Unassociated Document
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, 2006
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For
the transition period from _____________ to
_________________
|
Commission
File Number 001-15687
ATSI
COMMUNICATIONS, INC.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
Nevada
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
74-2849995
(IRS
Employer
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 o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes x No o
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 22, 2006
|
|
|
Common
Stock, $.001 par
|
14,797,460
|
Transitional
Small Business Disclosure Format: Yes x No o
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
QUARTERLY
REPORT ON FORM 10-QSB
FOR
THE QUARTER ENDED JANUARY 31, 2006
INDEX
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Balance Sheets as of January 31, 2006 and July 31, 2005
|
1
|
|
Consolidated
Statements of Operations for the Three and Six Months Ended
January 31, 2006 and 2005
|
2
|
|
Consolidated
Statements of Comprehensive Loss for the Three and Six Months Ended
January 31, 2006 and 2005
|
3
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended January 31, 2006
and
2005
|
4
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
9
|
|
|
|
Item
3.
|
Controls
and Procedures
|
18
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
18
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and use of proceeds
|
19
|
|
|
|
Item
3.
|
Default
upon senior securities
|
19
|
|
|
|
Item
5.
|
Other
Information
|
19
|
|
|
|
Item
6.
|
Exhibits
|
20
|
PART
1. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
|
|
|
|
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|
|
|
(In
thousands, except share information)
|
|
|
|
|
|
|
|
Jan
31,
|
|
July
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
(unaudited)
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
190
|
|
$
|
29
|
|
Accounts
receivable
|
|
|
278
|
|
|
170
|
|
Prepaid
& other current assets
|
|
|
20
|
|
|
44
|
|
Total
current assets
|
|
|
488
|
|
|
243
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
281
|
|
|
228
|
|
Less
- Accumulated depreciation and amortization
|
|
|
(138
|
)
|
|
(90
|
)
|
Net
property and equipment
|
|
|
143
|
|
|
138
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
631
|
|
$
|
381
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
702
|
|
$
|
611
|
|
Accounts
payable, CSI Business Finance
|
|
|
150
|
|
|
-
|
|
Accrued
liabilities
|
|
|
932
|
|
|
1,033
|
|
Current
portion of obligation under capital leases
|
|
|
3
|
|
|
3
|
|
Notes
payable
|
|
|
50
|
|
|
-
|
|
Notes
payable, related party
|
|
|
16
|
|
|
16
|
|
Notes
payable, Franklin, Cardwell & Jones (see note 4)
|
|
|
69
|
|
|
77
|
|
Convertible
debentures
|
|
|
234
|
|
|
234
|
|
Series
D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
issued
and outstanding
|
|
|
1,204
|
|
|
1,182
|
|
Series
E Cumulative Preferred Stock, 10,000 shares authorized, 1,170 shares
issued and outstanding
|
|
|
1,785
|
|
|
1,750
|
|
Derivative
Financial instrument liabilities (see note 7)
|
|
|
90
|
|
|
24
|
|
Liabilities
from discontinued operations, net of assets
|
|
|
-
|
|
|
1,152
|
|
Total
current liabilities
|
|
|
5,235
|
|
|
6,082
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
500
|
|
|
500
|
|
Obligation
under capital leases, less current portion
|
|
|
8
|
|
|
9
|
|
Other
|
|
|
6
|
|
|
8
|
|
Total
long-term liabilities
|
|
|
514
|
|
|
517
|
|
Total
liabilities
|
|
|
5,749
|
|
|
6,599
|
|
|
|
|
|
|
|
|
|
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
shares
|
|
|
|
|
|
|
|
issued
and outstanding
|
|
|
-
|
|
|
-
|
|
Series
H Convertible Preferred Stock, 16,000,000 shares authorized, 12,477,851
and 13,912,372 shares
|
|
|
|
|
|
|
|
issued
and outstanding, respectively
|
|
|
12
|
|
|
14
|
|
Common
stock, $0.001, 150,000,000 shares authorized, 14,610,848 and 10,397,222
shares
|
|
|
|
|
|
|
|
issued
and outstanding, respectively
|
|
|
15
|
|
|
10
|
|
Additional
paid in capital
|
|
|
70,436
|
|
|
69,930
|
|
Accumulated
deficit
|
|
|
(75,582
|
)
|
|
(76,674
|
)
|
Other
comprehensive income
|
|
|
1
|
|
|
502
|
|
Total
stockholders' deficit
|
|
|
(5,118
|
)
|
|
(6,218
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
631
|
|
$
|
381
|
|
See
accompanying summary of accounting policies and notes to financial statements.
ATSI
COMMUNICATIONS, INC.
|
|
AND
SUBSIDIARIES
|
|
|
|
(In
thousands, except per share amounts)
|
|
(unaudited)
|
|
|
|
|
|
Three
months ended January 31,
|
|
Six
months ended January 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
2,942
|
|
$
|
1,446
|
|
$
|
5,257
|
|
$
|
2,215
|
|
Network
services
|
|
|
5
|
|
|
74
|
|
|
13
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
|
2,947
|
|
|
1,520
|
|
|
5,270
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization, shown below)
|
|
|
2,769
|
|
|
1,422
|
|
|
5,009
|
|
|
2,194
|
|
Selling,
general and administrative
|
|
|
158
|
|
|
82
|
|
|
365
|
|
|
306
|
|
Legal
and professional fees
|
|
|
55
|
|
|
40
|
|
|
75
|
|
|
305
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
66
|
|
|
591
|
|
|
80
|
|
|
591
|
|
Non-cash
stock-based compensation, employees
|
|
|
-
|
|
|
474
|
|
|
180
|
|
|
474
|
|
Bad
debt
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
4
|
|
Depreciation
and amortization
|
|
|
26
|
|
|
24
|
|
|
48
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
3,074
|
|
|
2,637
|
|
|
5,757
|
|
|
3,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
(LOSS)
|
|
|
(127
|
)
|
|
(1,117
|
)
|
|
(487
|
)
|
|
(1,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
4
|
|
Derivative
instrument income (expense)
|
|
|
(53
|
)
|
|
2,062
|
|
|
(57
|
)
|
|
1,178
|
|
Debt
forgiveness income
|
|
|
38
|
|
|
-
|
|
|
38
|
|
|
460
|
|
Interest
expense
|
|
|
(28
|
)
|
|
(43
|
)
|
|
(54
|
)
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense), net
|
|
|
(43
|
)
|
|
2,023
|
|
|
(73
|
)
|
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS FROM CONTINUING OPERATIONS
|
|
|
(170
|
)
|
|
906
|
|
|
(560
|
)
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS (NOTE 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of discontinued operations
|
|
|
-
|
|
|
-
|
|
|
1,652
|
|
|
-
|
|
NET
INCOME FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
-
|
|
|
1,652
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS):
|
|
|
($170
|
)
|
$
|
906
|
|
$
|
1,092
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
PREFERRED DIVIDENDS
|
|
|
(54
|
)
|
|
(38
|
)
|
|
(95
|
)
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
|
|
($224
|
)
|
$
|
868
|
|
$
|
997
|
|
|
($70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
INCOME (LOSS) PER SHARE
|
|
|
($0.02
|
)
|
$
|
0.14
|
|
$
|
0.08
|
|
|
($0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
|
($0.02
|
)
|
$
|
0.14
|
|
|
($0.05
|
)
|
|
($0.01
|
)
|
From
discontinued operations
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.14
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
INCOME (LOSS) PER SHARE
|
|
|
($0.01
|
)
|
|
($0.03
|
)
|
$
|
0.04
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
|
($0.01
|
)
|
$
|
0.04
|
|
|
($0.02
|
)
|
$
|
0.00
|
|
From
discontinued operations
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.06
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
12,927,793
|
|
|
6,346,695
|
|
|
11,936,566
|
|
|
5,088,741
|
|
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 January 31,
|
|
Six
months ended January 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income (loss) to common stockholders |
|
$
|
(224 |
) |
$ |
868 |
|
$ |
997 |
|
$
|
(
70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
— |
|
|
—
|
|
|
(501
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) to common stockholders |
|
$
|
(224 |
) |
$ |
868 |
|
$ |
496 |
|
$
|
(70 |
) |
See
accompanying summary of accounting policies and notes to financial
statements.
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|
|
|
(In
thousands)
|
|
(unaudited)
|
|
|
|
|
|
Six
months ended January 31,
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
1,092
|
|
$
|
6
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
Gain
in disposal of discontinued operations
|
|
|
(1,652
|
)
|
|
-
|
|
Debt
forgiveness income
|
|
|
-
|
|
|
(460
|
)
|
Depreciation
and amortization
|
|
|
48
|
|
|
47
|
|
Non-cash
issuance of stock grants and options, employees
|
|
|
180
|
|
|
474
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
114
|
|
|
662
|
|
Provisions
for losses on accounts receivables
|
|
|
-
|
|
|
4
|
|
Derivative
instrument (income) expense
|
|
|
57
|
|
|
(1,178
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(108
|
)
|
|
(150
|
)
|
Prepaid
expenses and other
|
|
|
24
|
|
|
(42
|
)
|
Accounts
payable
|
|
|
173
|
|
|
130
|
|
Accrued
liabilities
|
|
|
18
|
|
|
39
|
|
Net
cash used in operating activities
|
|
|
(54
|
)
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases
of property & equipment
|
|
|
(4
|
)
|
|
(8
|
)
|
Acquisition
of business
|
|
|
-
|
|
|
(8
|
)
|
Net
cash used in investing activities
|
|
|
(4
|
)
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
50
|
|
|
370
|
|
Payments
on notes payable
|
|
|
-
|
|
|
(774
|
)
|
Proceeds
from factoring line of credit
|
|
|
150
|
|
|
-
|
|
Processing
fees, factoring line of credit
|
|
|
(26
|
)
|
|
-
|
|
Proceeds
from the exercise of warrants
|
|
|
46
|
|
|
788
|
|
Principal
payments on capital lease obligation
|
|
|
(1
|
)
|
|
(1
|
)
|
Net
cash provided by financing activities
|
|
|
219
|
|
|
383
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
161
|
|
|
(101
|
)
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
29
|
|
|
94
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
190
|
|
|
($7
|
)
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
|
-
|
|
|
-
|
|
Cash
paid for income taxes
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of debt
|
|
$
|
115
|
|
$
|
733
|
|
Issuance
of common stock for purchase of fixed & Intangible
assets
|
|
|
-
|
|
|
24
|
|
Conversion
of preferred stock to common stock
|
|
|
92
|
|
|
206
|
|
See
accompanying summary of accounting policies and notes to financial statements.
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
(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”). 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, have been
omitted. The Company has determined that the audited financial statements for
the year ended July 31, 2005, as filed with the Securities and Exchange
Commission on Form 10-KSB/A on November 2, 2005, and the Form 10-QSB for the
three months ended October 31, 2005, as filed with the Securities and Exchange
Commission on Form 10-QSB on December 15, 2005, should not be relied upon
because they do not correctly reflect a net gain or benefit relating to embedded
derivatives in certain securities. See Note 8 to the Interim Financial
Statements.
Derivative
financial instruments
We
do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.
Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at
each
reporting date, with changes in the fair value reported as charges or credits
to
income. For option-based derivative financial instruments, we use the
Black-Scholes option-pricing model to value the derivative instruments.
The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Derivative instrument liabilities are classified in
the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months
of
the balance sheet date.
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 January 31,
|
|
Six
months ended January 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) to common shareholders,
as reported
|
|
|
($224,000
|
)
|
$ |
868,000 |
|
$ |
997,000 |
|
|
($70,000 |
) |
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)
|
|
|
($224,000
|
)
|
$
|
868,000
|
|
$
|
715,501
|
|
|
($70,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
($0.02
|
)
|
$
|
0.14
|
|
$
|
0.09
|
|
|
($0.01
|
)
|
Pro
forma
|
|
|
($0.02
|
)
|
$
|
0.14
|
|
$
|
0.06
|
|
|
($0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
($0.01
|
)
|
$
|
0.04
|
|
$
|
0.04
|
|
$
|
0.00
|
|
Pro
forma
|
|
|
($0.01
|
)
|
$
|
0.04
|
|
$
|
0.03
|
|
$
|
0.00
|
|
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:
|
|
Six
Months Ended January 31,
|
|
|
2006
|
|
2005
|
|
Expected
dividends yield
|
|
|
0.00
|
%
|
|
N/A
|
|
Expected
stock price volatility
|
|
|
139
|
%
|
|
N/A
|
|
Risk-free
interest rate
|
|
|
4.42
|
%
|
|
N/A
|
|
Expected
life of options
|
|
|
3
years
|
|
|
N/A
|
|
During
the six months ended January 31, 2006, 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.
The compensation expense determined under the fair value option method for
these
options was $257,275.
Additionally,
during the six months ended January 31, 2006 ATSI granted 1,904,000 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. 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. The compensation expense
determined under the fair value option method for these options was $24,224.
During
the six months ended January 31, 2006, ATSI’s Board of Directors approved the
issuance of 1,125,000 shares to its employees and directors and 385,709 shares
to consultants with a market value of $180,000 and $78,066, respectively.
NOTE
3 - SETTLEMENT OF 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.
of a note receivable with a balance $598,000. ATSI previously recognized an
allowance for this receivable and the balance reflected in our balance sheet
was
$0. Additionally, as part of the settlement ATSI agreed to release 10% of ATSI
Communicaciones S.A de C.V. total outstanding common stock, that was held as
collateral on the note receivable.
NOTE
4 - 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.
Additionally, on January 6, 2006, the holder elected to convert $20,000 of
the
principal balance and $1,632 of accrued interest into 98,328 common shares
of
ATSI stock. 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.
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
6,
2006 and an annual interest rate of 18%. The
note
is secured by ATSI’s equipment, deposit accounts and accounts receivables.
Beginning on December 4, 2005 the
Company initiated making monthly interest payments of $750. The full principal
balance on this note is due at maturity. The Company has the option of paying
off the total outstanding principal balance at any time, but there’s a $10,000
early termination fee.
NOTE
5 - ACCOUNTS RECEIVABLE CREDIT FACILITY
On
November 4, 2005 ATSI entered into a credit facility agreement with CSI Business
Finance, Inc. Under the agreement, CSI Business Finance, Inc. committed to
loan
up to $150,000 secured by ATSI’s monthly receivables. The agreement expires on
November 4, 2006 and it has an annual interest rate of 18%. As part of the
transaction ATSI paid an application, legal and documentation fee of $6,000
and
a brokerage fee of $20,000 to Corporate Strategies, Inc. As of January 31,
2006
we have fully drawn the available credit facility of $150,000.
NOTE
6 - GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS
During
the six months ended January 31, 2006, ATSI recognized a gain on disposal of
discontinued operations of $1,652,000. The gain on disposal of discontinued
operations was associated with the sale in October 2005 of ATSI’s Mexican
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 and were assumed by the purchaser.
NOTE
7 - DERIVATIVES
ATSI
evaluated the application of SFAS 133 and EITF 00-19 for all of its
financial instruments and identified the following financial instruments as
derivatives:
1)
|
Note
Payable, Franklin Cardwell and Jones
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2)
|
9%
Convertible Debenture;
|
|
|
Warrants
to purchase common stock associated with the 2003 Debentures the
("2003
Debenture Warrants");
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3)
|
Warrants
to purchase common stock in connection with consulting agreements
with two
individuals (“Consulting Warrants”)
|
Based
on
the guidance in SFAS 133 and EITF 00-19, we concluded that all of these
instruments were required to be accounted for as derivatives. SFAS 133 and
EITF
00-19 require ATSI to bifurcate and separately account for the conversion
features of the Note Payable to Franklin Cardwell and Jones, the 9% Convertible
Debentures and warrants issued to consultants as embedded derivatives.
Pursuant
to SFAS 133, ATSI bifurcated the conversion feature from the Note Payable to
Franklin Cardwell and Jones, because the conversion price is not fixed and
it’s
not convertible into a fixed number of shares. Accordingly, the embedded
derivative must be bifurcated and accounted for separately.
In
addition, ATSI bifurcated the conversion feature from the 9% Convertible
debenture and the associated warrants, since the conversion price is not fixed
and it is not convertible into a fixed number of shares.
Furthermore,
ATSI concluded that the exercise price and the number of shares to be issued
under the “Consulting Warrants” to two individuals are fixed. However, since the
9% Convertible debenture was issued prior to these warrants and these debentures
might result in issuing an indeterminate number of shares, it cannot be
concluded that the Company has a sufficient number of authorized shares to
settle these warrants. As such, the warrants were accounted for as derivative
instrument liabilities. ATSI is required to record the fair value of the
conversion features and the warrants on its balance sheet at fair value with
changes in the values of these derivatives reflected in the consolidated
statement of operations as “Gain (loss) on embedded derivative liability.” The
derivative liabilities were not previously classified as such in ATSI’s
historical financial statements. In order to reflect these changes, ATSI will
restate its financial statements for the year ended July 31, 2005 and the three
months ended October 31, 2005.
The
impact of the application of SFAS 133 and EITF 00-19 on the balance sheet as
of
July 31, 2005 and the impact on the balance sheet and statements of operations
as of January 31, 2006 is as follows:
|
|
7/31/2005
|
|
1/31/2006
|
|
Loss
|
|
Note
Payable, Franklin Cardwell and Jones
|
|
|
18,851
|
|
|
43,476
|
|
|
24,625
|
|
9%
Convertible Debenture & warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consulting
warrants
|
|
|
5,353
|
|
|
46,293
|
|
|
40,940
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instrument total:
|
|
$
|
24,204
|
|
$
|
89,769
|
|
$
|
65,565
|
|
Since
the
conversion option for the Series D Preferred Stock is contingent, as a result
of
the ongoing litigation with the holders of these securities, the Series D
Preferred Stock is not within the scope of SFAS 133 and EITF 00-19. If the
contingency and lawsuit is resolved in the future and the holder becomes
able to convert, ATSI will assess whether the conversion option meets the
definition of a derivative under SFAS 133. However, as of July 31, 2003, the
Series D Preferred Stock, which is carried as a current liability, is recorded
at its stated redemption amount of $1,270 per share or approximately $942,000.
ATSI continues to accrue dividends on the Series D Preferred Stock, pending
resolution of the Company’s lawsuit. At January 31, 2006, the carrying amount of
the Series D Preferred Stock was $1,204,000, including accrued dividends of
$262,000.
Because
the conversion option for the Series E Preferred Stock is contingent, as a
result of the ongoing litigation with the holders of these securities, the
Series E Preferred Stock is not within the scope of SFAS 133 and EITF 00-19.
If
the contingency and lawsuit is resolved in the future and the holder
becomes able to convert, ATSI will assess whether the conversion option meets
the definition of a derivative under SFAS 133. However, as of July 31, 2003,
the
Series E Preferred Stock, which is carried as a current liability, is recorded
at its stated redemption amount of $1,250 per share or approximately $1,463,000.
ATSI continues to accrue an amount equivalent to dividends of 6% per annum
on
the Series E Preferred Stock, pending resolution of the Company’s lawsuit. At
January 31, 2006, the carrying amount of the Series E Preferred Stock was
$1,784,703, including accrued dividends of $322,000.
NOTE
8-SUBSEQUENT EVENTS
On
February 20, 2006 ATSI entered into a factoring agreement with CSI Business
Finance, Inc. Under the agreement CSI Business committed to purchase up to
$400,000 of ATSI’s monthly receivables. The factoring agreement is for an
indefinite period of time, the factor or the company can terminate this
agreement at its sole discretion at any time without
cause.
The
factoring rate ranges from 1.25%-2.25% per factored amount. The accounts
receivable factoring agreement is secured by ATSI’s accounts receivables. As of
date of this filing the Company has not factored any receivables under this
agreement.
On
March
22, 2006, the board of directors determined that the previously issued financial
statements for the fiscal year ended July 31, 2005 and for the three months
ended October 31, 2005 should no longer be relied upon because they do not
correctly reflect a net gain or benefit relating to embedded derivatives in
certain securities issued by ATSI. The previously issued financial statements
will be promptly amended and restated.
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 and six months ended January 31, 2006 and
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, 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 $52,000 in retail services revenue
during the six months ended January 31, 2006.
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 68 customers
and
our revenue increased from $2,362,000 during the six months ended January 31,
2005 to $5,270,000 for the six months ended January 31, 2006.
We
have
had operating losses for almost every quarter since we began operations in
1994.
Our
operating losses from continuing operations were approximately $487,000 and
$1,559,000, for the six months ended January 31, 2006 and 2005, respectively.
Additionally, we had a working capital deficit of approximately $4,747,000
at
January 31, 2006. 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, accounts receivable
factoring, 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 six months ended January 31,
2006 management continued to pursue different avenues for funding. During the
six months ended January 31, 2006 we received $46,000 from the exercise of
331,084 warrants. Additionally, as mentioned on footnotes 4 and 5, on November
4, 2005 we entered into a note payable with CSI Business Finance, Inc. for
$50,000 and also signed an accounts receivable credit facility with CSI Business
Finance, Inc. and as of the end of the second quarter we had drawn $150,000
of
this facility. The proceeds from the exercise of warrants, note payable and
accounts receivable credit facility 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
additional 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 and six month periods ended January 31, 2006 and 2005.
|
|
|
Three
Months Ended January 31,
|
|
|
Six
Months Ended January 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
$
|
|
|
%
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
2,942
|
|
|
100
|
%
|
$
|
1,446
|
|
|
95
|
%
|
$
|
5,257
|
|
|
100
|
%
|
$
|
2,215
|
|
|
94
|
%
|
Network
services
|
|
|
5
|
|
|
0
|
%
|
|
74
|
|
|
5
|
%
|
|
13
|
|
|
0
|
%
|
|
147
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
|
2,947
|
|
|
100
|
%
|
|
1,520
|
|
|
100
|
%
|
|
5,270
|
|
|
100
|
%
|
|
2,362
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (Exclusive of depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization, shown below)
|
|
|
2,769
|
|
|
94
|
%
|
|
1,422
|
|
|
94
|
%
|
|
5,009
|
|
|
95
|
%
|
|
2,194
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
178
|
|
|
6
|
%
|
|
98
|
|
|
6
|
%
|
|
261
|
|
|
5
|
%
|
|
168
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
158
|
|
|
5
|
%
|
|
82
|
|
|
5
|
%
|
|
365
|
|
|
7
|
%
|
|
306
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
and professional fees
|
|
|
55
|
|
|
2
|
%
|
|
40
|
|
|
3
|
%
|
|
75
|
|
|
1
|
%
|
|
305
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
66
|
|
|
2
|
%
|
|
591
|
|
|
39
|
%
|
|
80
|
|
|
2
|
%
|
|
591
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
stock-based compensation, employees
|
|
|
-
|
|
|
0
|
%
|
|
474
|
|
|
31
|
%
|
|
180
|
|
|
3
|
%
|
|
474
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad
debt
|
|
|
-
|
|
|
0
|
%
|
|
4
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
4
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
26
|
|
|
1
|
%
|
|
24
|
|
|
2
|
%
|
|
48
|
|
|
1
|
%
|
|
47
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(127
|
)
|
|
-4
|
%
|
|
(1,117
|
)
|
|
-73
|
%
|
|
(487
|
)
|
|
-9
|
%
|
|
(1,559
|
)
|
|
-66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense
|
|
|
-
|
|
|
0
|
%
|
|
4
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
4
|
|
|
0
|
%
|
Derivative
instrument income (expense)
|
|
|
(53
|
)
|
|
-2
|
%
|
|
2,062
|
|
|
136
|
%
|
|
(57
|
)
|
|
-1
|
%
|
|
1,178
|
|
|
50
|
%
|
Debt
forgiveness income
|
|
|
38
|
|
|
1
|
%
|
|
-
|
|
|
0
|
%
|
|
38
|
|
|
1
|
%
|
|
460
|
|
|
19
|
%
|
Interest
expense
|
|
|
(28
|
)
|
|
-1
|
%
|
|
(43
|
)
|
|
-3
|
%
|
|
(54
|
)
|
|
-1
|
%
|
|
(77
|
)
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
|
($170
|
)
|
|
-6
|
%
|
$
|
906
|
|
|
60
|
%
|
|
($560
|
)
|
|
-11
|
%
|
$
|
6
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of discontinued operations
|
|
|
-
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
1,652
|
|
|
31
|
%
|
|
-
|
|
|
0
|
%
|
Net
income from discontinued operations
|
|
|
-
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
1,652
|
|
|
31
|
%
|
|
-
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
preferred stock dividends
|
|
|
(54
|
)
|
|
-2
|
%
|
|
(38
|
)
|
|
-3
|
%
|
|
(95
|
)
|
|
-2
|
%
|
|
(76
|
)
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
|
($224
|
)
|
|
-8
|
%
|
$
|
868
|
|
|
57
|
%
|
$
|
997
|
|
|
19
|
%
|
|
($70
|
)
|
|
-3
|
%
|
Three
Months ended January 31, 2006 Compared to Three Months ended January 31,
2005
Operating
Revenues.
Consolidated operating revenues increased 94% between periods from $1,520,000
for the quarter ended January 31, 2005 to $2,947,000 for the quarter ended
January 31, 2006.
Carrier
services revenues increased $1,496,000, or 103% from the quarter ended January
31, 2005 to the quarter ended January 31, 2006. Our carrier traffic increased
from approximately 44,725,986 minutes in the second quarter of fiscal 2005
to
approximately 62,921,500 minutes in the quarter ended January 31, 2006. The
increase in revenue and carrier traffic can mainly be attributed to an increase
in customers during the second quarter of fiscal 2006 compared to the second
quarter of fiscal 2005. Network services revenues decreased approximately 93%
or
$69,000 from the quarter ended January 31, 2005 to the quarter ended January
31,
2006. The decrease in network services revenue is primarily due to the decrease
in network services customers. Currently we provide network services to only
one
customer.
Cost
of Services. (Exclusive of depreciation and amortization)
The
consolidated cost of services increased by $1,347,000 or 95% from the quarter
ended January 31, 2005 to the quarter ended January 31, 2006. 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 44,725,986
minutes in the second quarter of fiscal 2005 to approximately 62,921,500 minutes
in the quarter ended January 31, 2006, thus increasing our cost of services
between quarters. Consolidated cost of services, as a percentage of revenue
remained consistent between quarters at 94%. However, as a result of the
increase in total revenue our gross profit margin increased from $98,000 during
the quarter ended January 31, 2005 to $178,000 during the quarter ended January
31, 2006.
Selling,
General and Administrative (SG&A) Expenses (Exclusive
of $474,000 in non-cash stock based compensation expense to employees recognized
during fiscal 2005). SG&A expenses increased $76,000, or 93% from the
quarter ended January 31, 2005 to the quarter ended January 31, 2006. The
increase is primarily attributable to an
adjustment of $92,000 in salaries and wages associated with a reversal of an
over-accrual for services recognized during the second quarter of Fiscal 2005.
We did not recognize any adjustments during the second quarter ended January
31,
2006.
Legal
and professional Fees.
Legal
and professional fees increased $15,000, or 38% from the quarter ended January
31, 2005 to the quarter ended January 31, 2006. The increase is attributable
to
the recognition of approximately $15,000 in professional fees associated with
arbitration with a vendor, as described in the legal proceeding section of
this
report. We did not incur these types of expenses during the quarter ended
January 31, 2005.
Non-cash
issuance of common stock and warrants for services.
Non-cash issuance of common stock and warrants for services decreased by
$525,000 from the quarter ended January 31, 2005 to the quarter ended January
31, 2006. The decrease is
primarily due to recognition during the quarter ended January 31, 2005 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. We
did
not incur these types of expenses during the quarter ended January 31, 2006.
Non-cash
stock-based compensation, employees.
Non-cash compensation expense to employees decreased by $474,000 from the
quarter ended January 31, 2005 to the quarter ended January 31, 2006. The
decrease is attributed to the recognition during the quarter ended January
31,
2005 of approximately $474,000 of non-cash compensation expense associated
with
the stock grants to our employees and board of directors. We did not incur
these
types of expenses during the quarter ended January 31, 2006.
Bad
debt expense. Bad
debt
expense decreased by $4,000 from the quarter ended January 31, 2005 to the
quarter ending January 31, 2006. During the quarter ending January 31, 2005
we
recognized $4,000 in bad debt expense associated with the write-off of a
receivable from a carrier services customer that ceased operations.
Depreciation
and Amortization.
Depreciation and amortization increased by $2,000 or 8% from the quarter ended
January 31, 2005 to the quarter ended January 31, 2006. The increase in
depreciation expense is attributed to the increase in port capacity in our
Nextone soft-switch and the acquisitions of various computers during the second
quarter of fiscal 2006.
Operating
Loss.
The
Company’s operating loss decreased by $990,000 or 89% from the quarter ended
January 31, 2005 to the quarter ended January 31, 2006. The reduction in
operating loss is attributed to the increase in gross profit margin of $80,000
between quarters, the decrease between quarters in non-cash issuance of common
stock and warrants expense for services of $525,000 and the decrease in non-cash
stock based compensation expense to employees of $474,000.
Derivative
Instruments income (expense), net. Derivative
instruments income (expense) decreased by $2,115,000 from the quarter ended
January 31, 2005 to the quarter ended January 31, 2006. The decrease is as
a
result of the net unrealized (non-cash) change in the fair value of our
derivative instrument liabilities related to certain, warrants, and embedded
derivatives in our debt instruments that have been bifurcated and accounted
for
separately.
Debt
forgiveness income. Debt
forgiveness income increased by $38,000 from the quarter ended January 31,
2005
to the quarter ended January 31, 2006. The increase is primarily due to the
recognition during the quarter ended January 31, 2006 of $38,000 in debt
forgiveness income associated with the settlement of debt for the issuance
of
common stock. This transaction was related to the settlement of $49,000 in
debt
with a consultant, this debt was incurred during fiscal 2000 and associated
with
the commissions incurred as part of the acquisition of the concession license
in
Mexico. 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.
Interest
expense.
Interest expense decreased by $15,000 or 35% from the quarter ended January
31,
2005 to the quarter ended January 31, 2006. The decrease can be attributed
to
the decrease in interest expense associated with various note payables with
Recap Marketing that were fully paid during fiscal 2005. As a result during
the
quarter ended January 31, 2006 we did not incur any interest expense with Recap
Marketing.
Net
loss from continuing operations.
Net
loss from continuing operations increased by $1,076,000. The increase in net
loss from continuing operations is attributed to the decrease of $2,115,000
in
derivative instrument income between periods. The increase in net loss from
continuing operations was slightly offset by the increase in gross profit margin
of $80,000 between quarters, the decrease in non-cash issuance of common stock
and warrant expense for services of $525,000 and the decrease in non-cash stock
based compensation expense to employees of $474,000.
Preferred
Stock Dividends.
Preferred Stock Dividends expense increased by $16,000 or 42% between periods,
from $38,000 for the quarter ended January 31, 2005 to $54,000 during the
quarter ended January 31, 2006. The increase in preferred dividend expense
during the quarter ended January 31, 2006 is attributed to the recognition
of
preferred dividend expense associated with the conversion of 1,292,048
Redeemable Preferred Series H shares to 1,550,153 shares of common stock.
Net
income (loss) applicable to common stockholders.
Net
loss applicable to common stockholders increased by $1,092,000. The increase
in
net loss applicable to common stockholders is attributed to the decrease of
$2,115,000 in derivative instrument income between periods. The increase in
net
loss applicable to common stockholders was slightly offset by the increase
in
gross profit margin of $80,000 between quarters, the decrease in non-cash
issuance of common stock and warrant expense for services of $525,000 and the
decrease in non-cash stock based compensation expense to employees of $474,000.
Six
Months ended January 31, 2006 Compared to Six Months ended January 31,
2005
Operating
Revenues.
Consolidated operating revenues increased 123% between periods from $2,362,000
for the six months ended January 31, 2005 to $5,270,000 for the six months
ended
January 31, 2006.
Carrier
services revenues increased $3,042,000, or 137% from the six months ended
January 31, 2005 to the six months ended January 31, 2006. Our carrier traffic
increased from approximately 68,129,356 minutes in the six months ended January
31, 2005 to approximately 111,433,832 minutes in the six months ended January
31, 2006. The increase in revenue and carrier traffic can mainly be attributed
to increase in customers during fiscal 2006 compared to fiscal 2005. Network
services revenues decreased approximately 91% or $134,000 from the six months
ended January 31, 2005 to the six months ended January 31, 2006. The decrease
in
network services revenue is primarily due to the decrease in network services
customers.
Cost
of Services. (Exclusive of depreciation and amortization)
The
consolidated cost of services increased by $2,815,000 or 128% from the six
months ended January 31, 2005 to the six months ended January 31, 2006. 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 68,129,356 minutes in the six months ended January 31, 2005 to
approximately 111,433,832 minutes in the six months ended January 31, 2006,
thus
increasing our cost of services between quarters. Consolidated cost of services
as a percentage of sales increased from 93% in the six months of fiscal 2005
to
95% in the six months of fiscal 2006. As a result, gross margins declined from
7% of revenue in the six months of fiscal 2005 to 5% of revenue in the six
months of fiscal 2006. However, as a result of the increase in total revenue
our
gross profit margin increased from $168,000 during the period ended January
31,
2005 to $261,000 during the quarter ended January 31, 2006.
Selling,
General and Administrative (SG&A) Expenses
(Exclusive of $180,000 and $474,000 in non-cash stock based compensation expense
to employees recognized during fiscal 2006 and 2005, respectively). SG&A
expenses increased $59,000, or 19% from the six months ended January 31, 2005
to
the six months ended January 31, 2006. The
increase is primarily attributable to an
adjustment of $92,000 in salaries and wages and a reversal of an over-accrual
for services recognized during the second quarter of Fiscal 2005. We did not
recognize any adjustments during the second quarter ended January 31, 2006.
Legal
and professional Fees.
Legal
and professional fees decreased $230,000, or 75% from the six months ended
January 31, 2005 to the six months ended January 31, 2006.
The
decrease is attributable to the recognition of approximately $150,000 in
professional fees associated with a marketing campaign that commenced during
the
six months ended January 31, 2005. Additionally, during the six months ended
January 31, 2005 we recognized approximately $90,000 in legal fees associated
with a lawsuit filed by the Company for stock fraud and manipulation by various
institutions, as described in the legal proceeding section of this report.
We
did not incur these types of expenses during the six months ended January 31,
2006.
Non-cash
issuance of common stock and warrants for services.
Non-cash issuance of common stock and warrants for services decreased by
$511,000 from the six months ended January 31, 2005 to the six months ended
January 31, 2006. The decrease is primarily due to recognition during the
quarter ended January 31, 2005 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. We did
not incur these types of expenses during the six months ended January 31, 2006.
Non-cash
stock-based compensation, employees.
Non-cash compensation expense to employees decreased by $294,000 from the six
months ended January 31, 2005 to the six months ended January 31, 2006. The
decrease is attributed to the recognition during the six months ended January
31, 2005 of approximately $474,000 of non-cash compensation expense associated
with the stock grants to our employees and board of directors. We incurred
$180,000 of non-cash compensation expense associated with the stock grants
to
our employees and board of directors issued during the six months ended January
31, 2006.
Bad
debt expense. Bad
debt
expense decreased by $4,000 from the six months ended January 31, 2005 to the
six months ended January 31, 2006. During the six months ended January 31,
2005
we recognized $4,000 in bad debt expense associated with the write-off of a
receivable from carrier services customer that ceased operations.
Depreciation
and Amortization.
Depreciation and amortization increased by $1,000 or 2% from the six months
ended January 31, 2005 to the six months ended January 31, 2006. The increase
in
depreciation expense is attributed to the increase in port capacity in our
Nextone Soft-switch and the acquisition of various computers during the second
quarter of fiscal 2006.
Operating
Loss.
The
Company’s operating loss decreased by $1,072,000 or 69% from the six months
ended January 31, 2005 to the six months ended January 31, 2006. The reduction
in operating loss between periods is attributed to the increase in gross profit
margin of $93,000; the decrease between periods in non-cash issuance of common
stock and warrants expense for services of $511,000 and the decrease in non-cash
stock based compensation expense to employees of $294,000 and the decrease
in
legal and professional fees of $230,000.
Derivative
Instruments income (expense), net. Derivative
instruments income (expense) decreased by $1,235,000 from the six months ended
January 31, 2005 to the six months ended January 31, 2006. The decrease is
as a
result of the net unrealized (non-cash) change in the fair value of our
derivative instrument liabilities related to certain, warrants, and embedded
derivatives in our debt instruments that have been bifurcated and accounted
for
separately.
Debt
forgiveness income. Debt
forgiveness income decreased by 92% from $460,000 during the six months ended
January 31, 2005 to $38,000 during the six months ended January 31, 2006. The
decrease is primarily due to the recognition during the six months ended January
31, 2005 of $460,000 in debt forgiveness income associated with the settlement
of various liabilities for the issuance of common stock. These transactions
were
related to the settlement of $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.
Interest
expense.
Interest expense decreased by $23,000 or 30% from the six months ended January
31, 2005 to the six months ended January 31, 2006. 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 six months ended January 31, 2006 we did not incur any interest expense
with
Recap Marketing.
Net
loss from continuing operations.
Net
loss from continuing operations increased by $566,000. The increase in operating
loss between periods is attributed to the decrease in derivative instruments
income of $1,235,000 between periods. The increase in operating loss from
continuing operations was slightly offset by the increase in gross profit margin
of $93,000, the decrease between periods of $511,000 in non-cash issuance of
common stock and warrants expense for services and the decrease of $294,000
in
non-cash stock based compensation expense to employees and the decrease between
periods of $230,000 in legal and professional fees.
Net
income from discontinued operations. During
the six months ended January 31, 2006 we recognized a gain on disposal of
discontinued operations of $1,652,000. The
gain
on disposal of discontinued operations 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 and assumed all related liabilities on this entity
of $1,652,000 and as a result we recognized a gain of $1,652,000.
Preferred
Stock Dividends.
Preferred Stock Dividends expense increased by $19,000 or 25% between periods,
from $76,000 for the six months ended January 31, 2005 to $95,000 during the
six
months ended January 31, 2006. The increase in preferred dividend expense during
the six months ended January 31, 2006 is attributed to the recognition of
preferred dividend expense associated with the conversion of 1,634,562
Redeemable Preferred Series H shares to 1,961,157 shares of common stock.
Net
income (loss) to Common Stockholders.
During
the six months ended January 31, 2006 we recognized $997,000 in net income
to
common stockholders, this represented an improvement of $1,067,000 from the
six
months ended January 31, 2005. The improvement in net income to common
stockholders is primarily due to the recognition of $1,652,000 from the gain
on
disposal of discontinued operations associated with to the sale of ATSIMex
Personal S.A de C.V. Additionally, the improvement in net income to common
stockholders between periods is attributed to the increase in gross profit
margin of $93,000. Further, the improvement in net loss from continuing
operations is attributed to the decrease between periods of $511,000 in non-cash
issuance of common stock and warrants expense for services, the decrease of
$294,000 in non-cash stock based compensation expense to employees and the
decrease between periods of $230,000 in legal and professional fees. The
decrease in these expenses was slightly offset by the decrease during the same
period in debt forgiveness income of $422,000.
Liquidity
and Capital Resources
Cash
Position:
During
the six months ended January 31, 2006, operations consumed approximately $54,000
in cash, primarily due to the operating loss offset by non-cash expenses
compared to the prior period. Investing activities during the six months of
fiscal 2006 consumed an additional $4,000 relating to the acquisition of various
computers and routers. Financing activities during the six months of fiscal
2006
generated $219,000 in cash. This cash was primarily generated from proceeds
from
an accounts receivable credit facility of $150,000 and cash proceeds from a
note
payable of $50,000 from CSI Business Finance, Inc. as previously described
in
the footnotes to the financial statements. Additionally, we received $46,000
from the exercise of 331,084 warrants. These cash proceeds were offset by the
$26,000 paid to Corporate Strategies, Inc. for the factoring and processing
fees
and the $1,000 associated with the principal payments under the lease of certain
equipment. Overall, our net operating, investing and financing activities during
the six months ended January 31, 2006 provided an increase of $161,000 in cash.
We had a cash balance of $190,000 as of January 31, 2006.
Our
current operating expenses are expected to be approximately $70,000 per month,
including wages, rent, utilities, litigation fees and corporate professional
fees. We will require approximately $30,000 per month to cover the deficiencies
in cash from operations during Fiscal 2006. We intend to cover our initial
monthly operating expenses with our available cash and the factoring of our
receivables. We expect to continue conserving cash resources by paying executive
compensation, fees for certain consultants and professional services with shares
of our common stock. In addition, outstanding indebtedness payable to a law
firm
is being paid through conversions to common stock. Furthermore, we will continue
to pursue additional debt and equity financings to cover our deficiencies in
cash reserves. However, we presently do not have a definitive agreement in
place
to obtain such financing. Any additional debt or equity financing may not be
available in sufficient amounts or on acceptable terms. If such financing is
not
available in sufficient amounts or on acceptable terms, the Company's results
of
operations and financial condition may be adversely affected.
Additionally,
in an effort to continue to conserve cash, we are not presently paying quarterly
interest and dividends on our outstanding convertible debentures and Redeemable
Preferred stock. However, we have continued to accrue dividends and interest
on
such debentures and Redeemable Preferred stock. The increase in accrued
liabilities related to the dividends and interest in arrears contributed
approximately $107,000 in cash flow savings during the six months ended January
31, 2006.
Our
working capital deficit was $4,474,000 as of January 31, 2006. This represents
a
decrease of approximately $1,144,000 from our working capital deficit at July
31, 2005. The decrease can primarily be attributed to the recognition of a
gain
from discontinued operations associated with the 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:
·
|
$70,000
owed to Attorneys for legal services rendered during fiscal
2004.
|
|
|
·
|
$200,000
owed to CSI Business Finance, Inc. for a factoring line of credit
and a
current note payable.
|
|
|
·
|
$1,204,000
associated with the Series D Cumulative preferred stock. Of this
balance,
$942,000 is associated with the full redemption of this security
and
$262,000 is related to the accrued dividends as of January 31,
2006.
|
|
|
·
|
$1,785,000
associated with the Series E Cumulative preferred stock. Of this
balance,
$1,465,000 is associated with the full redemption of this security
and
$320,000 is related to the accrued dividends as of January 31, 2006.
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 July 9, 2004, we filed a separate but related lawsuit
in
the same court against Sam Levinson and Uri Wolfson. On February
25, 2005,
Judge Lewis A. Kaplan issued a memorandum opinion and order dismissing
the
complaint in the first action as to all defendants with prejudice. A
judgment was entered in that action on September 8, 2005. We
appealed that judgment on September 20, 2005 to the United States
Court of
Appeals for the Second Circuit. On April 27, 2005, the court entered
a final judgment dismissing the second 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. The defendants' briefs are due to be
filed in both appeals on March 29, 2006, and our reply briefs are
due to
be filed April 12, 2006. Currently we cannot predict the outcome
of this
litigation or the financial impact on our ongoing
operations.
|
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 in excess of operating expenses. 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 six months ended January 31, 2006, we received $150,000 from an accounts
receivable credit facility, $50,000 from a Note Payable with CSI Business
Finance, Inc. and $46,000 from the exercise of warrants. These funds allowed
us
to cover our operating expenses and other corporate expenses during the period
ended January 31, 2006. Additionally, on February 20, 2006 we entered into
a
factoring agreement with CSI Business Finance, Inc. Under the agreement, CSI
Business committed to purchase up to $400,000 of ATSI’s monthly receivables. As
our ongoing operations require, we will factor our receivables under this new
agreement. Currently we have not factored any receivables under the new
arrangement.
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 our 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
it is required, and will likely not be on 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 covered by
this
report. 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
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 July 9, 2004,
we filed a separate but related lawsuit in the same court against Sam Levinson
and Uri Wolfson. On February 25, 2005, Judge Lewis A. Kaplan issued a memorandum
opinion and order dismissing the complaint in the first action as to all
defendants with prejudice. A judgment was entered in that action on
September 8, 2005. We appealed that judgment on September 20, 2005 to the
United States Court of Appeals for the Second Circuit. On April 27, 2005,
the court entered a final judgment dismissing the second 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. The defendants' briefs are due to be filed
in both appeals on March 29, 2006, and our reply briefs are due to be filed
April 12, 2006. 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 alleged 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 180,272 shares of our common stock to Nextone
Communications, Inc. 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 Communications, Inc. on August 23, 2005 and September 14,
2005,
respectively, as part of the settlement agreement for certain litigation. The
shares issued to Nextone Communications, 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.
Additionally,
we issued 66,603 and 98,328 common shares to Franklin, Cardwell and Jones on
November 1, 2005 and January 6, 2006, respectively, for a payment of $10,000
of
accrued interest and principal payment of $33,000 on the current note payable.
The shares issued to Franklin, Cardwell and Jones 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.
On
December 2, 2005, we issued 50,000 shares of our common stock to Carlos
Kauachi/Dean Witter Reynolds as a settlement of debt of $49,000 associated
with
the commissions incurred as part of the acquisition of the concession license
in
Mexico during fiscal 2000. The shares issued to Carlos Kauachi/Dean Witter
Reynolds 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
January 31, 2006, 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
|
|
$
|
200,000
|
|
Series
D Cumulative Preferred Stock
|
|
|
262,000
|
|
Series
E Cumulative Preferred Stock
|
|
|
320,000
|
|
TOTAL
|
|
$
|
782,000
|
|
On
January 31, 2006, we received comments from the Securities and Exchange
Commission to our Annual Report on Form 10-KSB for the year ended July 31,
2005
and our Quarterly Report on Form 10-QSB for the three months ended October
31,
2005. One of the comments relates to the separate valuation of and accounting
for the embedded derivative obligation in our promissory note payable to
Franklin, Cardwell & Jones and other outstanding securities. On March 21,
2006, our board of directors determined that the previously issued financial
statements for the fiscal year ended July 31, 2005 and for the three months
ended October 31, 2005 should no longer be relied upon because they do not
correctly reflect a net gain or benefit relating to the embedded derivatives
in
such instruments. The board of directors has reviewed the accounting treatment
of its convertible securities with the Company’s independent accountants and
intends to promptly amend and restate any affected financial statements
previously filed with the Securities and Exchange Commission.
(a) Exhibits:
The following documents are filed as exhibits to this report.
Exhibit
Number
|
Description
|
|
|
10.1
|
Confidential
Settlement Agreement and Mutual release dated December 2, 2005 between
ATSI Communications, Inc. and Carlos Kauachi/Dean Witter
Reynolds.
|
|
|
10.2
|
Factoring
Agreement dated February 20, 2006 between ATSI Communications, Inc.
and
CSI Business Finance, Inc.
|
|
|
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 2006.
|
On
November 1, 2005, we filed a Current Report on Form 8-K under Item 3 the
issuance of 66,603 shares of our common stock, $.001 par value per share to
Franklin, Cardwell & Jones pursuant to the partial conversion of principal
of and accrued and unpaid interest on a promissory note dated November 1, 2004.
On
January 6, 2006, we filed a Current Report on Form 8-K under Item 3 the issuance
of 98,328 shares of our common stock, $.001 par value per share to Franklin,
Cardwell & Jones pursuant to the partial conversion of principal of and
accrued and unpaid interest on a promissory note dated November 1, 2004.
On
February 1, 2006 we filed a Current Report on Form 8-K reporting under Item
8
the formation of a new wholly owned subsidiary, Digerati Networks,
Inc. Digerati
Networks will market the Company’s VoIP services with the goal of achieving a
leadership position in the industry while building brand and name
recognition.
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.
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|
|
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ATSI
COMMUNICATIONS, INC.
|
|
|
(Registrant) |
Date: March
22, 2006 |
By: |
/s/
Arthur L. Smith |
|
Arthur
L. Smith |
|
Title: President
and Chief Executive Officer |
|
|
|
|
|
|
|
|
Date: March
22, 2006 |
By: |
/s/
Antonio Estrada |
|
Antonio
Estrada |
|
Title: Corporate
Controller (Principal Accounting and Principal Financial Officer)
|