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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2005
[ ] 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 1-15687
ATSI COMMUNICATIONS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 74-2849995
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
8600 WURZBACH, SUITE 700W
SAN ANTONIO, TEXAS 78240
(Address of Principal Executive Offices)
(210) 614-7240
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
CLASS OUTSTANDING AS OF MARCH 15, 2005
Common Stock, $.001 par 8,960,311
Transitional Small Business Disclosure Format: Yes [ ] No [X]
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED JANUARY 31, 2005
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of January 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the Three and Six Months
Ended January 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Comprehensive Loss for the Three and Six Months
Ended January 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2005 and 2004. . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . 8
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
Item 3. Default upon senior securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(unaudited)
January 31,
2005
-------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 4
Accounts receivable 175
Prepaid & other current assets 68
-------------
Total current assets 247
-------------
PROPERTY AND EQUIPMENT 152
Less - Accumulated depreciation (41)
-------------
Net property and equipment 111
-------------
OTHER ASSETS, net
Intangible Assets, net of accumulated amortization of $16 16
-------------
Total assets $ 374
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Pre-petition liabilities of bankrupt subsidiaries, net of assets $ 12,104
Accounts payable 541
Accrued liabilities 593
Current portion of obligation under capital leases 3
Notes payable 120
Convertible debentures 275
Series D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares issued and
outstanding. 1,160
Series E Cumulative Preferred Stock, 10,000 shares authorized, 1,170 shares issued and
outstanding 1,310
Liabilities from discontinued operations, net of assets 1,152
-------------
Total current liabilities 17,258
-------------
LONG-TERM LIABILITIES:
Notes payable 500
Obligation under capital leasses, less current portion 10
Other 9
-------------
Total long-term liabilities 519
-------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 3,750 issued
and outstanding -
Series H Convertible Preferred Stock, 16,000,000 shares authorized, 14,001,030 issued
and outstanding 14
9
Additional paid in capital 71,777
Accumulated deficit (89,705)
Other comprehensive Income 502
-------------
Total stockholders' deficit (17,403)
-------------
Total liabilities and stockholders' deficit $ 374
=============
1
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended January 31, Six-months ended January 31,
------------------------------------ ------------------------------------
2005 2004 2005 2004
----------------- ----------------- ----------------- -----------------
OPERATING REVENUES:
Services
Carrier services $ 1,446 $ 209 $ 2,215 $ 242
Network services 74 42 147 84
----------------- ----------------- ----------------- -----------------
Total operating revenues 1,520 251 2,362 326
OPERATING EXPENSES:
Cost of services (exclusive of depreciation
and amortization, shown below) 1,422 218 2,194 267
Selling, general and administrative 82 128 306 249
Legal and professional fees 40 88 305 149
Non-cash warrant expense, for services 591 15 591 30
Non-cash stock-based compensation, employees 474 - 474 -
Bad debt expense 4 - 4 4
Depreciation and amortization 24 - 47 -
----------------- ----------------- ----------------- -----------------
Total operating expenses 2,637 449 3,921 699
----------------- ----------------- ----------------- -----------------
OPERATING LOSS (1,117) (198) (1,559) (373)
OTHER INCOME (EXPENSE):
Other expense 4 - 4 1
Debt forgiveness income - - 460 -
Loss on an unconsolidated affiliate - (53) - (60)
Interest expense (35) (25) (66) (52)
----------------- ----------------- ----------------- -----------------
Total other income (expense) (31) (78) 398 (111)
NET LOSS (1,148) (276) (1,161) (484)
LESS: PREFERRED DIVIDENDS (38) (93) (76) (186)
----------------- ----------------- ----------------- -----------------
NET LOSS TO COMMON
STOCKHOLDERS ($1,186) ($369) ($1,237) ($670)
================= ================= ================= =================
BASIC AND DILUTED LOSS PER SHARE ($0.19) ($0.36) ($0.24) ($0.65)
================= ================= ================= =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 6,346,695 1,036,550 5,088,741 1,036,550
================= ================= ================= =================
2
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
For the three-months ended January 31, For the six-month ended January 31,
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Net loss to common stockholders ($1,186) ($369) ($1,237) ($670)
Foreign currency translation adjustment - - - -
------------------ ------------------ ------------------ ------------------
Comprehensive loss to common stockholders ($1,186) ($369) ($1,237) ($670)
================== ================== ================== ==================
3
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Six-months ended January 31,
2005 2004
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($1,161) ($484)
Adjustments to net loss:
Debt forgiveness income (460) -
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 47 -
Loss on an unconsolidated affiliate - 60
Non-cash issuance of stock grants and options, employees 474 -
Non-cash issuance of common stock and warrants for services 662 32
Provision for losses on accounts receivable 4 4
Changes in operating assets and liabilities:
Increase in
Accounts receivable (150) (29)
Prepaid expenses and other (42) (6)
Increase in
Accounts payable 130 139
Accrued liabilities 39 28
---------------- ----------------
Net cash used in operating activities (457) (256)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (8) -
Cash proceeds from sale of ATSICOM - 125
Investment in joint venture in ATSICOM - (47)
Acquisition of business (8) -
---------------- ----------------
Net cash (used in) provided by investing activities (16) 78
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 370 125
Payments on notes payable (774) -
Proceeds from the exercise of warrants 788 -
Principal payments on capital lease obligation (1) -
---------------- ----------------
Net cash provided by financing activities 383 125
---------------- ----------------
DECREASE IN CASH (90) (53)
---------------- ----------------
CASH AND CASH EQUIVALENTS, beginning of period 94 140
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 4 $ 87
================ ================
NON-CASH TRANSACTIONS
Issuance of common stock for conversion of debts $ 733
Issuance of common stock for purchase of Intangible assets 24
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of ATSI Communications,
Inc. have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and
Exchange Commission ("SEC"), and should be read in conjunction with the audited
financial statements and notes thereto of ATSI Communications Inc. filed with
the SEC on Form 10-K for the year ended July 31, 2004. In the opinion of
management, these interim financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements, which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year
ended July 31, 2004, as reported in the Form 10-K, have been omitted.
NOTE 2 - STOCK BASED COMPENSATION
ATSI accounts for its employee stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. ATSI granted 2,104,001 options to purchase common stock to employees
in the six months ending January 31, 2005. Sixty percent of these options vest
immediately and the remaining balances vest over three years. ATSI recorded
compensation expense of $42 under the intrinsic value method during the six
months ended January 31, 2005.
The following table illustrates the effect on net loss and net loss per share if
ATSI had applied the fair value provisions of FASB Statement No.123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Six Months Ended
January 31, January 31,
2005 2004 2005 2004
------------- ----------- --------- -----------
Net loss as reported $ (1,186) $ (369) $ (1,237) $ (670)
Add: stock based
compensation
determined under
intrinsic value-
based method 42 - 42 -
Less: stock based
compensation
determined under
fair value-
based method (1,000) - (1,000) -
------------- ----------- --------- -----------
Pro forma net loss $ (2,144) $ (369) $ (2,195) $ (670)
5
Basic and diluted net
loss per common share:
As reported $ (.19) $ (.36) $ (.25) $ (.65)
Pro forma (.34) (.36) (.44) (.65)
Additionally, during the six months ended January 31, 2005, ATSI issued 955,946
shares and 58,245 shares to its employees and consultants with a market value of
$463 and $40, respectively.
NOTE 3 - PRE-PETITION LIABILITIES (NET OF ASSETS) OF THE BANKRUPT SUBSIDIARIES
ATSI's subsidiaries, American TeleSource International, Inc. (ATSI Texas) and
TeleSpan, Inc. (TeleSpan) filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively. The
court ordered joint administration of both cases on April 9, 2003 and on May 14,
2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
were ATSI's primary operating companies and they have ceased operations. These
bankruptcies did not include ATSI Communications, Inc., the reporting entity.
On July 2, 2003, the U.S. Bankruptcy Court handling the Chapter 7 cases for ATSI
Texas and TeleSpan approved the sale of two of their subsidiaries, ATSI de
Mexico S.A de C.V. (ATSI Mexico) and Servicios de Infraestructura S.A de C.V.
(SINFRA), to Latingroup Ventures, L.L.C. (LGV), a non-related party. Under the
purchase agreement LGV acquired all the communication center assets and assumed
all related liabilities. Additionally, under the agreement, LGV acquired the
"Comercializadora" License owned by ATSI Mexico and the Teleport and Satellite
Network License and the 20-year Packet Switching Network license owned by
SINFRA. The Chapter 7 Bankruptcy Trustee received $17,500, which represents all
the proceeds from the sale of these entities. The Chapter 7 Bankruptcy Trustee
will manage the designation of these funds for the benefit of the creditors of
ATSI Texas and TeleSpan. Upon liquidation of all the assets owned by ATSI Texas
and TeleSpan, the Chapter 7 Trustee will negotiate all claims with creditors.
ATSI has not received any creditor objections to these court proceedings.
The following represents the pre-petition liabilities of the bankrupt
subsidiaries, net of assets (in thousands):
CURRENT LIABILITIES: January 31, 2005
-------------------- ----------------
Accounts payable $ 7,496
Accrued liabilities 2,015
Notes payable 386
Capital leases 2,207
----------------
TOTAL CURRENT LIABILITIES: $ 12,104
================
NOTE 4 - NOTES PAYABLE
6
During the first six months of fiscal 2005, ATSI borrowed a total of $370 from
Recap Marketing & Consulting, LLP and entered into a series of unsecured
convertible promissory notes bearing interest at the rate of 12% per annum, with
the following maturity dates:
ORIGINATION DATE AMOUNT MATURITY DATE
---------------- ------- ------------------
August 23, 2004 $ 25 August 23, 2005
August 30, 2004 25 August 30, 2005
September 15, 2004 25 September 15, 2005
September 20, 2004 150 September 20, 2005
October 8, 2004 25 October 8, 2005
October 12, 2004 25 October 12, 2005
October 15, 2004 10 October 15, 2005
October 25, 2004 15 October 25, 2004
November 5, 2004 25 November 5, 2005
November 15, 2004 15 November 15, 2005
December 1, 2004 10 December 1, 2005
December 21, 2004 10 December 1, 2005
January 4, 2005 10 January 4, 2006
--------
TOTAL $ 370
--------
On November 1, 2004, ATSI entered into a note payable with Franklin Cardwell and
Jones, PC, for $103 associated with legal and professional services previously
rendered. The promissory note payable has a maturity date of December 1, 2005
and has an annual interest rate of 6%. The note is secured by ATSI equipment and
accounts receivable. If ATSI pays the total outstanding balance on or before
April 30, 2005, all accrued interest is waived and ATSI receives a 10% discount
on the total outstanding balance. Beginning November 1, 2005, the holder of the
note may convert all or any part of the outstanding balance and accrued and
unpaid interest to shares of ATSI's common stock equal to the amount converted
divided by the product of (a). 90 times (b) the five-day average of the last
sales of the common stock prior to the conversion day.
NOTE 5 - WARRANTS
On October 13, 2003, ATSI entered into consulting agreements for twelve months
with certain individual affiliates of Recap Marketing & Consulting, LLP that
provided for the issuance of compensation warrants to purchase a total of
3,900,000 shares of ATSI's common stock at prices as indicated in the following
table. These warrants expire on November 30, 2005. At issuance ATSI recognized
$7,053 of non-cash compensation expense associated with the issuance of these
warrants.
COMMON SHARES EXERCISE PRICE
------------- --------------
2,000,000 $ 0.01/share
800,000 $ 0.25/share
850,000 $ 0.50/share
250,000 $ 0.75/share
During the 2nd quarter of fiscal 2005, individual affiliates of Recap Marketing
& Consulting LLP elected to exercise 3,380,644 warrants and Recap Marketing &
Consulting LLP forgave notes in the amount of $774 as the conversion price. The
following reflect the various exercise of warrants.
7
COMMON
---------
EXERCISE DATE EXERCISE PRICE SHARES
------------------ --------------- ---------
September 21, 2004 $ 0.01/share 762,000
October 14, 2004 $ 0.01/share 436,000
October 15, 2004 $ 0.01/share 150,000
November 2, 2004 $ 0.01/share 50,000
November 11, 2004 $ 0.01/share 36,100
November 11, 2004 $ 0.25/share 495,072
December 10, 2004 $ 0.25/share 300,000
December 15, 2004 $ 0.25/share 4,928
December 15, 2004 $ 0.50/share 95,072
December 17, 2004 $ 0.50/share 130,000
January 14, 2005 $ 0.50/share 834,472
January 31, 2005 $ 0.50/share 87,000
---------
3,380,644
---------
On November 1, 2004, ATSI extended the consulting agreements for an additional
six months with certain individual affiliates of Recap Marketing & Consulting,
LLP that provided for the issuance of compensation warrants to purchase a total
of 1,000,000 shares of ATSI's common stock at price of $0.50 per share. These
warrants expire on October 31, 2005. At signing of the extension to the
consulting agreements ATSI recognized $591 of non-cash compensation expense
associated with the issuance of these warrants.
NOTE 6 - SETTLEMENT AND RESTRUCTURING OF DEBT
On October 1, 2004, ATSI entered into a Settlement Agreement and Mutual release
with Alfonso Torres Roqueni, the former owner of the concession license
purchased by ATSICOM in July 2000. Under the settlement agreement amounts owed
of $1,360 were restructured and settled in exchange for the issuance by ATSI of
687,600 common shares for the payment of $860 of the related obligation. The
common shares were considered issued at $1.25 per share. However, if on the
measurement date of April 1, 2005, the average closing price of the ATSI common
stock for the ten (10) trading days immediately preceding the measurement date
is below $1.15, ATSI will be required to issue an additional 59,791 common
shares. If, however, the average closing price of the ATSI common stock for the
ten (10) trading days immediately preceding the measurement date is at or above
$1.15, no other consideration will be given and the 687,600 shares issued will
be considered as the final consideration. Additionally as part of the
settlement, ATSI issued a promissory note for the remaining balance of $500.
The note accrues interest at the rate of 6% per annum and has a maturity date of
October 1, 2007, with no monthly payments. ATSI recognized a gain of $235 on the
settlement of this debt.
On October 26, 2004, ATSI entered into a Settlement Agreement and Mutual release
with Infraestructura Espacial, S.A de C.V. and Tomas Revesz, a former ATSI
director. Under the settlement agreement, ATSI issued 30,000 shares of its
common stock for the settlement of all principal and interest owed under a note
payable in the amount of $250. This note was originally entered into on March
22, 2001 and subsequently restructured on September 12, 2002. ATSI recognized a
gain of $225 on the settlement of this debt.
8
NOTE 7 - ACQUISITION OF A LOCAL EXCHANGE CARRIER COMPANY
On August 1, 2004, ATSI entered into an Asset Purchase Agreement with Hinotel,
Inc., a Hispanic owned Competitive Local Exchange Carrier ("CLEC") based in
South Texas. The assets purchased under the agreement included Hinotel's
customer base, a customer management and billing system, and supplier contracts.
Additionally, the transaction included the assignment and transfer of the CLEC
license in the State of Texas. The purchase price of the assets was $32, paid
in 40,000 shares of ATSI common stock and $8 in cash.
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to January 31, 2005, ATSI amended the extension to the consulting
agreement entered into with certain individual affiliates of Recap Marketing &
Consulting, LLP on November 1, 2004. The amended consulting agreement provides
for the issuance of compensation warrants to purchase a total of 1,250,000
shares of ATSI's common stock at prices as indicated in the following table.
These warrants expire on February 28, 2006.
COMMON SHARES EXERCISE PRICE
------------- ---------------
300,000 $ 0.40/share
300,000 $ 0.30/share
650,000 $ 0.35/share
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: This Quarterly Report on Form 10-QSB contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
"Forward looking statements" are those statements that describe management's
beliefs and expectations about the future. We have identified forward-looking
statements by using words such as "anticipate," "believe," "could," "estimate,"
"may," "expect," and "intend." Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Additional Risk Factors section of the Annual
Report Form 10-K and other documents filed with the Securities and Exchange
Commission. Therefore, these types of statements may prove to be incorrect.
The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three and six months ended January 31,
2005 and 2004. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included in
the annual report on Form 10-K filed with the SEC on November 8, 2004. As used
in this section, the term "fiscal 2005" means the year ending July 31, 2005 and
"fiscal 2004" means the year ended July 31, 2004.
GENERAL
We are an international telecommunications carrier that utilizes the
Internet to provide economical international telecommunications services. Our
current operations consist of providing digital voice communications over data
networks and the Internet using Voice-over-Internet-Protocol ("VoIP"). We
provide high quality voice and enhanced telecommunication services to carriers,
telephony resellers and others through various agreements with local service
providers in the United States, Mexico, Asia, the Middle East and Latin America
utilizing VoIP telephony services. Our services are as follows:
9
Carrier Services: We provide VoIP termination services to United States and
Latin American telecommunications companies who lack transmission
facilities, require additional capacity or do not have the regulatory
licenses to terminate traffic in Mexico, Asia, the Middle East and Latin
America. Typically these telecommunications companies offer their services
to the public for domestic and international long distance services.
Network Services: We offer private communication links for multi-national
and Latin American corporations or enterprise customers who use a high
volume of telecommunications services to communicate with their U.S.
offices or businesses and need greater dependability than is available
through public networks. These services include data, voice and fax
transmission as well as Internet services between the customers multiple
international offices and branches
On August 1, 2004, we acquired a Local Exchange Carrier ("CLEC") based in
South Texas. This acquisition will serve as a gateway to reach out to the
Hispanic communities residing along the US and Mexico border. Our strategy is
to provide reliable and affordable local and long distance services to the
underserved Hispanic community through Texas. Our entry to the retail services
arena will allow us to leverage our existing international VoIP network with
additional services that have the potential to deliver higher margins than our
wholesale international VoIP services. We have deployed various postpaid and
prepaid retail services and generated approximately $43,000 in retail services
revenue during the six months ended January 31, 2005.
We have incurred operating losses and deficiencies in operating cash flows
in each year since our inception in 1994 and expect our losses to continue
through July 31, 2005. Our operating losses were $8,485,000, for the year
ending July 31, 2004. We had an operating loss of $1,559,000, for the six
months ended January 31, 2005 and a working capital deficit of $17,010,000 at
January 31, 2005. Due to such recurring losses, as well as the negative cash
flows generated from our operations and our substantial working capital deficit,
the auditor's opinion on our financial statements as of July 31, 2004 calls
attention to substantial doubts about our ability to continue as a going
concern. This means that there is substantial doubt that we will be able to
continue in business through July 31, 2005.
We have experienced difficulty in paying our vendors and lenders on time in
the past. As a result, during the six months ended January 31, 2005 management
continued to pursue different avenues for funding and we entered into various
short-term convertible promissory notes in the aggregate amount of $370,000.
These funds have allowed the Company to pay those operating and corporate
expenses that were not covered by our current cash inflows from operations. We
will continue to require additional funding until the cash inflows from
operations are sufficient to cover the monthly operating expenses. There is no
assurance that we will be successful in securing additionally funding over the
next twelve months.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's results
of operations in dollar mounts and as a percentage of total revenues for the
three and six-month period ended January 31, 2005 and 2004.
10
Three months ended January 31, Six months ended January 31,
------------------------------ ----------------------------
2005 2004 2005 2004
---- ---- ---- ----
(Unaudited)
-----------
$ % $ % $ % $ %
--------- -------- --------- -------- --------- -------- --------- --------
Operating revenues
------------------
Services
Carrier services $ 1,446 95% $ 209 83% $ 2,215 94% $ 242 74%
Network services 74 5% 42 17% 147 6% 84 26%
--------- -------- --------- -------- --------- -------- --------- --------
Total operating revenues 1,520 100% 251 100% 2,362 100% 326 100%
Cost of services (Exclusive of depreciation
and amortization, shown below) 1,422 94% 218 87% 2,194 93% 267 82%
--------- -------- --------- -------- --------- -------- --------- --------
Gross Margin 98 6% 33 13% 168 7% 59 18%
Selling, general and administrative
expense 82 5% 128 51% 306 13% 249 76%
Legal and professional fees 40 3% 88 35% 305 13% 149 46%
Non-cash warrant expense, for services 591 39% 15 6% 591 25% 30 9%
Non-cash stock-based compensation, employees 474 31% - 0% 474 20% - 0%
Bad debt expense 4 0% - 0% 4 0% 4 1%
Depreciation and amortization 24 2% - 0% 47 2% - 0%
--------- -------- --------- -------- --------- -------- --------- --------
Operating loss (1,117) -73% (198) -79% (1,559) -66% (373) -114%
Debt forgiveness income 0 0% - 0% 460 19% - 0%
Other expense (31) -2% (78) -31% (62) -3% (111) -34%
--------- -------- --------- -------- --------- -------- --------- --------
Net loss (1,148) -76% (276) -110% (1,161) -49% (484) -148%
--------- -------- --------- -------- --------- -------- --------- --------
Less: preferred stock dividends (38) -3% (93) -37% (76) -3% (186) -57%
--------- -------- --------- -------- --------- -------- --------- --------
Net loss to applicable to
common shareholders ($1,186) -78% ($369) -147% ($1,237) -52% ($670) -206%
--------- --------- --------- ---------
11
THREE MONTHS ENDED JANUARY 31, 2005 COMPARED TO THREE MONTHS ENDED JANUARY 31,
2004
Operating Revenues. Consolidated operating revenues increased by 506%
between periods from $251,000 for the quarter ended January 31, 2004 to
$1,520,000 for the quarter ended January 31, 2005.
Carrier services revenues increased approximately $1,237,000, or 592% from
the quarter ended January 2004 to the quarter ended January 2005. Our carrier
traffic increased from approximately 4.9 million minutes in the quarter ended
January 31, 2004 to approximately 41.9 million minutes during the quarter ended
January 31, 2005. The increase in revenue and carrier traffic can mainly be
attributed to the growth in VoIP carrier services since the implementation of
the NexTone VoIP soft-switch during the last quarter of fiscal 2004.
Network services revenues increased approximately 76% or $32,000 from the
quarter ended January 31, 2004 to the quarter ended January 31, 2005. The
increase in network services revenue is primarily due to the purchase and
assignment of a network services contract from American TeleSource International
de Mexico S.A de C.V. (ASTIMEX). Under the assignment and purchase agreement
with ATSIMEX, we acquired the remaining term of the network services contract,
which extended from February 2004 through June 2004 and generated monthly
revenues of approximately $22,000. The agreement has expired and we are
providing service to this customer on a month-to-month basis at the same revenue
rate.
Cost of Services (Exclusive of depreciation and amortization). The
consolidated cost of services increased by approximately $1,204,000 from the
quarter ended January 31, 2004 to the quarter ended January 31, 2005. The
increase in cost of services is a direct result of the increase in carrier
services revenue and network services revenue. As mentioned above, our carrier
traffic increased from approximately 4.9 million minutes during the quarter
ended January 31, 2004 to approximately 41.9 million minutes in the quarter
ended January 31, 2005, thus increasing our cost of services between quarters.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased by approximately $46,000, or 36% from the quarter ended January 31,
2004 to the quarter ended January 31, 2005. The decease is attributable to an
adjustment in salaries and wages and a reversal of an over-accrual for services
previously recognized.
Legal and professional Fees. Legal and professional fees decreased by
approximately $48,000, or 55% from the quarter ended January 31, 2004 to the
quarter ended January 31, 2005. During the quarter ended January 31, 2004, the
company incurred approximately $50,000 various legal and professional services
associated to the proxy preparation and annual shareholder meeting. These legal
and professional expenses were not incurred during the quarter ended January 31,
2005.
Non-cash warrant expense, for services. Non-cash warrant expense for
services increased by $576,000 from the quarter ended January 31, 2004 to the
quarter ended January 31, 2005. This increase is primarily due to recognition
of approximately $591,000 in non-cash compensation expense associated with the
consulting agreements entered into with certain individual affiliates of Recap
Marketing & Consulting, LLP. The consulting agreement provided for the issuance
of compensation warrants to purchase a total of 1,000,000 shares of ATSI's
common stock at price of $0.50 per share.
Non-cash stock-based compensation, employees. Non-cash compensation expense
to employees increased by $474,000 from the quarter ended January 31, 2004 to
the quarter ended January 31, 2005. This increase is attributed to the
recognition of approximately $474,000 in non-cash compensation expense
associated with the grant of stock options and stock grants to our employees and
board of directors.
Bad debt expense. Bad debt expense increased by $4,000 from the quarter
ended January 31, 2004 to the
12
quarter ending January 31, 2005. During the quarter ending January 31, 2005 we
recognized $4,000 in bad debt expense associated with the write-off of a
carriers services customer that ceased operations.
Depreciation and Amortization. Depreciation and amortization increased by
100% or $24,000 from the quarter ended January 31, 2004 to the quarter ended
January 31, 2005. The increase is attributed to the recognition of depreciation
expense and amortization on the NexTone VoIP soft-switch that was acquired
during the last quarter of fiscal 2004.
Operating Loss. The Company's operating loss increased by approximately
$919,000 or 464% from the quarter ended January 31, 2004 to the quarter ended
January 31, 2005. The increase in operating loss is attributed to the
recognition of $591,000 in non-cash warrant expense and $474,000 in non-cash
stock based compensation expense associated with the stock options and stock
grants awarded to the company employees and board of directors. The increase in
non-cash warrant and compensation expense was offset slightly by the increase in
gross margin of approximately $65,000.
Other expense. Other expense decreased approximately $47,000 or 60% from
the quarter ended January 31, 2004 to the quarter ended January 31, 2005. The
decrease in other expense is attributed to the decrease in loss in investment in
ATSICOM of approximately $53,000 recognized during the quarter ended January 31,
2004 associated with our portion of the losses on our investment in ATSICOM.
During the quarter ended January 31, 2005 the Company did not have a loss in
ATSICOM.
Preferred Stock Dividends. Preferred Stock Dividends expense decreased by
approximately $55,000 between periods, from $93,000 for the quarter ended
January 31, 2004 to $38,000 during the quarter ended January 31, 2005. During
fiscal 2004 we converted all Redeemable Preferred Series F and Series G shares
to common. As a result of these conversions, no dividends were incurred during
the quarter ended January 2005 related to these securities.
Net loss to Common Stockholders. The net loss for the quarter ended
January 31, 2005 increased to $1,186,000 from $369,000 for the quarter ended
January 31, 2004. The increase in net loss to common stockholders is mainly
attributed to the recognition of $591,000 in non-cash warrant expense and
$474,000 in non-cash stock based compensation expense associated with the stock
options and grants awarded to the company employees. Also, there was an
increase in depreciation and amortization of approximately $24,000 from the
quarter ended January 31, 2004 to the quarter ended January 31, 2005. The
increase in non-cash warrant and compensation expense and depreciation expense
was offset slightly by the increase in gross margin of approximately $65,000.
SIX MONTHS ENDED JANUARY 31, 2005 COMPARED TO SIX MONTHS ENDED JANUARY 31, 2004
Operating Revenues. Consolidated operating revenues increased by 625%
between periods from $326,000 for the six months ended January 31, 2004 to $2.4
million for the six months ended January 31, 2005.
Carrier services revenues increased approximately $2 million, or 815% from
the six months ended January 2004 to the six months ended January 2005. Our
VoIP carrier traffic increased from approximately 5.7 million minutes during the
six months ended January 31, 2004 to approximately 65.4 million minutes during
the six months ended January 31, 2005. The increase in revenue and carrier
traffic can mainly be attributed to an increase in capacity during the last
quarter of fiscal 2004.
Network services revenues increased approximately 75% or $63,000 from the
six-month period ended January 31, 2004 to the six-month period ended January
31, 2005. The increase in network services revenue is primarily due to the
purchase and assignment of a network services contract from American TeleSource
International de Mexico S.A de C.V. (ASTIMEX). Under the assignment and
purchase agreement with ATSIMEX, we acquired the remaining term of
13
the contract, which extended from February 2004 through June 2004 and generated
monthly revenues of approximately $22,000. The agreement has expired and we are
providing service to this customer on a month-to-month basis at the same revenue
rate.
Cost of Services (Exclusive of depreciation and amortization). The
consolidated cost of services increased by approximately $1.9 million, or 722%
from the six months ended January 31, 2004 to the six months ended January 31,
2005. The increase in cost of services is a direct result of the increase in
carrier services revenue and network services revenue. As mentioned above, our
carrier traffic increased from approximately 5.7 million minutes during the six
months ended January 31, 2004 to approximately 65.4 million minutes in the six
months ended January 31, 2005, thus increasing our cost of services between
periods.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased by approximately $57,000, or 23% from the six-month period ended
January 31, 2004 to the six-month period ended January 31, 2005. The increase is
attributed to the recognition of approximately $61,000 in wages and contract
labor associated with the operations of the retail services acquired during
fiscal 2005.
Legal and professional Fees. Legal and professional fees increased by
approximately $156,000, or 105% from the six-month period ended January 31, 2004
to the six-month period ended January 31, 2005. The increase is attributable to
the recognition of approximately $150,000 in professional fees associated with a
marketing campaign that commenced during the first quarter of fiscal 2005.
Additionally, during the six-month period we recognized approximately $90,000 in
legal fees associated to the lawsuit for stock fraud and manipulation by various
institutions.
Non-cash warrant expense, for services. Non-cash warrant expense for
services increased by $561,000 from the six months ended January 31, 2004 to the
six months ended January 31, 2005. This increase is primarily due to recognition
of approximately $591,000 in non-cash compensation expense associated with the
consulting agreements entered into with certain individual affiliates of Recap
Marketing & Consulting, LLP. The consulting agreement provided for the issuance
of compensation warrants to purchase a total of 1,000,000 shares of ATSI's
common stock at price of $0.50 per share.
Non-cash stock-based compensation, employees. Non-cash compensation expense
to employees increased by $474,000 from the six months ended January 31, 2004 to
the six months ended January 31, 2005. This increase is attributed to
recognition of approximately $474,000 in non-cash compensation expense
associated with the grant of stock options and stock grants to our employees and
board of directors.
Bad debt expense. Bad debt expense remained consistent at $4,000 over the
six months ended January 31, 2004 and the six months ended January 31, 2005.
During the six months ended January 31, 2005 we recognized $4,000 in bad debt
expense associated with the write-off of a carriers services customer that
ceased operations.
Depreciation and Amortization. Depreciation and amortization increased by
100% or $47,000 from the six months ended January 31, 2004 to the six months
ended January 31, 2005. The increase is attributed to the recognition of
depreciation expense and amortization on the NexTone VoIP soft-switch that was
acquired during the last quarter of fiscal 2004.
Operating Loss. The Company's operating loss increased by approximately
$1,186,000 or 318% from the six months ended January 31, 2004 to the six months
ended January 31, 2005. The increase in operating loss is attributed to the
recognition of $591,000 in non-cash warrant expense and $474,000 in non-cash
stock based compensation expense associated with the stock options and stock
grants awarded to the company employees and board of directors. The increase in
non-cash warrant and compensation expense was offset slightly by the increase in
gross margin of approximately $109,000.
14
Debt forgiveness income. Our debt forgiveness income increased
approximately $460,000 from the six months ended January 31, 2004 to the six
months ended January 31, 2005. During the six-month period ended January 31,
2005, we negotiated and exchanged various liabilities for equity. These
settlements were related to the settlement of the $859,500 liability with
Alfonso Torres Roqueni, the former owner of the concession license acquired in
July 2000, and the settlement of a $250,000 note payable with Infraestructura
Espacial, S.A de C.V. and Tomas Revesz, a former ATSI director. The debt
forgiveness income was based on the difference between the market price of ATSI
equity at the time of issuance and the market price calculated at the time of
the settlement of the debt.
Other expense. Other expense decreased approximately $49,000 or 44% from
the six months ended January 31, 2004 to the six months ended January 31, 2005.
The decrease in other expense is attributed to the decrease in loss in
investment in ATSICOM of approximately $53,000 recognized during the six months
ended January 31, 2004 associated with our portion of the losses on our
investment in ATSICOM. During the six months ended January 31, 2005 the Company
did not have any loss in ATSICOM.
Preferred Stock Dividends. Preferred Stock Dividends expense decreased by
approximately $110,000 between periods, from $186,000 for the six months ended
January 31, 2004 to $76,000 during the six months ended January 31, 2005.
During fiscal 2004 we converted all Redeemable Preferred Series F and Series G
shares to common. As a result of these conversions, no dividends were incurred
during the six months ended January 2005 related to these securities.
Net loss to Common Stockholders. The net loss for the six months ended
January 31, 2005 increased to $1,237,000 from $670,000 for the six months ended
January 31, 2004. The increase in net loss to common stockholders is mainly
attributed to the recognition of $591,000 in non-cash warrant expense and
$474,000 in non-cash stock based compensation expense associated with the stock
options and stock grants awarded to the company employees and board of
directors. Also, there was an increase in depreciation and amortization of
approximately $47,000 from the six months ended January 31, 2004 to the six
months ended January 31, 2005. The increase in non-cash warrant and compensation
expense and depreciation expense was offset slightly by the increase in gross
margin of approximately $109,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities: During the six months ended January 31,
2005, operations consumed approximately $457,000 in cash. This cash consumed by
operations is primarily due to net losses of approximately $1.2 million incurred
during the six months ending January 31, 2005 plus non-cash income of $460,000
arising from the forgiveness of debts. During the six months ended January 31,
2005 we recognized $474,000 in non-cash compensation expense associated with the
stock grants and stock options awarded to the employees and board of directors.
Additionally, we recognized $662,000 in non-cash warrant expense associated with
the consulting services agreement entered into during the second quarter of
fiscal 2005. We also recognized an increase in accounts payable of approximately
$130,000 and an increase in accrued liabilities of approximately $39,000. The
increase in accrued liabilities and accounts payable is primarily due to the
company recognizing approximately $66,000 in interest expense associated with
various notes, the accrual of preferred stock dividends of $76,000 and the
accrual of professional fees of approximately $20,000 associated with the
quarterly reviews and legal consulting work rendered during the six months.
Also, we recognized an increase in accounts receivables of $150,000 associated
with the billing to our customers during the quarter ending January 31, 2005. We
also recognized an increase in prepaid expenses for $30,000 related to the
prepayments/retainers to our attorneys for legal services.
Cash provided used in investing activities: During the six months ended
January 31, 2005, the Company made various payments for $8,000 related to the
acquisition of some telecommunications equipment acquired during fiscal 2005.
Additionally, during the quarter ended October 31, 2004, ATSI entered into an
Asset Purchase Agreement with
15
Hinotel, Inc., a Hispanic owned Competitive Local Exchange Carrier ("CLEC")
based in South Texas. The assets purchase under the agreement included
Hinotel's customer base, a customer management and billing system, and supplier
contracts. The transaction also included the assignment and transfer of the
CLEC license in the State of Texas. The purchase price of the assets was
$31,500, paid in 40,000 shares of ATSI common stock and $7,500 in cash.
Cash provided by financing activities: During the quarter ended October
31, 2004 we made principal payments on our capital lease obligation for
approximately $1,000 and we received $788,000 from the exercise of warrants and
$370,000 from proceeds from various notes payables. In addition, a result of
the exercise of warrants we also recognized payments of $774,000 on our notes
payable.
Overall, our net operating, investing and financing activities during the
six months ended January 31, 2005 provided a decrease of approximately $90,000
in cash balances. We intend to cover our monthly operating expenses with our
remaining available cash. Additionally, we will continue to pursue additional
equity offerings to cover our deficiencies in cash reserves. However, there is
no assurance that we will be able to secure the equity offerings required to
supplement our deficiencies in cash reserves.
Our working capital deficit at January 31, 2005 was approximately
$17,010,000. This represents a decrease of approximately $1,938,000 from our
working capital deficit at July 31, 2004. The decrease can primarily be
attributed to the settlement of various liabilities through the issuance of
common stock. These settlement were related to the settlement of $859,500
liability with Alfonso Torres Roqueni, the former owner of the concession
license acquired in July 2000 and the settlement of a $250,000 note payable with
Infraestructura Espacial, S.A de C.V. and Tomas Revesz, a former ATSI director.
Our working capital deficit at January 31, 2005 included approximately
$12,104,000 related to the pre-petition liabilities (net of assets), associated
with ATSI-Texas and TeleSpan, the two subsidiaries currently under Chapter 7
Bankruptcy. The pre-petition liability balance is composed primarily of the
following:
- $3 million in debt owed to IBM Corporation associated to a capital
lease;
- $1.3 million in debt to Northern Telecom, a subsidiary of Nortel
Networks, associated with some telecommunications equipment acquired
during fiscal year 2001;
- $5.1 million in debt to various international and domestic
telecommunications carriers for services provided during fiscal year
2002 and 2003;
- $250,000 in property taxes to various taxing entities,
- $550,000 to Universal Service Fund for telecommunication taxes;
and
- $2.4 million associated with rent expense, salaries and wages and
professional services to various entities.
Our working capital deficit after exclusion of the pre-petition liabilities is
approximately $5,612,000.
Our current obligations include $103,000 owed to Attorneys for legal
services rendered during fiscal 2004.
Our current liability includes approximately $1,160,000 associated with the
Series D Cumulative preferred stock. Of this balance, $942,000 is associated
with the full redemption of this security and $218,000 is related to the accrued
dividends as of January 31, 2005.
Our current liabilities include approximately $1,310,000 associated with
the Series E Cumulative preferred stock. Of this balance, $1,058,000 is
associated with the full redemption of this security and $252,000 is related to
the accrued dividends as of January 31, 2005. During the fiscal year ended July
31, 2003, the Company was de-listed from AMEX and according to the terms of the
Series E Cumulative preferred stock Certificate of Designation, if the
16
Company fails to maintain a listing on NASDAQ, NYSE or AMEX the Series E
preferred stockholder could request a mandatory redemption of the total
outstanding preferred stock. As of the date of this filing we have not received
such redemption notice.
On October 31, 2002 we filed a lawsuit in the Southern District Court of
New York against two financial institutions, Rose Glen Capital and Shaar Fund,
the holders of Series D and E Redeemable Preferred Stock, for stock fraud and
manipulation. These liabilities combined for a total of approximately
$2,470,000. Accounting rules dictate that these liabilities remain in our books
under Current Liabilities until the lawsuit is resolved in the judicial system
or otherwise. At this time we cannot predict the outcome or the time frame for
this to occur.
We also have approximately $1,152,000 of current liabilities (net of
assets) associated to the discontinued operations of the retail services unit.
This balance is composed primarily of approximately $453,000 owed to the Mexican
taxing authorities related to a note assumed through the acquisition of Computel
and approximately $699,000 related to income taxes owed as of January 31, 2005.
ONGOING OPERATIONS
We believe that, based on our limited access to capital resources and our
current cash balances, financial resources may not be available to support our
ongoing operations for the next twelve months or until we are able to generate
income from operations. These matters raise substantial doubt about our ability
to continue as a going concern. Our ability to continue as a going concern is
dependent upon the ongoing support of our stockholders and customers, our
ability to obtain capital resources to support operations and our ability to
successfully market our services.
As outlined in Note 4 to the financial statements, we have incurred amounts
of debt to finance our working capital requirements. During the six months
ended January 31, 2005, we borrowed a total of $370,000 and subsequent to the
quarter ended January 31, 2005 we barrowed an additional $24,000 from Recap
Marketing & Consulting, LLP; to fund our operating expenses and other corporate
expenses. This debt will be applied to the payment of warrants issued to
certain individual affiliates of Recap Marketing & Consulting, LLP.
We will continue to pursue cost cutting or expense deferral strategies in
order to conserve working capital. These strategies will limit the
implementation of our business plan and increase our future liabilities. We are
dependent on our operations and the proceeds from future debt or equity
investments to fund our operations and fully implement our business plan. If we
are unable to raise sufficient capital, we will be required to delay or forego
some portion of our business plan, which will have a material adverse effect on
our anticipated results from operations and financial condition. Alternatively,
we may seek interim financing in the form of private placement of debt or equity
securities. Such interim financing may not be available in the amounts or at
the time when is required, and will likely not be on the terms favorable to the
Company.
ITEM 3. CONTROLS AND PROCEDURES
The Company has adopted and implemented disclosure controls and procedures
designed to provide reasonable assurance that all reportable information will be
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms. Under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer and the Company's Controller and Principal Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of
the end of the fiscal quarter covered by this report. Based on that evaluation,
the President and Chief Executive Officer and the Controller and Principal
Financial Officer have concluded that these disclosure controls and procedures
are effective as of the end of the fiscal quarter
17
covered by this report. There were no changes in the Company's internal control
over financial reporting during the fiscal quarter covered by this report that
have had a material affect or are reasonably likely to have a material affect on
internal control over financial reporting
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of January 31, 2005, the Company was in arrears with respect to the
declaration of the following dividends payable on outstanding shares of its
Preferred Stock:
Series A Cumulative Preferred Stock $193,750
Series D Cumulative Preferred Stock 217,930
Series E Cumulative Preferred Stock 251,925
--------
TOTAL $663,605
========
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K/A
(a) Exhibits: The following documents are filed as exhibits to this
report.
EXHIBIT
NUMBER
------
4.1 Convertible Promissory Notes issued to Recap Marketing &
Consulting, LLP. *
4.2 Convertible Promissory Note issued to Franklin Cardwell and Jones,
PC. *
10.1 Extension to consulting agreements with Hunter M. A. Carr and
Donald W. Sapaugh. *
31.1 Certification of our President and Chief Executive Officer, under
Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of our Corporate Controller and Principal Financial
Officer, under Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certification of our President and Chief Executive Officer, under
Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification of our Corporate Controller and Principal Financial
Officer, under Section 906 of the Sarbanes-Oxley Act of 2002. *
(b) The following Current Reports on Form 8-K were filed during the
second quarter of fiscal 2005.
None
18
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: March 15, 2005 By: /s/ Arthur L. Smith
-------------- --------------------
Name: Arthur L. Smith
Title: President and
Chief Executive Officer
Date: March 15, 2005 By: /s/ Antonio Estrada
-------------- -------------------
Name: Antonio Estrada
Title: Corporate Controller
(Principal Accounting and Principal
Financial Officer)
19