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 April 30,
2008
|
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 $7,836,533 based on the closing price of $0.20 per share on June 11, 2008
as
reported on the over-the-counter bulletin board.
There
were 39,182,669 shares of issuer’s Common Stock outstanding as of June
11,
2008.
Transitional
Small Business Disclosure Format (check one): o Yes x
No
ATSI
COMMUNICATIONS, INC.
QUARTERLY
REPORT ON FORM 10-QSB
FOR
THE QUARTER ENDED APRIL 30, 2008
INDEX
|
|
Page
|
PART
I. FINANCIAL INFORMATION
|
|
|
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|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of April 30, 2008 and July 31,
2007(unaudited)
|
|
3
|
|
Consolidated
Statements of Operations for the Three and Nine Months Ended April
30,
2008
|
|
|
|
and
2007 (unaudited)
|
|
4
|
|
Consolidated
Statements of Comprehensive Income for the Three and Nine
Months
|
|
|
|
Ended
April 30, 2008 and 2007(unaudited)
|
|
5
|
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the Nine
Months
|
|
|
|
Ended
April 30, 2008 (unaudited)
|
|
6
|
|
Consolidated
Statements of Cash Flows for the Nine Months
|
|
|
|
Ended
April 30, 2008 and 2007 (unaudited)
|
|
7
|
|
Notes
to Consolidated Unaudited Financial Statements
|
|
8
|
|
|
|
|
|
Item
2. Management’s Discussions and Analysis and Plan Of
Operations
|
|
13
|
|
|
|
|
|
Item
3. Controls and Procedures
|
|
19
|
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
19
|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
19
|
|
|
|
|
|
Item
3. Default Upon Senior Securities
|
|
19
|
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
|
19
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|
|
|
|
|
Item
5. Other Information
|
|
19
|
|
|
|
|
|
Item
6. Exhibits
|
|
20
|
|
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share amounts)
(Unaudited)
|
|
April 30,
|
|
July 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
726
|
|
$
|
1,050
|
|
Accounts
receivable, net of allowance for bad debt of $95 and $98,
respectively
|
|
|
1,122
|
|
|
866
|
|
Note
receivable, relaetd party
|
|
|
15
|
|
|
-
|
|
Note
receivable
|
|
|
150
|
|
|
50
|
|
Prepaid
& other current assets
|
|
|
117
|
|
|
94
|
|
Total
current assets
|
|
|
2,130
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
LONG-TERM
ASSETS:
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
316
|
|
|
306
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
556
|
|
|
499
|
|
Less
- accumulated depreciation
|
|
|
(400
|
)
|
|
(281
|
)
|
Net
property and equipment
|
|
|
156
|
|
|
218
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,602
|
|
$
|
2,584
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,019
|
|
$
|
1,071
|
|
Accrued
liabilities
|
|
|
128
|
|
|
516
|
|
Current
portion of obligation under capital leases
|
|
|
3
|
|
|
3
|
|
Notes
payable
|
|
|
596
|
|
|
818
|
|
Convertible
debentures
|
|
|
140
|
|
|
76
|
|
Total
current liabilities
|
|
|
1,886
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
631
|
|
|
177
|
|
Convertible
debentures
|
|
|
100
|
|
|
158
|
|
Obligation
under capital leases, less current portion
|
|
|
1
|
|
|
3
|
|
Other
|
|
|
5
|
|
|
4
|
|
Total
long-term liabilities
|
|
|
737
|
|
|
342
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,623
|
|
|
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, 39,182,669
and
37,620,513 shares issued and outstanding, respectively
|
|
|
39
|
|
|
38
|
|
Additional
paid in capital
|
|
|
72,563
|
|
|
72,222
|
|
Accumulated
deficit
|
|
|
(72,624
|
)
|
|
(72,505
|
)
|
Other
comprehensive income
|
|
|
1
|
|
|
1
|
|
Total
stockholders' deficit
|
|
|
(21
|
)
|
|
(242
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
2,602
|
|
$
|
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 April 30,
|
|
Nine months ended April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
11,147
|
|
$
|
8,113
|
|
$
|
30,832
|
|
$
|
21,658
|
|
Communication
services
|
|
|
24
|
|
|
27
|
|
|
73
|
|
|
87
|
|
Total
operating revenues
|
|
|
11,171
|
|
|
8,140
|
|
|
30,905
|
|
|
21,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
|
|
10,384
|
|
|
7,647
|
|
|
28,713
|
|
|
20,175
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
|
|
555
|
|
|
317
|
|
|
1,916
|
|
|
1,271
|
|
Legal
and professional fees
|
|
|
86
|
|
|
84
|
|
|
239
|
|
|
199
|
|
Bad
debt expense
|
|
|
(23
|
)
|
|
29
|
|
|
(2
|
)
|
|
76
|
|
Depreciation
and amortization expense
|
|
|
42
|
|
|
24
|
|
|
120
|
|
|
62
|
|
Total
operating expenses
|
|
|
11,044
|
|
|
8,101
|
|
|
30,986
|
|
|
21,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
127
|
|
|
39
|
|
|
(81
|
)
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
-
|
|
|
-
|
|
|
41
|
|
|
-
|
|
Interest
income (expense)
|
|
|
(32
|
)
|
|
(253
|
)
|
|
(79
|
)
|
|
(322
|
)
|
Total
other income (expense), net
|
|
|
(32
|
)
|
|
(253
|
)
|
|
(38
|
)
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
95
|
|
|
(214
|
)
|
|
(119
|
)
|
|
(360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
PREFERRED DIVIDEND
|
|
|
-
|
|
|
(7
|
)
|
|
(12
|
)
|
|
(45
|
)
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
|
|
-
|
|
|
600
|
|
|
340
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME TO COMMON STOCKHOLDERS
|
|
$
|
95
|
|
$
|
379
|
|
$
|
209
|
|
$
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
INCOME PER SHARE:
|
|
$
|
0.00
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.02
|
|
DILUTED
INCOME PER SHARE
|
|
$
|
0.00
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
39,186,590
|
|
|
37,005,780
|
|
|
39,036,705
|
|
|
24,712,414
|
|
DILUTED
COMMON SHARES OUTSTANDING
|
|
|
38,778,587
|
|
|
39,842,780
|
|
|
39,286,505
|
|
|
27,549,414
|
|
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 April 30,
|
|
Nine months ended April 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
income to common stockholders
|
|
$
|
95
|
|
$
|
(214
|
)
|
$
|
(119
|
)
|
$
|
(360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) to common stockholders
|
|
$
|
95
|
|
$
|
(214
|
)
|
$
|
(119
|
)
|
$
|
(360
|
)
|
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
|
)
|
Acquisition
of Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,400
|
)
|
|
(0
|
)
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
(5
|
)
|
Shares
issued for Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,448,686
|
|
|
1
|
|
|
348
|
|
|
|
|
|
|
|
|
349
|
|
Common
shares issued for Preferred Stock Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,434
|
|
|
-
|
|
|
1
|
|
|
|
|
|
|
|
|
1
|
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
(12
|
)
|
Reversal
of previously recorded preferred dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
|
|
|
|
|
340
|
|
Stock
option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
339
|
|
Shares
issued for conversion of notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,436
|
|
|
-
|
|
|
30
|
|
|
|
|
|
|
|
|
30
|
|
Retirement
of preferred stock, settlement of lawsuit
|
|
|
(742
|
)
|
|
(1
|
)
|
|
(1,170
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
(702
|
)
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119
|
)
|
|
|
|
|
(119
|
)
|
BALANCE,
APRIL 30, 2008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,182,669
|
|
|
39
|
|
$
|
72,563
|
|
$
|
(72,624
|
)
|
$
|
1
|
|
$
|
(21
|
)
|
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)
|
|
Nine months ended April 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(119
|
)
|
$
|
(360
|
)
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
(41
|
)
|
|
-
|
|
Depreciation
and amortization
|
|
|
120
|
|
|
62
|
|
Issuance
of stock grants and options, employees for services
|
|
|
612
|
|
|
422
|
|
Issuance
of common stock and warrants for services
|
|
|
77
|
|
|
38
|
|
Provisions
for losses on accounts receivables
|
|
|
(2
|
)
|
|
76
|
|
Amortization
of debt discount
|
|
|
6
|
|
|
151
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(253
|
)
|
|
(308
|
)
|
Prepaid
expenses and other
|
|
|
(23
|
)
|
|
(17
|
)
|
Accounts
payable
|
|
|
(91
|
)
|
|
(1
|
)
|
Accrued
liabilities
|
|
|
(30
|
)
|
|
54
|
|
Net
cash provided by operating activities
|
|
|
256
|
|
|
117
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Investment
in certificates of deposit
|
|
|
(10
|
)
|
|
(302
|
)
|
Note
receivable
|
|
|
(100
|
)
|
|
-
|
|
Note
receivable, related party
|
|
|
(15
|
)
|
|
-
|
|
Purchases
of property & equipment
|
|
|
(20
|
)
|
|
(101
|
)
|
Net
cash used in investing activities
|
|
|
(145
|
)
|
|
(403
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
on notes payable, related party
|
|
|
-
|
|
|
(106
|
)
|
Payments
on notes payable
|
|
|
(178
|
)
|
|
(78
|
)
|
Payments
on advances from shareholders
|
|
|
|
|
|
(148
|
)
|
Retirement
of redeemable preferred stock series D&E
|
|
|
(250
|
)
|
|
-
|
|
Acquisition
of common stock
|
|
|
(5
|
)
|
|
-
|
|
Proceeds
from advances from shareholders
|
|
|
-
|
|
|
713
|
|
Proceeds
from Notes payables
|
|
|
-
|
|
|
350
|
|
Issuance
of common stock, cost of financing services
|
|
|
-
|
|
|
67
|
|
Proceeds
from the exercise of stock options
|
|
|
-
|
|
|
16
|
|
Proceeds
from the exercise of warrants
|
|
|
-
|
|
|
35
|
|
Principal
payments on capital lease obligation
|
|
|
(2
|
)
|
|
(2
|
)
|
Net
cash (used in) / provided by financing activities
|
|
|
(435
|
)
|
|
847
|
|
|
|
|
|
|
|
|
|
DECREASE
/ INCREASE IN CASH
|
|
|
(324
|
)
|
|
561
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
1,050
|
|
|
36
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
726
|
|
$
|
597
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
34
|
|
$
|
43
|
|
Cash
paid for income tax
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING TRANSACTIONS
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of debt
|
|
$
|
30
|
|
$
|
572
|
|
Issuance
of common stock for accounts payable
|
|
|
-
|
|
|
58
|
|
Conversion
of preferred stock to common stock
|
|
|
1
|
|
|
1,141
|
|
Preferred
stock dividends
|
|
|
12
|
|
|
45
|
|
Reversal
of previously recorded preferred stock dividend
|
|
|
(340
|
)
|
|
(828
|
)
|
Discount
for beneficial conversion feature on convertible debt
|
|
|
-
|
|
|
144
|
|
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 – STOCK-BASED COMPENSATION
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. ATSI’s Board of Directors determines the terms of any grants
under the plan. Exercise prices of all warrants, stock options and other awards
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 an amendment to 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 nine months ended April 30, 2008 were as
follows:
-
ATSI
granted options to purchase 1,835,000 common shares to certain employees and
Board Members 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
as
follows: 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 common shares 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
granted options to purchase 30,000 common shares to an employee with an exercise
price of $0.27 per share, the closing price of ATSI’s common stock on the grant
date, November 1, 2007. 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 $5,500 of non-cash compensation
expense over the relevant service period.
-
ATSI
granted options to purchase 100,000 common shares to an employee with an
exercise price of $0.18 per share, the closing price of ATSI’s common stock on
the grant date, January 28, 2008. 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 $14,753 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 6 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%-105
|
%
|
Risk-free
interest rate
|
|
|
3.15%-4.65
|
%
|
Expected
life of options
|
|
|
4-6
years
|
|
A
summary
of the options as of April 30,
2008
and
the
changes during the nine months ended April 30,
2008
is
presented below:
|
|
|
|
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
|
|
|
2,715,000
|
|
|
0.22
|
|
|
6
|
|
Forfeited
|
|
|
(74,999
|
)
|
|
0.21
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at April 30, 2008
|
|
|
8,238,999
|
|
|
0.19
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at April 30, 2008
|
|
|
4,673,666
|
|
$
|
0.18
|
|
|
6
|
|
NOTE
3 – DEBT
On
November 3, 2006,
ATSI
borrowed $250,000 from CCA Financial Services, Inc. This note initially had
an
interest 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. On November 4, 2007, ATSI and CCA Financial Services, Inc. agreed
to extend the term of the note to April 30, 2008. On April 30, 2008, ATSI and
CCA Financial Services, Inc. agreed to extend the term of the note to June
30,
2008. The new principal balance of the note is $150,000 and the interest rate
is
15% per annum. All other terms remain the same.
On
June
1, 2006, ATSI restructured $275,000 in original principal amount of its 9%
Convertible Subordinated 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
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 April
30, 2008, the principal balance and accrued interest on the New Debenture were
$240,000 and $21,000, respectively.
On
March
28, 2007, ATSI borrowed $100,000 from Wells Fargo Bank. This
note
bears interest at 7%, provides for twenty-four 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 interest at 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
October 1, 2007, ATSI restructured a $500,000 note payable to Alfonso Torres.
The new principal balance is $459,170. The new note bears interest at 6% 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 $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. ATSI has paid $60,000 towards the cash
commitment. As a result of the restructuring of the note ATSI recognized $41,000
in debt forgiveness income associated with the accrued interest forgiven by
Alfonso Torres.
On
December 10, 2007, ATSI and The Shaar Fund entered into a settlement agreement
relating to certain litigation. ATSI paid $75,000 on December 12, 2007 and
agreed to pay another $450,000 with interest at 7.5% per annum in quarterly
payments of $16,667 on each of January 31, 2008 and April 30, 2008, and in
quarterly payments of $26,042 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. The
Shaar
Fund surrendered for cancellation 742 shares of ATSI’s 6% Series D Cumulative
Convertible Preferred Stock and forgave approximately $340,000 in dividends
accrued thereon as of October 24, 2007.
NOTE
4 - ACCOUNTS RECEIVABLE FINANCING AGREEMENT
On
December 12, 2007, ATSI entered into a $3,000,000 accounts receivable financing
agreement with Wells Fargo Business Credit (“WFBC”), a division of Wells Fargo
Bank, N.A. On March 26, 2008, WFBC increased the accounts receivable financing
to $5,000,000. ATSI may offer to sell with recourse not less than $350,000
and
no more than $5,000,000 of its accounts receivable to WFBC each month. WFBC
pays
to ATSI 85% of the aggregate amount of each account transferred under the
Account Transfer Agreement. Once the account is collected by WFBC, it retains
the amount originally paid for the account plus a daily factoring rate of
0.0349% for each day outstanding measured from the funding date and until the
account is paid by ATSI’s customer. If an account is not paid within 90 days,
ATSI must repurchase the account for the amount that it originally received
for
the account and pay the factor rate that has accrued prior to repurchase. 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. Under
the receivable financing agreement with WFBC, ATSI is factoring approximately
$875,000 of its monthly receivables. As of April 30, 2008, ATSI had
approximately $11,000 of factored account receivables outstanding; ATSI will
continue to factor its receivables on a monthly basis as services are rendered
to its customers.
NOTE
5 – COMMON STOCK
During
the nine months ended April 30, 2008 ATSI issued the following:
|
-
|
149,288
shares of common stock valued at $30,820 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 an
unprocessed conversion of the Series H Preferred Stock.
|
|
- |
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 –WARRANTS ISSUED FOR SERVICES
During
the nine months ended April 30, 2008 ATSI granted 375,000 warrants for
consulting services. The exercise price of the warrants was set at $.18 per
warrant. ATSI recognized a non-cash warrant expense of $45,753 during the
quarter ended April 30, 2008.
The
fair
value of each 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
|
|
|
105
|
%
|
Risk-free
interest rate
|
|
|
3.62
|
%
|
Expected
life of options
|
|
|
4
years
|
|
NOTE
7 –NOTE RECEIVABLE
As
of
April 30, 2008,
ATSI had
loaned a total of $150,000 to NetSapiens Inc. The
note
receivable is due on June 26, 2008 with interest at 8% per year. The
note
is secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution
modules. ATSI can convert the outstanding interest and principal balance into
a
perpetual NetSapiens’ License.
NOTE
8 - 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., whereby ATSI provides accounting and
administrative support to Fiesta for $2,500 per month. As of April 30, 2008,
Fiesta owed ATSI $52,500 in management fees. Additionally,
under the joint management and marketing agreement between Telefamilia and
Fiesta, ATSI entered into a promissory note for $15,000 with Fiesta on February
1, 2008. The promissory note has a maturity date of July 30, 2008 and an annual
interest rate of 8%. 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). Based on these findings, ATSI
is
not required to consolidate Fiesta.
NOTE
9 – PREFERRED STOCK SETTLEMENTS
In
August
2007, ATSI reached a settlement agreement with the holders of the 1,170 shares
of ATSI’s Series E Convertible 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 were 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
Convertible Preferred Stock. Under the terms of the settlement agreement, The
Shaar Fund, Ltd. agreed to surrender all outstanding shares of ATSI’s Series D
Convertible Preferred Stock and waived all accrued and unpaid dividends thereon
in the amount of approximately $340,000 as of October 24, 2007. ATSI paid The
Shaar Fund, Ltd. $75,000 in cash in December 2007 and issued to The Shaar Fund
a
promissory note for $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. ATSI
will
be entitled to a discount of 22.5% on the then outstanding principal
balance
if
ATSI
pays the principal amount in full within the first 18 months.
NOTE
10 – SETTLEMENT AGREEMENT REACHED WITH LIGHTSPEED TELECOM,
INC.
On
April
30, 2008 ATSI and Lightspeed Telecom, Inc. entered into a settlement agreement
in which ATSI is to receive some software from Lightspeed and some pecuniary
consideration. This settlement arouse from a suit filed in December 2006 by
ATSI
against Lightspeed Telecom, Inc. in the 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 was for unpaid telecommunications services
provided at the instance of the individual Defendants. ATSI asserted such
services were obtained by or at the direction of Defendants without intent
to
pay.
NOTE
11 – SHARE REPURCHASE PROGRAM
On
April
16, 2008 ATSI’s Board of Directors approved a share buyback plan allowing the
Company to purchase up to $1 million of its common stock. The shares will be
bought through the open market through December 31, 2008 based on price and
market conditions. As of April 30, 2008 the Company has repurchased 20,400
of
its common stock at an average purchase price of $0.21.
NOTE
12 – SUBSEQUENT EVENTS
On
May 1,
2008, ATSI entered into a “Purchase Agreement” with Fiesta Communications, Inc.
Under the agreement ATSI agreed to sell all of the outstanding shares of
Telefamilia Communications, Inc. to Fiesta Communications, Inc. for 975,000
shares of common stock in Fiesta Communications and $30,000 in cash to be paid
in June 2008. Fiesta Communications issued a three-year promissory note in
the
amount of $52,984 for the services rendered by ATSI under the joint management
agreement dated January 1, 2006. The three-year promissory note will be paid
quarterly starting July 31, 2008 and has a maturity date of May 1, 2010 and
an
annual interest rate of 8%. The note will be secured by all assets of the new
combined entity of Fiesta. Additionally,
on May 1, 2008 Fiesta and ATSI entered into a note payable to ATSI for
$10,000,
which has a maturity date of July 30, 2008 and an interest rate of
8%.
A
summary
of Telefamilia’s financial information is as follow:
Telefamilia
Communications, Inc.
|
(In
thousands)
|
(Unaudited)
|
As
of April 30, 2008
|
|
|
|
|
|
Balance
|
|
|
|
|
|
Current
assets
|
|
$
|
78
|
|
Non-current
assets
|
|
$
|
4
|
|
|
|
|
|
|
Total
assets
|
|
$
|
82
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
48
|
|
Non-current
liabilities
|
|
$
|
3
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
51
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$
|
31
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
82
|
|
For
the nine months ended April 30, 2008
|
|
|
|
|
|
Amount
|
|
Revenues
|
|
$
|
73
|
|
Cost
of services
|
|
|
47
|
|
|
|
|
|
|
Gross
profits
|
|
$
|
26
|
|
|
|
|
|
|
Operating
expenses
|
|
|
70
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(44
|
)
|
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,” ”plan,” 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 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 and nine months ended April 30, 2008 and 2007.
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 as 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 and nine months ended April 30,
2008
and 2007. All dollar amounts are in thousands.
|
|
Three months ended April 30,
|
|
Nine months ended April 30,
|
|
|
|
2008
|
|
2007
|
|
Variances
|
|
%
|
|
2008
|
|
2007
|
|
Variances
|
|
%
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
11,147
|
|
$
|
8,113
|
|
$
|
3,034
|
|
|
37
|
%
|
$
|
30,832
|
|
$
|
21,658
|
|
$
|
9,174
|
|
|
42
|
%
|
Communication
services
|
|
|
24
|
|
|
27
|
|
|
(3
|
)
|
|
-11
|
%
|
|
73
|
|
|
87
|
|
|
(14
|
)
|
|
-16
|
%
|
Total
operating revenues
|
|
|
11,171
|
|
|
8,140
|
|
|
3,031
|
|
|
37
|
%
|
|
30,905
|
|
|
21,745
|
|
|
9,160
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
|
|
10,384
|
|
|
7,647
|
|
|
2,737
|
|
|
36
|
%
|
|
28,713
|
|
|
20,175
|
|
|
8,538
|
|
|
42
|
%
|
GROSS
MARGIN
|
|
|
787
|
|
|
493
|
|
|
294
|
|
|
60
|
%
|
|
2,192
|
|
|
1,570
|
|
|
622
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
|
|
555
|
|
|
317
|
|
|
238
|
|
|
75
|
%
|
|
1,916
|
|
|
1,271
|
|
|
645
|
|
|
51
|
%
|
Legal
and professional fees
|
|
|
86
|
|
|
84
|
|
|
2
|
|
|
2
|
%
|
|
239
|
|
|
199
|
|
|
40
|
|
|
20
|
%
|
Bad
debt expense
|
|
|
(23
|
)
|
|
29
|
|
|
(52
|
)
|
|
-179
|
%
|
|
(2
|
)
|
|
76
|
|
|
(78
|
)
|
|
-103
|
%
|
Depreciation
and amortization expense
|
|
|
42
|
|
|
24
|
|
|
18
|
|
|
75
|
%
|
|
120
|
|
|
62
|
|
|
58
|
|
|
94
|
%
|
OPERATING
INCOME (LOSS)
|
|
|
127
|
|
|
39
|
|
|
88
|
|
|
226
|
%
|
|
(81
|
)
|
|
(38
|
)
|
|
(43
|
)
|
|
-113
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0
|
%
|
|
41
|
|
|
-
|
|
|
41
|
|
|
100
|
%
|
Interest
income (expense)
|
|
|
(32
|
)
|
|
(253
|
)
|
|
221
|
|
|
87
|
%
|
|
(79
|
)
|
|
(322
|
)
|
|
243
|
|
|
75
|
%
|
Total
other income (expense), net
|
|
|
(32
|
)
|
|
(253
|
)
|
|
221
|
|
|
87
|
%
|
|
(38
|
)
|
|
(322
|
)
|
|
284
|
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
95
|
|
|
(214
|
)
|
|
309
|
|
|
-144
|
%
|
|
(119
|
)
|
|
(360
|
)
|
|
241
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
PREFERRED DIVIDEND
|
|
|
-
|
|
|
(7
|
)
|
|
7
|
|
|
100
|
%
|
|
(12
|
)
|
|
(45
|
)
|
|
33
|
|
|
73
|
%
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
|
|
-
|
|
|
600
|
|
|
(600
|
)
|
|
-100
|
%
|
|
340
|
|
|
828
|
|
|
(488
|
)
|
|
-59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME TO COMMON STOCKHOLDERS
|
|
$
|
95
|
|
$
|
379
|
|
$
|
(284
|
)
|
|
-75
|
%
|
$
|
209
|
|
$
|
423
|
|
$
|
(214
|
)
|
|
-51
|
%
|
Three
Months ended April 30, 2008 Compared to Three Months ended April 30,
2007
Operating
Revenues.
Consolidated operating revenues increased $3,031,000, or 37%, between periods
from $8,140,000 for the quarter ended April 30, 2007 to $11,171,000 for the
quarter ended April 30, 2008.
Carrier
services revenue increased by $3,034,000, or 37%, from the quarter ended April
30, 2007 to the quarter ended April 30, 2008. Our carrier traffic increased
by
30 % from approximately 111,878,669 minutes of voice traffic during the quarter
ended April 30, 2007 to approximately 145,481,136
minutes
of voice traffic during the quarter ended April 30, 2008. The increase in
revenue and VoIP minutes is attributable primarily to the upgrade to our
Nextone® Soft Switch, which allows us to offer high quality and dependable VoIP
services, serve more customers and efficiently process greater volume of data
records and calls.
Communication
services revenue decreased approximately 11%, or $3,000 from the quarter ended
April 30, 2007 to the quarter ended April 30, 2008. The decrease in
communication services revenue is primarily due to a decrease in retail
customers from 111 during the quarter ended April 30, 2007 to 97 during the
quarter ended April 30, 2008.
Cost
of Services (Exclusive of depreciation and amortization).
The
consolidated cost of services increased by $2,737,000, or 36%, from the quarter
ended April 30, 2007 to the quarter ended April 30, 2008. 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 111,878,669
minutes of voice traffic during the quarter ended April 30, 2006 to
approximately 145,481,136 minutes of voice traffic during the quarter ended
April 30, 2008, thus increasing our cost of services between quarters.
Consolidated cost of services, as a percentage of revenue was comparable between
quarters at 93%. Additionally, as a result of the increase in total revenue,
our
gross profits increased from $493,000 during the quarter ended April 30, 2007
to
$787,000 during the quarter ended April 30, 2008.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and
professional fees). SG&A
expenses increased by $238,000, or 75%, from the quarter ended April 30,
2007 to
the
quarter ended April 30, 2008. The increase is primarily attributable to an
increase in salaries of $120,000 as a result of the hiring of three new
employees and bonuses paid to officers. Additionally, non-cash compensation
expense to employees and warrant expense increased by $79,000 from the quarter
ended April 30, 2007 to
the
quarter ended April 30, 2008.
Legal
and professional fees.
Legal
and professional fees increased by $2,000, or 2%, from the quarter ended April
30, 2007 to
the
quarter ended April 30, 2008. The increase is attributable to $35,000 in legal
fees incurred during the quarter ended April 30, 2008 in connection with an
investor relations campaign. We did not incur similar expenses during the
quarter ended April 30, 2007.
Bad
debt expense.
Bad debt
expense decreased by $52,000, or 179%, from the quarter ended April 30, 2007
to
the quarter ended April 30, 2008. During the quarter ended April 30, 2008 we
recognized a $25,000 adjustment
in bad debt expense as a result of changes in the VoIP market and historical
uncollectible accounts, thus decreasing bad debt expense between periods.
Depreciation
and amortization.
Depreciation and amortization increased by $18,000 or 75%, from the quarter
ended April 30, 2007 to
the
quarter ended April 30, 2008. The increase is attributed to the amortization
during fiscal 2008 of the new computers and upgrades to our Nextone soft-switch
acquired during the third quarter of fiscal 2008.
Operating
income (loss).
The
Company’s operating income increased by $88,000, or 226%, from the quarter ended
April 30, 2007 to
the
quarter ended April 30, 2008. The improvement in operating income is attributed
to the increase between quarters in gross profit margin of approximately
$294,000. The increase in gross profit margin was offset by an increase of
approximately $238,000 in selling, general and administrative expenses due
to an
increase in salaries of $120,000 as a result of the hiring of three new
employees and bonuses paid to officers. Additionally, non-cash compensation
expense to employees and warrant expense increased by $79,000 from the quarter
ended April 30, 2007 to
the
quarter ended April 30, 2008.
Interest
income (expense).
Interest (expense) decreased by $221,000, or 87%, from the quarter ended April
30, 2007 to
the
quarter ended April 30, 2008. The decrease can be attributed to the payoff
of
various promissory notes during fiscal 2008; and the related lower average
balance of notes payable during the quarter ended April 30, 2008. Additionally,
during the quarter ended April 30, 2007 we recognized $143,723 attributed to
the
beneficial conversion feature associated with the conversion of various notes
payable and accrued interest and the amortization of approximately $93,000
in
deferred financing fees as part of a private placement common stock financing.
Net
income (loss).
Net
income increased by $309,000, or 144%, from the quarter ended April 30,
2007 to
the
quarter ended April 30, 2008. The improvement in net income is attributed to
the
increase between quarters in operating income and a decrease in interest expense
between quarters.
Preferred
stock dividends.
Preferred stock dividends decreased by $7,000, or 100%, between periods, from
$7,000 for the quarter ended April 30, 2007 to $0 during the quarter ended
April
30, 2008. The decrease is primarily the result of the conversion of all
Redeemable Preferred Stock during the first quarter of Fiscal 2008. As a result
we were not required to account for any preferred stock dividend during the
quarter ended April 30, 2008.
Reversal
of previously recorded preferred stock dividends. During
the quarter ended April 30, 2007 we recognized a reversal of previously recorded
dividend expense of $600,000, this reversal occurred as result of the conversion
into common stock of 9,063,260 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 applicable to common stockholders.
Net
income applicable to common stockholders decreased by $284,000, or 75%, from
the
quarter ended April 30, 2007 to
the
quarter ended April 30, 2008, although we recognized an increase in gross margin
between periods of $294,000 and an increase in operating income between quarters
of $88,000. The decrease in net income applicable to common stockholders is
attributed to the reversal
of previously recorded preferred stock dividends of $600,000 recognized during
the quarter ended April 30, 2007. We did not recognize this type of adjustment
during the quarter ended April 30, 2008.
Nine
Months ended April 30, 2008 Compared to Nine Months ended April 30,
2007
Operating
Revenues.
Consolidated operating revenues increased by $9,160,000, or 42%, between periods
from $21,745,000 for the nine months ended April 30, 2007 to $30,905,000 for
the
nine months ended April 30, 2008.
Carrier
services revenue increased $9,174,000, or 42%, from the nine months ended April
30, 2007 to the nine months ended April 30, 2008. The
increase in carrier services revenue is attributed to the increase in carrier
minutes. Our carrier services minutes increased by 33% from approximately
316,435,399 minutes of voice traffic during the nine months ended April 30,
2007
to approximately 419,571,789 minutes of voice traffic during the nine months
ended April 30, 2008. The
increase in revenue and VoIP minutes is attributable primarily to the upgrade
to
our Nextone® Soft Switch, which allows us to offer high quality and dependable
VoIP services, serve more customers and efficiently process greater volume
of
data records and calls.
Communication
services revenue decreased approximately 16%, or $14,000, from the nine months
ended April 30, 2007 to the nine months ended April 30, 2008. The decrease
in
communication services revenue is primarily due to a decrease in the average
monthly retail customers from 113 during the nine months ended April 30, 2007 to
100 during the nine months ended April 30, 2008.
Cost
of Services (Exclusive of depreciation and amortization).
The
consolidated cost of services increased by $8,538,000, or 42%, from the nine
months ended April 30, 2007 to the nine months ended April 30, 2008. 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, was comparable between periods at 93%. Despite the increase in cost
of
service (exclusive of depreciation and amortization), gross profits increased
from $1,570,000 during the nine months ended April 30, 2007 to $2,192,000 during
the nine months ended April 30, 2008 as a result of the increase in revenues.
As
previously mentioned, our carrier traffic increased by 33 % from approximately
316,435,399 minutes of voice traffic during the nine months ended April 30,
2007
to approximately 419,571,789 minutes of voice traffic during the nine months
ended April 30, 2008. The increase in carrier minutes can mainly be attributed
to an increase in customers during fiscal 2008 compared to fiscal 2007.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and
professional fees).
SG&A
expenses increased by $645,000, or 51%, from the nine months ended April 30,
2007 to the nine months ended April 30, 2008. The increase is primarily
attributable to an increase in salaries and wages of approximately $354,000
as a
result of the hiring of three new employees and bonuses paid to officers.
Furthermore, non-cash compensation expense to employees and warrant expense
increased by $235,000 from the nine months ended April 30, 2007 to the nine
months ended April 30, 2008. The increase is attributed to the recognition
during the nine months ended April 30, 2008 of approximately $612,000 of
non-cash compensation expense associated with the stock options issued to
employees and directors recorded under the adopted of FAS-123R, Modified Stock
based Compensation. We incurred approximately $422,000 on non-cash compensation
expense during the nine months ended April 30, 2007.
Legal
and Professional Fees.
Legal
and professional fees increased by $40,000, or 20%, from the nine months ended
April 30, 2007 to the nine months ended April 30, 2008. The increase is
attributable to $57,000 in legal fees incurred during the nine months ended
April 30, 2008 in connection with the litigation and settlement of a dispute
between ATSI and the holders of the 6% Series D Cumulative Convertible Preferred
Stock. We did not incur similar expenses during the nine months ended April
30,
2007.
Bad
debt expense. Bad
debt
expense decreased by $78,000, or 103%, from the nine months ended April 30,
2007
to the nine months ended April 30, 2008. During the nine months ended April
30,
2007 we recognized $76,000 in bad debt expense associated with uncollectible
accounts. During the nine months ended April 30, 2008 we recognized an
adjustment in bad debt of $2,000 as a result of changes in the VoIP market
and
historical uncollectible accounts, thus decreasing bad debt expense between
periods.
Depreciation
and amortization.
Depreciation and amortization increased by $58,000, or 94%, from the nine months
ended April 30, 2007 to the nine months ended April 30, 2008. The increase
is
attributed to the amortization during fiscal 2008 of the new computers and
the
upgrade to our Nextone soft-switch, which was acquired during the 3rd
quarter
of fiscal 2008.
Operating
income (loss).
The
Company’s operating loss increased by $43,000, or 113%, from the nine months
ended April 30, 2007 to the nine months ended April 30, 2008. The increase
in
operation loss is primarily attributable to an increase in salaries and wages
of
approximately $354,000 as a result of the hiring of three new employees and
bonuses paid to officers. Furthermore, the increase in non-cash compensation
expense to employees and warrant expense of $235,000 from the nine months ended
April 30, 2007 to the nine months ended April 30, 2008. Additionally, the
increase in operating loss is attributed to recognition of $57,000 in legal
and
professional fees in connection with the litigation and settlement between
ATSI
and the holders of the 6% Series D Cumulative Convertible Preferred Stock.
These
increases in expenses offset the increase in gross margin of approximately
$622,000 and the reduction in bad debt expense of $78,000 between periods.
Debt
forgiveness income.
Debt
forgiveness income increased by $41,000, or 100%, from the nine months ended
April 30, 2007 to the nine months ended April 30, 2008. 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 $243,000, or 75%, from the nine months
ended April 30, 2007 to the nine months ended April 30, 2008. The decrease
can
be attributed to the payoff of various promissory notes during fiscal 2008;
and
the related lower average balance of notes payable during the nine months ended
April 30, 2008. Additionally, during the nine months ended April 30, 2007 we
recognized $143,723 attributed to the beneficial conversion feature associated
with the conversion of various notes payable and accrued interest and the
amortization of approximately $93,000 in deferred financing fees as part of
a
private placement common stock financing.
Net
income (loss).
Net
income (loss) decreased by $241,000 from the nine months ended April 30, 2007
to
the nine months ended April 30, 2008. The improvement in net income (loss)
is
attributed to the increase between periods in gross profit margin of
approximately $622,000, the reduction in interest expense of $243,000, and
increase in debt forgiveness income. These improvements were partially offset
by
the increase of approximately $645,000 in selling, general and administrative
expenses.
Preferred
stock dividends.
Preferred stock dividends decreased by $33,000, or 73%, between periods, from
$45,000 for the nine months ended April 30, 2007 to $12,000 during the nine
months ended April 30, 2008. The decrease in preferred dividends between periods
is mainly attributed to a decrease in dividends associated with Series A
Convertible Preferred Stock, Series H Convertible Preferred Stock and Series
D
Convertible Preferred Stock. As of April 30, 2008 all Convertible Preferred
Stock has been converted or redeemed to common stock.
Reversal
of previously recorded preferred stock dividends. During
the nine months ended April 30, 2008, 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 dividends of
approximately $340,000 as of October 24, 2007. During the nine months ended
April 30, 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 11,802,381
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, and as a result, a reversal of preferred dividends
was recognized during the period.
Net
income (loss) applicable to common stockholders.
Net
income applicable to common stockholders decreased by $214,000, or 51%, from
the
nine months ended April 30, 2007 to
the
nine months ended April 30, 2008 even though we recognized an increase in net
income of $241,000. The decrease in net income applicable to common stockholders
is attributed to the reversal
of previously recorded preferred stock dividends of $828,000 recognized during
the nine months ended April 30, 2007 compared to a reversal of previously
recorded preferred stock dividend in the amount of $340,000 during the nine
months ended April 30, 2008.
Liquidity
and Capital Resources
Cash
Position:
We had a
cash balance of $726,000 as of April 30, 2008. Net cash provided by operating
activities during the nine months ended April 30, 2008 was approximately
$256,000. Net cash provided by operating activities was as a result of
adjustments for non-cash charges for depreciation of $120,000, debt forgiveness
income of $41,000, charges associated with issuance of stock grants and options
to employees for services of $612,000, issuance of common stock and warrants
for
services of $77,000 and provisions for losses on accounts receivables of $2,000.
Cash provided by operating activities was slightly offset by the cash used
by
changes in accounts payable of $91,000, accrued liabilities of $30,000 and
accounts receivables of $253,000.
Investing
activities during the nine months ended April 30, 2008 consumed $145,000 as
a
result of advances of $100,000 to NetSapiens, notes receivables of $15,000
with
Fiesta Communications, a related party, investments in certificates of deposit
and purchases of $20,000 of equipment.
Financing
activities during the nine months ended April 30, 2008 consumed $435,000 in
cash. This cash was primarily consumed by debt principal payments of $178,000
associated with various notes payable, acquisition of the Redeemable Preferred
stock Series D&E of $250,000, acquisition of our common stock of $5,000 and
principal payments of $2,000 associated with a capital lease obligation.
Overall, our net operating, investing and financing activities during the nine
months ended April 30, 2008 resulted in a decrease of $324,000 in our available
cash.
Our
current cash expenses are expected to be approximately $150,000 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. We anticipate that the April 30, 2008 balance of $726,000
in cash combined with expected net cash flow generated from operations and
the
factoring agreement with Wells Fargo Bank, will be sufficient to fund our
operations, capital asset expenditures and potential common stock repurchases
for the next twelve months. We are currently utilizing the factoring agreement
with Wells Fargo Bank as necessary to provide cash for operations. Under the
agreement we are able to factor up to $5,000,000 of our monthly accounts
receivable. On average, we are factoring account receivables of $875,000 per
month. As of April 30, 2008 we had $11,000 of outstanding receivables under
the
Wells Fargo Factoring agreement. We believe that the improvement in our cash
flows from operations as a result of our growth will facilitate our ability
to
obtain debt and/or equity funding from institutional investors. However, we
presently do not have a definitive agreement to obtain such
financing.
Our
working capital was $244,000 as of April 30, 2008. This represents an
improvement of approximately $668,000 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 and the net operating income generated from
operations through April 30, 2008.
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 Sr. VP of Finance & Corporate 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 Sr. VP of Finance & Corporate 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 effect on internal control over
financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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 the individual Defendants. ATSI asserts such services
were obtained by or at the direction of Defendants without intent to pay, which
the individual Defendants denied. Lightspeed admitted liability but the
two individual Defendants denied liability. In light of Lightspeed being
out of business and having virtually no confirmable hard assets, in April,
2008
the parties entered into a settlement agreement in which ATSI is to receive
some
software from Lighspeed and some pecuniary consideration from the individual
Defendants. In the event the Defendants perform such settlement agreement,
the lawsuit will be dismissed. Therefore, such case is currently
abated pending the performance of such settlement by Defendants.
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
|
Stock
Purchase Agreement between ATSI Communications, Inc. and Fiesta
Communications, Inc. dated May 1, 2008.
|
10.2
|
9.0%
Convertible Note due 2011 between ATSI Communications, Inc. and Fiesta
Communications, Inc. dated May 1, 2008.
|
10.3
|
Promissory
Note between ATSI Communications, Inc. and Fiesta Communications,
Inc.
dated May 1, 2008.
|
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:
June 13, 2008
|
By:
|
/s/ Arthur L. Smith
|
|
|
Name:
|
Arthur
L. Smith
|
|
Title:
|
President
and
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
Date:
June 13, 2008
|
By:
|
/s/ Antonio Estrada
|
|
|
Name:
|
Antonio
Estrada
|
|
Title:
|
Sr.
VP of Finance & Corporate Controller
|
|
|
(Principal
Accounting and Principal
|
|
|
Financial
Officer)
|