	)	$	2,122,396	$	(7,479,297	)	$	3,490,175

Denominator:
Weighted average basic common shares outstanding		24,708,691			24,084,939		24,463,291			23,928,446
Assumed conversion of dilutive securities:
Stock options		0			2,811,694		0			2,413,221

Diluted earnings (loss) per share—adjusted weighted average shares		24,708,691			26,896,633		24,463,291			26,341,667

Basic earnings (loss) per share	$	(0.20	)	$	0.09	$	(0.31	)	$	0.15

Diluted earnings (loss) per share	$	(0.20	)	$	0.08	$	(0.31	)	$	0.13

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 (loss)

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.

- 8 -

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 nine months ended September 30, 2013, 90% of our revenues were from four customers, comprised of 42%, 21%, 15% and 12%. Those customers were located in Poland, South Africa, the United States and South Africa, respectively. At September 30, 2013, the amounts due from such customers were $0, $1.6 million, $0 and $1.1 million, respectively, which were included in accounts receivable.

During the nine months ended September 30, 2012, 79% of our revenues were from three customers, which accounted for 32%, 32% and 15% of revenues, respectively. These customers were located in the United States, Scandinavia and Poland, respectively. At September 30, 2012, the amounts due from such customers were $3.0 million, $2.5 million and $2.9 million, respectively, which were included in accounts receivable.

As of September 30, 2013, we maintained inventory of $216,000 in China. In addition, substantially all of our $8.2 million of accounts receivable at September 30, 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 $646,000 and $350,000 for the nine months ended September 30, 2013 and September 30, 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:


	September 30, 2013		December 31, 2012
Raw materials	$	216,000	$	0
Finished goods		0		622,000

		216,000		622,000
Less reserves for excess and obsolete inventories		0		(292,000	)

	$	216,000	$	330,000

- 9 -

5. PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consisted of the following:


	September 30, 2013		December 31, 2012
Prepaid insurance	$	34,393	$	143,751
Prepaid taxes		25,092		18,792
Prepaid tooling		79,202		19,863
Other		303,535		278,320

	$	442,222	$	460,726

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	September 30, 2013			December 31, 2012
Machinery and equipment	$	326,311		$	326,311
Office furniture and equipment		304,479			300,800
Software		3,111,949			3,111,776

		3,742,739			3,738,887
Accumulated depreciation and amortization		(3,585,371	)		(3,513,866	)

	$	157,368		$	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. 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. 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 date of issuance. During the nine months ended September 30, 2013, the estimated repayment term was modified from three years to four years, increasing the note payable discount by $215,000 to $1.0 million. This discount is being charged to interest expense over the term of the Note.

During the first nine months of 2013, we made payments against the Note aggregating to $2.1 million. At September 30, 2013, the Note had a face value of $5.5 million and a discounted value of $4.9 million.

The balance on this Note consisted of the following:


	September 30, 2013			December 31, 2012
Note payable—face value	$	5,507,000		$	7,564,000
Less: unamortized imputed interest		(593,000	)		(618,000	)

Note payable, net of discount		4,914,000			6,946,000
Less: current portion		(303,000	)		(1,850,000	)

Noncurrent portion	$	4,611,000		$	5,096,000

- 10 -

Estimated future maturities of the Note payable at September 30, 2013, including current portion, are as follows:


2013	$	74,000
2014		307,000
2015		2,549,000
2016		1,984,000

Note payable, net of discount	$	4,914,000

8. BANK FINANCINGS

As of September 30, 2013 and December 31, 2012, we had outstanding loans of $3.9 million and $3.5 million, respectively. We currently have two active term loans.

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. We experienced an event of default under our term loan and credit facility with SVB related to compliance with a Fixed Charge Coverage Ratio and a Liquidity Ratio. We are working with SVB on a forbearance arrangement to reschedule payment of the loan. Consequently, we have reclassified the long-term amounts due under the SVB term loan to a current liability. At September 30, 2013, we had borrowings of $2.3 million under this loan.

In April 2013, 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 September 30, 2013). This loan bears interest based on the People’s Bank of China twelve month adjustable rate, which was 7% per annum at September 30, 2013.

9. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES

Other accrued expenses and current liabilities consisted of the following:


	September 30, 2013		December 31, 2012
Customer advances	$	679,400	$	32,840
Accrued payroll, taxes and benefits		1,146,043		1,391,761
Accrued foreign sales tax		107,400		182,400
Accrued income taxes		0		45,953
Accrued interest		0		2,560
Accrued legal and professional fees		87,500		100,000
Accrued license fees		25,000		25,000
Accrued operating expenses		269,757		346,499

	$	2,315,100	$	2,127,013

10. STOCKHOLDERS’ DEFICIT

Common Stock – 2013 Activity

During the nine months ended September 30, 2013, we issued 310,343 shares of our common stock to our executive employees as part of their annual compensation package. The fair value of these grants was $1.45 per share based on the market price at the date the grants were issued. These stock grants vest over a three year period.

During the nine months ended September 30, 2013, we issued 119,049 shares of our common stock to our non-employee directors as part of their annual compensation package. The fair value of these grants was $0.63 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.

During the nine months ended September 30, 2013, we cancelled 204,514 non-vested shares of our common stock issued to former executive employees. These shares were valued at prices ranging from $0.66 to $1.45 per share, and had a value of $244,000.

- 11 -

During the nine months ended September 30, 2013, employee stock options for 275,000 shares of our common stock were exercised at prices ranging from $.07 to $.10 per share resulting in proceeds of $23,000.

Stock Option – 2013 Activity

During the nine months ended September 30, 2013, we did not grant any stock options.

During the nine months ended September 30, 2013, we cancelled stock option awards to purchase 162,500 shares of common stock issued to a former executive employee. These shares had exercise prices ranging from $0.07 to $0.67 per share.

11. 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				Nine months ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Revenues
Europe	$	140,600	$	8,324,425	$	5,277,640	$	22,115,807
MEA		75,600		797,330		4,113,800		4,226,330
North America (United States and Canada)		6,101		6,897,638		1,772,760		16,634,320
Latin America		76,700		308,250		385,250		780,550
Asia		0		0		92,043		134,415

Total revenues	$	299,001	$	16,327,643	$	11,641,493	$	43,891,422

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				Nine months ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Revenues
Broadband gateways	$	216,200	$	9,004,617	$	5,384,083	$	26,430,380
Security alert systems		6,101		48,000		4,181,508		48,000
Wireline replacement terminals		0		6,653,576		1,640,752		15,976,532
Phones		76,700		621,450		435,150		1,436,510

Total revenues	$	299,001	$	16,327,643	$	11,641,493	$	43,891,422

12. 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 2014. The average basic monthly rent is approximately $6,000 during the lease periods for these three facilities.

Future estimated lease payments at September 30, 2013 are as follows:


Year Ending December 31,	Total Amount
2013	$	37,000
2014		47,000

	$	84,000

- 12 -

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 and nine months ended September 30, 2013 amounted to $54,000, and $173,000, respectively. Rent expense incurred for short-term and long-term obligations for the three and nine months ended September 30, 2012 amounted to $36,000, and $93,000, 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 September 30, 2013, the severance expense due would have been $627,000, 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 September 30, 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.

13. SUBSEQUENT EVENTS

On October 13, 2013 our board of directors approved a reduction in force that impacted approximately 50% of the Company’s employees and consultants, including H. Clark Hickock, our former Chief Executive Officer. We expect to incur total expenses relating to termination benefits associated with the reduction in force of approximately $600,000, which primarily represents cash expenditures the Company expects to pay out over the next twelve months. We will record these charges in the fourth quarter ending December 31, 2013. Overall, the reductions are expected to result in annual cost savings in excess of $5.0 million.

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”. 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 condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report.

Overview

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

Our wireless 3G and 4G gateway devices, security alert systems and phones have similar functionality to modems, alarm systems and phones 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.

- 13 -

Our products have traditionally been sold 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

Revenues were $299,000 for the third quarter of 2013. We continued to experience very poor revenue generation as a result of a significant drop in sales of our traditional products, and a delay in the launch of our new product lines. The low revenues combined with slow collection of receivables significantly impacted liquidity and capital resources and resulted in an event of default under our loan with SVB. While we did not anticipate the timing or concurrence of these events, they are each known risks inherent to our business, and we are aggressively managing to work through them.

In Europe, we did not ship to our two largest gateway customers during the third quarter. One of these customers ordered their first half requirements in the first quarter and we did not receive a follow-on order from this customer until late in the third quarter for shipments scheduled for the fourth quarter and early 2014. The other principal customer for our gateway products experienced much slower than expected sell through of our gateway products during 2013 and continues to work through accumulated inventory. The customer is selling through its inventory position, but we do not expect any significant orders from this customer until 2014.

In North America, we are transitioning our wireline replacement terminal product line to next generation products. We have developed the next generation version of our base terminal with improved performance and a lower price point and are working to establish market share for this product with carriers in North America. In addition, we are nearing completion of a wireline replacement terminal that incorporates some of the functions of our Home Alert product line. We are working with Sprint and other customers on this device. Testing and the launch of this product line have progressed much slower than we originally anticipated, and we do not expect any significant orders for these products until 2014.

Finally, the rollout of our new Home Alert product line has progressed much slower than originally anticipated. We have experienced some of the normal issues associated with the transition to a new product category. In Africa, we experienced minor warranty issues and significant delays to the launch of these products, and this market has proven to be very difficult and unpredictable. We are continuing to demonstrate our Home Alert products to carriers in North America, Europe, and Latin America and are receiving significant interest. While testing and product launch have progressed slower than anticipated, interest in the product line remains high, and we expect orders to come in over the next few months.

Overall, revenues by geographic region based on customer locations were as follows:


	Three months ended				Nine months ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Revenues
Europe	$	140,600	$	8,324,425	$	5,277,640	$	22,115,807
MEA		75,600		797,330		4,113,800		4,226,330
North America (United States and Canada)		6,101		6,897,638		1,772,760		16,634,320
Latin America		76,700		308,250		385,250		780,550
Asia		0		0		92,043		134,415

Total revenues	$	299,001	$	16,327,643	$	11,641,493	$	43,891,422

Revenues by product line were as follows:


	Three months ended				Nine months ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Revenues
Broadband gateways	$	216,200	$	9,004,617	$	5,384,083	$	26,430,380
Security alert systems		6,101		48,000		4,181,508		48,000
Wireline replacement terminals		0		6,653,576		1,640,752		15,976,532
Phones		76,700		621,450		435,150		1,436,510

Total revenues	$	299,001	$	16,327,643	$	11,641,493	$	43,891,422

At September 30, 2013 we had gross accounts receivable of $9.4 million from customers in Africa, all of which are significantly past due by their terms. As a result of the collection delays and uncertainty of the timing or payment in the African market, we increased our accounts receivable provision by $3.0 million in the third quarter. We are evaluating all options to monetize those receivables, including retaking possession of the product in order to sell it to different customers or regions.

- 14 -

Gross margins were 28% for the third quarter, consistent with recent quarters. Operating expenses were $5.0 million, significantly higher than recent quarters mainly attributable to a $3.0 million provision for losses on accounts receivable. The impact of the low revenues and accounts receivable provision resulted in a loss for the third quarter of $5.0 million.

The impact on operations of the low revenues for the quarter and the $3.0 million provision for losses on accounts receivable caused a significant reduction in our working capital at September 30, 2013. Overall, the net loss of $5.0 million resulted in a $5.0 million deterioration in our working capital deficit from $4.8 million at the beginning of the quarter to $9.8 million at September 30, 2013.

In addition to the impact of the low revenues, the slow collection of accounts receivable significantly reduced our cash availability. Consequently, we are delinquent in payments on most of our current financial obligations. Significantly, we are in default under our $2.3 million Loan and Security Agreement with SVB and are actively working with the bank on a forbearance and repayment agreement. We continue to be significantly past due to our contract manufacturers in China and those manufacturers have restricted their credit terms with us.

We are actively taking steps to return to profitable operations in order to improve our working capital. In addition, we are looking to secure additional working capital through the potential assignment of existing receivables, and/or the sale of debt or equity securities in order to secure our ability to continue operations. We have no firm agreements or arrangements for such financings in place at this time and the timing, terms and impact of any such financing is uncertain. See “Liquidity and Capital Resources” and “Risk Factors” below.

Outlook

Our third quarter revenues suffered as demand for our gateway and terminal products continued to be weak and we experienced significant delays in customer acceptance and orders for our next generation gateway products and our Home Alert product line. Entering the fourth quarter we have some backlog of orders that will generate revenue in the fourth quarter of 2013 and the first quarter of 2014, but not to historic levels.

In October 2013, subsequent to the end of period covered by this report, we effected a reduction in force that impacted approximately 50% of our employees and consultants. The reduction in force and other reductions in operating costs are intended to allow us to achieve profitable operations on annual revenues of approximately $20 million, assuming gross margins in the upper twenty percent range. In connection with these actions, we intend to continue our core gateway business, while we continue to roll out our new Home Alert product lines.

Our Home Alert product launch has faced challenges. We had warranty issues and collection issues with sales into Africa and product certification and testing for carriers in other markets have taken much longer than anticipated. As a consequence, we have expanded our sales and marketing efforts to carriers in new regions. We have also marketed to other mobile virtual network operators, MVNOs, and retail outlets. Those efforts have developed interest and opportunities that will be very significant if we can convert them to firm orders.

Revenues

Our products have traditionally been sold 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.

- 15 -

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 CIP (Carriage and Insurance Paid To), or DDU (Delivery Duty Unpaid). When we ship CIP, 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. 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, and 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

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.

- 16 -

Quarterly Results of Operations

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


($ in thousands)	Three months ended September 30, 2013					Three months ended September 30, 2012					Nine months ended September 30, 2013					Nine months ended September 30, 2012
Revenues	$	299		100.00	%	$	16,327		100.00	%	$	11,641		100.00	%	$	43,891		100.00	%
Cost of goods sold		215		71.93			11,802		72.28			8,255		70.91			32,559		74.18

Gross margin		84		28.07			4,525		27.72			3,386		29.09			11,332		25.82

Operating expenses:
Research and development		774		258.82			706		4.32			2,211		18.99			1,777		4.05
Sales and marketing		251		84.09			880		5.39			1,508		12.95			2,266		5.16
General and administrative		3,959		1,324.08			1,292		7.91			6,827		58.65			3,476		7.92

Total operating expenses		4,984		1,666.99			2,878		17.62			10,546		90.59			7,519		17.13

Operating income (loss)		(4,900	)	(1,638.92	)		1,647		10.10			(7,160	)	(61.50	)		3,813		8.69
Interest expense, net		(134	)	(44.59	)		(204	)	(1.25	)		(534	)	(4.59	)		(930	)	(2.12	)
Other income		0		0.00			791		4.84			215		1.85			791		1.80

Income (loss) before income tax provision		(5,034	)	(1,683.51	)		2,234		13.69			(7,479	)	(64.24	)		3,674		8.37
Income tax provision		0		0.00			112		0.69			0		0.00			184		0.42

Net income (loss)	$	(5,034	)	(1,683.51	)%	$	2,122		13.00	%	$	(7,479	)	(64.24	)%	$	3,490		7.95	%

Comparison of the Three and Nine Months Ended September 30, 2013 to the Three and Nine Months Ended September 30, 2012

Revenues

For the three months ended September 30, 2013, which we refer to as Q3 2013, revenues were $299,000 compared to $16.3 million for the three months ended September 30, 2012, which we refer to as Q3 2012, representing a 98% decrease. The decrease in revenues was the result of: decreased demand for our gateway products in Europe as our key customers there worked through inventory or prepared for launch of our next generation gateway; decreased demand for our wireline replacement terminals in North America; and slower than expected sales of our Home Alert products as we experienced problems launching the products in Africa, while customer testing of the products has taken longer than anticipated in North America.

For the nine months ended September 30, 2013, revenues were $11.6 million compared to $43.9 million for the nine months ended September 30, 2012, representing a 73% decrease. The decrease in revenues for the nine month period was attributable to the extraordinarily low revenues in the second and third quarters as a result of the factors described above.

In Q3 2013, our revenues were derived principally from three customers, which together represented 98% of revenues, and individually represented 47%, 26% and 25% of revenues, respectively. In Q3 2012, our revenues were derived principally from three customers, which together represented 86% of revenues, and individually represented 39%, 37% and 10% of revenues, respectively. Our revenues for Q3 2013 consisted of 72% for gateway devices, 26% for phone products and 2% for security alert systems. For Q3 2012, our revenues consisted of 55% for gateway devices, 41% for wireline replacement terminals and 4% for phone products.

For the nine months ended September 30, 2013, our revenues were derived principally from four customers, which together represented 90% of revenues, and individually represented 42%, 21%, 15% and 12% of revenues. For the nine months ended September 30, 2012, our revenues were derived principally from three customers, which together represented 79% of revenues, and individually represented 32%, 32% and 15% of revenues. Our revenues for the nine months ended September 30, 2013, consisted of 46% for gateway devices, 36% for security alert systems, 14% for wireline replacement terminals and 4% for phone products. For the nine months ended September 30, 2012, our revenues consisted of 60% for gateway devices, 37% 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 new customer opportunities where we have the ability to deliver products that address unique customer requirements with the potential to lead to significant sales.

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Cost of Goods Sold

For Q3 2013, cost of goods sold was $215,000 compared to $11.8 million for Q3 2012, a decrease of 98%. For the nine months ended September 30, 2013, cost of goods sold was $8.2 million compared to $32.6 million for the nine months ended September 30, 2012, a decrease of 75%. The decrease for both periods is primarily attributable to the decreased revenues from the comparative periods.

Gross Margin

For Q3 2013 and Q3 2012, gross margin as a percentage of revenues was 28%. For the nine months ended September 30, 2013, gross margin as a percentage of revenues was 29% compared to 26% for the nine months ended September 30, 2012. These margin differences are mainly reflective of product and customer mix in the comparable periods.

We do not expect any significant inventory write offs or non-recurring transactions in Q4 2013 that would impact gross margins. We are targeting gross margins in the upper twenties. However, intense price competition and aggressive new product releases by our competitors could put additional pressure on gross margins.

Research and Development

For Q3 2013, research and development was $774,000 compared to $706,000 for Q3 2012, an increase of 10%. For the nine months ended September 30, 2013, research and development was $2.2 million compared to $1.8 million for the nine months ended September 30, 2012, an increase of 24%. Both increases from the comparable periods are 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 Q4 2013 research and development expenses will decrease due to significant cost reductions implemented in October 2013.

Sales and Marketing

For Q3 2013, sales and marketing expenses were $251,000 compared to $880,000 for Q3 2012, a decrease of 71%. For the nine months ended September 30, 2013, sales and marketing expenses were $1.5 million compared to $2.3 million for the nine months ended September 30, 2012, a decrease of 33%. The decreases were mainly due to a decreased commission expenses as a result of the lower revenue volume.

We expect sales and marketing expenses to remain stable during Q4 2013, with the exception of fluctuating selling expenses based on the revenue levels and the customer mix.

General and Administrative

For Q3 2013, general and administration expenses were $4.0 million compared to $1.3 million for Q3 2012, an increase of 206%. The change from the comparable period is primarily attributable to an increase of $3.0 million in the bad debt reserve in Q3 2013 for certain aged receivables compared to a recovery of bad debt expense of $36,000 in Q3 2012, offset by reduced wage and bonus expenses.

For the nine months ended September 30, 2013, general and administration expenses were $6.8 million, compared to $3.5 million for the nine months ended September 30, 2012, an increase of 96%. The change from the comparable period is primarily attributable to an increase of $3.9 million in the bad debt reserve in the nine months ended September 30, 2013 for certain aged receivables compared to a recovery of bad debt expense of $120,000 in the nine months ended September 30, 2012, offset by reduced wage and bonus expenses.

We expect Q4 2013 general and administrative expenses will decrease due to significant cost reductions implemented in October 2013, with the exception of termination expenses of approximately $600,000.

Interest Expense, net

For Q3 2013, interest expense was a net expense of $133,000. This amount was comprised of interest expense of $80,000 associated with debt and financing activities and non-cash imputed interest amortization of $53,000 associated with the note payable discount on the promissory note issued to WNC. For Q3 2012, interest expense was $204,000. Substantially all of the expense resulted from interest expense associated with debt and financing activities.

For the nine months ended September 30, 2013, interest expense was a net expense of $535,000. This amount was comprised of interest expense of $295,000 associated with debt and financing activities and non-cash imputed interest amortization of $240,000 associated with the note payable discount on the promissory note issued to WNC. For the nine months ended September 30, 2012, net interest expense was $930,000. Substantially all of the expense resulted from interest expense associated with debt and financing activities.

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Other Income

For the nine months ended September 30, 2013, other income was $215,000 compared to $791,000 for the nine months ended September 30, 2012. On September 7, 2012, we issued a $7,714,000 promissory note to WNC in connection with a payment and settlement agreement. The note does not accrue interest and has no prepayment penalty. 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 date of issuance. During the nine months ended September 30, 2013, the estimated repayment term was modified from three years to four years, increasing the note payable discount by $215,000 to $1.0 million. This discount is being charged to interest expense over the term of the note.

Provision for Income Taxes

For the three and nine months ended September 30, 2013, we did not record income tax provisions. For the three and nine months ended September 30, 2012, we recorded income tax provisions of $112,000 and $184,000, respectively. Currently, we have established a full reserve against all deferred tax assets.

Net Income (Loss)

For Q3 2013, net loss was $5.0 million compared to net income of $2.1 million for Q3 2012. For the nine months ended September 30, 2013, net loss was $7.5 million compared to net income of $3.5 million for the nine months ended September 30, 2012.

Liquidity and Capital Resources

Liquidity

The $7.5 million net loss for the nine months ended September 30, 2013 has had a significant impact on working capital. The combination of very low revenue generation and slow collection on accounts receivable resulted in a substantial reduction in our cash and cash equivalents which was $70,000 at September 30, 2013. We ended the third quarter with net accounts receivable at $8.2 million, almost all of which were significantly past due based on the terms of their agreements. We are working with our customers to convert our outstanding receivables to cash. We need to return to profitable operations in order to improve our working capital, and/or need to secure additional working capital through the sale of debt or equity securities.

The following table summarizes key items affecting liquidity at September 30, 2013 and December 31, 2012:


	($ in thousands)
	September 30, 2013			December 31, 2012
Cash and cash equivalents	$	70		$	1,875
Accounts receivable	$	8,179		$	15,199
Accounts payable	$	10,217		$	10,203
Working capital (deficit)	$	(9,817	)	$	(2,164	)
Bank financings	$	3,876		$	3,477
Note payable, net of discount	$	4,914		$	6,946

For the nine months ended September 30, 2013, we used $107,000 of cash from operations derived from a cash net loss of $3.2 million (net income adjusted for depreciation and amortization expense, stock based compensation, provisions for losses on accounts receivable, note payable discount and imputed interest) offset by changes in operating assets and liabilities of $3.1 million. During the nine months ended September 30, 2013, we consumed $4,000 of cash for investing activities, and at September 30, 2013, we did not have any significant commitments for capital expenditures. Financing activities used $1.6 million of cash during the nine months ended September 30, 2013, including $2.1 million for repayments to the Note payable to WNC offset by a $399,000 increase in net bank financings.

Bank Financing

We currently have two bank financing arrangements.

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. We experienced an event of default under our term loan with SVB related to covenant compliance with a Fixed Charge Coverage Ratio and a Liquidity Ratio. We

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are working with SVB on a forbearance arrangement to reschedule payment of the loan. Consequently, we have reclassified the outstanding long-term balance of the term loan as a current liability. At September 30, 2013, we had borrowings of $2.3 million under this loan. Interest on the term loan accrues at 6.00% per annum.

Note Payable

In September 2012, we entered into a Payment Confirmation Agreement with WNC. 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 and has an estimated repayment term of four years. During the first nine months of 2013, we made payments on the Note of $2.1 million. At September 30, 2013, the Note had a face value of $5.5 million and a discounted value of $4.9 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. We are delinquent in payments to our contract manufacturers and they have restricted their credit terms with us. If we are unable to regain these credit terms, we may need to identify alternative manufacturers or secure additional capital in order to finance the production of our products.

Need for Additional Capital

If we are unable generate sufficient revenues to pay our expenses and service our debt, and our other existing sources of cash are insufficient to fund our activities, we will need to raise additional funds to continue our operations. We do not have any current 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 will likely 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 achieving and sustaining profitability and we cannot obtain additional funds on commercially reasonable terms or at all, we will likely be required to curtail significantly or cease our operations.

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

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 September 30, 2013, we had $70,000 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 September 30, 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 the 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 $12,000 for the three-month period ended September 30, 2013.

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Foreign Currency Exchange Rate Risk

During the nine months ended September 30, 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 September 30, 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 September 30, 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.

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If we cannot achieve 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 $1.1 million for the year ended December 31, 2011. However, we generated a net loss in the first nine months of 2013 of $7.5 million. We have 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 September 30, 2013, we had a stockholders’ deficit of $14.1 million and a working capital deficit of $9.8 million. We cannot guarantee that we will be successful in achieving profitability and improving our working capital position over time.

Traditionally, our principal source of working capital has been cash from operations. During 2013, we have experienced delays in the collection of certain accounts receivable and have not generated significant new revenues. We have substantial working capital tied up in our accounts receivable. We need to collect our existing accounts receivable and generate new revenues in order to fund our operations.

If we are unable to generate sufficient revenues to pay our expenses and service our debt, 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 will likely 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 achieving profitability and reducing our accumulated deficit, and we cannot obtain additional funds on commercially reasonable terms or at all, we will likely 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 nine months ended September 30, 2013, four customers accounted for 90% of our revenues, and individually accounted for 42%, 21%, 15% and 12%.

In the third quarter of 2013, we did not receive significant orders from our largest customers for a variety of reasons. Based on discussions with these customers, we expect to receive future orders from each of these customers, but the timing and amount is uncertain. If we lose one or more of our significant customers, or if one or more of our significant customers materially scales back its orders as has occurred in 2013, our revenues will likely 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. 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 nine months of 2013, we experienced a significant increase in our past due accounts receivable, including a significant amount of receivables to new customers located in Africa. We currently have $9.4 million of gross accounts receivable to customers in Africa, arising out of sales made in the fourth quarter of 2012 and the first quarter of 2013. Based on our current assessment of the

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customer’s ability to pay, we have taken a reserve against these receivables of $3.5 million. We are working with those customers to either obtain payment on the accounts, or return the inventory so we can attempt to resell it to other customers. Because of our limited working capital, the delay in collection of our accounts receivable has had 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.

We reported in our quarterly report for the period ended June 30, 2013 that we experienced an event of default under our Loan and Security Agreement with Silicon Valley Bank dated September 25, 2012, as amended. We remain in default. Specifically, we failed to comply with financial covenants that require us to (i) maintain a Fixed Charge Coverage Ratio of 1.25 to 1.00 and (ii) a Liquidity Ratio of 1.5 to 1.00. The Fixed Charge Coverage Ratio is a ratio of trailing twelve (12) month EBITDA (less cash paid for capital expenditures and taxes) divided by annualized interest and principal payments payable to the bank, as well as payments on other indebtedness. The Liquidity Ratio is a ratio of cash plus qualified accounts receivable to indebtedness owed to SVB. The event of default gives SVB the right to exercise remedies under the Loan and Security Agreement, including acceleration of all amounts due. We are working with SVB on a forbearance arrangement and to reschedule the repayment of the term loan.

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.

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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.

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Exhibit Index


Exhibit Number		Description of Exhibit

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.

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Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller reporting company