UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
[Mark
One]
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934 For
the quarterly period ended October 31,
2007
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 For
the transition period from ____________ to
___________
|
Commission
File Number 001-15687
ATSI
COMMUNICATIONS, INC.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
Nevada
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
74-2849995
(IRS
Employer
Identification
No.)
|
3201
Cherry Ridge
Building
C, Suite 300
San
Antonio, Texas 78230
(Address
of Principal Executive Offices)
(210)
614-7240
(Issuer’s
Telephone Number, Including Area Code)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No x
The
aggregate market value of the common equity held by non-affiliates of the issuer
was $8,608,268 based on the closing price of $0.22 per share on December 12,
2007 as reported on the over-the-counter bulletin board.
There
were 39,128,493 shares of issuer’s Common Stock outstanding as of December 12,
2007.
Transitional
Small Business Disclosure Format (check one): o Yes x
No
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
QUARTERLY
REPORT ON FORM 10-QSB
FOR
THE QUARTER ENDED OCTOBER 31, 2007
INDEX
|
Page
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements (unaudited)
|
|
|
|
|
|
Consolidated
Balance Sheets as of October 31, 2007 and July 31, 2007
|
3
|
|
Consolidated
Statements of Operations for the Three Months Ended October 31,
2007 and
2006
|
4
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the Three
Months
|
|
|
Ended
October 31, 2007 and 2006
|
5
|
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the Three
Months
|
|
|
Ended
October 31, 2007 and 2006
|
6
|
|
Consolidated
Statements of Cash Flows for the Three Months Ended October 31,
2007 and
2006
|
7
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
Item
2. Management’s Discussions and Analysis and Plan Of
Operations
|
12
|
|
|
|
Item
3. Controls and Procedures
|
16
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
16
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
17
|
|
|
Item
3. Default Upon Senior Securities
|
17
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
17
|
|
|
Item
5. Other Information
|
17
|
|
|
Item
6. Exhibits
|
|
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share amounts)
(Unaudited)
|
|
October
31,
|
|
July
31,
|
|
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
513
|
|
$
|
1,050
|
|
Accounts
receivable, net of allowance for bad debt of $98 and $0,
respectively
|
|
|
979
|
|
|
866
|
|
Note
receivable
|
|
|
150
|
|
|
50
|
|
Prepaid
& other current assets
|
|
|
107
|
|
|
94
|
|
Total
current assets
|
|
|
1,749
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
LONG-TERM
ASSETS:
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
309
|
|
|
306
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
500
|
|
|
499
|
|
Less
- accumulated depreciation
|
|
|
(321
|
)
|
|
(281
|
)
|
Net
property and equipment
|
|
|
179
|
|
|
218
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,237
|
|
$
|
2,584
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
958
|
|
$
|
1,071
|
|
Accrued
liabilities
|
|
|
99
|
|
|
516
|
|
Current
portion of obligation under capital leases
|
|
|
3
|
|
|
3
|
|
Notes
payable
|
|
|
615
|
|
|
818
|
|
Convertible
debentures
|
|
|
97
|
|
|
76
|
|
Total
current liabilities
|
|
|
1,772
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
743
|
|
|
177
|
|
Convertible
debentures
|
|
|
139
|
|
|
158
|
|
Obligation
under capital leases, less current portion
|
|
|
3
|
|
|
3
|
|
Other
|
|
|
5
|
|
|
4
|
|
Total
long-term liabilities
|
|
|
890
|
|
|
342
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,662
|
|
|
2,826
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT:
|
|
|
|
|
|
|
|
Series
D Cumulative Preferred Stock, 3,000 shares authorized, 0 and 742
shares
issued and outstanding
|
|
|
-
|
|
|
1
|
|
Series
E Cumulative Preferred Stock, 10,000 shares authorized, 0 and 1,170
shares
issued and outstanding
|
|
|
-
|
|
|
1
|
|
Common
stock, $0.001 par value, 150,000,000 shares authorized, 39,062,079
and
37,620,513 shares issued and outstanding,
respectively
|
|
|
39
|
|
|
38
|
|
Additional
paid in capital
|
|
|
72,333
|
|
|
72,222
|
|
Accumulated
deficit
|
|
|
(72,798
|
)
|
|
(72,505
|
)
|
Other
comprehensive income
|
|
|
1
|
|
|
1
|
|
Total
stockholders' deficit
|
|
|
(425
|
)
|
|
(242
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
2,237
|
|
$
|
2,584
|
|
See
accompanying summary of accounting policies and notes to financial statements.
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three months ended October 31,
|
|
|
|
2007
|
|
2006
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
9,402
|
|
$
|
6,499
|
|
Communication
services
|
|
|
25
|
|
|
33
|
|
Total
operating revenues
|
|
|
9,427
|
|
|
6,532
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
|
|
8,785
|
|
|
6,019
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
|
|
823
|
|
|
571
|
|
Legal
and professional fees
|
|
|
89
|
|
|
58
|
|
Bad
debt expense
|
|
|
-
|
|
|
23
|
|
Depreciation
and amortization expense
|
|
|
40
|
|
|
17
|
|
Total
operating expenses
|
|
|
9,737
|
|
|
6,688
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
(310
|
)
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
41
|
|
|
-
|
|
Interest
income (expense)
|
|
|
(24
|
)
|
|
(28
|
)
|
Total
other income (expense), net
|
|
|
17
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
(293
|
)
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
LESS:
PREFERRED DIVIDEND
|
|
|
(12
|
)
|
|
(2
|
)
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
|
|
340
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
|
$
|
35
|
|
$
|
(186
|
)
|
|
|
|
|
|
|
|
|
BASIC
INCOME (LOSS) PER SHARE:
|
|
$
|
0.00
|
|
$
|
(0.01
|
)
|
DILUTED
INCOME (LOSS) PER SHARE
|
|
$
|
0.00
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
38,792,388
|
|
|
17,569,410
|
|
DILUTED
COMMON SHARES OUTSTANDING
|
|
|
38,796,275
|
|
|
17,569,410
|
|
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)
(Unaudited)
|
|
Three months ended October 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
income (loss) to common stockholders
|
|
$
|
35
|
|
$
|
(186
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) to common stockholders
|
|
$
|
35
|
|
$
|
(186
|
)
|
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
|
|
|
|
|
|
|
|
|
|
Preferred (D)
|
|
Preferred (E)
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
Other Comp.
|
|
|
|
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Capital
|
|
(Deficit)
|
|
Income/Loss
|
|
Totals
|
|
BALANCE,
JULY 31, 2007
|
|
|
742
|
|
|
1
|
|
|
1,170
|
|
|
1
|
|
|
37,620,513
|
|
|
38
|
|
$
|
72,222
|
|
$
|
(72,505
|
)
|
$
|
1
|
|
$
|
(242
|
)
|
Shares
issued for Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,360,292
|
|
|
1
|
|
|
285
|
|
|
|
|
|
|
|
|
286
|
|
Common
shares issued for Preferred Stock Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,434
|
|
|
-
|
|
|
1
|
|
|
|
|
|
|
|
|
1
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
|
168
|
|
Shares
issued for conversion of notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,436
|
|
|
-
|
|
|
30
|
|
|
|
|
|
|
|
|
30
|
|
Retirement
of Series D preferred stock, settlement of lawsuit
|
|
|
(742
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(525
|
)
|
|
|
|
|
|
|
|
(525
|
)
|
Retirement
of Series E preferred stock, settlement of lawsuit
|
|
|
|
|
|
|
|
|
(1,170
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
(175
|
)
|
Reversal
of previously recorded preferred dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
|
|
|
|
|
340
|
|
Dividends
declared-current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
(12
|
)
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
(293
|
)
|
BALANCE,
OCTOBER 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,114,675
|
|
|
39
|
|
$
|
72,333
|
|
$
|
(72,798
|
)
|
$
|
1
|
|
$
|
(425
|
)
|
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)
(Unaudited)
|
|
Three months ended October 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(293
|
)
|
$
|
(184
|
)
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
41
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
40
|
|
|
17
|
|
Issuance
of stock grants and options, employees for services
|
|
|
440
|
|
|
315
|
|
Issuance
of common stock and warrants for services
|
|
|
15
|
|
|
11
|
|
Provisions
for losses on accounts receivables
|
|
|
-
|
|
|
23
|
|
Amortization
of debt discount
|
|
|
2
|
|
|
2
|
|
Settlement
of litigation with RoseGlen
|
|
|
(175
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(113
|
)
|
|
(67
|
)
|
Prepaid
expenses and other
|
|
|
(13
|
)
|
|
(4
|
)
|
Accounts
payable
|
|
|
(188
|
)
|
|
31
|
|
Accrued
liabilities
|
|
|
(140
|
)
|
|
36
|
|
Net
cash used in / provided by operating activities
|
|
|
(384
|
)
|
|
180
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Investment
in certificates of deposit
|
|
|
(4
|
)
|
|
-
|
|
Note
receivable
|
|
|
(100
|
)
|
|
-
|
|
Purchases
of property & equipment
|
|
|
(1
|
)
|
|
(12
|
)
|
Net
cash used in investing activities
|
|
|
(105
|
)
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
on notes payable, related party
|
|
|
-
|
|
|
(90
|
)
|
Payments
on notes payable
|
|
|
(47
|
)
|
|
-
|
|
Proceeds
from advances from shareholders
|
|
|
-
|
|
|
408
|
|
Proceeds
from the exercise of warrants
|
|
|
-
|
|
|
35
|
|
Principal
payments on capital lease obligation
|
|
|
(1
|
)
|
|
(1
|
)
|
Net
cash used in / provided by financing activities
|
|
|
(48
|
)
|
|
352
|
|
|
|
|
|
|
|
|
|
DECREASE
/ INCREASE IN CASH
|
|
|
(537
|
)
|
|
520
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
1,050
|
|
|
36
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
513
|
|
$
|
556
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
13
|
|
$
|
12
|
|
Cash
paid for income tax
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING TRANSACTIONS
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of debt
|
|
$
|
30
|
|
$
|
15
|
|
Conversion
of preferred stock to common stock
|
|
|
1
|
|
|
106
|
|
Preferred
stock dividend
|
|
|
12
|
|
|
2
|
|
Reversal
of previously recorded preferred stock dividend
|
|
|
(340
|
)
|
|
-
|
|
See
accompanying summary of accounting policies and notes to financial statements.
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION
The
accompanying unaudited interim consolidated financial statements of ATSI
Communications, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the United
States Securities and Exchange Commission. In the opinion of management, these
interim financial statements contain all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented. The results
of
operations for interim periods are not necessarily indicative of the results
to
be expected for the full year. Notes to the consolidated financial statements,
which would substantially duplicate the disclosure contained in the audited
financial statements for the most recent fiscal year ended July 31, 2007, as
reported in Form 10-KSB filed on October 17, 2007, have been
omitted.
NOTE
2 – GOING CONCERN
As
shown
in the accompanying financial statements, ATSI incurred net losses from
operations of $310,000 and $156,000 during the quarter ended October 31, 2007
and 2006, respectively, and has an accumulated deficit of $72.8 million and
working capital deficit of $23,000 as of October 31, 2007. Although we generated
sufficient cash from operations to cover our operating expenses during the
quarter ended October 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 or 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 – STOCK-BASED COMPENSATION
In
September 2005, ATSI adopted the “2005 Stock Compensation Plan” (the “Plan”).
The 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 ATSI’s Board of Directors determines the terms of
any grants under the Plan. 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.
In
August
2007, ATSI’s Board of Directors approved to amend the Plan. Under the amendment,
ATSI’s Board of Directors increased the maximum aggregate number of shares of
Common Stock that may be issued under the plan, from 7.5 million shares to
17.5
million shares.
The
grants under the Plan during the three months ended October 31, 2007
are:
-
ATSI
granted options to purchase 1,835,000 shares of 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, August 15, 2007. One
third of the options vested immediately on the grant date and the remaining
two-thirds will vest one-third on the first anniversary of the grant date and
one-third on the second anniversary of the grant date. All options expire if
not
exercised on or before the tenth anniversary of the grant date. Under the fair
value option method, ATSI recognized $89,000 of compensation expense associated
with the vested options on the date of grant. ATSI will recognize the remaining
$177,000 of non-cash compensation expense related to un-vested options over
the
relevant service periods.
-
ATSI
granted options to purchase 750,000 shares of common stock to an employee with
an exercise price of $0.23 per share, the closing price of ATSI’s common stock
on the grant date, September 1, 2007. Upon successfully achieving performance
objectives set by ATSI’s Board of Directors, the options will vest one-third on
the first anniversary of the date of grant, one-third on the second anniversary
of the date of grant, and one-third on the third anniversary of the date of
grant. All options expire if not exercised on or before the tenth anniversary
of
the grant date. Under the fair value option method, ATSI will recognize $119,000
of non-cash compensation expense over the relevant service period.
-
ATSI
issued 1,299,398 shares of unrestricted common stock to its employees and
directors for services rendered with a value of $272,873. (See Note 5 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
|
|
|
75
|
%
|
Risk-free
interest rate
|
|
|
4.65
|
%
|
Expected
life of options
|
|
|
6 years
|
|
A
summary
of the options as of October 31,
2007
and
the
changes during the three months ended October 31,
2007
is
presented below:
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
Weighted-average
|
|
remaining contractual
|
|
2005
Stock Compensation Plan
|
|
Options
|
|
exercise
price
|
|
term
(years)
|
|
Outstanding
at July 31, 2007
|
|
|
5,598,998
|
|
$
|
0.17
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,835,000
|
|
|
0.21
|
|
|
6
|
|
Forfeited
|
|
|
(20,000
|
)
|
|
0.21
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at October 31, 2007
|
|
|
7,413,998
|
|
|
0.18
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at October 31, 2007
|
|
|
4,700,333
|
|
$
|
0.18
|
|
|
6
|
|
NOTE
4 – DEBT
On
November 3, 2006,
ATSI
borrowed $250,000 from CCA Financial Services, Inc. This note initially had
an
interest at the rate of 16% per annum, provided for eleven monthly payments
of
principal and interest in the amount of $7,807 and a final payment at maturity
of $200,000, was secured by ATSI’s equipment, deposit accounts and accounts
receivables, and had an initial maturity date of November 3, 2007. ATSI has
the
option of paying off the total outstanding principal balance at any time without
any penalties. As of the date of this filing, ATSI and CCA Financial Services,
Inc. have agreed to extend the term of the note to April 30, 2008. The new
principal balance of the note is $150,000 and the interest rate is 15% per
annum. All other terms remained the same.
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 receivable. The
factoring agreement was for an initial period of twelve months and could be
terminated by ATSI at any time, subject to the payment of a $10,000 early
termination fee. The factoring interest rate payable on factored accounts ranges
from 1.00%-1.25% of the amount factored based on the number of days outstanding.
During the three months ended October 30, 2007 an average of $450,000 of
factored account receivables was outstanding under the factoring agreement.
As
of the date of this filing, ATSI did not have any factored account receivables
outstanding; ATSI will continue to factor its receivables on a monthly basis
as
services are rendered to its customers. As of the date of this filing, ATSI
and
CCA Financial Services, Inc. have agreed to extend the factoring agreement
for
an indefinite number of successive 30-day periods and agreed to waive the
termination fee.
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 payments of
principal and interest in the amount 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 payments
of principal and interest in the amount 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 $275,000 in original principal amount of its 9%
Convertible Subordinated Debentures (“Original 9% Debentures”) and $141,000 in
accrued interest by issuing new 9% Convertible Subordinated Debentures due
June
1, 2011 (“New Debentures”) with an aggregate face value of $416,000. Each New
Debenture accrues interest at the rate of 9% per annum payable annually. The
New
Debentures and any accrued interest are subject to conversion into common stock
by either ATSI or the holders of the New Debentures 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, subject
to a
maximum number of 1,540,741 common shares issuable upon conversion. The proceeds
from the New 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 New Debentures using the effective interest method. As of
October 31, 2007, the principal balance and accrued interest on the New
Debenture was $236,000 and $9,000, respectively.
On
October 1, 2007, ATSI restructured its $500,000 note payable to Alfonso Torres.
The new principal balance under the note payable is $459,170. The new note
bears
interest at the rate of 6% per annum and is payable in a single lump sum on
October 1, 2009. ATSI has the option of paying off the total outstanding
principal balance and accrued interest at any time without penalties. In
connection with the restructuring, ATSI issued 130,435 shares of common stock
at
price of $0.23 per share to pay off $30,000 of accrued interest under the
original note and agreed to pay $60,000 in cash, in equal monthly payments
starting November 2, 2007. As of the date of this filing ATSI has paid $40,000
towards the cash commitment. As a result of the restructuring of the note
payable, accrued interest in the amount of $41,000 was forgiven by Alfonso
Torres.
On
December 10, 2007, ATSI and The Shaar Fund entered into a settlement agreement
relating to certain litigation. In connection with the settlement, ATSI paid
$75,000 on December 12, 2007 and signed an unsecured promissory note in the
original principal amount of $450,000, bearing interest at the rate of 7.5%
per
annum and payable in quarterly payments of $16,667 in principal and accrued
interest on each of January 31, 2008 and April 30, 2008, and in quarterly
payments of $26,042 in principal and accrued interest commencing on July 31,
2008 and continuing until April 30, 2012. If
paid in
full within the first 18 months, ATSI will be entitled to a discount of 22.5%
on
the then outstanding principal balance. As
a result
of the settlement, The Shaar Fund agreed to surrender for cancellation 742
shares of the ATSI’s outstanding 6% Series D Cumulative Convertible Preferred
Stock and forgive approximately $340,000 in dividends accrued thereon as of
October 24, 2007.
NOTE
5 – COMMON STOCK
During
the three months ended October 31, 2007 ATSI issued:
- |
60,894
shares of common stock valued at $14,210 to its placement agent and
consultants for their services
rendered.
|
- |
1,299,398
shares of common stock to its employees and directors for services
rendered. ATSI recorded the fair value of $272,873 as the compensation
expense in its statement of operations.
|
- |
3,434
shares of common stock to a Series H Preferred Stock shareholder
for the
previously unprocessed issuance.
|
- |
130,436
shares of common stock to Alfonso Torres in lieu of $30,000 in accrued
interest associated with the Alfonso Torres note payable.
|
NOTE
6 –NOTE RECEIVABLE
On
July
13,
2007,
ATSI agreed to lend $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
is secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution
modules and provides for payment of principal and accrued interest at maturity.
ATSI can convert the outstanding interest and principal balance into a perpetual
NetSapiens’ License. As of October 31, 2007, ATSI has funded $150,000 to
NetSapiens.
NOTE
7 - RELATED PARTY TRANSACTIONS
In
January 2006, ATSI, through its wholly owned subsidiary, Telefamilia
Communications, Inc. (“Telefamilia”), entered into a joint management and
marketing agreement with Fiesta Communications, Inc. (“Fiesta”). Under the joint
management and marketing agreement ATSI provides accounting and administrative
support for a monthly fee of $2,500. As of October 31, 2007, Fiesta owed ATSI
$37,500 in management fees. ATSI’s CEO and President, Arthur L Smith, is a 20%
shareholder of Fiesta.
On
August
29, 2007, Telefamilia agreed to lend $5,000 to Fiesta. The promissory note
receivable has a maturity date of December 29, 2007 and an annual interest
rate
of 8%. On November 30, 2007, Fiesta repaid Telefamilia the principal balance
of
$5,000 and $100 of accrued interest.
On
October 24, 2007, Telefamilia agreed to lend $2,500 to Fiesta. The promissory
note receivable has a maturity date of December 24, 2007 and an annual interest
rate of 8%. On November 30, 2007, Fiesta repaid Telefamilia the principal
balance of $2,500 and $16 of accrued interest.
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). Based on these findings, ATSI
is
not required to consolidate Fiesta at its formation.
NOTE
8 – PREFERRED STOCK SETTLEMENTS
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.
In
December 2007, ATSI and The Shaar Fund Ltd. entered into a settlement agreement
in which they released each other from all claims relating to the Series D
Preferred Stock. Under the terms of the settlement agreement, The Shaar Fund,
Ltd. agreed to surrender all outstanding shares of Series D Preferred Stock
and
waived all accrued and unpaid dividends thereon in the amount of approximately
$340,000 as of October 24, 2007 and ATSI agreed to pay to The Shaar Fund, Ltd.
the sum of $75,000 in cash in December 2007 and issue to The Shaar Fund a
promissory note in the original principal amount of $450,000, bearing interest
at the rate of 7.5% per annum and payable in payments of $16,667 in principal
and accrued interest on each of January 31, 2008 and April 30, 2008, and in
quarterly payments of $26,042 in principal and accrued interest commencing
on
July 31, 2008 and continuing until April 30, 2012. If
paid in
full within the first 18 months, ATSI will be entitled to a discount of 22.5%
on
the then outstanding principal balance.
NOTE
9 – SUBSEQUENT EVENTS
On
December 12, 2007, ATSI entered into a $3 million accounts receivable financing
agreement with Wells Fargo Business Credit (“WFBC”), a division of Wells Fargo
Bank, N.A. Under the terms of the Account Transfer Agreement, ATSI may offer
to
sell with recourse not less than $350,000 and no more than $3,000,000 of its
accounts receivable to WFBC each month. The factoring agreement is for twelve
months and ATSI can terminate this agreement upon 30 days written notice,
subject to a $15,000 early termination fee. The factoring rate will be 0.0349%
of the face amount for each day after the sale until the account is collected
in
full. The
Account
Transfer Agreement
is
secured by ATSI’s accounts receivable.
As of
the date of this report, ATSI did not have any outstanding factored receivables
under this agreement.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATIONS
SPECIAL
NOTE: This Quarterly Report on Form 10-QSB contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and
Section 21E of the Securities 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. Some of these risks
include the availability and capacity of competitive data transmission networks,
the continued effectiveness of our concession from the government of Mexico,
and
or ability to raise sufficient capital to continue operations. Additional risks
are included in our Annual Report on Form 10-KSB filed with the Securities
and
Exchange Commission on October 17, 2007.
The
following is a discussion of the consolidated financial condition and results
of
operations of ATSI for the three months ended October 31, 2007 and 2006. As
used
in this section, the term “fiscal 2008” means the year ending July 31, 2008 and
“fiscal 2007” means the year ended July 31, 2007.
General
We
are an
international telecommunications carrier that utilizes the Internet to provide
cost-efficient and economical international telecommunications services. Our
current operations consist primarily of providing digital voice communications
over the Internet using Voice-over-Internet-Protocol ("VoIP"). We
provide high quality voice and enhanced telecommunication services to carriers,
telephony resellers and other VoIP carriers through various agreements with
service providers in the United States, Mexico, Asia, the Middle East and Latin
America utilizing VoIP technology. Our services include:
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.
Results
of Operations
The
following table sets forth certain items included in our results of operations
and variances between periods for the three month ended October 31, 2007 and
2006. All dollar amounts are in thousands.
|
|
Three
months ended October 31,
|
|
|
|
2007
|
|
2006
|
|
Variances
|
|
%
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
9,402
|
|
$
|
6,499
|
|
$
|
2,903
|
|
|
45
|
%
|
Communication
services
|
|
|
25
|
|
|
33
|
|
|
(8
|
)
|
|
-24
|
%
|
Total
operating revenues
|
|
|
9,427
|
|
|
6,532
|
|
|
2,895
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
|
|
8,785
|
|
|
6,019
|
|
|
2,766
|
|
|
46
|
%
|
GROSS
MARGIN
|
|
|
642
|
|
|
513
|
|
|
129
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
|
|
823
|
|
|
571
|
|
|
252
|
|
|
44
|
%
|
Legal
and professional fees
|
|
|
89
|
|
|
58
|
|
|
31
|
|
|
53
|
%
|
Bad
debt expense
|
|
|
-
|
|
|
23
|
|
|
(23
|
)
|
|
-100
|
%
|
Depreciation
and amortization expense
|
|
|
40
|
|
|
17
|
|
|
23
|
|
|
135
|
%
|
OPERATING
INCOME (LOSS)
|
|
|
(310
|
)
|
|
(156
|
)
|
|
(154
|
)
|
|
-99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
41
|
|
|
-
|
|
|
41
|
|
|
100
|
%
|
Interest
income (expense)
|
|
|
(24
|
)
|
|
(28
|
)
|
|
4
|
|
|
14
|
%
|
Total
other income (expense), net
|
|
|
17
|
|
|
(28
|
)
|
|
45
|
|
|
161
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
(293
|
)
|
|
(184
|
)
|
|
(109
|
)
|
|
-59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
PREFERRED DIVIDEND
|
|
|
(12
|
)
|
|
(2
|
)
|
|
(10
|
)
|
|
-500
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
|
|
340
|
|
|
-
|
|
|
340
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
|
$
|
35
|
|
$
|
(186
|
)
|
$
|
221
|
|
|
119
|
%
|
Three
Months ended October 31, 2007 Compared to Three Months ended October 31,
2006
Operating
Revenues.
Consolidated operating revenues increased 44% from $6,532,000 for the quarter
ended October 31, 2006 to $9,427,000 for the quarter ended October 31, 2007.
Carrier
services revenue increased $2,903,000, or 45% from the quarter ended October
31,
2006 to the quarter ended October 31, 2007. Our carrier traffic increased by
28
% from approximately 105,213,932 minutes of voice traffic during the quarter
ended October 31, 2006 to approximately 134,380,145
minutes
of voice traffic in the quarter ended October 31, 2007. The increase in revenue
and VoIP minutes is attributable primarily to the upgrade to our Nextone® Soft
Switch, the upgrade permits us to offer high quality and dependable VoIP
services, serve more customers and efficiently process greater volume of data
and calls.
Communication
services revenue decreased approximately by 24% or $8,000 from the quarter
ended
October 31, 2006 to the quarter ended October 31, 2007. The decrease in
communication services revenue is primarily due to a decrease in retail
customers from 130 during the quarter ended October 31, 2006 to 111 during
the
quarter ended October 31, 2007.
Cost
of Services (Exclusive of depreciation and amortization).
The
consolidated cost of services increased by $2,766,000, or 46%, from the quarter
ended October 31, 2006 to the quarter ended October 31, 2007. The increase
in
cost of services is a direct result of the increase in voice traffic, which
required an increase in service fees paid to our vendors for transmission
services. Consolidated cost of services, as a percentage of revenue increase
from 92% during the quarter ended October 31, 2006 to 93% during the quarter
ended October 31, 2007. Despite the increase in Cost of Service (exclusive
of
depreciation and amortization) as a percentage of sales, gross profits increased
from $513,000 during the quarter ended October 31, 2006 to $642,000 during
the
quarter ended October
31, 2007
as a
result of the increase in revenues.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and
professional fees). SG&A
expenses increased $252,000, or 44%, from the quarter ended October 31, 2006
to
the quarter ended October 31, 2007. The increase is primarily attributable
to an
increase in salaries of $112,000 as a result of the hiring a new sales executive
and bonuses paid to officers during the quarter ended October 31, 2007. Non-cash
compensation expense to employees increased by $126,000 from the quarter ended
October 31, 2006 compared to the quarter ended October 31, 2007. This increase
is primarily the result of the recognition during the quarter ended October
31,
2007 of approximately $440,000 of non-cash compensation expense associated
with
the stock options and grants issued to employees and directors compared
$314,000 during the quarter ended October 30, 2006.
Legal
and professional fees.
Legal
and professional fees increased $31,000, or 53%, from the quarter ended October
31, 2006 to
the
quarter ended October 31, 2007. The increase is attributable to $35,000 in
legal
fees incurred during the quarter ended October 31, 2007 in connection with
ongoing litigation between ATSI and the holders of the 6% Series D Cumulative
Convertible Preferred Stock. We did not incur similar expenses during the
quarter ended October 31, 2006.
Bad
debt expense. Bad
debt
expense decreased by $23,000 from the quarter ended October 31, 2006 to the
quarter ended October 31, 2007. During the quarter ended October 31, 2006 we
recognized $23,000 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 quarter ended October 31, 2007.
Depreciation
and amortization.
Depreciation and amortization increased by $23,000, or 135%, from the quarter
ended October 31, 2006 to the quarter ended October 31, 2007. The increase
is
attributed to the amortization during fiscal 2008 of new computers and equipment
acquired during fiscal 2007.
Operating
income (loss).
The
Company’s operating loss increased by $154,000 or 99% from the quarter ended
October 31, 2006 to the quarter ended October 31, 2007. The increase in
operating loss is attributed to an increase in selling,
general and administrative expenses of
approximately $252,000 due to an increase in salaries and wages of $122,000
and
an increase of $126,000 in non-cash compensation expense associated with stock
options and grants issued to employees and directors. The increase in selling,
general and administrative expenses was partially offset by the increase between
quarters of approximately $129,000 in gross profit margins and a decrease in
bad
debt expense of approximately $23,000.
Debt
forgiveness income.
Debt
forgiveness income increased by $41,000 from the quarter ended October 31,
2006
to the quarter ended October 31, 2007. The increase can be attributed to the
restructuring of the note payable and settlement with Alfonso Torres and
forgiveness of $41,000 in accrued interest.
Interest
income (expense).
Interest income (expense) decreased by $4,000 from the quarter ended October
31,
2006 to the quarter ended October 31, 2007. The decrease can be attributed
to
the payoff of various notes during the quarter as a result a reduction of
interest expense was recognized during the quarter ended October 31, 2007.
Net
income (loss).
Net
loss increased by $109,000 from the quarter ended October 31, 2006 to the
quarter ended October 31, 2007. The increase in net loss is attributed to
the
increase between quarters in selling, general and administrative expenses of
approximately $252,000 due to an increase in salaries and wages of $122,000
and
an increase of $126,000 of non-cash compensation expense associated with stock
options and grants issued to employees and directors. The increase in selling,
general and administrative expenses was partially offset by the increase between
quarters of approximately $129,000 in gross profit margins and a decrease in
bad
debt expense of approximately $23,000.
Preferred
stock dividends.
Preferred stock dividends increased by $10,000 between periods, from $2,000
for
the quarter ended October 31, 2006 to $12,000 during the quarter ended October
31, 2007. The increase is primarily the result of an adjustment of approximately
$16,000 in preferred stock dividends relating to the conversion of 833,392
shares of ATSI’s Series H Redeemable Convertible Preferred Stock into 1,236,994
shares of common stock during the quarter ended October 41, 2006, which offset
dividends accruing on other classes of preferred stock during that period.
We
did not have any conversions of preferred shares during the quarter ended
October 31, 2007.
Reversal
of previously recorded preferred stock dividends. During
the quarter ended October 31, 2007, we recognized a reversal of previously
recorded dividend expense of $340,000. This reversal occurred as result of
the
settlement agreement reached between ATSI and The Shaar Fund. As a result of
the
settlement The Shaar Fund agreed to surrender 742 shares of ATSI’s 6% Series D
Cumulative Convertible Preferred Stock and forgive accrued dividend of
approximately $340,000 as of October 24, 2007.
Net
income (loss) applicable to common stockholders.
Net
income (loss) applicable to common stockholders improved by $221,000 from the
quarter ended October 31, 2006 to the quarter ended October 31, 2007. The
improvement in net income (loss) applicable to common stockholders is attributed
to the reversal
of previously recorded preferred stock dividends of $340,000, the increase
between quarters of approximately $129,000 in gross profit margins, and a
decrease in bad debt expense of approximately $23,000. These improvements were
substantially offset by the increase between quarters in selling, general and
administrative expenses of approximately $252,000 due to an increase in salaries
and wages of $122,000 and an increase of $126,000 in non-cash compensation
expense associated with the stock options and grants issued to employees and
directors and an increase in professional fees of approximately $31,000.
Liquidity
and Capital Resources
Cash
Position:
We had a
cash balance of $513,000 as of October 31, 2007. Net cash used by operating
activities during the quarter ended October 31, 2007 was approximately $384,000,
primarily as a result of the payment of $175,000 in connection with the
settlement of litigation between ATSI and RGC International Investors, LDC
and
reduction of accounts payable by $198,000.
Investing
activities during the quarter
ended October
31, 2007 consumed $105,000 as a result of advances to NetSapiens.
Financing
activities during the quarter ended October 31, 2007, consumed $48,000 in cash.
This cash was primarily consumed by debt principal payments of $47,000
associated with various notes payables and principal payments of $1,000
associated with our capital leases. Overall, our net operating, investing and
financing activities during the quarter ended October 31, 2007 resulted in
a
decrease of $537,000 in our cash.
Our
current cash expenses are expected to be approximately $120,000 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. We are
currently utilizing the factoring agreement with CCA Financial Services, Inc.
as
necessary to provide cash for operations. Under the agreement we are able to
factor up to $1,000,000 of our monthly accounts receivable. On
an
average, we are factoring account receivables of $450,000 per month.
As of
the date of this filing, all factored receivables have been repaid to CCA
Financial Services and the entire amount of the factoring agreement is available
for future use.
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 on our outstanding convertible
debentures. However, we have continued to accrue interest on such debentures.
The increase in accrued liabilities related to the interest in arrears
contributed approximately $7,500 in cash flow savings during the quarter ended
October
31, 2007.
Our
working capital deficit was $23,000 as of October
31, 2007.
This
represents an improvement of approximately $401,000 from our working capital
deficit at July 31, 2007. The improvement can primarily be attributed to the
reversal of previously recorded preferred stock dividends of $340,000, as a
result of the settlement with The Shaar Fund.
Ongoing
operations
We
generated sufficient income from operations to cover our operating expenses
during the quarter ended October 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.
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.
We intend 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.
ITEM
3. 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 quarter 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 fiscal quarter covered by this report that have had a material affect
or are reasonably likely to have a material affect on internal control over
financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. 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 6% Series D Cumulative
Convertible Preferred Stock (the “Series D Preferred Stock”) and the holders of
our 6% Series E Cumulative Convertible Preferred Stock (the “Series E Preferred
Stock”), seeking recovery of damages and equitable relief for stock fraud and
manipulative practices in connection with the sale of the Series D and Series
E
Preferred Stock. In 2005, the court dismissed the Company’s claims and the
Company appealed. On July 11, 2007 the Court of Appeals affirmed the dismissals.
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 6% Series D Cumulative Convertible Preferred Stock, to declare that
any
right to convert or redeem the shares of the Series D Preferred Stock was barred
by applicable statute of limitations (the “Texas Case”). On August 2, 2007, The
Shaar Fund Ltd. filed a separate suit against ATSI in the United States District
Court for the Southern District Court of New York seeking damages and equitable
relief for alleged defaults under the Securities Purchase Agreement dated
February 18, 2000 under which it acquired the Series D Preferred Stock (the
“New
York Case”). The claims of the parties were consolidated in the New York Case by
agreement. In December 2007, the parities entered into a settlement agreement
in
which they released each other from all claims relating to the Series D
Preferred Stock. Under the terms of the settlement agreement, The Shaar Fund,
Ltd. agreed to surrender all outstanding shares of Series D Preferred
Stock. Additionally, The Shaar Fund waived its claims for alleged
accrued and unpaid dividends thereon in the amount of approximately
$340,000. The cancellation of the preferred stock is effective as of
October 24, 2007 and ATSI agreed to pay to The Shaar Fund, Ltd. the sum of
$75,000 in cash in December 2007 and issue to The Shaar Fund a
promissory note in the original principal amount of $450,000, bearing interest
at the rate of 7.5% per annum and payable in 16 quarterly payments over 48
months. If paid in full within the first 18 months, ATSI will be entitled to
a
discount of 22.5% on the then outstanding principal balance.
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 set for trial July
2008.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
During
the period covered by this report, the Company issued 130,438 shares of its
common stock to Alfonso Torres in lieu of interest accrued under a promissory
note. The transaction was privately negotiated between the Company and Mr.
Torres, 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.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM
5. OTHER INFORMATION
NONE
ITEM
6. EXHIBITS
(a) Exhibits:
The following documents are filed as exhibits to this report.
EXHIBIT
INDEX
Number
|
Description
|
|
|
10.1
|
Settlement
Agreement and Release dated December 10, 2007 among ATSI Communications,
Inc., John M. O’Quinn, the O’Quinn Law Firm, John M. O’Quinn &
Associates L.L.P., James W. Christian, Christian, Smith & Jewell LLP,
and The Shaar Fund, Ltd.
|
|
|
10.2
|
Promissory
Note dated December 10, 2007 in the original principal amount of
$450,000
payable to The Shaar Fund, Ltd.
|
|
|
10.3
|
Settlement
Agreement and Release dated October 1, 2007 between ATSI Communications,
Inc., and Alfonso Torres Roqueni.
|
|
|
10.4
|
Promissory
Note dated October 1, 2007 in the original principal amount of $459,170
payable to Alfonso Torres Roqueni.
|
|
|
10.5
|
Promissory
Note dated October 31, 2007 in the original principal amount of $200,000
payable to CCA Financial Services.
|
|
|
10.6
|
Security
Agreement dated October 31, 2007 with CCA Financial Services.
|
|
|
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.
|
SIGNATURE
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ATSI
COMMUNICATIONS, INC.
|
|
(Registrant)
|
|
|
|
|
|
|
Date:
December 14, 2007
|
By:
|
/s/
Arthur L. Smith
|
|
Name:
|
Arthur
L. Smith
|
|
Title:
|
President
and
|
|
|
Chief
Executive Officer
|
|
|
|
Date:
December 14, 2007
|
By:
|
/s/
Antonio Estrada
|
|
Name:
|
Antonio
Estrada
|
|
Title:
|
Corporate
Controller
|
|
|
(Principal
Accounting and Principal
|
|
|
Financial
Officer)
|