ITEM
1. FINANCIAL STATEMENTS
ATSI
COMMUNICATIONS, INC.
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|
AND
SUBSIDIARIES
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CONSOLIDATED
BALANCE SHEET
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(in
thousands, except share information)
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|
(unaudited)
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|
|
|
|
Oct
31,
|
|
|
July
31,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
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|
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|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3
|
|
$
|
29
|
|
Accounts
receivable
|
|
|
229
|
|
|
170
|
|
Prepaid
& other current assets
|
|
|
28
|
|
|
44
|
|
Total
current assets
|
|
|
260
|
|
|
243
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
231
|
|
|
228
|
|
Less
- Accumulated depreciation and amortization
|
|
|
(112
|
)
|
|
(90
|
)
|
Net
property and equipment
|
|
|
119
|
|
|
138
|
|
Total
assets
|
|
$
|
379
|
|
$
|
381
|
|
|
|
|
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|
|
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LIABILITIES
AND STOCKHOLDERS' DEFICIT
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|
|
|
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CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
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|
$
|
616
|
|
$
|
608
|
|
Accrued
liabilities
|
|
|
949
|
|
|
986
|
|
Current
portion of obligation under capital leases
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|
|
3
|
|
|
3
|
|
Notes
payable
|
|
|
104
|
|
|
104
|
|
Notes
payable, related party
|
|
|
16
|
|
|
16
|
|
Convertible
debentures
|
|
|
275
|
|
|
275
|
|
Series
D Cumulative Preferred Stock, 3,000 shares authorized,
742 shares issued
and outstanding
|
|
|
1,193
|
|
|
1,182
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|
Series
E Cumulative Preferred Stock, 10,000 shares authorized,
1,170 shares
issued and outstanding
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|
|
1,362
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|
|
1,345
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|
Liabilities
from discontinued operations, net of assets
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-
|
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1,152
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|
Total
current liabilities
|
|
|
4,518
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|
5,671
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|
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|
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LONG-TERM
LIABILITIES:
|
|
|
|
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Notes
payable
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|
500
|
|
|
500
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|
Obligation
under capital leases, less current portion
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|
|
8
|
|
|
9
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|
Other
|
|
|
7
|
|
|
8
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|
Total
long-term liabilities
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|
|
515
|
|
|
517
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|
Total
liabilities
|
|
|
5,033
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|
6,188
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STOCKHOLDERS'
DEFICIT:
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Preferred
stock, $0.001 par value, 10,000,000 shares authorized,
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Series
A Cumulative Convertible Preferred Stock, 50,000 shares
authorized, 3,750
shares
|
|
|
|
|
|
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|
issued
and outstanding
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|
|
-
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|
-
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Series
H Convertible Preferred Stock, 16,000,000 shares authorized,
13,769,866
and 13,912,372 shares
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|
|
|
|
|
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issued
and outstanding, respectively
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|
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14
|
|
|
14
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|
Common
stock, $0.001, 150,000,000 shares authorized, 11,557,883
and 10,397,222
shares
|
|
|
|
|
|
|
|
issued
and outstanding, respectively
|
|
|
12
|
|
|
10
|
|
Additional
paid in capital
|
|
|
72,279
|
|
|
71,916
|
|
Accumulated
deficit
|
|
|
(76,960
|
)
|
|
(78,249
|
)
|
Other
comprehensive income
|
|
|
1
|
|
|
502
|
|
Total
stockholders' deficit
|
|
|
(4,654
|
)
|
|
(5,807
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
379
|
|
$
|
381
|
|
|
|
|
|
|
|
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(unaudited)
|
|
Three
months ended October 31,
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|
|
|
2005
|
|
2004
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
Carrier
services
|
|
$
|
2,313
|
|
$
|
769
|
|
Network
services
|
|
|
9
|
|
|
73
|
|
|
|
|
|
|
|
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Total
operating revenues
|
|
|
2,322
|
|
|
842
|
|
|
|
|
|
|
|
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OPERATING
EXPENSES:
|
|
|
|
|
|
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|
Cost
of services (exclusive of depreciation and amortization,
shown
below)
|
|
|
2,240
|
|
|
772
|
|
Selling,
general and administrative
|
|
|
153
|
|
|
250
|
|
Legal
and professional fees
|
|
|
27
|
|
|
239
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
48
|
|
|
—
|
|
Non-cash
stock-based compensation, employees
|
|
|
180
|
|
|
—
|
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Depreciation
and amortization
|
|
|
22
|
|
|
23
|
|
|
|
|
|
|
|
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Total
operating expenses
|
|
|
2,670
|
|
|
1,284
|
|
|
|
|
|
|
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OPERATING
(LOSS)
|
|
|
(348
|
)
|
|
(442
|
)
|
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|
|
|
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OTHER
INCOME (EXPENSE):
|
|
|
|
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|
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Debt
forgiveness income
|
|
|
—
|
|
|
460
|
|
Gain
on disposal of investment
|
|
|
1,652
|
|
|
—
|
|
Interest
expense
|
|
|
(16
|
)
|
|
(31
|
)
|
|
|
|
|
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Total
other income (expense), net
|
|
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1,636
|
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|
429
|
|
|
|
|
|
|
|
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NET
INCOME (LOSS)
|
|
|
1,288
|
|
|
(13
|
)
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|
|
|
|
|
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LESS:
PREFERRED DIVIDENDS
|
|
|
(41
|
)
|
|
(38
|
)
|
|
|
|
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|
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NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
|
$
|
1,247
|
|
|
($51
|
)
|
|
|
|
|
|
|
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BASIC
INCOME (LOSS) PER SHARE
|
|
$
|
0.11
|
|
|
($0.01
|
)
|
|
|
|
|
|
|
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|
DILUTED
INCOME (LOSS) PER SHARE
|
|
$
|
0.04
|
|
|
($0.01
|
)
|
|
|
|
|
|
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|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
10,945,338
|
|
|
3,598,383
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
thousands)
(unaudited)
|
|
Three
months ended October 31,
|
|
|
|
2005
|
|
2004
|
|
Net
income (loss) to common stockholders
|
|
$
|
1,247
|
|
|
($51
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(501
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) to common stockholders
|
|
$
|
746
|
|
|
($51
|
)
|
See
accompanying summary of accounting policies and notes to financial
statements.
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Three
months ended October 31,
|
|
|
|
2005
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
1,288
|
|
|
($13
|
)
|
Adjustments
to net income (loss):
|
|
|
|
|
|
|
|
Gain
on disposal of investment
|
|
|
(1,653
|
)
|
|
—
|
|
Debt
forgiveness income
|
|
|
—
|
|
|
(460
|
)
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
22
|
|
|
23
|
|
Non-cash
issuance of stock grants and options, employees
|
|
|
180
|
|
|
—
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
52
|
|
|
40
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(59
|
)
|
|
(131
|
)
|
Prepaid
expenses and other
|
|
|
15
|
|
|
(20
|
)
|
Accounts
payable
|
|
|
67
|
|
|
90
|
|
Accrued
liabilities
|
|
|
20
|
|
|
105
|
|
Net
cash used in operating activities
|
|
|
(68
|
)
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases
of property & equipment
|
|
|
(3
|
)
|
|
(6
|
)
|
Acquisition
of business
|
|
|
—
|
|
|
(8
|
)
|
Net
cash used in investing activities
|
|
|
(3
|
)
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
—
|
|
|
286
|
|
Payments
on notes payable
|
|
|
—
|
|
|
14
|
|
Proceeds
from the exercise of warrants
|
|
|
46
|
|
|
—
|
|
Principal
payments on capital lease obligation
|
|
|
(1
|
)
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
45
|
|
|
300
|
|
DECREASE
IN CASH
|
|
|
(26
|
)
|
|
(80
|
)
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
29
|
|
|
94
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
3
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
|
—
|
|
|
—
|
|
Cash
paid for income taxes
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of debt
|
|
$
|
58
|
|
$
|
733
|
|
Issuance
of common stock for purchase of fixed & Intangible
assets
|
|
|
—
|
|
|
24
|
|
Conversion
of preferred stock to common stock
|
|
|
17
|
|
|
206
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 United States 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-KSB/A for the year ended July 31, 2005.
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, 2005, as reported in the Form 10-KSB/A, have been
omitted.
NOTE
2 - STOCK BASED COMPENSATION
ATSI
adopted the disclosure requirements of Financial Accounting Standard
No. 123,
Accounting for Stock-Based Compensation (FAS No. 123) and FAS No. 148
with
respect to pro forma disclosure of compensation expense for options issued.
For
purposes of the pro forma disclosures, the fair value of each option
grant is
estimated on the grant date using the Black-Scholes option-pricing
model.
ATSI
applies APB No. 25 in accounting for its stock option plans and, accordingly,
no
compensation cost has been recognized in ATSI financial statements for
stock
options under any of the stock plans which on the date of grant the exercise
price per share was equal to or exceeded the fair value per share. However,
compensation cost has been recognized for warrants and options granted
to
non-employees for services provided. 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, to stock-based employee compensation.
|
|
Three
months ended October 31,
|
|
|
|
2005
|
|
2004
|
|
Net
income (loss) to common
|
|
|
|
|
|
stockholders,
as reported
|
|
$
|
1,247,000
|
|
|
($51,000
|
)
|
Add:
stock
based compensation determined
|
|
|
|
|
|
|
|
under
intrinsic value based method
|
|
|
—
|
|
|
—
|
|
Less:
stock based compensation determined
|
|
|
|
|
|
|
|
under
fair value based method
|
|
|
(281,499
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss) to common stockholders
|
|
$
|
965,501
|
|
|
($51,000
|
)
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.11
|
|
|
($0.01
|
)
|
Pro
forma
|
|
$
|
0.09
|
|
|
($0.01
|
)
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.04
|
|
|
($0.01
|
)
|
Pro
forma
|
|
$
|
0.03
|
|
|
($0.01
|
)
|
The
fair
value of each option and warrant granted is estimated on the date of
grant using
the Black-Scholes option pricing model with the following
assumptions:
|
|
Three
Months Ended October 31,
|
|
|
|
2005
|
|
2004
|
|
Expected
dividends yield
|
|
|
0.00%
|
|
|
0.00%
|
|
Expected
stock price volatility
|
|
|
139%
|
|
|
0%
|
|
Risk-free
interest rate
|
|
|
4.42%
|
|
|
0%
|
|
Expected
life of options
|
|
|
3
years
|
|
|
3
years
|
|
During
the three months ended October 31, 2005, ATSI granted 2,450,000 options
to
purchase common stock to employees and members of the Board of Directors
with an
exercise price of $0.16, the average closing price of ATSI’s stock on September
29, 2005. These options will vest over a period of three years. ATSI
did not
recognize any expense at the time these options were granted since the
exercise
price on the options was equal to the average market price at the grant
date.
Additionally,
during the three months ended October 31, 2005 ATSI granted 1,904,000
options to
purchase stock to employees and members of the Board of Directors with
an
exercise price of $0.16, the average closing price of ATSI’s stock on September
29, 2005. Seventy three percent
of these options vest immediately and the remaining balances vest over
three
years. ATSI
did
not recognize any expense at the time these options were granted since
the
exercise price on the options was equal to the average market price at
the grant
date.
During
the three months ended October 31, 2005, ATSI’s Board of Directors approved the
issuance of 1,125,000 shares to its employees and directors and 262,160
shares
to consultants with a market value of $180,000 and $44,567, respectively.
NOTE
3 - SETTLEMENT OF UNRECORDED NOTE RECEIVABLE
On
October
31, 2005, ATSI Communications, Inc. and Telemarketing de Mexico S.A de
C.V.
reached a “Confidential Settlement Agreement and Mutual Release”. Under the
settlement agreement the parties agreed to release all claims and liabilities
between the parties. ATSI agreed to release Telemarketing de Mexico S.A
de C.V.
from the unrecorded note receivable of $598,000. Additionally, ATSI agreed
to
release the 10% of ATSICOM’s
total outstanding common stock that ATSI held as collateral on the note.
Under
the
terms of the “Share Purchase Agreement” dated May 24, 2003, ATSI was scheduled
to receive from Telemarketing
$20,750 per month for 24 months beginning in May 2004, contingent on
ATSI
generating 20,750,000 minutes of monthly traffic through ATSICOM’s network. ATSI
was not able to reach the above-mentioned volume of monthly minutes,
and as a
result Telemarketing did not pay the total remaining purchase price of
$598,000.
NOTE
4 - GAIN ON DISPOSAL OF INVESTMENT
During
the quarter ended October 31, 2005, ATSI recognized a gain on disposal
of
investment of $1,652,000. The gain on disposal of investment was associated
with
the sale in October 2005 of ATSI’s subsidiary, ATSIMex Personal S.A de C.V. This
entity discontinued all operations in May 2003. The total liabilities
of this
entity, net of assets were approximately $1,652,000.
NOTE
5 - NOTES PAYABLE
On
November 1, 2004, ATSI entered into a note payable with Franklin, Cardwell
&
Jones, PC, for $103,454 associated with legal and professional services
previously rendered. As per the terms in the note, the holder at any
time after
November 1, 2005 can 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) 0.90 times (b) the five-day average
of
the last sales of the common stock prior to the conversion day. On November
1,
2005, the holder of the note elected to convert $13,454 of the principal
balance
and $6,207 of the accrued interest into 66,603 common shares of ATSI.
The
promissory note payable had a maturity date of December 1, 2005 and has
an
annual interest rate of 6%. On December 1, 2005 Franklin, Cardwell and
Jones
agreed to extend the maturity date on this note until December 1, 2006.
NOTE
6 - SUBSEQUENT EVENTS
On
November 4, 2005 ATSI entered into a factoring agreement with CSI Business
Finance, Inc. Under the agreement CSI Business committed to purchase
up to
$150,000 of ATSI’s monthly receivables. The factoring agreement expires on
November 4, 2006 and it has an annual interest rate of 18%. Additionally,
as
part of the factoring transaction ATSI paid an application, legal and
documentation fee of $6,000 and a brokerage fee of $20,000 to Corporate
Strategies, Inc.
Additionally,
on November 4, 2005 ATSI entered into a note payable with CSI Business
Finance,
Inc. for $50,000. The promissory note payable has a maturity date of
November 4,
2006 and it has an annual interest rate of 18%. The
note
is secured by ATSI’s equipment, deposit accounts and accounts
receivables.
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. 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 months ended October 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-KSB/A filed with the SEC on November 2, 2005. As used in this
section, the term “fiscal 2006” means the year ending July 31, 2006 and “fiscal
2005” means the year ended July 31, 2005.
General
We
are an
international telecommunications carrier that utilizes the Internet to
provide
cost-efficient and economical international telecommunications services.
Our
current operations consist primarily of providing digital voice communications
over the Internet using Voice-over-Internet-Protocol ("VoIP"). We
provide high quality voice and enhanced telecommunication services to
carriers,
telephony resellers and other VoIP carriers through various agreements
with
service providers in the United States, Mexico, Asia, the Middle East
and Latin
America utilizing VoIP telephony services. Our services are as follows:
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
provide private communication links and VoIP gateway services to multi-national
and Latin American carriers and 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 currently available through their
own
telecommunication network. These services include data, voice and fax
transmission between multiple international offices and branches as well
as
Internet and collocation services in the United States.
Communication
Services:
We
provide retail local phone service and international VoIP long distance
service
to the U.S. Hispanic market throughout Texas, mainly in the Rio Grande
Valley.
Our local phone service includes access to a landline and value-added
services
such a caller ID and call waiting. These services are offered to our
customers
on both a prepaid and postpaid basis. Additionally, we provide prepaid
domestic
and long-distance services; under these services we allow our customers
to
access our prepaid VoIP network platform.
Our
Retail business was launched during the first quarter of Fiscal 2005
through the
acquisition of a Competitive
Local Exchange Carrier (“CLEC”) based in South Texas. This acquisition has
served 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 under our TeleFamilia brand and subsidiary
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 $22,500 in retail services
revenue
during the three months ended October 31, 2005.
Additionally,
during the second quarter of Fiscal 2006, we expanded our NexTone’
Communications Session Controller (soft-switch) by 65% to enhance our
VoIP
network. This network expansion has allowed us to route our traffic more
efficiently, improve our call processing, monitor quality of service
and enable
us to share port resources with our customers. The NexTone technology
has
allowed us to be more competitive and to improve our margins in our wholesale
international telecommunication services. As a result of these enhancements
to
our VoIP Network our customer base has grown to approximately 45 customers
and
our revenue increased from $769,000 during the quarter ended October
31, 2004 to
$2,313,000 for the quarter ended October 31, 2005.
We
have
had operating losses for almost every quarter since we began operations
in 1994.
Our
operating losses from continuing operations were approximately $348,000
and
$442,000, for the quarters ended October 31, 2005 and 2004, respectively.
Additionally, we had a working capital deficit of approximately $4,259,000
at
October 31, 2005. We
have
experienced difficulty in paying our vendors and lenders on time in the
past,
and we expect this trend to continue over the next 12 months as we continue
to
build our customer base and increase our operations. Moreover, we are
currently
pursuing various alternatives including equity offerings, exchanging
some
portion or all of our debt for equity, and restructuring our debt to
extend the
maturity. However, in the event we fail to execute on our current plan
or that
circumstances currently unknown or unforeseen by us arise, we may not
succeed in
re-capitalizing the Company or be able to obtain additional funding to
allow us
to meet our obligations.
Due
to
the recurring losses, negative cash flows generated from our operations
and our
substantial working capital deficit, our auditor’s opinion on our financial
statements as of July 31, 2005 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 the end of
our next
fiscal year, July 31, 2006. In order to remain a going concern, we intend
to
attract new customers to generate additional revenues and/or generate
cash from
debt or equity offerings. There is no assurance that we will be able
to obtain
sufficient additional customers or funding to continue as a going concern.
As
a
result of the recurring losses, negative cash flows from operations and
our
substantial working capital deficit, during the quarter ended October
31, 2005
management continued to pursue different avenues for funding. During
the quarter
ended October 31, 2005 we received $46,000 from the exercise of 331,084
warrants. The proceeds from the exercise of warrants 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-month period ended October 31, 2005 and 2004.
|
|
Three
Months Ended October 31,
|
|
|
|
2005
|
|
2004
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
2,313
|
|
|
100
|
%
|
$
|
769
|
|
|
91
|
%
|
Network
services
|
|
|
9
|
|
|
0
|
%
|
|
73
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
|
2,322
|
|
|
100
|
%
|
|
842
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (Exclusive of depreciation and amortization,
shown
below)
|
|
|
2,240
|
|
|
96
|
%
|
|
772
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
82
|
|
|
4
|
%
|
|
70
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
153
|
|
|
7
|
%
|
|
250
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
and professional fees
|
|
|
27
|
|
|
1
|
%
|
|
239
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
48
|
|
|
2
|
%
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
stock-based compensation, employees
|
|
|
180
|
|
|
8
|
%
|
|
—
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
22
|
|
|
1
|
%
|
|
23
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(348
|
)
|
|
-15
|
%
|
|
(442
|
)
|
|
-52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
—
|
|
|
0
|
%
|
|
460
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of investment
|
|
|
1,652
|
|
|
71
|
%
|
|
—
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(16
|
)
|
|
-1
|
%
|
|
(31
|
)
|
|
-4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
1,288
|
|
|
55
|
%
|
|
(13
|
)
|
|
-2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
preferred stock dividends
|
|
|
(41
|
)
|
|
-2
|
%
|
|
(38
|
)
|
|
-5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common
stockholders
|
|
$
|
1,247
|
|
|
54
|
%
|
|
($51
|
)
|
|
-6
|
%
|
Three
Months ended October 31, 2005 Compared to Three Months ended October
31,
2004
Operating
Revenues.
Consolidated operating revenues increased 176% between periods from $842,000
for
the quarter ended October 31, 2004 to $2,322,000 for the quarter ended
October
31, 2005.
Carrier
services revenues increased $1,544,000, or 201% from the quarter ended
October
31, 2004 to the quarter ended October 31, 2005. Our carrier traffic increased
from approximately 16,304,526 minutes in the first quarter of fiscal
2005 to
approximately 47,943,067 minutes in the quarter ended October 31, 2005.
The
increase in revenue and carrier traffic can mainly be attributed to increase
in
customers during the first quarter of fiscal 2006 compared to the first
quarter
of fiscal 2005. Network services revenues decreased approximately 88%
or $64,000
from the quarter ended October 31, 2004 to the quarter ended October
31, 2005.
The decrease in network services revenue is primarily due to the decrease
in
network services customers and the termination of the Network Services
contract
with a BC Nexxia.
Cost
of Services. (Exclusive of depreciation and amortization)
The
consolidated cost of services increased by $1,468,000 or 190% from the
quarter
ended October 31, 2004 to the quarter ended October 31, 2005. The increase
in
cost of services is a direct result of the increase in carrier services
revenue.
As mentioned above, our carrier traffic increased from approximately
16,304,526
minutes in the first quarter of fiscal 2005 to approximately 47,943,067
minutes
in the quarter ended October 31, 2005, thus increasing our cost of services
between quarters. Consolidated cost of services as a percentage of sales
increased from 92% in the first quarter of fiscal 2005 to 96% in the
first
quarter of fiscal 2006, primarily as a result of decline in revenue from
network
services and the increase in costs paid to our providers that could not
be
passed on to our customers. As a result, gross margins declined from
8% of
revenue in the first quarter of fiscal 2005 to 4% of revenue in the first
quarter of fiscal 2006
Selling,
General and Administrative (SG&A) Expenses.
SG&A expenses decreased $97,000, or 39% from the quarter ended October 31,
2004 to the quarter ended October 31, 2005. The decrease is attributable
to the
reduction of $45,000 in wages and contract labor associated with the
operations
of the retail services during the quarter ended October 31, 2004.
Legal
and professional Fees.
Legal
and professional fees decreased $212,000, or 89% from the quarter ended
October
31, 2004 to the quarter ended October 31, 2005. The decrease is attributable
to
the recognition of approximately $150,000 in professional fees associated
with a
marketing campaign that commenced during the quarter ended October 31,
2004.
Additionally, during the quarter ended October 31, 2004 we recognized
approximately $90,000 in legal fees associated to the lawsuit for stock
fraud
and manipulation by various institutions, as describe in the legal preceding
section of this report. We did not incur these types of expenses during
the
quarter ended October 31, 2005.
Non-cash
issuance of common stock and warrants for services.
Non-cash issuance of common stock and warrants for services increased
by $48,000
from the quarter ended October 31, 2004 to the quarter ended October
31, 2005.
This increase is primarily due to recognition of non-cash compensation
expense
associated with the consulting agreements entered with an individual
for legal
services relating to pending litigation and consulting services associated
with
the retail services unit.
Non-cash
stock-based compensation, employees.
Non-cash compensation expense to employees increased by $180,000 from
the
quarter ended October 31, 2004 to the quarter ended October 31, 2005.
This
increase is attributed to the recognition of non-cash compensation expense
associated with the stock grants to our employees and board of directors.
Depreciation
and Amortization.
Depreciation and amortization decreased by $1,000 or 4% from the quarter
ended
October 31, 2004 to the quarter ended October 31, 2005. The decrease
is
attributed to the lower depreciable base of equipment during the first
quarter
of fiscal 2006.
Operating
Loss.
The
Company’s operating loss decreased by $94,000 or 21% from the quarter ended
October 31, 2004 to the quarter ended October 31, 2005. The decrease
in
operating loss is attributed to the decrease in legal and professional
fees by
$212,000 and a decrease in SG&A expenses of $97,000 between quarters which
were partially offset by an increase in non-cash issuance of common stock
and
warrants for services and non-cash stock-based compensation to
employees.
Debt
forgiveness income. Debt
forgiveness decreased by 100% from $460,000 during the quarter ended
October 31,
2004 to $0 during the quarter ended October 31, 2005. During the quarter
ended
October 31, 2004 we recognized $460,000 in debt forgiveness income associated
with the settlement of various liabilities for equity. These transactions
were
related to the settlement of a $859,500 liability with Alfonso Torres
Roqueni,
the former owner of the concession license that we 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.
Gain
on disposal of Investment.
Gain on
disposal of investment increased by $1,652,000 or 100% from the quarter
ended
October 31, 2004 to the quarter ended October 31, 2005. The
gain
on disposal of investment arose from the sale of ATSI’s ownership in ATSIMex
Personal S.A de C.V. Under the share purchase agreement the buyer acquired
the
total ownership on this entity and as a result we recognized a gain of
$1,652,000.
Other
Income (expense).
Other
expense decreased by $15,000 or 48% from the quarter ended October 31,
2004 to
the quarter ended October 31, 2005. The decrease can be attributed to
the
decrease in interest expense associated with the various Note payables
with
Recap Marketing fully paid during fiscal 2005. As a result during the
quarter
ended October 31, 2005 we did not incur any interest expense to Recap
Marketing.
Preferred
Stock Dividends.
Preferred Stock Dividends expense increased by $3,000 or 8% between periods,
from $38,000 for the quarter ended October 31, 2004 to $41,000 during
the
quarter ended October 31, 2005. The increase in preferred dividend expense
is
attributed to the recognition of preferred dividend expense related to
the
conversion of 342,514 Redeemable Preferred Series H shares to 411,004
shares of
common stock.
Net
income (loss) to Common Stockholders.
During
the quarter ended October 31, 2005 we recognized $1,247,000 in net income
to
common stockholders, this represented an improvement of $1,298,000 or
2545% from
the quarter ended October 31, 2004. The improvement in net income to
common
stockholders is primarily due to the recognition of $1,652,000 in gain
in
disposal of investment related to the sale of ATSIMex Personal to a Mexican
buyer.
Liquidity
and Capital Resources
Cash
Position:
During
the quarter ended October 31, 2005, operations consumed approximately
$68,000 in
cash, primarily due to the operating loss and the reduction in accounts
receivable compared to the prior period. Investing activities during
the first
quarter of fiscal 2006 consumed an additional $3,000 relating to the
acquisition
of two new routers to accommodate the increase in our network capacity.
Financing activities during the first quarter of fiscal 2006 generated
$46,000
from the exercise of 331,084 warrants, which was offset by $1,000 relating
to
principal payments under the lease of certain equipment. Overall, our
net
operating, investing and financing activities during the three months
ended
October 31, 2005 provided a decrease of $26,000 in cash balances. We
intend to
cover our monthly operating expenses with our remaining available cash.
Additionally, we will continue to pursue additional debt and equity financings
to cover our deficiencies in cash reserves. However, there is no assurance
that
we will be able to secure the equity funding required to supplement our
deficiencies in cash reserves.
Our
working capital deficit at October 31, 2005 was $4,259,000. This represents
a
decrease of approximately $1,170,000 from our working capital deficit
at July
31, 2005. The decrease can primarily be attributed to the recognition
of a gain
on disposal of investment of $1,652,000. The gain on disposal of investment
is
associated with the sale of ATSI’s ownership in ATSIMex Personal S.A de C.V.
Our
current liabilities include:
· |
$103,454
owed to Attorneys for legal services rendered during fiscal
2004.
|
· |
$1,193,000
associated with the Series D Cumulative preferred stock. Of
this balance,
$942,000 is associated with the full redemption of this security
and
$251,000 is related to the accrued dividends as of October
31,
2005.
|
· |
$1,362,000
associated with the Series E Cumulative preferred stock. Of
this balance,
$1,058,000 is associated with the full redemption of this security
and
$304,000 is related to the accrued dividends as of October
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 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 United States District
Court
for the Southern District Court of New York against several
individuals
and financial institutions, including the holders of our Series
D and E
Redeemable Preferred Stock, for, among other things, stock
fraud and
manipulation. On February 25, 2005, Judge Lewis A. Kaplan issued
a
memorandum opinion and order dismissing the complaint as to
all defendants
with prejudice. We plan to appeal that decision once a final
judgment has
been entered. On July 9, 2004, we filed a separate but related
lawsuit in
the same court against Sam Levinson and Uri Wolfson. On April
27, 2005,
the court entered a final judgment dismissing that action with
prejudice
based on the February 25, 2005 decision in the first action.
On May 25,
2005, we appealed the dismissal of the second action to the
United States
Court of Appeals for the Second Circuit. On September 9, 2005
we appealed
the dismissal of the first action to the United States Court
of Appeals
for the Second Circuit. Our attorneys are also in the process
of
investigating whether any other institutions participated in
the
manipulation of the company's stock and to advise us whether
to pursue
other legal
|
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.
During
the three months ended October 31, 2005, we received $46,000 from the
exercise
of warrants, these funds allows us to cover our operating expenses and
other
corporate expenses.
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 disclosures controls and
procedures
were not effective as of the end of the fiscal quarter covered by this
report.
Significant adjustments were proposed by the independent registered public
accounting firm related to the option expense. The Company is in the
process of
improving its controls and procedures in these areas. There have not
been any
changes in the Company’s internal control over financial reporting during the
fiscal quarter to which this report relates that have materially affected,
or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
October 31, 2002, we filed a lawsuit in the United States District Court
for the
Southern District Court of New York against several individuals and financial
institutions, including the holders of our Series D and E Redeemable
Preferred
Stock, for, among other things, stock fraud and manipulation. On February
25,
2005, Judge Lewis A. Kaplan issued a memorandum opinion and order dismissing
the
complaint as to all defendants with prejudice. We plan to appeal that
decision
once a final judgment has been entered. On July 9, 2004, we filed a separate
but
related lawsuit in the same court against Sam Levinson and Uri Wolfson.
On April
27, 2005, the court entered a final judgment dismissing that action with
prejudice based on the February 25, 2005 decision in the first action.
On May
25, 2005, we appealed the dismissal of the second action to the United
States
Court of Appeals for the Second Circuit. On September 9, 2005 we appealed
the
dismissal of the first action to the United States Court of Appeals for
the
Second Circuit. Our attorneys are also in the process of investigating
whether
any other institutions participated in the manipulation of the company's
stock
and to advise us whether to pursue other legal proceedings. Currently
we cannot
predict the outcome of this litigation or
the
financial impact on our ongoing operations.
On
February 3, 2005 Helen G. Schwartz, Trustee for ATSI Communications,
Inc. (a
Texas corporation) and TeleSpan, Inc. filed in the U.S. Bankruptcy Court
for the
Western District of Texas an Adversary Proceeding against ATSI Communications,
Inc., a Nevada corporation alleging that ATSI-Nevada had received preferential
payments as defined by the U.S. Bankruptcy Code in the amount of $510,836.
On
March 31, 2005, ATSI filed its response denying any such payments were
received
by ATSI Nevada, formerly ATSI Delaware. On August 29, 2005 the U.S. Bankruptcy
Court for the Western District of Texas dismissed this proceeding against
ATSI
Communications, Inc., a Nevada Corporation for lack of merit.
In
January 2004, we filed a petition in the 150th
Judicial
District of Bexar County, Texas against Inter-tel.net, Inc. and Vianet
Communications, Inc. d/b/a Inter-tel.net seeking declaratory relief that
ATSI
Communications, Inc. is not bound by the Carrier Services Agreement between
Vianet Communications, Inc. and ATSI-Texas. On February 27, 2004 the
Bankruptcy
Court in the ATSI-Texas Bankruptcy case allowed Vianet Communications,
Inc. to
amend its claim against ATSI-Texas that was pending in the Bankruptcy
of
ATSI-Texas and assert its claim for breach of contract against ATSI.
The
Bankruptcy Court then ordered the lawsuit to be remanded back to state
court for
hearing. On August 10, 2005 a settlement was reached with Vianet Communications.
As part of the settlement, we issued 200,000 warrants to purchase ATSI
stock,
the exercise price on the warrants range from $0.12 to $0.23. Additionally,
we
issued 200,000 shares of Series H preferred Stock that can be converted
into 1.2
shares of common stock after it’s been held for (1) one year and into 1.5 shares
of common stock if held for (2) two years.
On
June
17, 2005, ATSI Communications, Inc. filed an arbitration claim against
Ntera
Holdings, Inc. for $100,000 and attorney’s fees. The claim is associated with a
dispute over supposed debt incurred under a Reciprocal Network Carrier
Service
Agreement between the parties. On July 7, 2005 Ntera Holdings, Inc. filed
a
counterclaim. Under the arbitration claim we are not disputing all of
the
alleged indebtedness but we are alleging the offset of services and that
the
payment should be in the form of exchange of services, as implied in
the
Reciprocal Network Carrier Service Agreement with Ntera Holdings, Inc.
Currently
we can not predict the result of the arbitration or the financial impact
on our
ongoing operations.
We
may
become a party to future claims and legal proceedings arising in the
ordinary
course of business. Due to the inherent uncertainty of litigation, the
range of
possible loss, if any, cannot be estimated with a reasonable degree of
precision
and there can be no assurance that the resolution of any particular claim
or
proceeding would not have an adverse effect on our results of operations
in the
period in which it occurred.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On
October 25, 2005, we issued 180,772 shares of our common stock to Nextone
Communciations as a payment of $58,000 on the principal balance associated
with
the Nextone soft Switch. Additionally, we issued 69,180 and 95,238 common
shares
to Vianet Communciations Inc. on August 23, 2005 and September 14, 2005,
respectively, as part of the settlement agreement in certain litigation.
The
shares issued to Nextone Communciations, Inc. and Vianet Communications,
Inc.
were issued pursuant to an exemption from registration under Section
4(2) of the
Securities Act because of the limited size of the group, the absence
of public
solicitation or advertising, and restrictions on resale of the
shares.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
As
of
October 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
|
|
$
|
222,000
|
|
Series
D Cumulative Preferred Stock
|
|
|
251,000
|
|
Series
E Cumulative Preferred Stock
|
|
|
305,000
|
|
TOTAL
|
|
$
|
778,000
|
|