Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(mark
one)
x
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the
fiscal year ended July 31, 2007
o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the
transition period from _______to _________
Commission
File Number: 001-15687
ATSI
COMMUNICATIONS, INC.
(Name
of
Small Business Issuer in Its Charter)
Nevada
(State
or Other Jurisdiction of Incorporation or Organization)
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74-2849995
(IRS
Employer Identification No.)
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|
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3201
Cherry Ridge, Building C, Suite 300
San
Antonio, Texas
(Address
of Principal Executive Offices)
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78230
(Zip
Code)
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(210)
614-7240
(Issuer’s
Telephone Number)
Securities
registered under Section 12(b) of the Exchange Act: NONE
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, Par Value $0.001 Per Share
(Title
of
Class)
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
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. x Yes o
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) o
Yes x No
Registrant’s
revenues for its most recent fiscal year were $31,692,150
The
aggregate market value of the common equity held by non-affiliates of the issuer
was $10,518,338
based on
the closing price of
$0.27
per
share on October
15, 2007
as
reported on the over-the-counter bulletin board.
There
were 38,956,810 shares of issuer ’s Common Stock outstanding as of October 15,
2007.
Transitional
Small Business Disclosure Format (check one): o Yes x
No
TABLE
OF CONTENTS
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Page |
PART
I
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Item
1. Description of Business
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3
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Overview
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3
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History
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4
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Recent
Developments
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4
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Services
and Products
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4
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Carrier
Services
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4
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Network
Services
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5
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Communication
Services
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5
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Voice
over Internet Protocol Network
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5
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Strategy
and Competitive Conditions
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7
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Government
Regulations/ Concession License
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9
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Suppliers
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13
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Employees
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13
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Risk
Factors
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13
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Item
2. Description of Properties
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15
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Item
3. Legal Proceedings
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16
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Item
4. Submission of Matters to a Vote of Security Holders
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16
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PART
II
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Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters
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16
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Item
6. Management’s Discussion and Analysis or Plan of
Operations
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18
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Item
7. Financial Statements and Supplementary Data
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26
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Item
8. Changes in and Disagreements with Accountants on Accounting and
Financial
Disclosures
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45
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Item
8A.Controls and Procedures
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45
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PART
III
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Item
9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with
Section 16(A) of the Exchange Act
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45
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Item
10. Executive Compensation
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47
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Item
11. Security Ownership of Certain Beneficial Owners and
Management
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51
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Item
12. Certain Relationships and Related Transactions
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52
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Item
13. Exhibits and Reports on Form 8-K
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52
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Item
14. Principal Accountant Fees and Services
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55
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PART
I
ITEM
I. BUSINESS.
Overview
We
are an
international telecommunications carrier that utilizes the Internet to provide
cost-efficient and economical international communication 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 communication 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 technology. Our services include:
Carrier
Services: We
provide VoIP communication services to United States and foreign
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 and VoIP services.
Network
Services: We provide
private communications 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
telecommunications 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,
primarily 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. In addition, we provide prepaid
domestic and international long-distance services with access to our VoIP
network platform.
We
have
had operating losses for almost every quarter since we began operations in
1994.
Our operating income from continuing operations were approximately $91,000
and
our operating loss $598,000, for the years ended July 31, 2007, and 2006,
respectively. Additionally, we had a working capital deficit of approximately
$424,000 at July 31, 2007; this represents an improvement in our working capital
deficit of approximately of $2,376,000 from our balance at July 31, 2006.
We
produced positive operating income during the 2nd,
3rd
and
4th
quarters
of fiscal 2007 and expect to pay our vendors and lenders on time in the future
if this trend continues. Additionally, we generated sufficient income from
operations to cover our operating expenses during the fiscal year ended July
31,
2007. However, we believe that due to our limited access to capital, we may
not
be able to support our ongoing operations if we do not continue producing
positive operating income in the future. Our ability to continue as a going
concern is dependent upon generating sufficient income from operations to cover
our operating expense, the ongoing support of our stockholders and customers,
and our ability to obtain capital resources to support expansion.
During
the twelve months ended
July 31, 2007,
we
received $713,000
from a private placement financing. We also received $35,000
from the exercise of warrants and $16,000 from the exercise of stock options.
These funds, along with funds generated from operations, allowed us to cover
our
operating expenses and other corporate expenses during the nine months
ended
April 30, 2007.
Additionally, on November 3, 2006, we entered into a factoring agreement with
CCA Financial Services, Inc. Under the agreement, CCA Financial Services
committed to purchase up to $1,000,000 of our monthly receivables. As our
ongoing operations require, we will factor our receivables under this new
agreement. As of date of this filing, we did not have any outstanding factored
receivables under this agreement.
We
will
continue to pursue cost cutting strategies in order to conserve working capital,
which could limit the implementation of our business plan. We are dependent
on
our operations and the proceeds from future debt or equity investments to fully
implement our business plan. If we are unable to continue producing positive
cash flow from operations or raise sufficient capital, we will be required
to
delay or forego some portion of our business plan, which could have an adverse
effect on our anticipated results from operations and our financial condition.
In
addition, we are currently pursuing various financing alternatives including
expansion of our current accounts receivable factoring arrangement and
exchanging some portion or all of our debt for equity. However, we may not
be
successful in these efforts or circumstances currently unknown or unforeseen
by
us may arise that will result in us not being able to obtain additional funding
for our business plan.
History
ATSI
Communications, Inc., a Nevada corporation, was formed in 2004 as the successor
to the business originally incorporated in 1994 as a Canadian holding company,
Latcomm International, Inc., with a Texas operating subsidiary, Latin America
Telecomm, Inc. Both corporations were renamed “American TeleSource
International, Inc.” in 1994. In May 1998, the Canadian corporation completed a
share exchange with a newly formed Delaware corporation, also called American
TeleSource International, Inc., which resulted in the Canadian corporation
becoming the wholly owned subsidiary of the Delaware corporation. Our
stockholders voted to change our name from American TeleSource International,
Inc. to ATSI Communications, Inc. in 2003 and to reincorporate in the State
of
Nevada by merger into our wholly owned subsidiary in 2004. We own 49% of ATSI
Comunicaciones S.A de C.V. (ATSICOM), a Mexican corporation that holds a 30-year
concession allowing for the sale of voice and data services, long distance
transport, and the operation of a telecommunications network in
Mexico.
Recent
Developments
During
the year ended July 31, 2007 (“fiscal 2007”):
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·
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We
expanded our NexTone Intelliconnect™
System by adding 1000 ports of capacity to our Multiprotocol Session
Exchange (“MSX”) and Session Border Controller (“SBC”). This
network expansion has allowed us to route our traffic more efficiently,
improve our call processing, monitor quality of service and support
our
growth in our core business. In addition, the NexTone™ technology has
allowed us to be more competitive and to improve margins in our
international VoIP carrier services.
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·
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We
entered into a $1 Million accounts receivable financing agreement
and a
$250,000 note payable with CCA Financial Services, Inc. This financing
arrangement provided us with access to capital to fund our growth
initiatives and allowed us to service top tier customers that required
extended payment terms.
|
Services
and Products
We
provide three types of services: Carrier Services, Network Services and
Communication Services.
Carrier
Services
consists
of VoIP
communication services sold to United States and foreign 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 and VoIP services. Revenues from this
service accounted for approximately 99% of our total revenue during the year
ended July 31, 2007. The percentage of our total volume of carrier services
traffic sent by customers can fluctuate dramatically, on a quarterly, and
sometimes, daily basis. During fiscal 2007, we entered into various reciprocal
agreements with our customers that allow them to transport and terminate traffic
over our network and allowed us to transmit and terminate traffic over their
networks. These reciprocals agreements with our customers were not for a
specific period of time or volume of minutes. Under the reciprocal agreements,
both parties were given a set of rates for services and each party would decide
the volume of minutes it would send to be processed. Therefore, on a
month-to-month basis there was not a required volume commitment of minutes
from
each party and the parties were free to re-route their traffic away to a lower
priced provider.
Network
Services consist
links and VoIP gateway services to multi-national and foreign 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 the foreign telecommunication networks.
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. We
currently provide network Services to World Data, a Mexican corporation on
a
month-to-month basis and generate approximately $1,500 per month in revenue.
There is no assurance that we will continue to generate this revenue in the
future or that we will be able to enter into a long-term contract with World
Data or any other customer.
Communication
Services consists
of retail local
telephone service and international VoIP long distance service. We provide
these
services on both a post use and prepaid basis to individuals in the United
States and Mexico, primarily to the U.S. Hispanic Market in the Rio Grande
Valley. Our local telephone service provides access to a basic phone services
and value-added features such as call waiting and caller ID. Domestic and
international long distance services are provided through access to our VoIP
platform. Revenues from Communication Services accounted for approximately
$113,000 or 1% of our total revenues in fiscal 2007.
Voice
over Internet Protocol Networks
The
basic
technology of traditional telecommunications systems was designed for slow
mechanical switches. Communications over the traditional telephone network
are
routed through circuits that must dedicate all circuit resources to each call
from its inception until the call ends, regardless of whether anyone is actually
talking on the circuit. This circuit-switching technology incurs a significant
cost per call and does not efficiently support the integration of voice with
data services. Data networks, however, were designed for electronic switching.
They break the data stream into small, individually addressed packages of data
(“packets”) that are routed independently of each other from the origin to the
destination. Therefore, they do not require a fixed amount of bandwidth to
be
reserved between the origin and destination of each call and they do not waste
bandwidth when it is not being used for actual transmission of information.
This
allows multiple voice or voice and data calls to be pooled, resulting in these
networks being able to carry more calls with an equal amount of bandwidth.
Moreover, they do not require the same complex switching methods required by
traditional voice telephone networks, instead using a multiplicity of routers
to
direct each packet to its destination and they automatically route packets
around blockages, congestion or outages.
Packet
switching can be used within a data network or across networks, including the
public Internet. The Internet itself is not a single data network owned by
any
single entity, but rather a loose interconnection of networks belonging to
many
owners that communicate using the Internet Protocol (“IP”). By converting voice
signals to digital data and handling the voice signals as data, it can be
transmitted through the more efficient switching networks designed for data
transmissions and through the Internet using the IP. The transmission of voice
signals as digitalized data streams over the Internet is known as Voice over
Internet Protocol or “VoIP”. A VoIP network has the following advantages over
traditional networks:
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Integration
of Voice and Data:
VoIP networks allow for the integration and transmission of voice,
data,
and images using the same network equipment.
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Simplification:
An
integrated infrastructure that supports all forms of communication
allows
more standardization, a smaller equipment complement, and less equipment
management.
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Network
Efficiency:
The integration of voice and data fills up the data communication
channels
efficiently, thus providing bandwidth consolidation and reduction
of the
costs associated with idle bandwidth. The sharing of equipment and
operations costs across both data and voice users can also improve
network
efficiency since excess bandwidth on one network can be used by the
other,
thereby creating economies of scale for voice (especially given the
rapid
growth in data traffic). An integrated infrastructure that supports
all
forms of communication allows more standardization and reduces the
total
equipment complement. This combined infrastructure can support dynamic
bandwidth optimization and a fault tolerant design. The differences
between the traffic patterns of voice and data offer further opportunities
for significant efficiency improvements.
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Co-existence
with traditional communication mediums: IP
telephony can be used in conjunction with existing PSTN switches,
leased
and dial-up lines, PBXs and other customer premise equipment (CPE),
enterprise LANs, and Internet connections. IP telephony applications
can
be implemented through dedicated gateways, which in turn can be based
on
open standards platforms for reliability and scalability.
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·
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Cost
reduction:
Under the VoIP network, the connection is directly to the Internet
backbone and as a result the telephony access charges and settlement
fees
are avoided.
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The
growth of voice on the Internet was limited in the past due to poor sound
quality caused by technical issues such as delays in packet transmission and
by
bandwidth limitations related to Internet network capacity and local access
constraints. However, the continuing addition of data network infrastructure,
recent improvements in packet switching and compression technology, and new
software algorithms and improved hardware have substantially reduced delays
in
packet transmissions and resulted in better sound quality. Nevertheless, certain
VoIP routes into countries with limited or poor Internet infrastructure continue
to lack the consistent quality required for voice transport and termination.
A
number
of large long distance carriers have announced Internet telephony service
offerings. Smaller Internet telephony service providers have also begun to
offer
low-cost Internet telephony services from personal computers to telephones
and
from telephones to telephones. Traditional carriers have substantial investments
in traditional telephone network technology, and therefore have been slow to
embrace Internet technology.
We
believe that the infrastructure required for a global network is too expensive
for most companies to deploy on their own. This mandates that the network be
a
combination of gateways owned by different operators. For a network to achieve
optimal functionality and quality, however, the gateways need to be
interoperable, or able to communicate with one another. Interoperability
continues to be a challenge for VoIP providers and recently, technological
solutions have emerged that support interoperability between different protocols
and/or gateways. Cisco appears to have emerged as a dominant supplier of VoIP
gateways and other manufacturers often seek to make their equipment
interoperable with Cisco.
Long
distance telephone calls transported over the Internet are less expensive than
similar calls carried over the traditional telephone network primarily because
the cost of using the Internet is not determined by the distance those calls
need to travel. Also, routing calls over the Internet is more cost-effective
than routing calls over the traditional telephone network because the technology
that enables Internet telephony is more efficient than traditional telephone
network technology. The greater efficiency of the Internet creates cost savings
that can be passed on to the consumer in the form of lower long distance rates
or retained by the carrier as higher margins.
By
using
the public Internet, VoIP providers like ATSI are able to avoid direct payment
for transport of communications, instead paying for large “pipes” into the
public Internet, billed by bandwidth rather than usage, which transmits calls
to
a distant gateway. The Internet, which has its origins in programs devised
by
the Department of Defense to provide multiple routes and therefore redundancy
which was largely immune from the failure of a single network element, provides
great redundancy and can be “self healing” in the event of an outage in a
particular network element or transmission path. Moreover, adding an additional
entry or exit point (a Point of Presence or “PoP”) does not require any
expensive or time consuming reconfiguration or reprogramming of existing network
elements. The new element is simply installed with a specific IP address and
it
can send or receive information from any other IP address on the
Internet.
Strategy
and Competitive Conditions
The
long
distance telephony market and the Internet telephony market are highly
competitive. Our competitors include major telecommunications carriers in the
U.S., foreign telecommunications carriers (which may be owned by foreign
governments), and numerous small competitors, and we expect to face continuing
competition based on price and service offerings from existing competitors
and
new market entrants in the future. The principal competitive factors in our
market include price, coverage, customer service, technical response times,
reliability, and network size/capacity. The competitive landscape is rapidly
altering the number, identity and competitiveness of the marketplace, and we
are
unable to determine with certainty the impact of potential consolidation in
our
industry.
A
number
of large long distance carriers have introduced services that make Internet
telephony or voice services over the Internet available to other carriers.
All
major telecommunications companies either presently do or could route traffic
to
destinations worldwide and compete directly with us. Smaller Internet telephony
service providers have also begun to offer low-cost Internet telephony services
from personal computers to telephones and from telephones to telephones. All
major telecommunications companies either presently do or could route traffic
to
destinations worldwide and compete directly with us. In addition, Internet
service providers and other companies currently in related markets have begun
to
provide voice over the Internet services or adapt their products to enable
voice
over the Internet services. These related companies may migrate into the
Internet telephony market as direct competitors.
Many
of
our competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we have.
As
a result, certain of these competitors may be able to adopt more aggressive
pricing policies that could hinder our ability to market our services. We
believe that our key competitive advantages are our ability to deliver reliable,
high quality voice service over the Internet in a cost-effective manner. We
cannot provide assurances, however, that these advantages will enable us to
succeed against comparable service offerings from our competitors. A large
number of telecommunications companies, including AT&T, iBasis
and
Qwest currently provide wholesale voice telecommunications service which
competes with our business. These companies have large budgets available for
research and development, may further enhance the quality and acceptance of
the
transmission of voice over the Internet.
Our
strategy is to position ourselves to take advantage of the current
demonopolization of the Latin American telecommunications markets, as well
as
the increasing demand for international communications services between foreign
markets and the United States. Historically, telecommunications services in
Latin America have been provided by state-run companies, operating as a legal
or
de
facto
monopoly. Although these companies failed to satisfy the demand for services
in
their countries, the regulatory scheme effectively precluded competition by
foreign carriers. Currently, there is a trend toward demonopolization of the
telecommunications industry in Latin America, and many of these countries are
in
various stages of migration toward a competitive, multi-carrier market. Many
Latin American countries produce a significant number of immigrants to the
United States, or are becoming homes to U.S. based corporations seeking lower
labor costs. At the same time that Latin American markets have been opening
up,
the demand for telecommunications services between the United States and Latin
America (particularly Mexico) has been strengthened by:
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·
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the
rapid growth of the Latino segment of the United States population
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Mexico’s
status as the top calling partner with the United States
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increase
in trade and travel between Latin America and the United States
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the
build-out of local networks and corresponding increase in the number
of
telephones in homes and businesses in Latin countries
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proliferation
of communications devices such as faxes, mobile phones, pagers, and
personal computers
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declining
rates for services as a result of increased competition.
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Carriers
buying wholesale termination into Mexico, while cost conscious, are increasingly
demanding high reliability and quality in service delivery. Sustainability
and
growth in this segment depends on specific competitive advantages like proper
licenses, network redundancy, favorable termination agreements, or the presence
of a business infrastructure and relationships in the specific terminating
market. The Company competes with the dominant providers, such as Qwest, as
well
as other, smaller providers for international long distance services to Mexico.
The Company believes that in contrast to the dominant providers, it has a much
more focused and cost competitive strategy that targets select higher margin
telecommunication niches utilizing VoIP technology. Certain carriers provide
termination services in Mexico at lower prices, by using unlicensed IP points
of
presence. These carriers, however, have several disadvantages including:
(i) generally poor quality, (ii) limited capacity, and (iii) poor
reliability, since Mexican authorities periodically shut down their operations.
In addition, network expansions by existing and newly licensed carriers in
Mexico have put pressure on termination prices. The combination of
non-conventional termination and the new settlement rates have reduced U.S
to
Mexico termination prices from an average price of about $0.27 per minute in
1998 to a current rate of $0.07 per minute.
Our
strengths include our knowledge of, and relationships within, the
telecommunications industry in the United States and certain countries within
Latin America, particularly Mexico. Our management and employees have in-depth
knowledge of the Mexican culture, business environment and telecommunications
industry. As a result, we have been able to obtain a key long distance
concession through our 49% ownership in ATSICOM that allows us to both generate
and carry traffic within Mexico and between Mexico and the United States.
Government
Regulation
Our
operations are subject to federal, state and foreign laws and regulations.
There
is significant uncertainty regarding the application of the Communications
Act
of 1934 and the regulations adopted by the Federal Communications Commission
(“FCC”) to Internet telephone and there is a risk that either the FCC or
Congress will impose common carrier restrictions and other requirements of
traditional telecommunications providers to providers of VoIP services.
U.S
Federal and State Regulation of Carrier Services
We
believe that, under U.S. law, the Internet-related services that we provide
constitute information services as opposed to regulated telecommunications
services, and, as such, are not currently regulated as telecommunications common
carriers by the Federal Communications Commission (FCC) or state agencies
charged with regulating telecommunications carriers. Nevertheless, aspects
of
our operations may be subject to state or federal regulation, including
regulations governing universal service funding, disclosure of confidential
communications and excise tax issues. We cannot provide assurances that
Internet-related services will not be actively regulated in the future. Several
efforts have been made in the U.S. to enact federal legislation that would
either regulate or exempt from regulation services provided over the Internet.
Increased regulation of the Internet may slow its growth, particularly if other
countries also impose regulations. Such regulation may negatively impact the
cost of doing business over the Internet and materially adversely affect our
business, operating results, financial condition and future
prospects.
While
the
FCC to date has declined to classify VoIP providers as telecommunications
carriers for regulatory purposes, various entities have challenged this premise,
both before the FCC and at various state government agencies.
However,
the FCC has ruled that certain traffic carried in part utilizing the Internet
protocol format was nonetheless regulated telecommunications for which certain
regulatory obligations applied. The
FCC
has considered whether to impose surcharges or other common carrier regulations
upon certain providers of Internet telephony, primarily those which, unlike
us,
provide Internet telephony services directly to end users. Recently,
the FCC ruled that interconnected VoIP service providers must make
contributions to the Universal Service Fund. Additionally, the FCC has a pending
proceeding to further examine the question of whether certain forms of VoIP
services are information services or telecommunications services. The two are
treated differently in several respects, with certain information services
being
regulated to a lesser degree. The FCC has noted that certain forms of
phone-to-phone VoIP services bear many of the same characteristics as more
traditional voice telecommunications services and lack the characteristics
that
would render them information services. The FCC has indicated that the
mechanisms for contributing to the Universal Service Fund, issues as to
applicability of access charges and other matters will be considered in that
context. Adverse
rulings or rulemakings could subject us to licensing requirements and additional
fees and subsidies.
If
the
FCC were to determine that certain Internet-related services including Internet
telephony services are subject to FCC regulations as telecommunications
services, the FCC could subject providers of such services to traditional common
carrier regulation, including payment of access charges to local telephone
companies. A decision to impose such charges could also have retroactive effect.
It is also possible that the FCC may adopt a regulatory framework other than
traditional common carrier regulation that would apply to Internet telephony
providers. Any such determinations could materially adversely affect our
business, financial condition, operating results and future prospects to the
extent that any such determinations negatively affect the cost of doing business
over the Internet or otherwise slow the growth of the Internet.
State
regulatory authorities may also retain jurisdiction to regulate certain aspects
of the provision of intrastate Internet telephony services. Several state
regulatory authorities have initiated proceedings to examine the regulation
of
such services. Others could initiate proceedings to do so.
Other
regulations affecting the Internet in the United States.
Congress
has recently adopted legislation that regulates certain aspects of the Internet,
including online content, user privacy and taxation. In addition, Congress
and
other federal entities are considering other legislative and regulatory
proposals that would further regulate the Internet. Congress has; for example,
considered legislation on a wide range of issues including Internet spamming,
database privacy, gambling, pornography and child protection, Internet fraud,
privacy and digital signatures. Various states have adopted and are considering
Internet-related legislation. Increased U.S. regulation of the Internet may
slow
its growth, particularly if other governments follow suit, which may negatively
impact the cost of doing business over the Internet and materially adversely
affect our business, financial condition, results of operations and future
prospects. Legislation has also been proposed that would clarify the regulatory
status of VoIP service. The Company has no way of knowing whether legislation
will pass or what form it might take.
Regulations
pertaining to our retail operations.
In
the
United States, services provided through our retail operations are subject
to
the provisions of the Communications Act of 1934, as amended, the FCC
regulations, and the applicable laws and regulations of the various states
and
state regulatory commissions.
As
a
carrier offering services to the public, we must comply with the requirements
of
common carriage under the Communications Act of 1934, including the offering
of
service on a nondiscriminatory basis at just and reasonable rates, and obtaining
FCC approval prior to any assignment of authorizations or any transfer of legal
or actual control of the company.
We
are
subject to various specific common carrier telecommunications requirements
set
forth in the FCC’s rules, including operating, reporting and fee requirements.
Both federal and state regulatory agencies have broad authority to impose
monetary and other penalties on us for violations of regulatory requirements.
Domestic
Service Regulation. We are considered a non-dominant domestic interstate
carrier subject to minimal regulation by the FCC. We are not required to obtain
FCC authority to initiate or expand our domestic interstate operations, but
we
are required to obtain FCC approval to transfer control or discontinue service
and to file various reports and pay various fees and assessments. Among other
things, interstate common carriers must offer service on a nondiscriminatory
basis at just and reasonable rates. In addition, as a non-dominant carrier,
we
are subject to the FCC’s complaint jurisdiction.
All
interstate telecommunications carriers are required to contribute to the federal
universal service programs. The FCC currently is considering revising its
universal service funding mechanism. We cannot predict the outcome of these
proceedings or their potential effect on us. Although we currently do not
provide VoIP
services
to the end users or consumers, VoIP services that we may provide in the future
are not currently subject to direct regulation by the FCC or state regulatory
commissions to the extent that they qualify as “enhanced” or “information”
services. The FCC defines enhanced services as services that (1) employ computer
processing applications that act on the format, content, code, protocol or
similar aspects of the subscriber’s transmitted information, (2) provide the
subscriber additional, different or restructured information, or (3) involve
subscriber interaction with stored information. In 1998, in a non-binding
report, the FCC observed that “computer-to-computer” VoIP may be appropriately
considered to be unregulated but that “phone-to-phone” VoIP may lack the
characteristics that would render them unregulated “information” services. In
February 2004, the FCC ruled that free computer-to-computer VoIP service is
not
“telecommunications service” and that it is an interstate “information service.”
Although this order clarifies some of the relevant VoIP issues, the FCC has
not
yet issued a formal decision as to whether other variations of VoIP services
should be subject to traditional common carrier telecommunications service
regulation, such as access charge obligations. In March 2004, the FCC released
a
Notice of Proposed Rulemaking (“NPRM”) regarding VoIP service. The NPRM
specifically addresses the regulatory classification and jurisdiction of VoIP;
the application of access charges; and how to preserve key public policy
objectives such as universal service, 911/emergency services, law enforcement
surveillance requirements, and the needs of persons with disabilities. In
November 2004, the FCC ruled that services provided by a particular VoIP
provider are interstate in nature, and not subject to entry regulations of
the
various state Public Service Commissions. The FCC, however, declined to rule
on
whether the service is a regulated telecommunications service or an unregulated
information service. In addition, in December 2004, the United States Court
of
Appeals for the 8th
Circuit
ruled that such VoIP provider’s service is not subject to state regulation.
Subsequently, in a series of orders, the FCC has decided to apply universal
service, 911/emergency services, law enforcement surveillance requirements,
customer privacy requirements, and requirements relating to the provision of
services to speech and hearing-impaired persons to providers of “interconnected”
VoIP services (i.e., those that are capable of both originating calls from
and
terminating calls to users of the public switched telephone network), but in
each case the FCC has explicitly declined to decide whether such services are
“telecommunications” services subject to more comprehensive regulation. Instead,
the FCC continues to examine the appropriate regulatory treatment of VoIP on
a
piecemeal basis. While initial indications from the FCC suggest that regulation
of VoIP will be limited in nature, the future regulatory treatment of other
variations of VoIP by the FCC and state regulatory bodies continues to be
uncertain. Furthermore, Congressional dissatisfaction with the FCC’s treatment
of IP telephony could result in legislation requiring the FCC to impose greater
or lesser regulation. Changes to, and further clarifications of, the treatment
of VoIP services could result in the imposition of burdensome regulation and
fees on some of our services and/or increase certain of our operating costs.
State
Regulation. Our intrastate long distance operations are subject to
various state laws and regulations, including, in most jurisdictions,
certification and tariff filing requirements. Telefamilia Communications, Inc.
(Telefamilia), a wholly owned subsidiary of ours, maintains the necessary
certificate and tariff approvals, where approvals are necessary, to provide
intrastate long distance service in Texas. Telefamilia also maintains the
necessary certificate to provide local services in Texas. Texas requires prior
approval or notification for certain stock or asset transfers or
for
the issuance of securities, debt or for name changes. As a certificated carrier,
consumers may file complaints against us at the public service commissions.
Certificates of authority can generally be conditioned, modified, canceled,
terminated, or revoked by state regulatory authorities for failure to comply
with state law and/or the rules, regulations and policies of the state
regulatory authorities. Fines and other penalties also may be imposed for such
violations. Public service commissions also regulate access charges and other
pricing for telecommunications services within each state. The Regional Bell
Operating Carriers and other Local Exchange Carriers have been seeking reduction
of state regulatory requirements, including greater pricing flexibility, which,
if granted, could subject us to increased price competition. We may also be
required to contribute to universal service funds in Texas.
International
Regulation
The
regulatory treatment of Internet telephony outside of the U.S. varies widely
from country to country. A number of countries that currently prohibit
competition in the provision of voice telephony also prohibit Internet
telephony. Other countries permit but regulate Internet telephony. Some
countries will evaluate proposed Internet telephony service on a case-by-case
basis and determine whether it should be regulated as a voice service or as
another telecommunications service. In many countries, Internet telephony has
not yet been addressed by legislation or regulation. Increased regulation of
the
Internet and/or Internet telephony providers or the prohibition of Internet
telephony in one or more countries could materially adversely affect our
business, financial condition, operating results and future prospects.
The
International Settlements Policy governs settlements between top tier U.S.
carriers’ and foreign carriers’ costs of terminating traffic over each other’s
networks. The FCC recently enacted certain changes in rules designed to allow
U.S. carriers to propose methods to pay for international call termination
that
deviate from traditional accounting rates and the International Settlement
Policy. The FCC has also established lower benchmarks for the rates that U.S.
carriers can pay foreign carriers for the termination of international services
and these benchmarks may continue to decline. These rule changes have lowered
the costs of our top tier competitors to terminate traffic in the United States
and are contributing to the downward pricing pressure facing us in the carrier
market.
Other
General regulations
Congress
has recently adopted legislation that regulates certain aspects of the Internet,
including online content, user privacy and taxation. In addition, Congress
and
other federal entities are considering other legislative and regulatory
proposals on a wide range of issues including Internet spamming, database
privacy, gambling, pornography and child protection, Internet fraud, privacy
and
digital signatures. Various states have adopted and are considering
Internet-related legislation. Increased U.S. regulation of the Internet may
slow
its growth, particularly if other governments follow suit, which may negatively
impact the cost of doing business over the Internet and materially adversely
affect our business, financial condition, results of operations and future
prospects. The Company has no way of knowing whether legislation will pass
or
what form it might take.
The
Telecommunications Act of 1996 (the “Telecom Act”), which became law in February
1996, was designed to dismantle the monopoly system and promote competition
in
all aspects of telecommunications. The FCC has promulgated and continues to
promulgate major changes to their telecommunications regulations. One aspect
of
the Telecom Act that is of particular importance to us is that it allows Bell
Operating Companies or BOCs to offer in-region long distance service once they
have taken certain steps to open their local service monopoly to competition.
The FCC has now granted such in-region long distance authorization to BOCs
throughout the nation. Given their extensive resources and established customer
bases, the entry of the BOCs into the long distance market, specifically the
international market, has created increased competition for us.
Although
we do not know of any other specific new or proposed regulations that will
affect our business directly, the regulatory scheme for competitive
telecommunications market is still evolving and there could be unanticipated
changes in the competitive environment for communications in general. For
example, the FCC is currently considering rules that govern how Internet
providers share telephone lines with local telephone companies and compensate
local telephone companies. These rules could affect the role that the Internet
ultimately plays in the telecommunications market.
The
International Settlements Policy governs settlements between top tier U.S.
carriers’ and foreign carriers’ costs of terminating traffic over each other’s
networks. The FCC recently enacted certain changes in our rules designed to
allow U.S. carriers to propose methods to pay for international call termination
that deviate from traditional accounting rates and the International Settlement
Policy. The FCC has also established lower benchmarks for the rates that U.S.
carriers can pay foreign carriers for the termination of international services
and these benchmarks may continue to decline. These rule changes have lowered
the costs of our top tier competitors to terminate traffic in the United States
and are contributing to the downward pricing pressure facing us in the carrier
market.
Concession
License
The
Secretaría de Comunicaciones y Transportes (“SCT”) and Comisión Federal de
Telecomunicaciones or Federal Telecommunications Comisión (“COFETEL”) issued
ATSICOM a 30-year license in June 1998 to install and operate a public network.
Under this license, ATSICOM is required to:
General
requirements
|
·
|
Maintain
approximately $10 million in registered and subscribed capital.
|
|
·
|
Install
and operate a network in Mexico. The Mexican government must approve
the
operating plan before it is implemented and any future changes to
the
operating plan.
|
|
·
|
Continuously
develop and conduct training programs for its staff.
|
|
·
|
Designate
an individual responsible for the technical functions to operate
the
concession.
|
Concession
services requirements
|
·
|
Provide
continuous and efficient services at all times to its customers.
|
|
·
|
Establish
a complaint center and correction facilities center and report to
the
Mexican Government on a monthly basis the complaints received and
the
actions taken to resolve the problems.
|
Tariff
Requirements
|
·
|
Invoice
its customer only tariffs rates that have been approved by the Mexican
government.
|
Verification
and Information requirements
|
·
|
Provide
audited financial statements on a yearly basis that includes a detailed
description of the fixed assets utilized in the network and accounting
reporting by region and location of where the services are being
provided.
|
|
·
|
Provide
quarterly reports and updates on the expansion of the network in
Mexico
and a description of the training programs and research and development
programs.
|
|
·
|
Provide
statistic reports of traffic, switching capacity and other parameters
in
the network.
|
Guarantee
requirements
|
·
|
Post
a bond/insurance policy for approximately $500,000 payable to the
Mexican
Federal Treasury Department in the event the concession is revoked
for
failure to perform any of the
requirements.
|
Under
this concession, we have the right to terminate voice and data communications
in
Mexico. The revocation or modification of this concession would have a material
adverse effect on our business.
Suppliers
We
rely
on various suppliers to provide services in connection with our communication
services. We depend on various Global VoIP companies to complete our voice
over
Internet (VoIP) traffic between US, Mexico,
Asia, the Middle East and Latin America. We are not dependent upon any single
supplier.
Employees
As
of
July 31, 2007, we had nine employees, all of whom performed operational,
technical and administrative functions. We believe our future success will
depend to a large extent on our continued ability to attract and retain highly
skilled and qualified employees. We consider our employee relations to be good.
None of these aforementioned employees belong to labor unions.
Risk
Factors
Our
business is subject to various operational and financial risks that could have
an adverse effect on our financial condition or our results of operations.
In
addition the general economic risks associated with operation of a small company
in a regulated industry, some of the risk factors that may apply specifically
to
us are set forth below.
Our
results of operations fluctuate from period to period. Our
revenue and results of operations have fluctuated and will continue to fluctuate
from quarter to quarter in the future due to a number of factors over which
we
have no control, including:
|
·
|
Many
of our customers are not obligated to route a minimum amount of traffic
over our system and the amount of traffic we handle may decline if
our
customers elect to route traffic over systems they operate or systems
operated by other providers;
|
|
·
|
increased
competition from other telecommunication service providers or from
service
companies in related fields that offer telecommunication services
may
adversely affect the amount we can charge for traffic routed over
our
system;
|
|
·
|
we
may be required to reduce our charges for routing traffic to maintain
high
utilization of our equipment;
|
|
·
|
the
termination fees, connection fees and other charges from our
suppliers;
|
|
·
|
fraudulently
sent or received traffic for which we are obligated to pay but which
we
are unable to bill to any customer;
|
|
·
|
changes
in call volume among the countries to which we complete calls;
|
|
·
|
technical
difficulties or failures of our network systems or third party delays
in
expansion or provisioning system components;
and
|
|
·
|
our
ability to manage our traffic on a constant basis so that routes
are
profitable.
|
We
may be unable to generate sufficient volume of traffic to be profitable.
VoIP
has
only recently been developed and many users are only becoming aware of its
potential If the market for VoIP telephony and new services does not develop
as
we expect, or develops more slowly than expected, we may be unable to maintain
a
high level of utilization. Some factors that may adversely affect acceptance
of
VoIP technology include:
|
·
|
perceptions
that the quality of voice transmitted over the Internet is low;
|
|
·
|
perceptions
that VoIP is unreliable;
|
|
·
|
our
inability to deliver traffic over the Internet with significant cost
advantages;
|
|
·
|
development
by our customers of their own capacity on routes served by us; and
|
|
·
|
an
increase in termination costs of international calls.
|
We
rely on third parties to provide and maintain the networks over which we
transmit traffic. Our
business model depends on the availability of the Internet and traditional
telephone networks to transmit voice and data. Third parties own and maintain
the equipment that translates calls from traditional voice networks to the
Internet, and vice versa and other equipment that comprise the Internet for
these systems fail to maintain their lines properly, fail to maintain the
ability to terminate calls, or otherwise disrupt our ability to provide service
to our customers, our ability to complete calls or provide other services could
be interrupted.
Our
suppliers could increase the cost of services they provide or deny us access
to
systems that they operate. We
maintain relationships with communications service providers in many countries
and with other carriers to carry traffic on their systems. There is no assurance
that these services will continue to be available to us on acceptable terms,
if
at all. If we are unable to replace any provider that ceases to provide services
to us on acceptable terms, or to identify and develop relationships with new
service providers, our ability to provide services in certain countries may
be
adversely affected.
We
are subject to downward pricing pressures and a continuing need to renegotiate
overseas rates. As
a
result of numerous factors, including increased competition and global
deregulation of telecommunications services, prices for international long
distance calls have been decreasing. This downward trend of prices to end-users
has caused us to lower the prices we charge communication service providers
for
call completion on our network. If this downward pricing pressure continues,
we
may not be able to offer VoIP services at costs lower than, or competitive
with,
the traditional voice network services with which we compete. Moreover, in
order
for us to lower our prices, we have to renegotiate rates with our foreign
service providers who complete calls for us. We may not be able to renegotiate
these terms favorably enough, or fast enough, to allow us to continue to offer
services in a particular country on a cost-effective basis. The continued
downward pressure on prices and our
inability to renegotiate favorable terms in a particular country could have
a
material adverse effect on our ability to operate our network.
We
are subject to risks relating to operations in foreign countries.
Because
we provide many of our services internationally, we are subject to additional
risks related to providing services into foreign countries. In particular,
in
order to provide services in some countries, we have forged relationships with
foreign operators. Associated risks include:
|
·
|
unexpected
changes in tariffs, trade barriers and regulatory requirements relating
to
Internet access or VoIP;
|
|
·
|
economic
weakness, including inflation, or political instability in particular
foreign economies and markets;
|
|
·
|
difficulty
in collecting accounts receivable;
|
|
·
|
tax,
consumer protection, telecommunications, and other laws;
|
|
·
|
foreign
currency fluctuations, which could result in increased operating
expenses
and reduced revenues; and
|
|
·
|
unreliable
government power to protect our rights;
|
International
governmental regulation and legal uncertainties and other laws could limit
our
ability to provide our services, make them more expensive, or subject us to
legal liability. Many
countries currently prohibit or limit competition in the provision of
traditional voice telephony services. In some of those countries, licensed
telephony carriers as well as government regulators and law enforcement
authorities have questioned the legal authority of VoIP services. Our
failure to qualify as a properly licensed service provider, or to comply with
other foreign laws and regulations, could materially adversely affect our
business, financial condition, and results of operations. It is also possible
that countries may apply to our activities laws relating to services provided
over the Internet, including laws governing:
|
·
|
pricing
controls and termination costs;
|
|
·
|
characteristics
and quality of products and services;
|
|
·
|
qualification
to do business;
|
|
·
|
cross-border
commerce, including laws that would impose tariffs, duties and other
import restrictions;
|
|
·
|
copyright,
trademark and patent infringement; and
|
|
·
|
claims
based on the nature and content of Internet materials, including
defamation, negligence and the failure to meet necessary obligations.
|
If
foreign governments or other bodies begin to impose related restrictions on
VoIP
or our other services or otherwise enforce other laws against us or our foreign
suppliers, such actions could have a material adverse effect on our operations.
If
we are not able to keep up with rapid technological change in a cost-effective
way, the relative quality of our services could suffer. The
technology upon which our services depend is changing rapidly. Significant
technological changes could render the hardware and software that we use
obsolete, and competitors may begin to offer new services that we are unable
to
offer. If we are unable to respond successfully to these developments or do
not
respond in a cost-effective way, we may not be able to offer competitive
services and our business results may suffer.
We
may not be able to expand and upgrade our network adequately and
cost-effectively to accommodate any future growth. Our
VoIP
business requires that we handle a large number of international calls
simultaneously. As we expand our operations, we expect to handle significantly
more calls. If we do not expand and upgrade our hardware and software quickly
enough, we will not have sufficient capacity to handle the increased traffic
and
growth in our operating performance would suffer as a result. Even with such
expansion, we may be unable to manage new deployments or utilize them in a
cost-effective manner. In addition to lost growth opportunities, any such
failure could adversely affect customer confidence in our network and services.
Single
points of failure on our network may make our business vulnerable.
We
operate one network control center in San Antonio, Texas. We have not yet
designed a redundant system, provided for excess capacity, or taken other
precautions against platform and network failures as well as facility failures
relating to power, air conditioning, destruction, or theft. We are vulnerable
to
a network failure that may prohibit us from offering services.
We
depend on our current personnel and may have difficulty attracting and retaining
the skilled employees we need to execute our business plan.
Our
future success will depend, in large part, on the continued service of our
key
management and technical personnel. If any of these individuals or others we
employ are unable or unwilling to continue in their present positions, our
business, financial condition and results of operations could suffer.
If
the Internet infrastructure is not adequately maintained, we may be unable
to
maintain the quality of our services and provide them in a timely and consistent
manner. Our
future success will depend upon the maintenance of the Internet infrastructure,
including a reliable network backbone with the necessary speed, data capacity
and security for providing reliability and timely Internet access and services.
To the extent that the Internet continues to experience increased numbers of
users, frequency of use or bandwidth requirements, the Internet may become
congested and be unable to support the demands placed on it and its performance
or reliability may decline thereby impairing our ability to complete calls
and
provide other services using the Internet at consistently high quality. The
Internet has experienced a variety of outages and other delays as a result
of
failures of portions of its infrastructure or otherwise. Future outages or
delays could adversely affect our ability to complete calls and provide other
services. Moreover, critical issues concerning the commercial use of the
Internet, including security, cost, ease of use and access, intellectual
property ownership and other legal liability issues, remain unresolved and
could
materially and adversely affect both the growth of Internet usage generally
and
our business in particular. Finally, important opportunities to increase traffic
on our network will not be realized if the underlying infrastructure of the
Internet does not continue to be expanded to more locations worldwide.
ITEM
2. DESCRIPTION
OF PROPERTIES.
Our
executive office is located at 3201 Cherry Ridge, Building C, Suite 300, San
Antonio, Texas, consisting of 3,618 square feet. The lease for this facility
will expire on November 15, 2011. We pay annual rent of $47,439. We believe
that
our leased facilities are suitable and adequate for their intended use.
ITEM
3. LEGAL
PROCEEDINGS.
On
October 31, 2002, ATSI 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. Among other things, such claims asserted stock fraud and
manipulation claims. On July 9, 2004, we filed a separate but related lawsuit
in
the same court against Sam Levinson and Uri Wolfson. In 2005, Judge Lewis A.
Kaplan dismissed the complaints in both actions as to all defendants with
prejudice; essentially stating the claims did not plead causes of action under
federal law. ATSI appealed those dismissal judgments to the United States Court
of Appeals for the Second Circuit. On July 11, 2007 the Court of Appeals
affirmed the dismissals.
RGC
International Investors, LDC ("RGC"), who had been a Defendant in the New York
litigation referenced above, filed a lawsuit in the Chancery Court in Delaware
against ATSI on March 20, 2007 asserting it still had rights of enforcement
against ATSI to convert preferred stock to common stock or redeem such stock
in
connection with Certificate of Designation issued regarding such series E
preferred stock in October of 2000. ATSI asserted, among other things, that
RGC
is barred from such relief based on the applicable statute of limitations.
In
August 2007 the parties reached a confidential settlement agreement.
Under
the
confidential settlement agreement the 1,170 shares of Series E Preferred Stock
have been cancelled.
In
June
2007, ATSI initiated a declaratory judgment action in the United States District
Court for the Western District of Texas against Shaar Fund, Ltd., holder of
series D preferred stock who still asserted it had rights under instruments
that
issued incident to such stock. ATSI asserted that alleged rights asserted by
the
Shaar Fund Ltd are barred by applicable statute of limitations. On August 2,
2007, Shaar Fund Ltd. filed a separate suit against ATSI in the United States
District Court for the Southern District Court of New York asserting it
continued to own rights under the instruments relating to the series D preferred
stock. By September, 2007, the parties reached an agreement as to the competing
suits which led to ATSI dismissing the Texas suit in favor of litigating all
remaining issues between it and Shaar Fund Ltd. as to such matters in United
States District Court for the Southern District Court of New York. Pleading
deadlines have been extended in the New York action as the parties are currently
explore a mutual resolution.
In
December 2006, ATSI filed suit in Bexar County District Court to recover
approximately $63,000 (plus attorney’s fees, legal interest, and court costs)
against a company that called itself Lightspeed Telecom, Inc. and its principals
or alter egos. The suit is for unpaid telecommunications services provided
at
the instance of Defendants. ATSI asserts such services were obtained by or
at
the direction of Defendants without intent to pay, which the individual
Defendants deny. Lightspeed admits liability but the two individual Defendants
deny liability. This case is currently in the process of being set for trial
in
2008.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
PART
II.
ITEM5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES.
|
Market
for Common Equity
Our
common stock is quoted on the OTC Bulletin Board under the symbol “ATSX”. The
following table sets forth the high and low bid prices for our common stock
from
August 1, 2005 through July 31, 2007, as reported by Bloomberg, LP. Price
quotations on the OTC Bulletin Board reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions.
Fiscal
2006
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
0.44
|
|
$
|
0.14
|
|
Second
Quarter
|
|
$
|
0.43
|
|
$
|
0.21
|
|
Third
Quarter
|
|
$
|
0.51
|
|
$
|
0.25
|
|
Fourth
Quarter
|
|
$
|
0.39
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
0.19
|
|
$
|
0.34
|
|
Second
Quarter
|
|
$
|
0.22
|
|
$
|
0.36
|
|
Third
Quarter
|
|
$
|
0.19
|
|
$
|
0.34
|
|
Fourth
Quarter
|
|
$
|
0.23
|
|
$
|
0.24
|
|
Holders
As
of
July 31, 2007, we had approximately 6,706 common shareholders of record.
Dividends
We
have
not paid cash dividends on our common stock and we do not anticipate paying
a
dividend in the future.
Equity
Compensation Plans
The
following table provides information regarding securities that have been or
are
authorized to be issued under our equity compensation plans as of July 31,
2007:
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans
|
|
|
|
|
Equity
Compensation plans approved by security holders
|
-0-
|
N/A
|
-0-
|
|
|
|
|
Equity
Compensation Plans not approved by security
holders
|
5,699,000
|
$.17
|
821,000
|
|
|
|
|
Total
|
5,699,000
|
$.17
|
821,000
|
The
material features of each equity compensation plan are described in Note 9
of
the Notes to the Financial Statements.
Sales
of Unregistered Securities
On
September 18, 2006, the Company issued 66,226 shares of its common stock to
Mr.
Richard Benkendorf, a former director, under a settlement agreement. The shares
were exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and were restricted from further transfer without
registration.
On
October 2, 2007, the Company issued 150,000 shares of its common stock for
$34,500 to NetComm Services Corp. upon exercise of warrants. The shares were
exempt from registration under Section 4(2) of the Securities Act of 1933,
as
amended, and were restricted from further transfer without
registration.
On
January 22, 2007, the Company issued 111,909 shares of its common stock in
exchange for 2,750 shares of Series A Convertible Preferred Stock and all
accrued dividends thereon. The shares were exempt from registration under
Section 3(a)(9) of the Securities Act of 1933, as amended.
On
February 7, 2007, the Company issued 137,412 shares of its common stock to
Mr.
John Fleming, a director, under a settlement agreement. The shares were exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
and were restricted from further transfer without registration.
On
June
1, 2007, the Company issued 419,081 shares of its common stock to the holders
of
its debentures dated June 1, 2006. The shares were exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, and were
restricted from further transfer without registration.
During
the twelve months ended July 31, 2007, the Company issued a total of 495,062
to
various professionals in lieu of fees. These shares were exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,
and
were restricted from further transfer without registration.
During
the twelve months ended July 31, 2007, the Company issued a total of 16,149,938
shares of common stock in connection with the conversion and redemption of
all
outstanding shares of its Series H Convertible Preferred Stock. No compensation
was paid to any person in connection with the exchange and the exchange was
exempt from registration pursuant to Section 3(a)(9) of the Securities Act
of
1033.
During
the twelve months ended July 31, 2007, the Company issued 137,412 shares of
its
common stock to Mr. John Fleming, a director, pursuant to a settlement
agreement. The transaction was privately negotiated between the Company and
Mr.
Fleming, with whom the Company has substantial prior relationship. The shares
were issued without registration pursuant to Section 4(2) of the Securities
Act
of 1933.
During
the twelve months ended July 31, 2007, the Company issued an aggregate of
2,566,482 shares of its common stock in exchange and conversion of outstanding
promissory notes in the original principal amount of $564,600 and accrued
interest of $10,292. The promissory notes were originally sold in a private
placement that did not involve a public solicitation and all of the note holders
certified to the Company that they are accredited investors. In addition, the
Company issued 297,270 shares of common stock to the placement agent in
connection with the original private placement of the promissory notes. The
shares were exempt from registration under Section 4(2) of the Securities Act
of
1933 as a private placement.
ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
SPECIAL
NOTE: This Annual Report on Form 10-KSB contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended
and
Section 21E of the Securities and Exchange Act of 1934, as amended. “Forward
looking statements” are those statements that describe management’s beliefs and
expectations about the future. We have identified forward-looking statements
by
using words such as “anticipate,” “believe,” “could,” “estimate,” “may,”
“expect,” and “intend.” Although we believe these expectations are reasonable,
our operations involve a number of risks and uncertainties, including our
ability to continue as a going concern.
The
following is a discussion of the consolidated financial condition and results
of
operations of ATSI Communications, Inc., for the fiscal years ended July 31,
2007 and 2006. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto, and the other financial information included
elsewhere in this annual report on Form 10-KSB. For purposes of the following
discussion, fiscal 2007 or 2007 refers to the year ended July 31, 2007 and
fiscal 2006 or 2006 refers to the year ended July 31, 2006.
Sources
of revenue and direct cost
Sources
of revenue:
Carrier
Services: We
currently provide VoIP communication services to U.S. and foreign
telecommunications companies that 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. In addition, we provide
private communications links and VoIP gateway services.
Communication
Services:
We
provide retail local phone service and international VoIP long distance service
primarily 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. We also provide prepaid domestic
and long-distance services through our prepaid VoIP network platform. Customers
access this platform and complete the call by using their local phone number
as
a “PIN” or personal identification number.
Network
Services:
We
provide private communication links and VoIP gateway services to multi-national
and foreign carriers and enterprise customers who require a high volume of
telecommunications services to communicate with their U.S. offices or businesses
and need greater dependability than is currently available through the foreign
telecommunication networks. These services include data, voice and fax
transmission between multiple international offices and branches as well as
Internet and co-location services in the United States.
Direct
Costs:
Carrier
Services: We
incur
transmission and termination charges from our suppliers and the providers of
the
infrastructure and network. The cost is based on a per minute rate and volume
of
minutes transported and terminated through the network. Additionally, we incur
fixed Internet bandwidth charges and per minute billing charges. In some cases
we incur installation charges from certain carriers. These installation costs
are passed on to our customers for the connection to our VoIP network.
Communication
Services:
We incur
charges for local telephone service and related features from the local exchange
carrier. Additionally, we incur a cost per minute and platform fees from our
suppliers for long distance services and platform access based on the number
of
accounts and calls accessed by our customers.
Network
Services:
Under
the network services, we incur bandwidth and co-location charges. The bandwidth
charges are incurred as part of the connection links between the customer’s
different remote locations and sites to transmit data, voice and Internet
services. We also incur co-location charges that are passed through to our
customers.
Results
of Operations
The
following table sets forth certain items included in our results of operations
in thousands of dollars amounts and variances between periods for the years
ended July 31, 2007 and 2006.
|
|
Years
ended July 31,
|
|
|
|
2007
|
|
2006
|
|
Variances
|
|
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
31,562
|
|
$
|
14,549
|
|
$
|
17,013
|
|
|
117
|
%
|
Communication
services
|
|
|
113
|
|
|
125
|
|
|
(12
|
)
|
|
-10
|
%
|
Network
services
|
|
|
17
|
|
|
22
|
|
|
(5
|
)
|
|
-23
|
%
|
Total
operating revenues
|
|
|
31,692
|
|
|
14,696
|
|
|
16,996
|
|
|
116
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
|
|
29,521
|
|
|
13,869
|
|
|
15,652
|
|
|
113
|
%
|
GROSS
MARGIN
|
|
|
2,171
|
|
|
827
|
|
|
1,344
|
|
|
163
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
|
|
1,625
|
|
|
1,138
|
|
|
487
|
|
|
43
|
%
|
Legal
and professional fees
|
|
|
258
|
|
|
195
|
|
|
63
|
|
|
32
|
%
|
Bad
debt expense
|
|
|
98
|
|
|
-
|
|
|
98
|
|
|
-100
|
%
|
Depreciation
and amortization expense
|
|
|
99
|
|
|
92
|
|
|
7
|
|
|
8
|
%
|
OPERATING
INCOME (LOSS)
|
|
|
91
|
|
|
(598
|
)
|
|
689
|
|
|
115
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on derivative instrument liabilities
|
|
|
-
|
|
|
(6
|
)
|
|
6
|
|
|
100
|
%
|
Debt
forgiveness income
|
|
|
-
|
|
|
50
|
|
|
(50
|
)
|
|
-100
|
%
|
Interest
expense
|
|
|
(348
|
)
|
|
(151
|
)
|
|
(197
|
)
|
|
-130
|
%
|
Total
other income (expense), net
|
|
|
(348
|
)
|
|
(107
|
)
|
|
(241
|
)
|
|
-225
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) FROM CONTINUING OPERATIONS
|
|
|
(257
|
)
|
|
(705
|
)
|
|
448
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of discontinued operations
|
|
|
-
|
|
|
1,652
|
|
|
(1,652
|
)
|
|
-100
|
%
|
NET
INCOME FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
1,652
|
|
|
(1,652
|
)
|
|
-100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(257
|
)
|
$
|
947
|
|
$
|
(1,204
|
)
|
|
-127
|
%
|
LESS:
PREFERRED DIVIDEND
|
|
|
(56
|
)
|
|
(959
|
)
|
|
903
|
|
|
94
|
%
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
|
|
828
|
|
|
-
|
|
|
828
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
|
$
|
515
|
|
$
|
(12
|
)
|
$
|
527
|
|
|
4392
|
%
|
Year
Ended July 31, 2007 Compared to Year ended July 31, 2006
Operating
revenues.
Consolidated operating revenues increased by 116% between periods from $14.7
million for the year ended July 31, 2006 to $31.7 million for the year ended
July 31, 2007.
Carrier
Services revenues increased by approximately $17 million, or 117% from the
year
ended July 31, 2006 to the year ended July 31, 2007. Our VoIP carrier traffic
increased from approximately 283
million
minutes during the year ended July 31, 2006 to
approximately 451 million minutes during the year ended July 31, 2007. The
increase in revenue and carrier traffic can mainly be attributed to an increase
in customers over the last twelve months. The increase in total customers is
as
a result of the Company’s ability to offer high quality and dependable VoIP
services to multiple countries in the world and greater capacity due to our
increase in port capacity in our Nextone Soft Switch.
Communication
services revenue decreased approximately 10% or $12,000 from the year ended
July
31, 2006 to the year ended July 31, 2007. The decrease in communication services
revenue is primarily due to a decrease in retail customers from 159 during
the
year ended July 31, 2006 to 117 during the year ended July 31,
2007.
Network
Services revenues decreased by approximately 23% or $5,000 from the year ended
July 31, 2006 to the year ended July 31, 2007. 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 approximately $15.7 million, or 113% from the year ended
July 31, 2006 to the year ended July 31, 2007. 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 283 million minutes
during the year ended July 31, 2006 to approximately 451 million minutes in
the
year ended July 31, 2007. Cost of services, as a percentage of revenue decreased
from 94% during the year ended July 31, 2006 to 93% during the year ended July
31, 2007. Additionally, as a result of the increase in total revenue our gross
profits increased from $827,000 during the year ended July 31, 2006 to
$2,171,000 during the year ended July 31, 2007.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and
professional fees).
SG&A
expenses increased $487,000, or 43% from the year ended July 31, 2006 to the
year ended July 31, 2007. The increase is primarily attributable to an increase
in salaries and wages of approximately $257,000 as a result of the hiring of
two
new employees, bonuses paid to officers, and accounts receivable-factoring
fees
of approximately $43,000 during the year ended July 31, 2007. Furthermore,
non-cash issuance of common stock and warrants for services increased by
$157,000 from the year ended July 31, 2006 to the year ended July 31, 2007.
The
increase is attributed to the recognition during the year ended July 31, 2007
of
approximately $473,000 of non-cash compensation expense associated with stock
options issued to employees and directors compared $267,000 in fiscal 2006.
Legal
and professional fees.
Legal
and professional fees increased by $63,000, or 32% from the year ended July
31,
2006 to the year ended July 31, 2007. The increase is attributable to the
recognition of approximately $7,500 associated with the preparation of the
closing documents for the new accounts receivable factoring agreement. Also,
during the year ended July 31, 2007 we recognized approximately $31,000 in
professional fees associated with the evaluation of derivative instruments
and
restructuring of debt and we recognized approximately $45,000 in legal fees
associated with a lawsuit filed by the Company for stock fraud and manipulation
by various institutions.
Bad
debt expense.
During
the year ended July 31, 2007 we recognized $98,000 in bad debt expense for
certain accounts receivable we deemed we were unlikely to collect. We did not
recognize any bad debt expense during the year ended July 31, 2006.
Depreciation
and amortization.
Depreciation and amortization increased by $7,000 or 8% year ended July 31,
2006
to the year ended July 31, 2007. The increase is attributed to the amortization
during the fiscal 2007 of new computers and equipment acquired during fiscal
2007.
Operating
income (loss).
The
Company’s operating income (loss) improved by $689,000 or 115% from the year
ended July 31, 2006 to the year ended July 31, 2007. The improvement in
operating income (loss) between periods is attributed to the increase in gross
profit of $1,344,000. The increase in gross profit margin was partially offset
by the increase in selling, general and administrative expenses, legal and
professional fees, and bad debt expense.
Loss
on derivative instruments liabilities, net. The
Company recognized a loss on derivative instruments of $6,000 during the year
ended July 31, 2006. No gain or loss was recognized during the year ended July
31, 2007, as we had no derivative liabilities during 2007.
Debt
forgiveness income. Debt
forgiveness income decreased by $50,000 from the year
ended July 31, 2006 to the year ended July 31, 2007.
The
decrease is primarily due to the recognition during the year ended July 31,
2006
of $50,000 in debt forgiveness income associated with the settlement of debt
for
the issuance of common stock. This
transaction was related to the settlement of $50,000 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’s equity at the time of issuance and the market price calculated at the
time of the settlement of the debt. We did not have any debt forgiveness income
in 2007.
Interest
expense.
Interest expense increased by $197,000 from the year ended July 31, 2006 to
the
year ended July 31, 2007. The increase can be attributed to the beneficial
conversion feature of $143,723 recognized with conversion of the $564,600 in
notes payable plus accrued interest of $10,292 and to
the
amortization of approximately $94,000 of deferred financing fees as
part
of the private placement financing.
Net
loss from continuing operations.
Net
loss from continuing operations improved by $448,000 from the year ended July
31, 2006 to the year ended July 31, 2007. The improvement in net loss between
periods is attributed to the increase in operating income, which as partially
offset by the increase in interest expense.
Net
income from discontinued operations. During
the year ended July 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. No gain on disposal of discontinued operation was recognized
during the year ended July 31, 2007.
Preferred
stock dividends.
Preferred stock dividends decreased by $903,000 or 94% between periods, from
$959,000 for the year ended July 31, 2006 to $56,000 during the year ended
July
31, 2007. The decrease in preferred dividends between periods is mainly
attributed to the conversion of Series A Convertible Preferred Stock and Series
H Convertible Preferred Stock during 2007.
Reversal
of previously recorded preferred stock dividends. During
the year ended July 31, 2007, we recognized a reversal of previously recorded
dividend expense of $828,000. This reversal occurred as result of the conversion
into common stock of 2,750 shares of Series A Convertible Preferred Stock and
11,802,420 shares of Series H Convertible Preferred Stock. At the time of
conversion of these securities the
market price of ATSI’s stock was higher than at the time of issuance of the
securities. As a result, a reversal of preferred dividends was recognized during
the period.
Net
income (loss) to common stockholders.
Net
income (loss) to common stockholders improved by $527,000. The improvement
in
net income applicable to common stockholders is attributed to the cumulative
effect of the increase in operating income and the reversal of previously
recorded preferred dividend of approximately $828,000.
Liquidity
and Capital Resources
Cash
Position:
We had a
cash balance of $1,050,000 as of July 31, 2007. Net cash provided by operating
activities during the year ended July 31, 2007, was approximately $562,000,
attributable to improved operating results from an increase in gross margins
offset by working capital changes.
Investing
activities during the year
ended July 31, 2007,
consumed $501,000. We used $306,000 to acquire two certificates of deposit
necessary to secure certain obligations of the Company. We used $50,000 on
a
note receivable issued to a NetSapiens. The note receivable is secured by
NetSapiens’ proprietary Starter Platform License. Additionally, we used $145,000
to upgrade our Nextone Soft-switch and other equipment necessary to handle
the
increase in minutes of voice traffic transported in our network and sustain
higher revenues.
Financing
activities during the year ended July 31, 2007, generated $953,000 in cash.
This
cash was primarily generated from proceeds of our private placement of $713,000,
proceeds from a notes payable of $550,000, cash proceeds of $35,000 from the
exercise of 150,000 warrants and cash proceeds of $16,000 from the exercise
of
100,000 stock options. These cash proceeds were offset by debt principal
payments of $106,000 associated with two related party notes payable, the
principal payments of $104,000 associated with various notes payable, the
principal payments of $148,000 associated with advances from shareholders and
principal payments of $3,000 associated with our capital leases. Overall, our
net operating, investing and financing activities during the year ended July
31,
2007 provided an increase of $1,014,000 in cash.
Our
current cash expenses are expected to be approximately $90,000 per month,
including wages, rent, utilities, litigation fees and corporate professional
fees. We are currently generating sufficient cash from operations to cover
all
monthly cash expenses, but we cannot predict if, over the next twelve months,
we
will continue to generate sufficient cash from operations to cover all of our
cash expenses. We intend to cover our monthly cash expenses with our cash
produced from operations and financing activities. We expect to continue
conserving cash resources by paying long-term executive compensation and fees
for certain professional services with shares of our common stock. Additionally,
on November 3, 2006, we entered into a factoring agreement with CCA Financial
Services, Inc. Under the agreement, CCA Financial Services committed to purchase
up to $1,000,000 of ATSI’s monthly receivables. As
our
ongoing operations require, we will continue factoring our receivables under
this agreement, which on average has been $850,000 of our monthly
receivables.
As of
the date of this filing, we paid all factor receivables to our factoring agent;
we will continue to factor our receivables on a monthly basis as services are
rendered to our customers. Furthermore, we will continue to pursue additional
debt and equity financings to fund continued growth and increase our 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
operational results and future financial condition may be adversely affected.
We
are
not presently paying quarterly interest or dividends on our outstanding
convertible debentures and preferred stock. However, we have continued to accrue
dividends and interest on such debentures. The increase in accrued liabilities
related to the dividends and interest in arrears contributed approximately
$76,000 in cash flow savings during the year ended July 31,
2007.
Our
working capital deficit was $424,000 as of July
31,
2007.
This
represents an improvement of approximately $2,376,000 from our working capital
deficit at July 31, 2006. The improvement can primarily be attributed to the
elimination of $1,773,680 of accrued dividends due to the conversion into common
stock of 11,802,420 shares of Series H Convertible Preferred Stock and accrued
dividends. Additionally, during the year ended July 31, 2007, we reclassified
a
note payable of $500,000 from long-term liabilities to current liabilities.
This
note is due in October 2007.
Ongoing
operations
We
generated sufficient income from operations to cover our operating expenses
during the fiscal year ended July 31, 2007. However, we believe that due to
our
limited access to capital, we may not be able to support our ongoing operations
if we do not continue producing positive operating income in the future. Our
ability to continue as a going concern is dependent upon generating sufficient
income from operations to cover our operating expense, the ongoing support
of
our stockholders and customers, and our ability to obtain capital resources
to
support expansion.
During
the year ended
July 31, 2007,
we
received $713,000
from the private placement financing, $35,000
from the exercise of warrants and $16,000 from the exercise of stock options.
These funds, along with funds generated from operations, allowed us to cover
our
operating expenses and other corporate expenses during the year ended
July 31, 2007.
Additionally, on November 3, 2006, we entered into a factoring agreement with
CCA Financial Services, Inc. Under the agreement, CCA Financial Services
committed to purchase up to $1,000,000 of our monthly receivables. As our
ongoing operations require, we will factor our receivables under this agreement.
As of date of this filing, we did not have any outstanding factored receivables
under this agreement.
We
will
continue to pursue cost cutting strategies in order to conserve working capital
that could limit the implementation of our business plan. We are dependent
on
our operations and the proceeds from future debt or equity investments to fully
implement our business plan. If we are unable to continue producing positive
cash flow from operations or raise sufficient capital, we will be required
to
delay or forego some portion of our business plan, which will have an 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.
Critical
Accounting Policies
Revenue
Recognition. ATSI
derives revenue from Carrier Services, Network Services, and Communication
Services. ATSI records and reports its revenue on the gross amount billed to
its
customers in accordance with EITF 99-19. Revenue
is recognized when persuasive evidence of an arrangement exists, service or
network capacity has been provided, the price is fixed or determinable,
collectibility is reasonably assured and there are no significant obligations
remaining.
Carrier
Service:
ATSI
provides VoIP communication services to U.S. and foreign 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.
Carrier
service revenue is derived through transporting and terminating minutes of
telecommunications traffic over ATSI’s owned or leased VoIP network (Voice over
Internet Protocol). ATSI recognizes revenue in the period the service is
provided, net of revenue reserves for potential billing credits. Such disputes
can result from disagreements with customers regarding the duration, destination
or rates charged for each call.
Communication
Services:
ATSI
provides 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
in both prepaid and postpaid basis. Additionally, ATSI provides prepaid domestic
and long-distance services; under these services ATSI allows our customers
to
access our prepaid VoIP network platform. The customer will access this platform
and be able to complete the call by using their local phone number as their
“PIN” or personal identification number. The revenues derived from prepaid local
telephone and long-distance are billed monthly in advance and are recognized
the
following month when services are provided. Additionally, revenues derived
from
postpaid local telephone and long-distance services are recognized monthly
as
services are provided.
Network
Services:
ATSI
provides
private communication links and VoIP gateway services to multi-national and
foreign 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 the foreign
telecommunication networks. 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.
ATSI
recognizes network services revenue during the period the service is
provided.
Direct
Cost of Revenue:
Carrier
Services: Under
carrier services, ATSI incurs termination charges. These charges are related
to
the fees that ATSI is charged by carriers/vendors for the termination of phone
calls into their infrastructure and network to
terminate traffic in Mexico, Asia, the Middle East and Latin America.
The
cost
is based on a per minute rate and volume. ATSI also incurs installation charges
from various carriers; this cost is passed on to customers for the connection
to
the VoIP network from ATSI’s carriers.
Network
Services:
Under
network services, ATSI incurs Internet, co-location, and fiber optic charges.
The Internet and fiber optic charges are incurred as part of the connection
links between the customer’s different remote locations and sites to transmit
data, voice and Internet services. Co-location charges are incurred for space
utilized to install gateways, servers, and other communications equipment.
Communication
Services:
ATSI
incurs charges for local telephone service and related features from the
dominant local exchange carrier. Additionally, ATSI incurs a cost per minute
and
platform fees from two suppliers for long distance services and platform
access.
Stock-based
compensation. Effective
February 1, 2006, ATSI began recording compensation expense associated with
stock options and other forms of equity compensation in accordance with
Statement of Financial Accounting Standards No. 123R,
Share-Based Payment,
as
interpreted by SEC Staff Accounting Bulletin No. 107. Prior to February 1,
2006, ATSI had accounted for stock options according to the provisions of
Accounting Principles Board Opinion No. 25,“Accounting
for Stock Issued to Employees”,
and
related interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value. ATSI adopted the modified
prospective transition method as permitted under SFAS No. 123R, and,
consequently, has not retroactively adjusted results from prior periods.
Under
this modified prospective transition method, compensation cost associated with
stock options recognized during fiscal 2006 includes the amortization related
to
the remaining service period of all stock option awards granted prior to
February 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123.
Derivative
financial instruments.
ATSI
does 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, ATSI uses 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.
ATSI
evaluates the application of SFAS 133 and EITF 00-19 for all of its financial
instruments.
ITEM
7. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated
Financial Statements of ATSI Communications, Inc. and
Subsidiaries
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
27
|
Consolidated
Balance Sheets for the Years Ended July 31, 2007 and 2006
|
28
|
Consolidated
Statements of Operations for the Years Ended July 31, 2007 and
2006
|
29
|
Consolidated
Statements of Comprehensive Income (loss) for the Years Ended July
31,
2007 and 2006
|
30
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the Years Ended July 31,
2007 and 2006
|
31
|
Consolidated
Statements of Cash Flows for the Years Ended July 31, 2007 and
2006
|
32
|
Notes
to Consolidated Financial Statements
|
33
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
ATSI
Communications, Inc.
San
Antonio, Texas
We
have
audited the accompanying consolidated balance sheets of ATSI
Communications, Inc. and subsidiaries as of July 31, 2007 and 2006, and the
related consolidated statements of operations, comprehensive income (loss),
stockholders’ deficit and cash flows for each of the two years then ended. These
consolidated financial statements are the responsibility of ATSI’s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
ATSI as
of
July 31, 2007 and 2006 and the consolidated results of their operations and
its
cash flows for each of the two years then ended in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
ATSI will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, ATSI has a working capital deficit, has
suffered recurring losses from operations and has a stockholders’ deficit. These
conditions raise substantial doubt about ATSI’s ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MALONE
& BAILEY, PC
www.malone-bailey.com
Houston,
Texas
October
15, 2007
PART
1. FINANCIAL INFORMATION
|
|
|
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
(In
thousands, except per share amounts)
|
|
|
|
July
31,
|
|
July
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,050
|
|
$
|
36
|
|
Accounts
receivable, net of allowance for bad debt of $98 and $0,
respectively
|
|
|
866
|
|
|
621
|
|
Note
receivable
|
|
|
50
|
|
|
-
|
|
Prepaid
& other current assets
|
|
|
94
|
|
|
33
|
|
Total
current assets
|
|
|
2,060
|
|
|
690
|
|
|
|
|
|
|
|
|
|
LONG-TERM
ASSETS:
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
306
|
|
|
-
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
499
|
|
|
284
|
|
Less
- accumulated depreciation
|
|
|
(281
|
)
|
|
(182
|
)
|
Net
property and equipment
|
|
|
218
|
|
|
102
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,584
|
|
$
|
792
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,071
|
|
$
|
676
|
|
Accounts
payable, related parties
|
|
|
-
|
|
|
42
|
|
Line
of credit, CSI Business Finance
|
|
|
-
|
|
|
150
|
|
Accrued
liabilities
|
|
|
516
|
|
|
2,389
|
|
Current
portion of obligation under capital leases
|
|
|
3
|
|
|
3
|
|
Notes
payable
|
|
|
818
|
|
|
50
|
|
Notes
payable, related party
|
|
|
-
|
|
|
106
|
|
Convertible
debentures
|
|
|
76
|
|
|
74
|
|
Total
current liabilities
|
|
|
2,484
|
|
|
3,490
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
177
|
|
|
500
|
|
Convertible
debentures
|
|
|
158
|
|
|
234
|
|
Obligation
under capital leases, less current portion
|
|
|
3
|
|
|
6
|
|
Other
|
|
|
4
|
|
|
4
|
|
Total
long-term liabilities
|
|
|
342
|
|
|
744
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,826
|
|
|
4,234
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT:
|
|
|
|
|
|
|
|
Series
A Cumulative Convertible Preferred Stock, $0.001, 50,000 shares
authorized, 0 and 2,750 shares issued
and outstanding
|
|
|
-
|
|
|
-
|
|
Series
D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
issued
and outstanding
|
|
|
1
|
|
|
1
|
|
Series
E Cumulative Preferred Stock, 10,000 shares authorized, 1,170
shares
issued and outstanding
|
|
|
1
|
|
|
1
|
|
Series
H Convertible Preferred Stock, $0.001, 16,000,000 shares authorized,
0 and
11,802,353 shares issued
and outstanding, respectively
|
|
|
-
|
|
|
12
|
|
Common
stock, $0.001 par value, 150,000,000 shares authorized, 37,620,513
and
16,44,768 shares
|
|
|
|
|
|
|
|
issued
and outstanding, respectively
|
|
|
38
|
|
|
16
|
|
Additional
paid in capital
|
|
|
72,222
|
|
|
68,775
|
|
Accumulated
deficit
|
|
|
(72,505
|
)
|
|
(72,248
|
)
|
Other
comprehensive income
|
|
|
1
|
|
|
1
|
|
Total
stockholders' deficit
|
|
|
(242
|
)
|
|
(3,442
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
2,584
|
|
$
|
792
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
Years
ended July 31,
|
|
|
|
2007
|
|
2006
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
Carrier
services
|
|
$
|
31,562
|
|
$
|
14,549
|
|
Communication
services
|
|
|
113
|
|
|
125
|
|
Network
services
|
|
|
17
|
|
|
22
|
|
Total
operating revenues
|
|
|
31,692
|
|
|
14,696
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
|
|
29,521
|
|
|
13,869
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
|
|
1,625
|
|
|
1,138
|
|
Legal
and professional fees
|
|
|
258
|
|
|
195
|
|
Bad
debt expense
|
|
|
98
|
|
|
-
|
|
Depreciation
and amortization expense
|
|
|
99
|
|
|
92
|
|
Total
operating expenses
|
|
|
31,601
|
|
|
15,294
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
91
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
Loss
on derivative instrument liabilities
|
|
|
-
|
|
|
(6
|
)
|
Debt
forgiveness income
|
|
|
-
|
|
|
50
|
|
Interest
expense
|
|
|
(348
|
)
|
|
(151
|
)
|
Total
other income (expense), net
|
|
|
(348
|
)
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
NET
(LOSS) FROM CONTINUING OPERATIONS
|
|
|
(257
|
)
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
Gain
on disposal of discontinued operations
|
|
|
-
|
|
|
1,652
|
|
NET
INCOME FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(257
|
)
|
$
|
947
|
|
LESS:
PREFERRED DIVIDEND
|
|
|
(56
|
)
|
|
(959
|
)
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
|
|
828
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
|
$
|
515
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
BASIC
INCOME (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
0.02
|
|
$
|
(0.12
|
)
|
From
discontinued operations
|
|
$
|
-
|
|
$
|
0.12
|
|
Total
|
|
$
|
0.02
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
DILUTED
INCOME (LOSS) PER SHARE
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
From
discontinued operations
|
|
$
|
-
|
|
$
|
0.05
|
|
Total
|
|
$
|
(0.01
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
27,908,044
|
|
|
13,516,342
|
|
DILUTED
COMMON SHARES OUTSTANDING
|
|
|
28,049,739
|
|
|
31,287,366
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
(In
thousands, except per share amounts)
|
|
|
|
Years
ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(Restated)
|
|
Net
income (loss) to common stockholders
|
|
$
|
515
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) to common stockholders
|
|
$
|
515
|
|
$
|
(513
|
)
|
|
|
|
|
|
|
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS DEFICIT
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
|
Preferred
(A)
|
|
Preferred
(D)
|
|
Preferred
(E)
|
|
Preferred
(H)
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
Comp.
|
|
|
|
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Capital
|
|
(Deficit)
|
|
Income/Loss
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JULY 31, 2005
|
|
|
3,750
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,912,300
|
|
|
14
|
|
|
10,396,892
|
|
|
10
|
|
$
|
66,741
|
|
$
|
(73,195
|
)
|
$
|
502
|
|
$
|
(5,928
|
)
|
Shares
issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549,456
|
|
|
1
|
|
|
127
|
|
|
|
|
|
|
|
|
128
|
|
Shares
issued to purchase assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,272
|
|
|
-
|
|
|
58
|
|
|
|
|
|
|
|
|
58
|
|
Shares
issued for P/S conversion
|
|
|
(1,000
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,309,880
|
)
|
|
(2
|
)
|
|
2,959,731
|
|
|
3
|
|
|
167
|
|
|
|
|
|
|
|
|
168
|
|
Shares
issued for debt conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
-
|
|
|
866,386
|
|
|
1
|
|
|
255
|
|
|
|
|
|
|
|
|
256
|
|
Reclass
of Series D from debt
|
|
|
|
|
|
|
|
|
742
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740
|
|
|
|
|
|
|
|
|
740
|
|
Reclass
of Series E from debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,170
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
1,170
|
|
Exercise
of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366,666
|
|
|
-
|
|
|
54
|
|
|
|
|
|
|
|
|
54
|
|
Warrant
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
49
|
|
Preferred
stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(959
|
)
|
|
|
|
|
|
|
|
(959
|
)
|
Shares
issued for services, employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125,000
|
|
|
1
|
|
|
179
|
|
|
|
|
|
|
|
|
180
|
|
Derivative
instruments (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
82
|
|
Beneficial
conversion feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
26
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
87
|
|
Other
comp. income/loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(501
|
)
|
|
(501
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
947
|
|
|
|
|
|
947
|
|
BALANCE,
JULY 31, 2006
|
|
|
2,750
|
|
|
—
|
|
|
742
|
|
|
1
|
|
|
1,170
|
|
|
1
|
|
|
11,802,420
|
|
|
12
|
|
|
16,444,403
|
|
|
16
|
|
$
|
68,775
|
|
$
|
(72,248
|
)
|
$
|
1
|
|
$
|
(3,442
|
)
|
Shares
issued for Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,475,062
|
|
|
1
|
|
|
333
|
|
|
|
|
|
|
|
|
334
|
|
Common
shares issued for Preferred Stock Conversion
|
|
|
(2,750
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,802,420
|
)
|
|
(12
|
)
|
|
16,261,847
|
|
|
16
|
|
|
1,137
|
|
|
|
|
|
|
|
|
1,141
|
|
Exercise
of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
2
|
|
|
35
|
|
|
|
|
|
|
|
|
37
|
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
(56
|
)
|
Reversal
of previously recorded preferred dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828
|
|
|
|
|
|
|
|
|
828
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
|
|
|
|
|
267
|
|
Proceeds
from exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
1
|
|
|
16
|
|
|
|
|
|
|
|
|
17
|
|
Beneficial
Conversion Feature, private placement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
144
|
|
Shares
issued for conversion of notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189,201
|
|
|
2
|
|
|
743
|
|
|
|
|
|
|
|
|
745
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JULY 31, 2007
|
|
|
—
|
|
|
—
|
|
|
742
|
|
|
1
|
|
|
1,170
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
37,620,513
|
|
|
38
|
|
$
|
72,222
|
|
$
|
(72,505
|
)
|
$
|
1
|
|
$
|
(242
|
)
|
See
accompanying summary of accounting policies and notes to the consolidated
financial statements .
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
Years
ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(257
|
)
|
$
|
947
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
Gain
in disposal of investment
|
|
|
-
|
|
|
(1,652
|
)
|
Debt
forgiveness income
|
|
|
-
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
99
|
|
|
92
|
|
Issuance
of stock grants and options, employees for services
|
|
|
473
|
|
|
267
|
|
Issuance
of common stock and warrants for services
|
|
|
129
|
|
|
176
|
|
Provisions
for losses on accounts receivables
|
|
|
98
|
|
|
-
|
|
Loss
on derivative instrument liabilities
|
|
|
-
|
|
|
6
|
|
Amortization
of debt discount
|
|
|
152
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(343
|
)
|
|
(451
|
)
|
Prepaid
expenses and other
|
|
|
(61
|
)
|
|
10
|
|
Accounts
payable
|
|
|
174
|
|
|
101
|
|
Accounts
payable - related parties
|
|
|
15
|
|
|
43
|
|
Accrued
liabilities
|
|
|
83
|
|
|
157
|
|
Net
cash provided by / used in operating activities
|
|
|
562
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Investment
in certificates of deposit
|
|
|
(306
|
)
|
|
(4
|
)
|
Note
receivable
|
|
|
(50
|
)
|
|
-
|
|
Purchases
of property & equipment
|
|
|
(145
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(501
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from notes payable, related party
|
|
|
-
|
|
|
120
|
|
Payments
on notes payable, related party
|
|
|
(106
|
)
|
|
(30
|
)
|
Proceeds
from notes payable
|
|
|
550
|
|
|
50
|
|
Payments
on notes payable
|
|
|
(104
|
)
|
|
-
|
|
Payments
on advances from shareholders
|
|
|
(148
|
)
|
|
-
|
|
Proceeds
from advances from shareholders
|
|
|
713
|
|
|
-
|
|
Proceeds
from line of credit, net
|
|
|
-
|
|
|
124
|
|
Proceeds
from the exercise of stock options
|
|
|
16
|
|
|
|
|
Proceeds
from the exercise of warrants
|
|
|
35
|
|
|
54
|
|
Principal
payments on capital lease obligation
|
|
|
(3
|
)
|
|
(3
|
)
|
Net
cash provided by financing activities
|
|
|
953
|
|
|
315
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
1,014
|
|
|
7
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
36
|
|
|
29
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
1,050
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
77
|
|
$
|
24
|
|
Cash
paid for income tax
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING TRANSACTIONS
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of debt
|
|
$
|
688
|
|
$
|
256
|
|
Issuance
of common stock for accounts payable
|
|
|
58
|
|
|
-
|
|
Issuance
of common stock for purchase of fixed & intangible
assets
|
|
|
-
|
|
|
58
|
|
Conversion
of preferred stock to common stock
|
|
|
1,141
|
|
|
167
|
|
Discount
for beneficial conversion feature on convertible debt
|
|
|
144
|
|
|
26
|
|
Fair
value of derivatives transferred to equity
|
|
|
-
|
|
|
82
|
|
Reclass
preferred stock from debt to equity
|
|
|
-
|
|
|
1,912
|
|
Preferred
stock dividends
|
|
|
56
|
|
|
959
|
|
Reversal
of previously recorded preferred stock dividend
|
|
|
(828
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business.
ATSI
Communications, Inc. was incorporated in Nevada on May 24, 2004. ATSI is an
international telecommunications carrier that utilizes the Internet to provide
economical international communication services to carriers and telephony
resellers around the world. ATSI’s continuing operations consist of VoIP carrier
services, network services, and retail communication services. ATSI’s primary
business consists of providing VoIP communication services to U.S. and foreign
telecommunications companies that lack transmission facilities and require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America.
Principles
of Consolidation. The
consolidated financial statements have been prepared on the accrual basis of
accounting under accounting principles generally accepted in the United States.
All significant inter-company balances and transactions have been eliminated
in
consolidation.
Reclassifications.
Certain
amounts in the consolidated financial statements of the prior year have been
reclassified to conform to the presentation of the current year for comparative
purposes.
Use
of Estimates.
In
preparing financial statements, management makes estimates and assumptions
that
affect the reported amounts of assets and liabilities in the balance sheet
and
revenue and expenses in the statement of expenses. Actual results could differ
from those estimates.
Concentration
of Credit Risk. Financial
instruments that potentially subject ATSI to concentration of credit risk
consist primarily of trade receivables. In the normal course of business, ATSI
provides credit terms to its customers. Accordingly, ATSI performs ongoing
credit evaluations of its customers and maintains allowances for possible
losses, which, when realized, have been within the range of management’s
expectations. ATSI maintains cash in bank deposits accounts, which, at times,
may exceed federally insured limits. ATSI has not experienced any losses in
such
accounts and ATSI does not believe ATSI is exposed to any significant credit
risk on cash and cash equivalents.
Revenue
Recognition. ATSI
derives revenue from Carrier Services, Network Services, and Communication
Services. ATSI records and reports its revenue on the gross amount billed to
its
customers in accordance with EITF 99-19. Revenue
is recognized when persuasive evidence of an arrangement exists, service or
network capacity has been provided, the price is fixed or determinable,
collectibility is reasonably assured and there are no significant obligations
remaining.
Carrier
Service:
ATSI
provides VoIP communication services to U.S. and foreign 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.
Carrier
service revenue is derived through transporting and terminating minutes of
telecommunications traffic over ATSI’s owned or leased VoIP network (Voice over
Internet Protocol). ATSI recognizes revenue in the period the service is
provided, net of revenue reserves for potential billing credits. Such disputes
can result from disagreements with customers regarding the duration, destination
or rates charged for each call.
Communication
Services:
ATSI
provides 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
in both prepaid and postpaid basis. Additionally, ATSI provides prepaid domestic
and long-distance services; under these services ATSI allows our customers
to
access our prepaid VoIP network platform. The customer will access this platform
and be able to complete the call by using their local phone number as their
“PIN” or personal identification number. The revenues derived from prepaid local
telephone and long-distance are billed monthly in advance and are recognized
the
following month when services are provided. Additionally, revenues derived
from
postpaid local telephone and long-distance services are recognized monthly
as
services are provided.
Network
Services:
ATSI
provides
private communication links and VoIP gateway services to multi-national and
foreign 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 the foreign
telecommunication networks. 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.
ATSI
recognizes network services revenue during the period the service is
provided.
Direct
Cost of Revenue:
Carrier
Services: Under
carrier services, ATSI incurs termination charges. These charges are related
to
the fees that ATSI is charged by carriers/vendors for the termination of phone
calls into their infrastructure and network to
terminate traffic in Mexico, Asia, the Middle East and Latin America.
The
cost
is based on a per minute rate and volume. ATSI also incurs installation charges
from various carriers; this cost is passed on to customers for the connection
to
the VoIP network from ATSI’s carriers.
Network
Services:
Under
network services, ATSI incurs Internet, co-location, and fiber optic charges.
The Internet and fiber optic charges are incurred as part of the connection
links between the customer’s different remote locations and sites to transmit
data, voice and Internet services. Co-location charges are incurred for space
utilized to install gateways, servers, and other communications equipment.
Communication
Services:
ATSI
incurs charges for local telephone service and related features from the
dominant local exchange carrier. Additionally, ATSI incurs a cost per minute
and
platform fees from two suppliers for long distance services and platform
access.
Cash
and Cash Equivalents.
For
purposes of the statement of cash flows, ATSI considers all highly liquid
investments purchased with an original maturity of three months or less to
be
cash equivalents.
Allowance
for Doubtful Accounts.
Bad debt
expense is recognized based on management’s estimate of likely losses each year
based on past experience and an estimate of current year uncollectible amounts.
As of July 31, 2007, ATSI’s allowance for doubtful accounts balance was
approximately $98,000. There was no allowance for doubtful accounts as of July
31, 2006.
Investment
in unconsolidated subsidiary. On
May
22, 2003 ATSI sold 51% of its interest in ATSI Comunicaciones S.A de C.V.,
(ATSICOM) As of July 31, 2007, ATSI has a 49% interest in the profits and equity
of ATSICOM, a Mexican corporation engaged in providing telecommunications
services. During fiscal 2003, ATSI recorded the investment in the unconsolidated
subsidiary in conformity with the equity method of accounting. During the year
ended July 31, 2004, ATSI determined that the estimated future cash flows
expected from the concession license were less than its carrying value. As
a
result ATSI recorded an impairment loss of approximately $702,000 to reduce
the
recorded value of the concession license to zero. Although
there is no assurance of future value appreciation, from time to time ATSI
will
conduct a valuation of its investment in the concession license and record
the
determined value, if any, in its financial statements. As of July 31, 2007,
nothing has come to management’s attention that would require ATSI to make any
adjustment to its financial statement.
Property
and equipment. Property
and equipment is recorded at cost. Additions are capitalized and maintenance
and
repairs are charged to expense as incurred. Gains and losses on dispositions
of
equipment are reflected in operations. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which are
one to five years.
Impairment
of Long-Lived Assets.
ATSI
reviews the carrying value of its long-lived assets annually or whenever events
or changes in circumstances indicate that the value of an asset may no longer
be
appropriate. ATSI assesses recoverability of the carrying value of the asset
by
estimating the future net cash flows expected to result from the asset,
including eventual disposition. If the future net cash flows are less than
the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset’s carrying value and fair value.
Derivative
financial instruments.
ATSI
does 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, ATSI uses 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. There are no derivative instrument liabilities as of
July 31, 2007.
Income
taxes.
ATSI
recognizes deferred tax assets and liabilities based on differences between
the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to be recovered. ATSI provides a valuation allowance for deferred
tax
assets for which it does not consider realization of such assets to be more
likely than not.
Stock-based
compensation. Effective
February 1, 2006, ATSI began recording compensation expense associated with
stock options and other forms of equity compensation in accordance with
Statement of Financial Accounting Standards No. 123R,
Share-Based Payment,
as
interpreted by SEC Staff Accounting Bulletin No. 107. Prior to February 1,
2006, ATSI had accounted for stock options according to the provisions of
Accounting Principles Board Opinion No. 25,“Accounting
for Stock Issued to Employees”,
and
related interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value. ATSI adopted the modified
prospective transition method as permitted under SFAS No. 123R, and,
consequently, has not retroactively adjusted results from prior periods.
Under
this modified prospective transition method, compensation cost associated with
stock options recognized during fiscal 2006 includes the amortization related
to
the remaining service period of all stock option awards granted prior to
February 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123.
The
following table illustrates the effect on net income loss and net loss per
share
for the twelve months ended July 31, 2007 if ATSI had applied the fair value
provisions of FASB Statement No. 123R, to stock-based employee compensation:
|
|
Twelve
months ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
income (loss) to common
|
|
|
|
|
shareholders,
as reported
|
$
|
515,000
|
|
$
|
(12,000
|
)
|
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 |
$
|
515,000
|
|
$
|
(293,499
|
)
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share:
|
|
|
|
|
|
|
|
As
reported |
$
|
0.02
|
|
$
|
0.00
|
|
|
Pro
forma |
$
|
0.02
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per common share:
|
|
|
|
|
|
|
|
As
reported |
$
|
(0.01
|
)
|
$
|
0.03
|
|
|
Pro
forma |
$
|
(0.01
|
)
|
$
|
(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:
|
|
For
the Years Ended July 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Expected
dividends yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected
stock price volatility
|
|
|
80
|
%
|
|
50
|
%
|
Risk-free
interest rate
|
|
|
4.51
|
%
|
|
4.39
|
%
|
Expected
life of options
|
|
|
7
years
|
|
|
10
years
|
|
Basic
and diluted net loss per share.
The
basic net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss per
common share is computed by dividing the net loss adjusted on an "as if
converted" basis, by the weighted average number of common shares outstanding
plus potential dilutive securities.
Recently
issued accounting pronouncements.
ATSI
does not expect the adoption of any other recently issued accounting
pronouncements to have a significant impact on ATSI’s results of operations,
financial position or cash flows.
NOTE
2 - GOING CONCERN
As
shown
in the accompanying financial statements, ATSI incurred net losses from
operations of $257,000 and $705,000 in fiscal 2007 and 2006, respectively,
has
an accumulated deficit of $72.5 million and a working capital deficit of
$424,000 as of July 31, 2007. Although we generated sufficient income from
operations to cover our operating expenses during the fiscal year ended July
31,
2007, these conditions create doubt as to ATSI’s ability to continue as a going
concern. Management plans to continue to improve its financial position through
the profitable growth of its operations subject to its capital limitations.
Management will also continue to pursue financings that may include raising
additional capital through the issuance of debt and sales of common stock,
preferred stock. The financial statements do not include any adjustments that
might be necessary if ATSI is unable to continue as a going
concern.
NOTE
3 - PROPERTY AND EQUIPMENT
Following
is a summary of ATSI’s property and equipment at July 31, 2007 and 2006 (in
thousands):
|
|
Useful
lives
|
|
2007
|
|
2006
|
|
Telecom
equipment & software
|
|
|
1-5
years
|
|
$
|
499
|
|
$
|
284
|
|
Less:
accumulated depreciation
|
|
|
|
|
|
(281
|
)
|
|
(182
|
)
|
Net-property
and equipment
|
|
|
|
|
$
|
218
|
|
$
|
102
|
|
For
the
years ended July 31, 2007 and 2006, depreciation and amortization totaled
approximately $99,000 and $92,000, respectively.
NOTE
4 -NOTE RECEIVABLE
On
July
13,
2007,
ATSI agreed to loan $150,000 to NetSapiens Inc. The
promissory note receivable has a maturity date of June 26, 2008 and an annual
interest rate of 8%. The note will be funded by ATSI in five installments as
follows:
1)
|
$50,000
on July 13, 2007;
|
2)
|
$25,000
on August 13, 2007;
|
3)
|
$25,000
on September 13, 2007;
|
4)
|
$25,000
on October 13, 2007; and
|
5)
|
$25,000
on November 13, 2007.
|
The
note
is secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution
modules and provides for accrual of interest each month with the principal
balance due at maturity. Additionally, ATSI can convert at any time the
outstanding interest and principal balance into a perpetual NetSapiens’ License.
As of July 31, 2007, the principal balance outstanding on the note was $50,000
and ATSI has funded the remaining $100,000 as of October 12, 2007.
NOTE
5 - NOTES PAYABLE
On
November 3, 2006,
ATSI
borrowed $250,000 from CCA Financial Services, Inc. This note bears an interest
at the rate of 16%, provides for eleven monthly principal and interest payments
of $7,807 and a final payment at maturity of $200,000, is secured by ATSI’s
equipment, deposit accounts and accounts receivables and matures on November
3,
2007. ATSI has the option of paying off the total outstanding principal balance
at any time without any penalties. In
connection with the transaction ATSI paid application, legal and documentation
fees of $7,500.
On
November 3, 2006, ATSI entered into an accounts receivable factoring agreement
with CCA Financial Services, Inc. Under the agreement, CCA
Financial Services
committed to purchase up to $1,000,000 of ATSI’s accounts receivables. The
factoring agreement is for twelve months and ATSI can terminate this agreement
at its sole discretion at any time, subject to a $10,000 early termination
fee.
The factoring rate ranges from 1.00%-1.25% based on the factored amount and
number of days outstanding. As our ongoing operations require, we will continue
factoring our receivables under this agreement, which on average has been
$850,000 of our monthly receivables. As of the date of this filing, we did
not
have any factored receivables outstanding; we will continue to factor our
receivables on a monthly basis as services are rendered to our
customers.
During
the nine months ended April 30, 2007, ATSI borrowed $564,000 under several
notes
payable. Which matured on May 28, 2007 and bear an annual interest rate of
12%.
On
February 1, 2007, ATSI notified the holders of the notes of its intent to
convert the outstanding principal and interest into common stock. The conversion
price was set by ATSI at $0.22 per share, which was approximately 80% of the
market price at February 1, 2007. A
beneficial conversion feature for the difference between the closing price
and
the conversion price was recognized in accordance with EITF 98-5 and EITF 00-27.
The beneficial conversion feature is presented as a discount to the related
debt
or a dividend to the related equity, with an offsetting amount increasing
additional paid-in capital.
As a
result, ATSI recognized $143,723 in discount from the beneficial conversion
feature at the time of the issuance and issued 2,566,482
common
shares to the note holders. In addition, ATSI issued 238,636 shares of common
stock with a fair value of $66,818 and made cash payment of $26,960 for services
provided by the placement agents in connection with the placement of the notes.
As of July 31, 2007, the entire discount has been expensed by ATSI as the result
of the conversion of all notes to common shares.
On
February 7, 2007, ATSI paid off its $16,000 note payable with Mr. John Fleming,
a director of ATSI.
On
March
28, 2007, ATSI borrowed $100,000 from Wells Fargo Bank. This
note
bears an annual interest rate of 7%, provides for twelve monthly principal
and
interest payments of $4,481, and is secured by ATSI’s certificate of deposit for
$100,000. ATSI has the option of paying off the total outstanding principal
balance at any time without any penalties.
On
July
25, 2007, ATSI borrowed $200,000 from Wells Fargo Bank. This
note
bears an annual interest rate of 7.25%, provides for thirty-six monthly
principal and interest payments of $6,208 and is secured by ATSI’s certificate
of deposit for $200,000. ATSI has the option of paying off the total outstanding
principal balance at any time without any penalties.
On
June
1, 2006, ATSI restructured it’s 9% Convertible Subordinated Debentures
(“Original 9% debentures”) by issuing 416 9% Convertible Subordinated Debentures
(“New Debentures”) with a face value of $1,000 each, due June 2011. The New
Debentures were issued in exchange for all of the Original 9% Debentures in
the
aggregate principal amount of $275,000 and $141,000 of accrued interest through
June 2006. Each New Debenture accrues interest at the rate of 9% per annum
payable annually. The debentures and any accrued interest are subject to an
election to convert into common stock by either ATSI or the holders at the
higher of (a) $0.27 per share or (b) the average closing price of ATSI’s common
stock for the 10 days immediately preceding the date of conversion. The maximum
common shares that can be issued upon conversion of the debentures are 1,540,741
common shares. Additionally, the proceeds from the debentures have been
discounted by $26,000 to reflect a beneficial conversion feature derived from
the difference between the conversion price and the market price at the time
of
issuance. The discount will be amortized over the life of the debentures using
the effective interest method. On June 1, 2007, ATSI issued 419,081 restricted
common shares as the 2nd principal payment and accrued interest on
the debentures of $83,200 and $29,952, respectively. Additionally, as of July
31, 2007, ATSI had approximately $85,000 in accrued interest associated with
these debentures.
ATSI
analyzed these instruments for derivative accounting consideration under SFAS
133 and EITF 00-19, and determined that derivative accounting is not
applicable.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Leases:
ATSI
leases its office space with monthly payments of $4,085; the lease expires
in
November 2011. The annual rent expense under the operating lease was $43,486
and
$45,442 for 2006 and 2007, respectively. The future minimum lease payments
under
the operating lease are as follows:
FY2008
|
|
$
|
47,439
|
|
FY2009
|
|
|
48,199
|
|
FY2010
|
|
|
49,100
|
|
FY2011
|
|
|
49,250
|
|
Litigation:
On
October 31, 2002, ATSI 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. On July 11, 2007, the lawsuit was dismissed by the Court
of Appeals.
One
of
the defendants, RGC International Investors, LDC, filed a lawsuit in the
Chancery Court in Delaware against ATSI on March 20, 2007 asserting it still
had
rights of enforcement against ATSI to convert preferred stock to common stock
or
redeem such stock in connection with Certificate of Designation issued regarding
such series E preferred stock in October of 2000. In August 2007 the parties
reached a confidential settlement agreement under which the
1,170
shares of Series E Preferred Stock have been cancelled.
Currently
ATSI is still in litigation with Shaar Fund, Ltd., the holders of the series
D
preferred stock and is involved in settlement negotiations.
NOTE
7 - EQUITY
Common
Stock
During
the year ended July 31, 2007 ATSI issued:
|
-
|
495,062
shares of common stock valued at $128,920 for its placement agent
fees and
legal and consulting services rendered by various
individuals.
|
|
-
|
980,000
shares of common stock to its employees and directors for services
rendered. ATSI recorded compensation expense of $205,800 in its statement
of operations for the aggregate market value of the stock at the
date of
issuance.
|
|
-
|
16,149,938
shares of common stock in connection with the conversion and redemption
of
11,802,420 shares of Series H Preferred Stock and accrued premium
common
shares.
|
|
-
|
111,909
shares of common stock in connection with the conversion of 2,750
shares
of Series A Preferred Stock and accrued dividend.
|
|
-
|
150,000
shares of common stock upon exercise of outstanding warrants for
aggregate
proceeds of $34,500.
|
|
- |
100,000
shares of common stock upon exercise of outstanding stock options
by an
employee for $16,000.
|
|
-
|
66,226
shares of common stock to Richard Benkendorf as a payment of $15,226
under
a settlement agreement.
|
|
-
|
137,412
shares of common stock to John Fleming as a payment of $42,600 under
a
settlement agreement.
|
|
-
|
2,566,482
shares of common stock in connection with the conversion of various
notes
payable in the principal amount of $564,600 and accrued interest
of
$10,292.
|
|
-
|
419,081
shares of common stock valued at $113,152 in connection with the
annual
payment on the “New Debentures” dated June 1, 2006.
|
No
dividends were declared on ATSI’s common stock during fiscal 2007 and
2006.
Preferred
Stock
The
terms
of ATSI’s preferred stock restrict ATSI from declaring and paying dividends on
ATSI’s common stock until such time as all outstanding dividends have been
fulfilled related to the preferred stock. The outstanding preferred stock have
liquidation preference prior to common stock and ratably with each other. No
dividends were declared on ATSI’s preferred stock during fiscal 2007 and 2006.
Series
A Preferred Stock
Series
A
Preferred Stocks were issued in March 1999. The
Series A Preferred Stock and any accumulated, unpaid dividends may be converted
into Common Stock for up to one year at the average closing price of the Common
Stock for twenty (20) trading days preceding the Date of Closing (the “Initial
Conversion Price”). On each Anniversary Date up to and including the fifth
Anniversary Date, the Conversion price on any unconverted Preferred Stock,
will
be reset to be equal to 75% of the average closing price of the stock for the
then twenty (20) preceding days provided that the Conversion price can not
be
reset any lower than 75% of the Initial Conversion Price. As these conversion
features were considered a “beneficial conversion feature” to the holder, ATSI
allocated approximately $3.6 million of the approximately $5.0 million in
proceeds to additional paid-in capital as a discount that has been fully
amortized in prior periods. The Series A Preferred Stock is callable and
redeemable by ATSI at 100% of its face value, plus any accumulated, unpaid
dividends at ATSI’s option any time after the Common Stock of ATSI has traded at
200% or more of the conversion price in effect for at least twenty (20)
consecutive trading days. The Series A Preferred Stock holders are entitled
to
vote, based on number of common stock into which the preferred stock could
be
converted. Dividends are payable on June 1, September 1, December 1 and March
1.
During
fiscal 2007, ATSI issued 111,909 common shares in conversion of 2,750 shares
of
Series A Preferred Stock. As of July 31, 2007, all
Series A
Preferred Stock have been converted into common stock.
Series
D Preferred Stock
Series
D
Preferred Stock was issued in February 2000. The Series D Preferred Stock
accrues cumulative dividends at the rate of 6% per annum payable quarterly.
The
Series D Preferred Stock and any accumulated, unpaid dividends may be converted
into Common Stock for up to two years at the lesser of a) the market price
on
the day prior to closing or b) 83% of the five lowest closing bid prices on
the
ten days preceding conversion. The terms of ATSI’s Series D Preferred Stock
allow for mandatory redemption by the holder upon certain conditions. The Series
D Preferred Stock allows the holder to elect redemption upon the change of
control of ATSI at 120% of the sum of $1,300 per share and accrued and unpaid
dividends. Additionally, the holder may elect redemption at $1,270 per share
plus accrued and unpaid dividends if ATSI refuses to honor conversion notice
or
if a third party challenges conversion. The Series D Preferred Stock holders
are
not entitled to vote.
On
January 24, 2003 ATSI received a demand redemption letter from the Series D
Preferred holders. ATSI has not issued these shares; it is the position of
ATSI
that the investor’s shares are not owed. Further ATSI has filed a lawsuit
against one or more parties to whom the investors share are allegedly
owed.
In
June
2007, ATSI initiated a declaratory judgment action in the United States District
Court for the Western District of Texas against Shaar Fund, Ltd., holder of
series D preferred stock who still asserted it had rights under instruments
that
issued incident to such stock. ATSI asserted that alleged rights asserted by
the
Shaar Fund Ltd are barred by applicable statute of limitations.
On
August
2, 2007, Shaar Fund Ltd. filed a separate suit against ATSI in the United States
District Court for the Southern District Court of New York asserting it
continued to own rights under the instruments relating to the series D preferred
stock.
By
September, 2007, the parties reached an agreement as to the competing suits
which led to ATSI dismissing the Texas suit in favor of litigating all remaining
issues between it and Shaar Fund Ltd. as to such matters in United States
District Court for the Southern District Court of New York. Pleading deadlines
have been extended and the parties are currently exploring a mutual
resolution.
As
of
July 31, 2007, 742 shares of Series D Preferred Stock remain outstanding, for
which ATSI has accrued approximately $285,000 for dividends.
Series
E Preferred Stock
Series
E
Preferred Stocks were issued in October 2000 with a stated value of $1,000
per
share.. The Series E Preferred Stock contain certain conversion and redemption
features which provide that (1) they may be converted into Common Stock for
up
to three years at the lesser of a) the market price - defined as the average
of
the closing bid price for the five lowest of the ten trading days prior to
conversion or b) the fixed conversion price - defined as 120% of the lesser
of
the average closing bid price for the ten days prior to closing or the October
12, 2000 closing bid price and (2) allow for mandatory redemption by the holder
upon certain conditions.
The
Series E Preferred Stock allows the holder to elect redemption at $1,250 per
share plus 6% per annum if: 1) ATSI refuses conversion notice, 2) an effective
registration statement was not obtained by prior to March 11, 2001, 3)
bankruptcy proceedings are initiated against ATSI, 4) The Secretaría de
Comunicaciones y Transportes of the SCT limits or terminates the scope of the
concession or, 5) if ATSI fails to maintain a listing on NASDAQ, NYSE or AMEX.
ATSI believes that the holders of the Series E Preferred Stock can no longer
enforce the conversion or redemption features of the Preferred Stock instruments
due to, among other things, the expiration of the applicable statute of
limitations. Subsequent to July 31, 2007 the parties reached a confidential
settlement agreement. Under the confidential settlement agreement the 1,170
shares of Series E Preferred Stock have been cancelled. The
Series E Convertible Preferred Stock holders are not entitled to
vote.
As
of
July 31, 2007, 1,170 shares of Series E Preferred Stock remained outstanding
and
in August 2007, ATSI reached a confidential settlement agreement with the
holders of the 1,170 shares of Series E Preferred Stock. Under the confidential
settlement agreement ATSI paid $175,000 to the Series E Preferred Stock
shareholders and the 1,170
shares of Series E Preferred Stock have
been
cancelled.
Series
H Preferred Stock
On
May 6,
2004, ATSI’s stockholders approved the reincorporation of ATSI into a wholly
owned subsidiary, ATSI Merger Corporation in Nevada. As a result of the merger,
ATSI’s Stockholders of record as of May 24, 2004 received one (1) share of New
ATSI Common Stock and ten (10) shares of New ATSI Series H Convertible Preferred
Stock for each 100 shares of Old ATSI Common Stock surrendered. During fiscal
2004, 14,385,000 shares of the New ATSI Series H Convertible Preferred Stock
were issued.
Pursuant
to ATSI’s Certificate of Incorporation, ATSI’s board of directors may issue, in
series, 16,000,000 of the New ATSI Series H Convertible Preferred shares, with
a
par value of $0.001. The Series H Convertible Preferred Stock holders are not
entitled to vote but they are entitled to receive dividends on common stock.
Per
the certificate of designation, ATSI can redeem the Series H Preferred Stock
for
common stock at any time.
During
fiscal 2007, 11,802,420
shares
of
Series H Preferred Stock were converted to 16,149,938
shares
of
common stock. As of July 31, 2007, all shares of Series H Preferred Stock have
been converted into common stock.
NOTE
8 - STOCK-BASED COMPENSATION AND WARRANTS
In
September 2005, ATSI adopted its 2005 Stock Compensation Plan. This plan
authorizes the grant of up to 7.5 million warrants, stock options, restricted
common shares, non-restricted common shares and other awards to employees,
directors, and certain other persons. The Plan is intended to permit ATSI to
retain and attract qualified individuals who will contribute to the overall
success of ATSI. The terms of any grants under the Plan are determined by the
Board of Directors of ATSI. Exercise prices of all of the warrants and stock
options and other awards will vary based on the market price of the shares
of
common stock as of the date of grant. The warrants, stock options, restricted
common stock, non-restricted common stock and other awards vest based on the
terms of the individual grant.
Issuances
under the “2005 Stock Compensation Plan” during fiscal 2007 are:
-
1,345,000 options to purchase common stock to its employees and members of
the
Board of Directors with an exercise price of $0.21 per share, the closing price
of ATSI’s common stock on the grant date, September 25, 2006. One third of the
options vested immediately at the issuance date and the remaining two-thirds
will vest equally over a period of two years. Under the fair value option
method, ATSI recognized $71,000 of compensation expense associated with the
vested options at the date of grant. ATSI will recognize the remaining $142,000
of non-cash compensation expense related to un-vested options over the service
period.
-
980,000
shares of unrestricted common stock to its employees and directors for services
rendered. See Note 7 for details.
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:
Expected
dividend yield
|
|
|
0.00
|
%
|
Expected
stock price volatility
|
|
|
80
|
%
|
Risk-free
interest rate
|
|
|
4.51
|
%
|
Expected
life of options
|
|
|
7
years
|
|
A
summary
of the options as of July 31,
2006
and 2007 and
the
changes during the year ended July 31,
2006
and 2007 is
presented below:
|
|
|
|
|
|
Weighted-
average
|
|
|
|
|
|
Weighted-
average
|
|
remaining
contractual
|
|
2005
Stock Compensation Plan
|
|
Options
|
|
exercise
price
|
|
term
(years)
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2005
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Granted
|
|
|
4,354,000
|
|
|
0.16
|
|
|
9
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
at July 31, 2006
|
|
|
4,354,000
|
|
$
|
0.16
|
|
|
9
|
|
Granted
|
|
|
1,345,000
|
|
|
0.21
|
|
|
9
|
|
Exercised
|
|
|
(100,000
|
)
|
|
0.16
|
|
|
9
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
at July 31, 2007
|
|
|
5,599,000
|
|
$
|
0.17
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at July 31, 2007
|
|
|
2,837,000
|
|
$
|
0.17
|
|
|
9
|
|
In
June
2004, ATSI adopted the 2004 stock compensation plan. This plan authorizes the
grant of up to 7.5 million of warrants, stock options, restricted common stock,
non-restricted common stock and other awards, or a combination, to employees,
directors, consultants and certain other persons. The plan is intended to permit
ATSI to retain and attract qualified individuals who will contribute to ATSI’s
overall success of ATSI. The exercise price of all of the warrants, stock
options, restricted common stock, non-restricted common stock and other awards
will vary based on the market price of the shares of common stock as of the
date
of grant. The warrants, stock options, restricted common stock, non-restricted
common stock and other awards vest pursuant based in the individual security
granted.
The
issuances under this plan during fiscal 2006 and 2007 are:
|
-
|
On
January 1, 2006, ATSI entered into consulting agreements for 90 days
with
NetComm Services Corp. The consulting agreement automatically renews
every
90 days unless either party notifies the other of the intent to cancel
within 15 days prior to the renewal period. As of July 31, 2007,
the
consulting agreement has automatically renewed and is still effective.
The
consulting agreement with NetComm Services Corp. provided for the
issuance
of compensation warrants to purchase a total of 150,000 shares of
ATSI’s
common stock at price of $0.23 per share. These warrants expire on
January
1, 2009. At issuance, ATSI recognized $29,477 of non-cash compensation
expense associated with the issuance of these warrants.
During fiscal 2007 150,000 warrants were exercised at a price of
$0.23 per
share.
|
A
summary
of the warrants as of July 31,
2006
and 2007 and
the
changes during the year ended July 31,
2006
and 2007 is
presented below:
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
Weighted-average
|
|
remaining
contractual
|
|
2004
Stock Compensation Plan (Warrants)
|
|
Warrants
|
|
exercise
price
|
|
term
(years)
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2005
|
|
|
303,140
|
|
$
|
0.25
|
|
|
3
|
|
Granted
|
|
|
350,000
|
|
|
0.23
|
|
|
3
|
|
Exercised
|
|
|
(366,666
|
)
|
|
0.24
|
|
|
3
|
|
Forfeited
|
|
|
(136,474
|
)
|
|
0.25
|
|
|
3
|
|
Outstanding
at July 31, 2006
|
|
|
150,000
|
|
$
|
0.23
|
|
|
3
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(150,000
|
)
|
|
0.23
|
|
|
3
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
at July 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at July 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
NOTE
9 - PREFERRED STOCK DIVIDEND
During
fiscal 2007, ATSI reversed previously recorded accrued dividends payable on
outstanding shares of Series A Convertible Preferred Stock and Series H
Convertible Preferred Stock of $828,000. The
adjustment to the accrued dividends occurred as a result of the conversion
of
2,750 shares of Series A Convertible Preferred Stock and 11,802,420 shares
of
Series H Convertible Preferred Stock into 16,261,847 shares of ATSI's common
stock. Upon
conversion of these preferred shares, ATSI reversed the balance previously
accrued for dividends with a corresponding amount recorded to common stock
at
par value and additional paid in capital. The reversal is reflected as a
reconciling item on the statements of operations to derive net income to common
stockholders.
NOTE
10 - INCOME TAXES
At
July
31, 2007, ATSI had a consolidated net operating loss carry-forward (“NOL”) of
approximately $8,416,000 expiring ranging from 2009 through 2026. ATSI had
no
deferred tax asset resulting from its NOL. The loss carry forwards are subject
to certain limitations under the Internal Revenue Code including Section 382
of
the Tax Reform Act of 1986.
ATSI
conducts a periodic examination of its valuation allowance. Factors considered
in the evaluation include recent and expected future earnings and ATSI’s
liquidity and equity positions. As of July 31, 2007, ATSI has determined that
a
valuation allowance is necessary for the entire amount of deferred tax
assets.
Deferred
tax assets are comprised of the following as of July 31, 2007 and
2006:
|
|
2007
|
|
2006
|
|
Net
operating loss carry-forward
|
|
$
|
2,861,000
|
|
$
|
3,964,000
|
|
Valuation
allowance
|
|
|
(2,861,000
|
)
|
|
(3,964,000
|
)
|
Total
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
In
June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109” (FIN 48). This Interpretation provides guidance on
recognition, classification and disclosure concerning uncertain tax liabilities.
The evaluation of a tax position requires recognition of a tax benefit if
it is
more likely than not it will be sustained upon examination. We adopted this
Interpretation effective January 1, 2007. The adoption did not have a material
impact on our consolidated financial statements.
NOTE
11 - EARNINGS (LOSS) PER SHARE
In
accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share
have been computed based upon the weighted average common shares outstanding.
Diluted earnings per share gives effect to outstanding convertible preferred
shares, warrants and stock options, unless their effect is anti-dilutive.
Earnings (loss) per common share has been computed as follows:
|
|
Year
ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands, except share information)
|
|
Net
income (loss) to be used to compute income
|
|
|
|
|
|
(loss)
per share:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(257
|
)
|
$
|
947
|
|
Less
preferred dividends
|
|
|
772
|
|
|
(959
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common
|
|
|
|
|
|
|
|
Shareholders
- Basic
|
|
|
515
|
|
|
(12
|
)
|
Add
back preferred dividends
|
|
|
(772
|
)
|
|
959
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common
|
|
|
|
|
|
|
|
shareholders
-Diluted
|
|
$
|
(257
|
)
|
$
|
947
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
27,908,044
|
|
|
13,516,342
|
|
Effect
of conversion of preferred shares
|
|
|
-
|
|
|
15,591,698
|
|
Effect
of warrants and options
|
|
|
141,695
|
|
|
2,179,326
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
assuming
dilution
|
|
|
28,049,739
|
|
|
31,287,366
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share
|
|
$
|
0.02
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share
|
|
$
|
(0.01
|
)
|
$
|
0.03
|
|
NOTE
12 - RELATED PARTY TRANSACTIONS
In
January 2006, ATSI, through its wholly owned subsidiary, Telefamilia
Communications, Inc., entered into a joint management and marketing agreement
with Fiesta Communications, Inc. Under the joint management and marketing
agreement ATSI provides accounting and administrative support for a monthly
fee
of $2,500. As of July 31, 2007, Fiesta owed ATSI $30,000 in management fees.
ATSI’s CEO and President, Arthur L Smith, is a 20% shareholder of Fiesta.
ATSI
has
evaluated its relationship with Fiesta and determined that Fiesta is not a
variable interest entity under FIN 46(R) and also concluded that it is not
the
primary beneficiary as defined by FIN 46(R) and, as a result, ATSI is not
required to consolidate Fiesta at its formation.
NOTE
13 - SUBSEQUENT EVENTS
On
August
15, 2007 ATSI granted 1,835,000 options to purchase common stock to its
employees and members of the Board of Directors with an exercise price of $0.21
per share, the closing price of ATSI’s common stock on the grant date. One third
of the options vested immediately at the issuance date and the remaining
two-thirds will vest equally over a period of two years. Under the fair value
option method, ATSI recognized $89,000 of compensation expense associated with
the vested options at the date of grant. ATSI will recognize the remaining
$177,000 of non-cash compensation expense related to un-vested options over
the
service period. Additionally, on August 15, 2007 ATSI
issued 1,299,398 shares of unrestricted common stock to its employees and
directors for services rendered with a market value of $272,874.
In
August
2007, ATSI reached a confidential settlement agreement with the holders of
the
1,170 shares of Series E Preferred Stock. Under the confidential settlement
agreement ATSI paid $175,000 to the Series E Preferred Stock shareholders and
the 1,170
shares of Series E Preferred Stock have
been
cancelled.
ITEM
8.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
NONE.
ITEM
8A. CONTROLS
AND PROCEDURES.
Evaluation
of Disclosure 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(b)
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 year covered by this report.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company's internal control over financial reporting
during the fourth fiscal quarter covered by this report that have had a material
affect or are reasonably likely to have a material affect on internal control
over financial reporting.
PART
III
ITEM
9. |
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION
16(A) OF THE EXCHANGE
ACT.
|
Business
Experience
The
following table contains the name, age of our directors and executive
officers.
Name
|
Age
|
Position
Held
|
Arthur
L. Smith
|
42
|
President,
Chief Executive Officer and Director
|
Ruben
Caraveo
|
39
|
Sr.
Vice President, Operations and Technology
|
Antonio
Estrada
|
33
|
Corporate
Controller
|
John
R. Fleming
|
53
|
Director,
Interim Executive Chairman of the Board
|
Murray
R. Nye
|
53
|
Director
|
Arthur
L. Smith
has
served as our Chief Executive Officer and Director since May 2003. Mr. Smith
also served as the President of ATSI de Mexico S.A de C.V. from August 2002
to
April 2003, as our Chief Executive Officer and a Director from June 1996 to
July
2002 and as our President since our formation in June 1996 to July 1998. Mr.
Smith also served as President, Chief Operating Officer and a director of
ATSI-Canada since its formation in May 1994. From December 1993 until May 1994,
Mr. Smith served in the same positions with Latcomm International Inc., which
amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in May 1994.
From
June 1989 to December 1993, Mr. Smith was employed as director of international
sales by GeoComm Partners, a satellite-based telecommunications company located
in San Antonio, providing telecommunications services to Latin America. Mr.
Smith has over 18 years’ experience in the telecommunications industry.
Ruben
R. Caraveo
has
served as our Sr. Vice President of Operations and Technology since August
2006,
and is also the Chief Operations Officer for our wholly-owned subsidiary
Digerati Networks, Inc. Mr. Caraveo also served as Vice President of Sales
and
Operations from May 2003 to July 2006. Mr. Caraveo is responsible
for the daily operations of Digerati Networks, Inc., Network
Engineering, MIS, and the delivery of VoIP Carrier Services. Prior to joining
ATSI, Mr. Caraveo served as Vice President of Operations and Engineering at
Vycera Communications where he was responsible for overseeing all daily
operations, including Network Operations, Engineering, Marketing, and the
Network Trouble Reporting and Resolution departments. His prior experience
also
includes positions with Worldtel Interactive, Frontier, and WorldCom. Mr.
Caraveo has more than 18 years' telecommunications industry experience,
specializing in the areas of Carrier Sales, Network Operations, Engineering,
Data and Systems Analysis, Product Marketing, and Systems Development. Mr.
Caraveo attended California State University, Northridge, School of
Engineering.
Antonio
Estrada has served
as
our Corporate Controller since May 2003. From January 2002 through January
2003,
Mr. Estrada served as our Director of International Accounting and Treasurer.
From January 2001 to January 2002, Mr. Estrada served in various roles within
ATSI, including International Accounting Manager and general Accountant. Prior
to joining ATSI in 1999 he served as a Senior Accountant for the Epilepsy
Association of San Antonio and South Texas. Mr. Estrada has more than 10 years’
experience in the telecommunications industry, financial reporting, treasury
management, internal audit and accounting. Mr. Estrada graduated from the
University of Texas at San Antonio, with a Bachelors of Business Administration,
with a concentration in Accounting.
John
R. Fleming
has
served as our Non-executive Chairman of the Board since August 2002 and as
one of our Directors since January 2001. Mr. Fleming is the principal and
founder of Vision Corporation, an early-stage investment company that focuses
on
communications technologies, service and hardware. Mr. Fleming also
owns Secure Media Solutions, Inc. , which specializes
in digital medium transfer technologies for both the film and
television industries. Prior to forming Vision Corporation, Mr.
Fleming served as President, International of IXC Communications, Inc. from
April 1998 to December 1999. Immediately prior to that he served as IXC’s
President of Emerging Markets from December 1997, as Executive Vice President
of
IXC from March 1996 through November 1997 and as Senior Vice President of IXC
from October 1994 through March 1996. He served as Vice President of Sales
and
Marketing of IXC from its formation in July 1992 until October 1994. Prior
to
that, Mr. Fleming served as Director of Business Development and Director of
Carrier Sales of CTI from 1986 to March 1990 and as Vice President of Marketing
and Sales of CTI from March 1990 to July 1992. Mr. Fleming was a Branch Manager
for Satellite Business Systems from 1983 to 1986.
Murray
R. Nye
has
served as one of our Directors since its formation in June 1996. Mr. Nye also
served as of the Chief Executive Officer and a director of ATSI-Canada from
its
formation in May 1994. From December 1993 until May 1994, Mr. Nye served in
the
same positions with Latcomm International Inc., which company amalgamated with
Willingdon Resources Ltd. to form ATSI-Canada in May 1994. From 1992 to 1995,
Mr. Nye served as President of Kirriemuir Oil & Gas Ltd. From 1989 until
1992, Mr. Nye was self-employed as a consultant and Mr. Nye is again currently
self-employed as a consultant. Mr. Nye serves as a director of D.M.I.
Technologies, Inc., an Alberta Stock Exchange-traded company.
Audit
Committee and Audit Committee Financial Expert
The
Company does not presently have an audit or compensation committee or other
board committee performing equivalent functions. The Company’s Board of
Directors performs all functions of the audit committee and compensation
committee. The Company does not have an audit committee financial expert because
none of its current directors have the necessary training or experience to
qualify as a financial expert.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors and executive officers and persons who own more than 10% of a
registered class of the Company’s equity securities to file various reports with
the Securities and Exchange Commission concerning their holdings of, and
transactions in, securities of the Company. Copies of these filings must be
furnished to the Company. Based on a review of the copies of such forms
furnished to the Company and other information, the Company believes that,
during the fiscal year ended July 31, 2007, the following individuals failed
to
report transactions in the Company’s equity securities or reported transactions
late:
Name
and Position
|
|
Number
of Transactions Not Reported
|
|
Number
of Reports Filed Late
|
|
Number
of Transactions Reported Late
|
|
|
|
|
|
|
|
|
|
Arthur
L. Smith, President and Director
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Ruben
R. Caraveo, Sr. Vice President
|
|
|
15
|
|
|
15
|
|
|
15
|
|
Antonio
Estrada, Controller
|
|
|
0
|
|
|
0
|
|
|
0
|
|
John
R. Fleming
|
|
|
5
|
|
|
0
|
|
|
0
|
|
Murray
R. Nye
|
|
|
5
|
|
|
0
|
|
|
0
|
|
Code
of Ethics
ATSI
Communications, Inc. adopted an
Executive Code of Ethics that applies to the Chief Executive Officer, Chief
Financial Officer, Controller and other members of our management team. The
Executive Code of Ethics may be viewed on our Website, www.atsi.net.
Upon
request, a copy of the Executive Code of Ethics will be provided without charge
upon written request to ATSI Communications, Inc., 3201 Cherry Ridge, Building
C, Suite 300, San Antonio, Texas 78230.
ITEM
10. EXECUTIVE
COMPENSATION.
COMPENSATION
DISCUSSION AND ANALYSIS
Compensation
Objectives
Our
compensation programs are designed to meet the following objectives:
|
-
|
Offer
compensation opportunities that attract highly qualified executives,
reward outstanding initiative and achievement, and retain the leadership
and skills necessary to build long-term shareholder value;
|
|
-
|
Emphasize
pay-for-performance by maintaining a portion of executives’ total
compensation at risk, tied to both our annual and long-term financial
performance and the creation of shareholder value; and
|
|
-
|
Further
our short and long-term strategic goals and values by aligning executive
officer compensation with business objectives and individual performance.
|
Our
Board
of Directors believes that an executive’s compensation should be tied not just
to how the individual executive performs, but also to how well our management
team performs against both financial and non-financial goals.
Compensation
Elements
Our
executive compensation program is intended to be simple and clear, and consists
of the following elements (depending on individual performance):
|
-
|
Annual
performance-based cash bonus;
|
|
-
|
Long-term
incentives in the form of stock options;
and
|
|
-
|
Benefits
that are offered to executives on the same basis as our non-executive
employees
|
Role
of Management in Determining Compensation Decisions
At
the
request of our Board of Directors, our management makes recommendations to
our
Board of Directors relating to executive compensation program design, specific
compensation amounts, bonus targets, incentive plan structure and other
executive compensation related matters, including with respect to such matters
pertaining to our Chief Executive Officer. Our Board of Directors maintains
decision-making authority with respect to these executive compensation matters.
Our
Board
of Directors reviews the recommendations of our management with respect to
total
executive compensation and each element of compensation when making pay
decisions. In allocating compensation among compensation elements, we emphasize
incentive, not fixed compensation to ensure that executives only receive
superior pay for superior results. We equally value short- and long-term
compensation because both short- and long-term results are critical to our
success.
Compensation
Elements
Our
executive compensation program has three primary integrated components: base
salary, annual incentive awards, and long term-incentive awards in the form
of
stock options. In addition, our compensation program is comprised of various
benefits provided to all employees, including life insurance, health insurance
and other customary benefits. The objectives and details of why each element
of
compensation is paid are described below.
Base
Salary
Our
objective for paying base salaries to executives is to reward them for
performing the core responsibilities of their positions and to provide a level
of security with respect to a portion of their compensation. Our Compensation
Committee considers a number of factors when setting base salaries for
executives, including the following:
|
-
|
Existing
salary levels;
|
|
-
|
Competitive
pay practices;
|
|
-
|
Individual
and corporate performance; and
|
|
-
|
Internal
equity among our executives, taking into consideration their relative
contributions to our success.
|
Annual
Incentive Awards
Our
objective for offering annual cash bonus awards to our named executive officers
is to motivate them to achieve our financial goals, while taking into account
their individual goals and responsibilities. Our Board of Directors implemented
our 2007 executive officer bonus plan, effective as of the first quarter of
fiscal 2007 pursuant to which our named executive officers became eligible
to
receive cash bonus awards calculated and paid on a quarterly basis. The amounts
payable under our 2007 executive officer bonus plan were to be calculated based
on our revenue, margin, cash balance and net income for 2007 against the 2007
financial plan approved by our Board of Directors.
Under
our
2007 executive officer bonus plan, we assigned a specific bonus target to each
executive for performance in 2007. Our Board of Directors designed these bonus
targets were designed to allow for additional compensation in the event we
meet
our targets set fort under the financial plan approved by our Board of
Directors. Cash bonus targets were determined based on individual responsibility
levels and performance expectations and would be payable in a proportionate
amount representing the percentage of our targeted corporate net income goal
pursuant to our 2007 financial plan. After discussion and deliberation, our
Board of Directors ultimately approved
our management’s recommendations as detailed below:
|
|
|
|
2007 Target
|
|
Name
|
|
Title
|
|
Bonus
|
|
Arthur
L. Smith
|
|
|
President,
Chief Executive Officer and Director
|
|
$
|
75,000.00
|
|
Ruben
Caraveo
|
|
|
Sr.
Vice President, Operations and Technology
|
|
$
|
71,500.00
|
|
Antonio
Estrada
|
|
|
Corporate
Controller
|
|
$
|
45,000.00
|
|
On
June
19, 2006, our Board of Directors approved the 2007 annual bonus payouts and
2007
base salaries and bonus targets.
Payouts
under our 2007 executive officer bonus plan are dependent on our achievement
towards our revenue; margin, cash balance and net income goal such that 100%
of
the bonus target amounts would be paid upon achievement of 100% of the net
income goal. Above and below target performance methodologies were also
established.
We
consider the specific net income goals in our 2007 financial plan to be our
confidential information, the disclosure of which would cause us to experience
financial harm. We believe that tying annual bonus payments for each of our
named executive officers to the achievement of challenging revenue, margin,
cash
balance and net income goals best aligns the interest of our executives with
the
interests of our shareholders and promotes a unity of purpose among our key
business leaders. Regardless of our actual financial performance under our
2007
financial plan, our Board of Directors retained the discretion to adjust bonuses
payable under our 2007 executive officer bonus plan up or down as it deemed
appropriate.
The
following table sets forth the compensation paid to the Chief Executive Officer
and all of the other Named Executive Officers as of July 31, 2007.
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All
Other Compensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
Arthur
L. Smith
CEO
& President
|
2007
|
$150,000
|
$42,187(3)
|
$47,250(1)
|
$63,000(1)
|
$22,154(2)
|
$324,591
|
|
|
|
|
|
|
|
|
Ruben
Caraveo
Senior
Vice President
|
2007
|
$130,000
|
$48,750(3)
|
$36,750(1)
|
$52,500(1)
|
$19,904(2)
|
$287,904
|
|
|
|
|
|
|
|
|
Antonio
Estrada
Corporate
Controller
|
2007
|
$90,000
|
$28,686(3)
|
$36,750(1)
|
$52,500(1)
|
$15,216(2)
|
$223,152
|
|
(1)
|
A
description of the assumptions made in valuation of options granted
can be
found in Note 9 to the Financial Statements, which is deemed to be
a part
of this Item.
|
|
(2)
|
All
other compensation consists of contributions by the Company into
the
Non-Standardized Profit Sharing
Plan.
|
|
(3)
|
This
represents bonus paid for the first three quarters of fiscal 2007,
the
2007 4th
quarter bonuses will be paid during the 1st
quarter of fiscal 2008.
|
The
following table sets forth information relating to unexercised options held
by,
and unvested stock awards to, each of the Named Executive Officers as of July
31, 2007.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Option
Awards
|
Stock
Awards
|
|
Number
of Securities Underlying Unexercised Options
|
Number
of Securities Underlying Unexercised Options
|
|
Equity
Incentive Plan Awards:
|
Option
Exercise Price
|
|
Number
of Shares or Units of Stock That Have Not Vested
|
Market
Value of Shares or Units of Stock That Have Not
Vested
|
|
|
|
|
Number
of Securities Underlying Unexercised Unearned Options
(#)
|
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
Arthur
L. Smith
|
175,000
|
350,000
|
(1)
|
-
|
$
0.16
|
9/29/2015
|
-
|
-
|
|
370,666
|
49,334
|
(2)
|
-
|
$
0.16
|
10/3/20015
|
-
|
-
|
|
100,000
|
200,000
|
(3)
|
-
|
$
0.21
|
9/25/2016
|
-
|
-
|
Ruben
Caraveo
|
158,333
|
316,667
|
(1)
|
-
|
$
0.16
|
9/29/2015
|
-
|
-
|
|
330,332
|
44,668
|
(2)
|
-
|
$
0.16
|
10/3/20015
|
-
|
-
|
|
83,333
|
166,667
|
(3)
|
-
|
$
0.21
|
9/25/2016
|
-
|
-
|
Antonio
Estrada
|
158,333
|
316,667
|
(1)
|
-
|
$
0.16
|
9/29/2015
|
-
|
-
|
|
302,332
|
44,668
|
(2)
|
-
|
$
0.16
|
10/3/20015
|
-
|
-
|
|
83,333
|
166,667
|
(3)
|
-
|
$
0.21
|
9/25/2016
|
-
|
-
|
|
(1)
|
50%
of the options vest on September 29, 2007 and 50% on September 29,
2008
|
|
(2)
|
Options
vest on October 3, 2007
|
|
(3)
|
50%
of the options vest on September 25, 2007 and 50% on September 25,
2008
|
Option
Exercises
No
options to purchase our common stock were exercised by our executive officers
named in the Summary Compensation Table above during the fiscal year ended
July
31, 2007
Non-Standardized
Profit Sharing Plan
We
currently provide a Non-Standardized Profit Sharing Plan; the Board of Directors
approved the plan on September 15, 2006. Under the plan our employees qualified
to participate in the plan after one year of employment. Contribution under
the
plan by the Company is based on 25% of the annual base salary of each eligible
employee. Contributions under the plan are fully vested upon funding.
Nonqualified
Deferred Compensation
We
do not
have any non-qualified defined contribution plans or other deferred compensation
plans.
Compensation
of Directors
The
following table sets forth information relating to compensation of directors
who
are not also executive officers during the year ended July 31,
2007.
Name
|
Fees
Earned or Paid in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Nonqualified
Deferred Compensation Earnings
($)
|
All
Other Compensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
John
Fleming
|
|
$31,500(1)
|
$42,000(1)
|
|
|
$73,500
|
Murray
Nye
|
|
$31,500(2)
|
$42,000(2)
|
|
|
$73,500
|
|
(1)
|
As
of July 31, 2007, Mr. Fleming had options to purchase an aggregate
of
825,000 shares of common stock and 150,000 shares of common stock
issued
pursuant to Stock awards. A description of the assumptions made in
valuation of options granted can be found in Note 9 to the Financial
Statements, which is deemed to be a part of this
Item.
|
|
(2)
|
As
of July 31, 2007, Mr. Nye had options to purchase an aggregate of
825,000
shares of common stock and 150,000 shares of common stock issued
pursuant
to Stock awards. A description of the assumptions made in valuation
of
options granted can be found in Note 9 to the Financial Statements,
which
is deemed to be a part of this
Item.
|
Each
Director that is not an officer of the Company receives $2,000 for each meeting
of the Board attended in person and $500 for each meeting attended by telephone.
In addition to the foregoing, each Director is reimbursed the reasonable
out-of-pocket expenses in connection with their travel to an attendance at
meetings of the Board of Directors.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information
regarding securities authorized to be issued under equity compensation plans
is
set forth under Item 4 of this Annual Report on Form 10-KSB.
The
following table lists the beneficial ownership of shares of our Common Stock
(i)
each person know to the Company to own more than 5% of the outstanding voting
securities issued by the Company, (ii) each director and nominee, (iii) the
Named Executive Officers, and (iv) all directors and officers as a group.
Information with respect to officers, directors and their families as of July
31, 2007 and is based on the books and records of the Company and information
obtained from each individual. Information with respect to other stockholders
is
based upon the Schedule 13D or Schedule 13G filed by such stockholders with
the
Securities and Exchange Commission. Unless otherwise stated, the business
address of each individual or group is the same as the address of the Company's
principal executive office and all securities are beneficially owned solely
by
the person indicated.
|
|
%
OF
|
TOTAL
VOTING
|
NAME
OF INDIVIDUAL OR GROUP
|
COMMON
STOCK
|
CLASS
(1)
|
INTEREST
|
|
|
|
|
Arthur
L. Smith
|
1,790,819
(2)
|
4.3%
|
1,790,819
(2)
|
President,
Chief Executive Officer
|
|
|
|
Director
|
|
|
|
|
|
|
|
Ruben
R. Caraveo
|
1,118,446
(3)
|
2.7%
|
1,118,446
(3)
|
Vice
President, Sales and Operations
|
|
|
|
|
|
|
|
Antonio
Estrada
|
1,133,125
(4)
|
2.7%
|
1,133,125
(4)
|
Corporate
Controller
|
|
|
|
|
|
|
|
John
R. Fleming
|
1,083,424
(5)
|
2.6%
|
1,083,424
(5)
|
Director
|
|
|
|
|
|
|
|
Murray
R. Nye
|
1,083,424
(6)
|
2.6%
|
1,083,424
(6)
|
Director
|
|
|
|
|
|
|
|
ALL
OFFICERS AND
|
|
|
|
DIRECTORS
AS A GROUP
|
6,209,238
(7)
|
15.0%
|
6,209,238
(7)
|
|
(1) |
Based
upon 41,357,180 shares of common stock outstanding as of July 31,
2007.
Any shares represented by options exercisable within 60 days after
July
31, 2007 are treated as being outstanding for the purpose of computing
the
percentage of the class for such person but not
otherwise.
|
|
(2)
|
Includes
645,667 shares subject to options exercisable at July 31,
2007.
|
|
(3) |
Includes
572,000 shares subject to options exercisable at July 31,
2007.
|
|
(4) |
Includes
572,000 shares subject to options exercisable at July 31,
2007.
|
|
(5) |
Includes
425,000 shares subject to options exercisable at July 31,
2007.
|
|
(6) |
Includes
425,000 shares subject to options exercisable at July 31,
2007.
|
|
(7) |
Includes
2,611,667 shares subject to options exercisable at July 31,
2007.
|
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
In
January 2006, ATSI, through its wholly owned subsidiary, Telefamilia
Communications, Inc., entered into a joint management and marketing agreement
with Fiesta Communications, Inc. Under the joint management and marketing
agreement ATSI provides accounting and administrative support for a monthly
fee
of $2,500. As of July 31, 2007, Fiesta owed ATSI $30,000 in management fees.
ATSI’s CEO and President, Arthur L Smith, is a 20% shareholder of Fiesta.
ATSI
has
evaluated its relationship with Fiesta and determined that Fiesta is not a
variable interest entity under FIN 46(R) and also concluded that it is not
the
primary beneficiary as defined by FIN 46(R) and, as a result, ATSI is not
required to consolidate Fiesta at its formation.
ITEM
13. EXHIBITS
AND REPORTS ON FORM 8-K
The
following documents are exhibits to this report.
2.1
|
Plan
and Agreement of Merger of ATSI Communications, Inc. with and into
ATSI
Merger Corporation, dated as of March 24, 2004. (Exhibit
2.1 to Form 8-K of ATSI filed on May 24,
2004)
|
3.1
|
Articles
of Incorporation of ATSI Merger Corporation. (Exhibit
3.1 to Form 8-K of ATSI filed on May 24,
2004)
|
3.2
|
Bylaws
of ATSI Merger Corporation. (Exhibit
3.2 to Form 8-K of ATSI filed on May 24,
2004)
|
3.3
|
Articles
of Merger of ATSI Communications, Inc. with and into ATSI Merger
Corporation. (Exhibit
3.3 to Form 8-K of ATSI filed on May 24,
2004)
|
4.1
|
Securities
Purchase Agreement between The Shaar Fund Ltd. and ATSI dated July
2, 1999
(Exhibit
10.33 to Registration statement on Form S-3 (No. 333-84115) filed
August
18, 1999)
|
4.2
|
Common
Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
July 2,
1999 (Exhibit
10.35 to Registration statement on Form S-3 (No. 333-84115) filed
August
18, 1999)
|
4.3
|
Registration
Rights Agreement between The Shaar Fund Ltd. and ATSI dated July
2, 1999
(Exhibit
10.36 to Registration statement on Form S-3 (No. 333-84115) filed
August
18, 1999)
|
4.4
|
Securities
Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September
24, 1999 (Exhibit
10.39 to Registration statement on Form S-3 (No. 333-84115) filed
October
26, 1999)
|
4.5
|
Common
Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
September 24, 1999 (Exhibit
10.41 to Registration statement on Form S-3 (No. 333-84115) filed
October
26, 1999)
|
4.6
|
Registration
Rights Agreement between The Shaar Fund Ltd. and ATSI dated September
24,
1999 (Exhibit
10.42 to Registration statement on Form S-3 (No. 333-84115) filed
October
26, 1999)
|
4.7
|
Formof
Modification of Convertible Note (Exhibit
4.6 to Registration statement on Form S-3 (No. 333-35846) filed
April 28,
2000)
|
4.8
|
Securities
Purchase Agreement between The Shaar Fund Ltd. and ATSI dated February
22,
2000 (Exhibit
4.5 to Registration statement on Form S-3 (No. 333-89683) filed April
13,
2000)
|
4.9
|
Common
Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
February 22, 2000 (Exhibit
4.7 to Registration statement on Form S-3 (No. 333-89683) filed April
13,
2000)
|
4.10
|
Registration
Rights Agreement between The Shaar Fund Ltd. and ATSI dated February
22,
2000
(Exhibit 4.9 to Registration statement on Form S-3 (No. 333-89683)
filed
April 13, 2000)
|
4.11
|
Convertible
Debenture Agreement (Exhibit
4.37 to Annual Report on Form 10-K for the year ended July 31, 2003
filed
November 12, 2003)
|
4.12
|
Secured
Promissory Note and Security Agreement dated November 4, 2005 between
ATSI
Communications, Inc. and CSI Business Finance, Inc. (Exhibit
4.2 to form 10-QSB for the period Ended October 31, 2005 filed December
15, 2005)
|
4.18
|
Convertible
Debenture Agreement (Exhibit
4.18 to Annual Report on Form 10-KSB for the year ended July 31,
2006
filed October 30, 2006)*
|
4.19
|
Promissory
Note dated May 5, 2006 between Telefamilia Communications, Inc. and
Fiesta
Communications, Inc. (Exhibit
4.19 to Annual Report on Form 10-KSB for the year ended July 31,
2006
filed October 30, 2006)*
|
4.20 |
Note
Receivable dated July 13, 2007 between ATSI Communications, Inc.
and
NetSapiens,
Inc.*
|
10.1
|
Stock
Purchase Agreement with Telemarketing (Sale of ATSICOM) (Exhibit
10.1 to Form 8-K filed June 16, 2003)
|
10.2
|
Interconnection
Agreement TELMEX and ATSICOM (English summary) (Exhibit
10.26 to Annual Report on Form 10-K for year ended July 31, 2003
filed
November 12, 2003)
|
10.3
|
Interconnection
Agreement TELMEX and ATSICOM (English Translation) (Exhibit
10.27 to Amended Annual Report on Form 10-K/A for the year ended
July 31,
2003 filed March 2, 2004)
|
10.4
|
Stock
Purchase Agreement dated October 15, 2005 between ATSI Communications,
Inc. and Alejandro Sanchez Guzman (Sale of ATSIMex Personal S.A de
C.V.)
(Exhibit 10.2 to quarterly report Form 10QSB for the quarter ended
October
31, 2005 filed December 15,
2005)
|
10.5
|
Factoring
Agreement dated February 20, 2006 between ATSI Communications, Inc.
and
CSI Business Finance, Inc. (Exhibit
10.2 to quarterly report Form 10QSB for the quarter ended January
31, 2006
filed March 23, 2006)
|
10.6
|
Agreement
of Compromise, Settlement and Release dated May 27, 2006 between
ATSI
Communications, Inc. and Richard C. Benkendorf. (Exhibit
10.2 to quarterly report Form 10QSB for the quarter ended April 30,
2006
filed June 13, 2006)
|
10.7
|
Confidential
Settlement Agreement dated August 27, 2007 between ATSI Communications,
Inc. and RGC International Investors,
LDC.*
|
21
|
Subsidiaries
of ATSI (Exhibit
21 to Annual Report on Form 10-K for year ended July 31, 2004 filed
November 9, 2004)
|
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.
*
|
99.1
|
FCC
Radio Station Authorization - C Band (Exhibit
10.10 to Registration statement on Form S-4 (No. 333-05557) filed
June 7,
1996)
|
99.2
|
FCC
Radio Station Authorization - Ku Band (Exhibit
10.11 to Registration statement on Form 10 (No. 333-05557) filed
June 7,
1996)
|
99.3
|
Section
214 Certification from FCC (Exhibit
10.12 to Registration statement on Form 10 (No. 333-05557) filed
June 7,
1996)
|
99.4
|
Comercializadora
License (Payphone License) issued to ATSI-Mexico (Exhibit
10.24 to Registration statement on Form 10 (No. 000-23007) filed
August
22, 1997)
|
99.5
|
Network
Resale License issued to ATSI-Mexico (Exhibit
10.25 to Registration statement on Form 10 (No. 000-23007) filed
August
22, 1997)
|
99.6
|
Shared
Teleport License issued to Sinfra (Exhibit
99.7 to Amended Annual Report on Form 10-K for year ended July 31,
1999
filed April 14, 2000)
|
99.7
|
Packet
Switching Network License issued to SINFRA (Exhibit
10.26 to Registration statement on Form 10 (No. 000-23007) filed
August
22, 1997)
|
99.8
|
Value-Added
Service License issued to SINFRA
(Exhibit 99.9 to Amended Annual Report on Form 10-K for year ended
July
31, 1999 filed April 13, 2000)
|
99.9
|
Public
Utility Commission of Texas ("PUC") approval of transfer of the Service
Provider Certificate of Authority ("SPCOA") from Hinotel, Inc. to
ATSI's
subsidiary, Telefamilia Communications, Inc. Dated October 25,
2004.
(Exhibit 99.1 on Form 10-QSB for the quarter ended October 31, 2004
filed
December 15, 2004)
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
The
Company paid the following fees to its principal independent accountants for
services during the fiscal years ended July 31, 2007 and July 31,
2006.
|
|
Year
Ended July 31,
|
|
Description
of Fees
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$
|
31,500
|
|
$
|
32,000
|
|
Other
Fees
|
|
|
26,140
|
|
|
24,500
|
|
Tax
Fees
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
The
Audit
Committee has instructed Malone and Bailey, PC that any fees for non-audit
services must be approved before being incurred.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ATSI
COMMUNICATIONS, INC.
|
|
|
|
Date: October
17, 2007
|
By:
|
/s/
Arthur L. Smith
|
|
|
Arthur
L. Smith
President
and
Chief
Executive Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
Signature
|
Title
|
Date
|
|
|
|
/s/
Arthur L. Smith
|
Principal
Executive Officer and Director
|
October
17, 2007
|
Arthur
L. Smith
|
|
|
|
|
|
/s/
Antonio Estrada
|
Principal
Accounting Officer
|
October
17, 2007
|
Antonio
Estrada
|
Principal
Finance Officer
|
|
|
|
|
/s/
John R. Fleming
|
Director
|
October
17, 2007
|
John
R. Fleming
|
|
|
|
|
|
/s/
Murray R. Nye
|
Director
|
October
17, 2007
|
Murray
R. Nye
|
|
|