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Patel v. Axesstel, Inc.

United States District Court, S.D. California

February 13, 2015

Amish Patel, Individually and on behalf of all others similarly situated, Plaintiff,
v.
Axesstel, Inc., H. Clark Hickock, and Patrick Gray, Defendant.

ORDER DENYING MOTION TO DISMISS

CATHY ANN BENCIVENGO, District Judge.

On April 24, 2014, Jesse Cowan filed a putative class action complaint against Defendants Axesstel, Inc. ("Axesstel"), its former Chief Executive Officer ("CEO"), H. Clark Hickock, and its Chief Financial Officer ("CFO") and current CEO, Patrick Gray, alleging violation of federal securities laws. The Court then granted an unopposed motion by Amish Patel for appointment as lead plaintiff and for approval of class counsel. On September 22, 2014, Patel filed an amended class action complaint against Defendants. Defendants have moved to dismiss the amended complaint. The motion has been fully briefed, and the Court determined that it was suitable for submission without oral argument. Because the amended complaint alleges facts that create a strong inference of scienter, the motion is DENIED.

I. The Parties

A. The Plaintiff Class

The putative class in this case consists of all purchasers of Axesstel stock between February 28, 2013, to October 17, 2013 (the "Class Period"). [Doc. No. 13 at ¶ 1.] Lead Plaintiff Amish Patel and named plaintiff Jesse Cowan both purchased Axesstel stock on several occasions during the Class Period. [ Id. at ¶¶ 22, 23.]

B. Axesstel

Defendant Axesstel is a Nevada corporation founded in 2000 with its principal place of business in San Diego, California. [ Id. at ¶¶ 24, 30.] As of the end of 2012, Axesstel had a total of thirty-five full-time employees, only fifteen of whom were located in the United States. [ Id. at ¶ 35.] Of the thirty-five employees, six were involved in executive, general and administrative functions, three were involved in sales and marketing, and the remainder worked in product development or operations. [ Id. ] Axesstel also had eight consultants, including seven in sales and marketing, and one in product development. [ Id. ] In its 2012 Form 10-K filing with the Securities and Exchange Commission (the "SEC"), Axesstel stated that it "has a small employee base and depend[s] substantially on [its] current executive officers and key sales, engineering and operational employees." [ Id. at ¶ 37.]

Axesstel provides various wireless and broadband products, including (1) 3G and 4G broadband gateway devices that can be used to provide wireless broadband data to multiple computers on a network, (2) wireless desktop telephones, and (3) wire-line replacement terminals that provide an alternative to a traditional landline telephone network. [ Id. at ¶ 30.] Axesstel sells and markets its products worldwide. In the fourth quarter of 2012, Axesstel came out with a new "Home Alert" product line that, once installed, automatically sends messages to pre-assigned phone numbers or email addresses if the home or office is broken into and a sensor is set off. [ Id. at ¶ 31.] The Home Alert system was intended to be a low cost alternative to traditional monitored alarm services because there is no monthly monitoring fee. [ Id. at ¶ 33.]

C. H. Clark Hickock

Hickock was Axesstel's CEO from March 2008 through October 13, 2013, and a director from March 2008 through October 17, 2013. [ Id. at ¶ 25.] In addition, in early June 2013, Hickock assumed the management responsibilities of Axesstel's Chief Marketing Officer, who resigned on June 7, 2013. [ Id. at ¶ 38.] Going forward, the sales executives for each of Axesstel's four key regional markets reported directly to Hickock. [ Id. ] When announcing this change on June 13, 2013, Axesstel explained that Hickock "has been increasingly active in key customer relationships." [ Id. ] Along these lines, Hickock spent four weeks in Africa in early 2013 during which he had 13 customer meetings and met with a logistics partner and local wireless operators. [ Id. at ¶ 129.]

Hickock participated in the issuance of, signed, or certified as accurate pursuant to a Sarbanes-Oxley Required Certification, [1] most or all of the alleged false statements that form the basis of Plaintiffs' securities fraud claim, including statements made in several of Axesstel's SEC filings during the Class Period. [ Id. at ¶ 26.]

D. Patrick Gray

Gray was Axesstel's CFO from February 2007 through the present, and has also been CEO since October 13, 2013, following Hickock's termination. [ Id. at ¶ 27.] Prior to joining Axesstel, Gray held various finance and accounting positions with other companies. [ Id. ] He has an M.B.A. and a B.S. in business administration with a concentration in accounting. [ Id. ] Like Hickock, the complaint alleges that Gray participated in the issuance of, signed, or certified as accurate most or all of the alleged false statements that form the basis of Plaintiffs' securities fraud claim, including statements made in several of Axesstel's SEC filings during the Class Period.

II. Factual and Procedural Background

Over the course of its 88 pages, the amended complaint identifies a number of allegedly false statements by Defendants during the Class Period. However, the crux of Plaintiffs' securities fraud case is that (1) Axesstel improperly recognized and reported revenue from purported sales of its Home Alert products to five customers in Africa in the fourth quarter of 2012 and first quarter of 2013, and (2) Axesstel misrepresented the collectability of the accounts receivable related to this revenue. As discussed below, Axesstel's alleged false statements were made primarily in its annual and quarterly SEC filings and related conference calls with analysts and investors to discuss those filings.

A. Axesstel's Revenue Recognition Policy

The amended complaint alleges, among other things, that Axesstel violated its own revenue recognition policy in connection with the revenue reported in its SEC filings. That policy, as stated in several of the filings at issue here, includes the following:

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."

[ Id. at ¶ 42.] The amended complaint also alleges some of the terms of the accounting bulletins referenced in Axesstel's revenue recognition policy, which state that revenue is realized or realizable only when:

(a) "Persuasive evidence of an arrangement exists, " with the term "arrangement" meaning the final understanding between the parties as to the specific nature and terms of the agreed-upon transaction; (b) "Delivery has occurred or services have been rendered;" (c) "The seller's price to the buyer is fixed or determinable;" and (d) "Collectability is reasonably assured."

[ Id. at ¶ 43. (quoting SAB 101(A)(1).] Further, the amended complaint alleges that SAB 104, Topic 13, 3(b) explains:

After delivery of a product or performance of a service, if uncertainty exists about customer acceptance, revenue should not be recognized until acceptance occurs. Customer acceptance provisions may be included in a contract, among other reasons, to enforce a customer's rights to (1) test the delivered product... Accordingly, when such contractual customer acceptance provisions exist, the staff generally believes that the seller should not recognize revenue until customer acceptance occurs or the acceptance provisions lapse.

[ Id. at ¶ 51.]

B. February 28, 2013

1. SEC Filings

The first set of Axesstel's alleged false statements occurred on February 28, 2013, when it filed with the SEC its Fiscal Year 2012 ("FY 2012") Form 10-K, its FY 2012 Form 8-K, and a separate press release announcing its results that was attached to the Form 8-K (the "FY 2012 PR"). The 10-K was signed by Hickock and Gray, while the 8-K was signed by Gray alone. [ Id. at ¶ 70.] These documents announced Axesstel's financial results for the fourth quarter ("Q4") of 2012, and for FY 2012 as a whole. To that end, Axesstel recognized a total of $15.8 million in revenue in Q4 2012, which amount included $3.5 million resulting from the purported sales of Home Alert products to two ...


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