UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB/A
(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,
2005
|
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
|
|
74-2849995
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(IRS
Employer
Identification
No.)
|
8600
Wurzbach, Suite 700W
San
Antonio, Texas 78240
(Address
of Principal Executive Offices)
|
|
(210)
614-7240
(Issuer’s
Telephone Number, Including Area
Code)
|
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:
Class
|
|
Outstanding
As Of June 14, 2005
|
Common
Stock, $.001 par
|
|
9,514,190
|
Transitional
Small Business Disclosure Format: Yes o No x
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
QUARTERLY
REPORT ON FORM 10-QSB/A
FOR
THE QUARTER ENDED APRIL 30, 2005
INDEX
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
|
Item
1. Financial
Statements (Unaudited)
|
|
|
|
|
|
Consolidated
Balance Sheet as of April 30, 2005
|
1
|
|
Consolidated
Statements of Operations for the Three and Nine Months Ended April
30,
2005 and 2004
|
2 |
|
Consolidated
Statements of Comprehensive Income (Loss) for the Three and Nine Months
Ended
April 30, 2005 and 2004 |
3 |
|
Consolidated
Statements of Cash Flows for the Nine Months Ended April 30, 2005
and 2004
|
4
|
|
Notes
to Consolidated Financial Statements
|
5 |
|
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
12
|
|
|
|
Item
3. Controls and Procedures
|
20 |
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1. Legal Proceedings
|
20 |
|
|
|
Item
2. Unregistered Sales of Equity Securities and use of
proceeds
|
21 |
|
|
|
Item
3. Default upon senior securities
|
21 |
|
|
|
Item
6. Exhibits
|
21
|
Statement
Regarding This Amendment
This
amendment to the Form 10-QSB for the period ended April 30, 2005, as previously
filed on June 14, 2005 includes restated financial statements to properly
reflect the warrants issued to consultants, the
conversion features of the Note Payable to Franklin Cardwell & Jones and the
accounting of the 9% Convertible Debentures and associated warrants as
derivative instrument
liabilities instead of as equity. Additionally, the embedded conversion
features of the Note Payable to Franklin Cardwell and Jones and the embedded
conversion
features of the 9% Convertible Debentures and warrants related
to the debt, have been bifurcated from the debt and accounted for separately
as
derivative instrument liabilities. We have added footnote 6 further explaining
the derivative instrument liabilities and provided information on subsequent
changes. In addition, we have modified the estimated volatility used in the
Black-Scholes option pricing model used to value the warrants issued to
consultants, the warrants issued to the 9% Convertible
Debentures holders and
the
conversion features embedded in our Note Payable to Franklin, Cardwell &
Jones and 9%
Convertible Debentures.
We
are
required to record the fair value of the conversion features and the warrants
on
our balance sheet at fair value with changes in the values of these derivatives
reflected in the consolidated statement of operations as “Gain (loss) on
embedded derivative liability.” The
effect
of the (non-cash) changes related to accounting separately for these derivative
instrument liabilities and modifying the estimated volatility; on our
consolidated statement of operations for the quarter and nine months ended
April
30, 2005, was a increase in our net income attributable to common shareholders
of $347,000 and $72,000, respectively. The effect on our consolidated balance
sheet as of April 30, 2005 was a net decrease in stockholders equity of
$398,000.
We
have
also recorded an additional liability and a corresponding adjustment of $404,774
to additional paid in capital to present our Series E Convertible Preferred
Stock at its full redemption value of $1,463,000.
In
all
other material respects, this Amended Quarterly Report on Form 10-QSB is
unchanged from the Quarterly Report on Form 10-QSB previously filed by the
Company on June 14, 2005. This amendment should also be read in conjunction
with
our amended Annual Report on Form 10-KSB/A for the fiscal year ended July 31,
2005 and our Quarterly Reports on Form 10-QSB/A for the quarters ended October
31, 2005 and January 31, 2006, together with any subsequent amendments
thereof.
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET (RESTATED)
(in
thousands, except share information)
|
|
April
30,
|
|
|
|
2005
|
|
ASSETS
|
|
(unaudited)
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
63
|
|
Accounts
receivable
|
|
|
145
|
|
Prepaid
& other current assets
|
|
|
44
|
|
Total
current assets
|
|
|
252
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
228
|
|
Less
- accumulated depreciation
|
|
|
(65
|
)
|
Net
property and equipment
|
|
|
163
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
Intangible
assets, net of accumulated amortization of $24
|
|
|
8
|
|
|
|
|
|
|
OTHER
ASSETS, net
|
|
|
|
|
Note
receivable
|
|
|
-
|
|
Investment
in joint venture
|
|
|
-
|
|
Total
assets
|
|
$
|
423
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Accounts
payable
|
|
$
|
506
|
|
Accrued
liabilities
|
|
|
558
|
|
Current
portion of obligation under capital leases
|
|
|
3
|
|
Notes
payable, related party
|
|
|
24
|
|
Notes
payable, Franklin, Cardwell & Jones
|
|
|
77
|
|
Convertible
debentures
|
|
|
234
|
|
Series
D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
issued
and outstanding
|
|
|
1,171
|
|
Series
E Cumulative Preferred Stock, 10,000 shares authorized, 1,170 shares
issued and outstanding
|
|
|
1,732
|
|
Derivative
financial instrument liabilities
|
|
|
23
|
|
Liabilities
from discontinued operations, net of assets
|
|
|
1,152
|
|
Total
current liabilities
|
|
|
5,480
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
Notes
payable
|
|
|
500
|
|
Obligation
under capital leases, less current portion
|
|
|
9
|
|
Other
|
|
|
8
|
|
Total
long-term liabilities
|
|
|
517
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT:
|
|
|
|
|
Series
A Cumulative Convertible Preferred Stock, 50,000 shares authorized,
3,750
issued
|
|
|
|
|
and
outstanding
|
|
|
-
|
|
Series
H Convertible Preferred Stock, 16,000,000 shares authorized, 13,912,572
issued
|
|
|
|
|
and
outstanding
|
|
|
14
|
|
Common
stock, $0.001, 150,000,000 shares authorized, 9,514,190 issued and
outstanding
|
|
|
10
|
|
Additional
paid in capital
|
|
|
66,771
|
|
Accumulated
deficit
|
|
|
(72,871
|
)
|
Other
comprehensive income
|
|
|
502
|
|
Total
stockholders' deficit
|
|
|
(5,574
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
423
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (RESTATED)
(in
thousands, except share information)
(unaudited)
|
|
|
|
|
|
|
|
Three
months ended April 30,
|
|
Nine
months ended April 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
1,727
|
|
$
|
484
|
|
$
|
3,943
|
|
$
|
726
|
|
Network
services
|
|
|
70
|
|
|
77
|
|
|
217
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
|
1,797
|
|
|
561
|
|
|
4,160
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
amortization, shown below)
|
|
|
1,660
|
|
|
501
|
|
|
3,854
|
|
|
768
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non
cash stock compensation to employees and warrants for services, shown
below)
|
|
|
139
|
|
|
164
|
|
|
314
|
|
|
413
|
|
Legal
and professional fees
|
|
|
60
|
|
|
52
|
|
|
365
|
|
|
201
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
-
|
|
|
-
|
|
|
533
|
|
|
30
|
|
Non-cash
stock-based compensation, employees
|
|
|
-
|
|
|
-
|
|
|
474
|
|
|
-
|
|
Bad
debt expense
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
4
|
|
Depreciation
and amortization
|
|
|
32
|
|
|
6
|
|
|
79
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,891
|
|
|
723
|
|
|
5,623
|
|
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
(94
|
)
|
|
(162
|
)
|
|
(1,463
|
)
|
|
(535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
9
|
|
|
-
|
|
|
13
|
|
|
1
|
|
Debt
forgiveness income
|
|
|
-
|
|
|
-
|
|
|
460
|
|
|
-
|
|
Gain
on disposal of investment
|
|
|
12,104
|
|
|
-
|
|
|
12,104
|
|
|
-
|
|
Gain
from sale of assets
|
|
|
-
|
|
|
25
|
|
|
-
|
|
|
25
|
|
Loss
on an unconsolidated affiliate
|
|
|
-
|
|
|
(25
|
)
|
|
-
|
|
|
(85
|
)
|
Gain
(loss) on derivative instrument liabilities
|
|
|
135
|
|
|
-
|
|
|
(317
|
)
|
|
-
|
|
Interest
income (expense)
|
|
|
11
|
|
|
(32
|
)
|
|
(68
|
)
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
12,259
|
|
|
(32
|
)
|
|
12,192
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
12,165
|
|
|
(194
|
)
|
|
10,729
|
|
|
(684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
PREFERRED DIVIDENDS
|
|
|
(38
|
)
|
|
(82
|
)
|
|
(114
|
)
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) TO COMMON STOCKHOLDERS
|
|
$
|
12,127
|
|
|
($276
|
)
|
$
|
10,615
|
|
|
($952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED INCOME (LOSS) PER SHARE
|
|
$
|
1.39
|
|
|
($0.23
|
)
|
$
|
1.69
|
|
|
($0.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
8,719,307
|
|
|
1,174,662
|
|
|
6,272,332
|
|
|
1,081,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (RESTATED)
(in
thousands)
(unaudited)
|
|
Three
months ended April 30,
|
|
Nine
months ended April 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
income (loss) to common stockholders
|
|
$
|
12,127
|
|
|
($276
|
)
|
$
|
10,615
|
|
|
($952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) to common stockholders
|
|
$
|
12,127
|
|
|
($276
|
)
|
$
|
10,615
|
|
|
($952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying summary of accounting policies and notes to financial
statements.
|
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (RESTATED)
(in
thousands)
(unaudited)
|
|
Nine
months ended April 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
10,729
|
|
|
($684
|
)
|
Adjustments
to net income (loss):
|
|
|
|
|
|
|
|
Gain
on disposal of investment
|
|
|
(12,104
|
)
|
|
-
|
|
Debt
forgiveness income
|
|
|
(460
|
)
|
|
-
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
79
|
|
|
6
|
|
Loss
on an unconsolidated affiliate
|
|
|
-
|
|
|
85
|
|
Non-cash
issuance of stock grants and options, employees
|
|
|
474
|
|
|
-
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
533
|
|
|
32
|
|
Provision
for losses on accounts receivable
|
|
|
4
|
|
|
4
|
|
Loss
on derivative instrument liability
|
|
|
317
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(120
|
)
|
|
(11
|
)
|
Prepaid
expenses and other
|
|
|
(18
|
)
|
|
(21
|
)
|
Increase
in
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
62
|
|
|
116
|
|
Accrued
liabilities
|
|
|
77
|
|
|
86
|
|
Net
cash used in operating activities
|
|
|
(427
|
)
|
|
(387
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases
of property & equipment
|
|
|
(8
|
)
|
|
-
|
|
Cash
proceeds from sale of ATSICOM
|
|
|
-
|
|
|
187
|
|
Investment
in joint venture in ATSICOM
|
|
|
-
|
|
|
(47
|
)
|
Acquisition
of business
|
|
|
(8
|
)
|
|
-
|
|
Net
cash (used in) provided by investing activities
|
|
|
(16
|
)
|
|
140
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
810
|
|
|
215
|
|
Payments
on notes payable
|
|
|
(810
|
)
|
|
(6
|
)
|
Proceeds
from the exercise of warrants
|
|
|
414
|
|
|
-
|
|
Principal
payments on capital lease obligation
|
|
|
(2
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
412
|
|
|
209
|
|
DECREASE
IN CASH
|
|
|
(31
|
)
|
|
(38
|
)
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
94
|
|
|
140
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
63
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of debt
|
|
$
|
829
|
|
$
|
-
|
|
Issuance
of common stock for purchase of intangible assets
|
|
|
24
|
|
|
-
|
|
Fair
value of the derivative instrument
|
|
|
26
|
|
|
6,569
|
|
Change
in derivative liabilities on warrants exercised
|
|
|
1,668
|
|
|
1,668
|
|
|
|
|
|
|
|
|
|
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 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 Securities and Exchange
Commission (“SEC”), and should be read in conjunction with the audited financial
statements and notes thereto of ATSI Communications Inc. filed with the SEC
on
Form 10-K for the year ended July 31, 2004. 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. The Company amended this quarterly report to
reflect a net loss for the period ended April 30, 2005, related to embedded
derivatives in certain securities. See Note 6 to the Financial Statements.
Derivative
financial instruments
The
Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks. Derivative financial instruments are
initially measured at their fair value. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported as charges or credits to income. For
option-based derivative financial instruments, ATSI uses the Black-Scholes
option-pricing model to value the derivative instruments.
The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Derivative instrument liabilities are classified in
the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months
of
the balance sheet date.
NOTE
2 - STOCK BASED COMPENSATION
ATSI
accounts for its employee stock-based compensation plans under Accounting
Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees. ATSI granted 2,104,001 options to purchase common stock to employees
in the nine months ending April 30, 2005. Sixty percent of these options vest
immediately and the remaining balance vest over three years. ATSI recorded
compensation expense of $42,000 under the intrinsic value method during the
nine
months ended April 30, 2005.
The
following table illustrates the effect on net loss and net loss per share if
ATSI had applied the fair value provisions of FASB Statement No.123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
|
|
Three
months ended April 30,
|
|
Nine
months ended April 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Restated)
|
|
Net
income (loss) to common
|
|
|
|
|
|
|
|
|
|
shareholders,
as reported
|
|
$
|
12,127,000
|
|
|
($276,000
|
)
|
$
|
10,615,000
|
|
|
($952,000
|
)
|
Add:
|
stock
based compensation determined under-the
intrinsic value-based method |
|
|
-
|
|
|
-
|
|
|
42,080
|
|
|
|
|
Less:
|
stock
based compensation determined under-the
fair value-based method |
|
|
-
|
|
|
|
|
|
(1,000,493 |
) |
|
|
|
Pro
forma net income (loss)
|
|
$
|
12,127,000
|
|
|
($276,000
|
)
|
$
|
9,656,587
|
|
|
($952,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1.39
|
|
|
($0.23
|
)
|
$
|
1.69
|
|
|
($0.88
|
)
|
Pro
forma
|
|
$
|
1.39
|
|
|
($0.23
|
)
|
$
|
1.54
|
|
|
($0.88
|
)
|
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:
|
|
Nine
Months Ended April 30,
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Expected
dividends yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected
stock price volatility
|
|
|
126
|
%
|
|
248
|
%
|
Risk-free
interest rate
|
|
|
2
|
%
|
|
2
|
%
|
Expected
life of options
|
|
|
1-3
years
|
|
|
1-3
years
|
|
Additionally,
during the nine months ended April 30, 2005, ATSI issued 900,000 shares to
its
employees and
333,170 shares to consultants with a market value of $432,000 and $132,240,
respectively.
NOTE
3 - GAIN ON DISPOSAL OF INVESTMENT
During
the quarter ending April 30, 2005 ATSI recognized a gain on disposal of
investment of approximately $12,104,000. The gain on disposal of investment
was
associated with the disposal of ATSI’s subsidiaries, American TeleSource
International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan). These entities
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February
4,
2003 and February 18, 2003 respectively. The court ordered joint administration
of both cases on April 9, 2003 and on May 14, 2003 the court converted the
cases
to Chapter 7. The two bankrupt subsidiaries were ATSI’s primary operating
companies and they have ceased operations. These bankruptcies did not include
ATSI Communications, Inc., the reporting entity. On July 2, 2003, the U.S.
Bankruptcy Court handling the Chapter 7 cases for ATSI Texas and TeleSpan
approved the sale of two of their subsidiaries, ATSI de Mexico S.A de C.V.
(ATSI
Mexico) and Servicios de Infraestructura S.A de C.V. (SINFRA), to Latingroup
Ventures, L.L.C. (LGV), a non-related party. Under the purchase agreement LGV
acquired all the communication center assets and assumed all related
liabilities. Additionally, under the agreement, LGV acquired the “Comercializadora”
License
owned by ATSI Mexico and the Teleport and Satellite Network License and the
20-year Packet Switching Network license owned by SINFRA. The Chapter 7
Bankruptcy Trustee received $17,500, which represents all the proceeds from
the
sale of these entities. The Chapter 7 Bankruptcy Trustee has managed the
designation of these funds for the benefit of the creditors of ATSI Texas and
TeleSpan. Upon liquidation of all the assets owned by ATSI Texas and TeleSpan,
the Chapter 7 Trustee will manage all claims with the related creditors. ATSI
did not receive any creditor objections to these court proceedings.
The
following represents the pre-petition liabilities of the bankrupt subsidiaries,
net of assets (in thousands):
|
|
|
|
|
Accounts
payable
|
|
$
|
7,496
|
|
Accrued
liabilities
|
|
|
2,015
|
|
Notes
payable
|
|
|
386
|
|
Capital
leases
|
|
|
2,207
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES:
|
|
$
|
12,104
|
|
NOTE
4 - NOTES PAYABLE
During
the nine months of fiscal 2005, ATSI
borrowed a total of $414,000 from Recap
Marketing & Consulting, LLP and entered into a series of unsecured
convertible promissory notes bearing interest at the rate of 12% per annum,
with
the following maturity dates:
Origination
Date
|
|
Amount
|
|
Maturity
Date
|
|
|
|
|
|
|
|
August
23, 2004
|
|
$
|
25,000
|
|
|
August
23, 2005
|
|
August
30, 2004
|
|
|
25,000
|
|
|
August
30, 2005
|
|
September
15, 2004
|
|
|
25,000
|
|
|
September
15, 2005
|
|
September
20, 2004
|
|
|
150,000
|
|
|
September
20, 2005
|
|
October
8, 2004
|
|
|
25,000
|
|
|
October
8, 2005
|
|
October
12, 2004
|
|
|
25,000
|
|
|
October
12, 2005
|
|
October
15, 2004
|
|
|
10,000
|
|
|
October
15, 2005
|
|
October
24, 2004
|
|
|
15,000
|
|
|
October
24, 2005
|
|
November
5, 2004
|
|
|
25,000
|
|
|
November
5, 2005
|
|
November
15, 2004
|
|
|
15,000
|
|
|
November
15, 2005
|
|
December
1, 2004
|
|
|
10,000
|
|
|
December
1, 2005
|
|
December
21, 2004
|
|
|
10,000
|
|
|
December
21, 2005
|
|
January
4, 2005
|
|
|
10,000
|
|
|
January
4, 2006
|
|
February
2, 2005
|
|
|
10,000
|
|
|
February
2, 2006
|
|
February
3, 2005
|
|
|
4,000
|
|
|
February
3, 2006
|
|
February
17, 2005
|
|
|
10,000
|
|
|
February
3, 2006
|
|
March
22, 2005
|
|
|
10,000
|
|
|
March
22, 2006
|
|
April
6, 2005
|
|
|
10,000
|
|
|
April
6, 2006
|
|
|
|
|
|
|
|
|
|
Total
During FY2005
|
|
$
|
414,000
|
|
|
|
|
On
November 1, 2004, ATSI entered into a note payable with Franklin Cardwell &
Jones, PC, for $103,454 associated with legal and professional services
previously rendered. The promissory note payable has a maturity date of December
1, 2005 and has an annual interest rate of 6%. The note is secured by ATSI
equipment and accounts receivable. Beginning November 1, 2005, the holder of
the
note may convert all or any part of the outstanding balance and accrued and
unpaid interest to shares of ATSI’s common stock equal to the amount converted
divided by the product of (a) 0. 90 times (b) the five-day average of the last
sales of the common stock prior to the conversion day. The conversion feature
was determined to be an embedded derivative and, accordingly, the embedded
derivative portion of the value of the note is attributable to the conversion
feature. The embedded derivative value at April 30, 2005, is $15,741 and is
included in Derivative Financial Instrument Liabilities on the balance sheet.
During the quarter end nine months ended April 30, 2005 we recognized a gain
on
derivative instrument liabilities of $24,138
and $10,540, respectively.
NOTE
5 - WARRANTS
On
October 13, 2003, ATSI entered into consulting agreements for twelve months
with
certain individual affiliates of Recap Marketing & Consulting, LLP that
provided for the issuance of compensation warrants to purchase a total of
3,900,000 shares of ATSI’s common stock at prices as indicated in the following
table. These warrants expire on November 30, 2005. At issuance ATSI recognized
$6,569,000 of non-cash compensation expense associated with the issuance of
these warrants.
COMMON
SHARES
|
|
EXERCISE
PRICE
|
|
|
|
|
|
2,000,000
|
|
$
|
0.01/share
|
|
800,000
|
|
$
|
0.25/share
|
|
850,000
|
|
$
|
0.50/share
|
|
250,000
|
|
$
|
0.75/share
|
|
During
the first nine months of fiscal 2005, individual affiliates of Recap Marketing
& Consulting LLP elected to exercise 3,799,930 warrants and Recap Marketing
& Consulting LLP forgave notes in the amount of $810,000 as the conversion
price. The exercise price of the warrants ranged from $0.01 per share to $0.50
per share.
On
November 1, 2004, ATSI extended the consulting agreements for an additional
six
months with certain individual affiliates of Recap Marketing & Consulting,
LLP that provided for the issuance of compensation warrants to purchase a total
of 1,000,000 shares of ATSI’s common stock at price of $0.50 per share. These
warrants expire on October 31, 2005. At signing of the extension to the
consulting agreements ATSI recognized $400,000 of non-cash compensation expense
associated with the issuance of these warrants.
On
March
1, 2005, ATSI amended the extension to the consulting agreement with certain
individuals’ affiliates of Recap Marketing & Consulting, LLP and extended
the agreement for an additional 12 months. The amendment to the agreements
allows for the repricing of 1,250,000 compensation warrants at a new exercise
price’s ranging from $0.30 per share to $0.40 per share. At signing of the
amendment to the extension of the consulting agreement, ATSI recognized $0
of
non-cash compensation expense associated with the issuance of these warrants.
At
issuance, ATSI recognized $7,053,000 of non-cash compensation expense. In
connection with the restatement, these warrants have been accounted for as
derivative instruments and, accordingly,
ATSI
reduced compensation expense in 2004 by $483,000. The
embedded derivative value is $7,360 at April 30, 2005 and is included in
Derivative Financial Instrument Liabilities on the balance sheet. A
corresponding gain (loss) of $0 and $106,404 is reflected in the statement
of
operations for the quarter ended April 30, 2004 and 2005, respectively, as
loss
on derivative instrument liability. Additionally, a corresponding gain (loss)
of
$0 and ($327,552) is reflected in the statement of operations for the nine
months ended April 30, 2004 and 2005, respectively, as loss on derivative
instrument liability. See Note 6.
NOTE
6 - DERIVATIVES
ATSI
evaluated the application of SFAS 133 and EITF 00-19 for all of its
financial instruments and identified the following financial instruments as
derivatives:
1)
|
Note
Payable, Franklin Cardwell and Jones
|
|
|
2)
|
9%
Convertible Debenture;
|
|
Warrants
to purchase common stock associated with the 2003 Debentures the
("2003
Debenture Warrants");
|
|
3)
|
Warrants
to purchase common stock in connection with consulting agreements
with two
individuals (“Consulting Warrants”)
|
Based
on
the guidance in SFAS 133 and EITF 00-19, we concluded that all of these
instruments were required to be accounted for as derivatives. SFAS 133 and
EITF
00-19 require ATSI to bifurcate and separately account for the conversion
features of the Note Payable to Franklin Cardwell and Jones, the 9% Convertible
Debentures & warrants issued to consultants as embedded derivatives.
Pursuant
to SFAS 133, ATSI bifurcated the conversion feature from the Note Payable to
Franklin Cardwell and Jones, because the conversion price is not fixed and
it’s
not convertible into a fixed number of shares. Accordingly, the embedded
derivative must be bifurcated and accounted for separately.
In
addition, ATSI bifurcated the conversion feature from the 9% Convertible
debenture and the associated warrants, since the conversion price is not fixed
and it is not convertible into a fixed number of shares.
Furthermore,
ATSI concluded that the exercise price and the number of shares to be issued
under the “Consulting Warrants” to two individuals are fixed. However, since the
9% Convertible debenture was issued prior to these warrants and these debentures
might result in issuing an indeterminate number of shares, it cannot be
concluded that the Company has a sufficient number of authorized shares to
settle these warrants. As such, the warrants were accounted for as derivative
instrument liabilities. ATSI is required to record the fair value of the
conversion features and the warrants on its balance sheet at fair value with
changes in the values of these derivatives reflected in the consolidated
statement of operations as “Gain (loss) on embedded derivative liability.” The
derivative liabilities were not previously classified as such in ATSI’s
historical financial statements. In order to reflect these changes, ATSI has
restated its financial statements for the year ended July 31, 2005 and the
three
months ended April 31, 2005, October 31, 2005 and January 31, 2006.
The
impact of the application of SFAS 133 and EITF 00-19 on the balance sheet as
of
April 30, 2005 and July 31, 2004 as follows:
|
|
Embedded
derivative liability balance
|
|
Net
Change
|
|
|
|
4/30/2005
|
|
7/31/2004
|
|
in
value
|
|
Note
Payable, Franklin Cardwell and Jones
|
|
$
|
15,741
|
|
|
-
|
|
$
|
15,741
|
|
9%
Convertible Debenture & warrants
|
|
|
6
|
|
|
10,503
|
|
|
(10,497
|
)
|
Consulting
warrants
|
|
|
7,360
|
|
|
1,338,375
|
|
|
(1,331,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
23,107
|
|
$
|
1,348,878
|
|
|
($1,325,771
|
)
|
And
the
impact on the statements of operations as the quarter and nine months ended
of
April 30, 2005 and 2004 as follows:
Gain
(loss) on embedded derivative liabilities:
|
|
Three
months ended April 30,
|
|
Nine
months ended April 30,
|
|
|
|
4/30/2005
|
|
4/30/2004
|
|
4/30/2005
|
|
4/30/2004
|
|
Note
Payable, Franklin Cardwell and Jones
|
|
$
|
24,138
|
|
|
-
|
|
$
|
10,540
|
|
|
-
|
|
9%
Convertible Debenture & warrants
|
|
|
4,280
|
|
|
-
|
|
|
10,495
|
|
|
-
|
|
Consulting
warrants
|
|
|
106,404
|
|
|
-
|
|
|
(337,552
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gain (loss) on embedded derivative liabilities:
|
|
$
|
134,822
|
|
|
-
|
|
|
($316,517
|
)
|
|
-
|
|
Since
the
conversion option for the Series D Preferred Stock is contingent, as a result
of
the ongoing litigation with the holders of these securities, the Series D
Preferred Stock is not within the scope of SFAS 133 and EITF 00-19. If the
contingency and lawsuit is resolved in the future and the holder becomes
able to convert, ATSI will assess whether the conversion option meets the
definition of a derivative under SFAS 133. However, as of July 31, 2003, the
Series D Preferred Stock, which is carried as a current liability, is recorded
at its stated redemption amount of $1,270 per share or approximately $942,000.
ATSI continues to accrue dividends on the Series D Preferred Stock, pending
resolution of the Company’s lawsuit. At April 30, 2005, the carrying amount of
the Series D Preferred Stock was $1,171,000, including accrued dividends of
$229,000.
Because
the conversion option for the Series E Preferred Stock is contingent, as a
result of the ongoing litigation with the holders of these securities, the
Series E Preferred Stock is not within the scope of SFAS 133 and EITF 00-19.
If
the contingency and lawsuit is resolved in the future and the holder
becomes able to convert, ATSI will assess whether the conversion option meets
the definition of a derivative under SFAS 133. However, as of July 31, 2003,
the
Series E Preferred Stock, which is carried as a current liability, is recorded
at its stated redemption amount of $1,250 per share or approximately $1,463,000.
ATSI continues to accrue an amount equivalent to dividends of 6% per annum
on
the Series E Preferred Stock, pending resolution of the Company’s lawsuit. At
April 30, 2005, the carrying amount of the Series E Preferred Stock was
$1,732,000, including accrued dividends of $269,000.
NOTE
7 - RESTATEMENT
ATSI
has
restated its 2005 and 2004 quarterly financial statement from amounts previously
reported. ATSI has
determined that certain financial instruments issued by the Company contain
features that require the Company to account for these features as derivative
instruments. Accordingly, warrants issued to consultants, the
conversion features of the Note Payable to Franklin Cardwell and Jones & the
9% Convertible Debentures and associated warrants have
been
accounted for as derivative instrument liabilities rather than as equity.
Additionally, the embedded conversion
features of the Note Payable to Franklin Cardwell & Jones and the
embedded
conversion
features of the 9% Convertible Debentures and warrants related
to the debt, have been bifurcated from the debt and accounted for separately
as
derivative instrument liabilities. Note 7 was added to disclose the derivative
instrument liabilities and provided information on subsequent changes. In
addition, ATSI has modified the estimated volatility used in the Black-Scholes
option pricing model used to value the warrants issued to consultants, the
warrants issued to the 9% Convertible
Debentures holders and
the
conversion features embedded in the note payable to Franklin, Cardwell &
Jones and 9%
Convertible Debentures.
ATSI
is
required to record the fair value of the conversion features and the warrants
on
the balance sheet at fair value with changes in the values of these derivatives
reflected in the consolidated statement of operations as “Gain (loss) on
derivative instrument liabilities.” The
effect
of the (non-cash) changes related to accounting separately for these derivative
instrument liabilities and modifying the estimated volatility, on the
consolidated statement of operations for the quarter and nine months ended
April
30, 2005, was an increase in the net income attributable to common shareholders
of $347,000 and $72,000, respectively. Basic and diluted earnings per share
attributable to common shareholders for the quarter and nine months ended April
30, 2005 increased by $0.04 and $0.01, respectively. The effect on the
consolidated balance sheet as of April 30, 2005 was a decrease in stockholders
equity of $398,000.
In
all
other material respects, the financial statements are unchanged. Following
is a summary of the restatement adjustments:
|
|
For
the three months ended April 30, 2005
|
|
For
the three months ended April 30, 2004
|
|
|
|
(in
thousands, except share information)
|
|
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
Summary
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
423
|
|
|
-
|
|
$
|
423
|
|
$
|
865
|
|
|
-
|
|
$
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-petition
Liabilities of bankrupt subsidiaries, net of assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,354
|
|
|
-
|
|
|
12,354
|
|
Accounts
payable
|
|
|
506
|
|
|
-
|
|
|
506
|
|
|
427
|
|
|
-
|
|
|
427
|
|
Accrued
liabilities
|
|
|
520
|
|
|
38
|
|
|
558
|
|
|
2,472
|
|
|
12
|
|
|
2,484
|
|
Current
portion of obligation under capital leases
|
|
|
3
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Notes
payable
|
|
|
24
|
|
|
-
|
|
|
24
|
|
|
654
|
|
|
-
|
|
|
654
|
|
Notes
payable, Franklin Cardwell & Jones
|
|
|
104
|
|
|
(27
|
)
|
|
77
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Convertible
debentures
|
|
|
275
|
|
|
(41
|
)
|
|
234
|
|
|
275
|
|
|
(41
|
)
|
|
234
|
|
Series
D Cumulative Preferred Stock
|
|
|
1,171
|
|
|
-
|
|
|
1,171
|
|
|
1,126
|
|
|
-
|
|
|
1,126
|
|
Series
E Cumulative Preferred Stock
|
|
|
1,327
|
|
|
405
|
|
|
1,732
|
|
|
1,257
|
|
|
405
|
|
|
1,662
|
|
Derivative
financial instrument liabilities
|
|
|
-
|
|
|
23
|
|
|
23
|
|
|
-
|
|
|
38
|
|
|
38
|
|
Liabilities
from discontinued operations
|
|
|
1,152
|
|
|
-
|
|
|
1,152
|
|
|
1,152
|
|
|
-
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
5,082
|
|
|
398
|
|
|
5,480
|
|
|
19,717
|
|
|
414
|
|
|
20,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
517
|
|
|
-
|
|
|
517
|
|
|
52
|
|
|
-
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Series
H preferred stock
|
|
|
14
|
|
|
-
|
|
|
14
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Common
stock
|
|
|
10
|
|
|
-
|
|
|
10
|
|
|
144
|
|
|
-
|
|
|
144
|
|
Additional
paid in capital
|
|
|
72,185
|
|
|
(5,414
|
)
|
|
66,771
|
|
|
61,201
|
|
|
(405
|
)
|
|
60,796
|
|
Accumulated
deficit
|
|
|
(77,887
|
)
|
|
5,016
|
|
|
(72,871
|
)
|
|
(80,751
|
)
|
|
(9
|
)
|
|
(80,760
|
)
|
Other
comprehensive income
|
|
|
502
|
|
|
-
|
|
|
502
|
|
|
502
|
|
|
-
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholder's deficit
|
|
|
(5,176
|
)
|
|
(398
|
)
|
|
(5,574
|
)
|
|
(18,904
|
)
|
|
(414
|
)
|
|
(19,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholder's deficit
|
|
$
|
423
|
|
|
-
|
|
$
|
423
|
|
$
|
865
|
|
|
-
|
|
$
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,797
|
|
|
-
|
|
$
|
1,797
|
|
$
|
561
|
|
|
-
|
|
$
|
561
|
|
Operating
expenses, COGS & depreciation
|
|
|
2,112
|
|
|
(221
|
)
|
|
1,891
|
|
|
723
|
|
|
-
|
|
|
723
|
|
Operating
loss
|
|
|
(315
|
)
|
|
221
|
|
|
(94
|
)
|
|
(162
|
)
|
|
-
|
|
|
(162
|
)
|
Other
Income
|
|
|
12,133
|
|
|
126
|
|
|
12,259
|
|
|
(29
|
)
|
|
(3
|
)
|
|
(32
|
)
|
Net
income (loss) from continuing operations
|
|
|
11,818
|
|
|
347
|
|
|
12,165
|
|
|
(191
|
)
|
|
(3
|
)
|
|
(194
|
)
|
Net
income from discontinued operations
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends
|
|
|
(38
|
)
|
|
-
|
|
|
(38
|
)
|
|
(82
|
)
|
|
-
|
|
|
(82
|
)
|
Net
income (loss) to common stockholders
|
|
$
|
11,780
|
|
|
347
|
|
$
|
12,127
|
|
|
($273
|
)
|
|
(3
|
)
|
|
($276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings (loss) per share
|
|
$
|
1.35
|
|
$
|
0.04
|
|
$
|
1.39
|
|
|
($0.23
|
)
|
$
|
0.00
|
|
|
($0.23
|
)
|
Diluted
Earnings (loss) per share
|
|
$
|
1.35
|
|
$
|
0.04
|
|
$
|
1.39
|
|
|
($0.23
|
)
|
$
|
0.00
|
|
|
($0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended April 30, 2005
|
|
|
For
the nine months ended April 30, 2004
|
|
|
|
|
(in
thousands, except share information)
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
Summary
statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,160
|
|
|
-
|
|
$
|
4,160
|
|
$
|
887
|
|
|
-
|
|
$
|
887
|
|
Operating
expenses, COGS & depreciation
|
|
|
6,034
|
|
|
(411
|
)
|
|
5,623
|
|
|
1,422
|
|
|
-
|
|
|
1,422
|
|
Operating
loss
|
|
|
(1,874
|
)
|
|
411
|
|
|
(1,463
|
)
|
|
(535
|
)
|
|
-
|
|
|
(535
|
)
|
Other
Income
|
|
|
12,531
|
|
|
(339
|
)
|
|
12,192
|
|
|
(141
|
)
|
|
(8
|
)
|
|
(149
|
)
|
Net
income (loss) from continuing operations
|
|
|
10,657
|
|
|
72
|
|
|
10,729
|
|
|
(676
|
)
|
|
(8
|
)
|
|
(684
|
)
|
Net
income from discontinued operations
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividends
|
|
|
(114
|
)
|
|
-
|
|
|
(114
|
)
|
|
(268
|
)
|
|
-
|
|
|
(268
|
)
|
Net
income (loss) to common stockholders
|
|
$
|
10,543
|
|
|
72
|
|
$
|
10,615
|
|
|
($944
|
)
|
|
(8
|
)
|
|
($952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings (loss) per share
|
|
$
|
1.68
|
|
$
|
0.01
|
|
$
|
1.69
|
|
|
($0.87
|
)
|
|
($0.01
|
)
|
|
($0.88
|
)
|
Diluted
Earnings (loss) per share
|
|
$
|
1.68
|
|
$
|
0.01
|
|
$
|
1.69
|
|
|
($0.87
|
)
|
|
($0.01
|
)
|
|
($0.88
|
)
|
NOTE
8 - SETTLEMENT AND RESTRUCTURING OF DEBT
On
October 1, 2004, ATSI entered into a Settlement Agreement and Mutual release
with Alfonso Torres Roqueni, the former owner of the concession license
purchased by ATSICOM in July 2000. Under the settlement agreement amounts owed
of $1,360,000 were restructured and settled in exchange for the issuance by
ATSI
of 687,600 common shares for the payment of $860,000 of the related obligation.
The common shares were considered issued at $1.25 per share. However, if on
the
measurement date of April 1, 2005, the average closing price of the ATSI common
stock for the ten (10) trading days immediately preceding the measurement date
is below $1.15, ATSI will be required to issue an additional 59,791 common
shares. If, however, the average closing price of the ATSI common stock for
the
ten (10) trading days immediately preceding the measurement date is at or above
$1.15, no other consideration will be given and the 687,600 shares issued will
be considered as the final consideration. Additionally as part of the
settlement, ATSI issued a promissory note for the remaining balance of $500,000.
The note accrues interest at the rate of 6% per
annum
and has a maturity date of October 1, 2007, with no monthly payments. ATSI
recognized a gain of $235,000 on the settlement of this debt.
On
October 26, 2004, ATSI entered into a Settlement Agreement and Mutual release
with Infraestructura Espacial, S.A de C.V. and Tomas Revesz, a former ATSI
director. Under the settlement agreement, ATSI issued 30,000 shares of its
common stock for the settlement of all principal and interest owed under a
note
payable in the amount of $250,000. This note was originally entered into on
March 22, 2001 and subsequently restructured on September 12, 2002. ATSI
recognized a gain of $225,000 on the settlement of this debt.
On
March
28, 2005, ATSI entered into a Settlement
Agreement (at mediation) with James C. Cuevas, Raymond G. Romero, Texas
Workforce Commission and ATSI-Texas.
The
Settlement Agreement was subject to board approval. The Board of Directors
met
on April 28, 2005 and approved the Settlement Agreement, subsequently; ATSI
issued 169,280 shares of its common stock for the settlement of all unpaid
wages
in the amount of $90,000. This claim was originally filed in December 2003
by
ATSI as a cause of action in the 407th Judicial District of Bexar County, Texas
against James C. Cuevas, Raymond G. Romero, Texas Workforce Commission and
ATSI-Texas whereby ATSI was seeking judicial review on the decision issued
by
the Texas Workforce Commission were it awarded a claim for unpaid wages against
ATSI.
NOTE
9 - ACQUISITION OF A LOCAL EXCHANGE CARRIER COMPANY
On
August
1, 2004, ATSI entered into an Asset Purchase Agreement with Hinotel, Inc.,
a
Hispanic owned Competitive Local Exchange Carrier (“CLEC”) based in South Texas.
The assets purchased under the agreement included Hinotel’s customer base, a
customer management and billing system, and supplier contracts. Additionally,
the transaction included the assignment and transfer of the CLEC license in
the
State of Texas. The purchase price of the assets was $32,000 paid in 40,000
shares of ATSI common stock and $8,000 in cash.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL
NOTE: This Quarterly Report on Form 10-QSB/A contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
“Forward looking statements” are those statements that describe management’s
beliefs and expectations about the future. We have identified forward-looking
statements by using words such as “anticipate,” “believe,” “could,” “estimate,”
“may,” “expect,” and “intend.” Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Additional Risk Factors section of the Annual
Report Form 10-K and other documents filed with the Securities and Exchange
Commission. Therefore, these types of statements may prove to be incorrect.
The
following is a discussion of the consolidated financial condition and results
of
operations of ATSI for the three and nine months ended April 30, 2005 and 2004.
As used in this section, the term “fiscal 2005” means the year ending July 31,
2005 and “fiscal 2004” means the year ended July 31, 2004.
General
We
are an
international telecommunications carrier that utilizes the Internet to provide
economical international telecommunications services. Our current operations
consist of providing digital voice communications over data networks and 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 local service providers
in the United States, Mexico, Asia, the Middle East and Latin America utilizing
VoIP telephony services. Our services are as follows:
Carrier
Services: We
provide VoIP termination services to United States and Latin American
telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America. Typically these
telecommunications companies offer their services to the public for domestic
and
international long distance services.
Network
Services: We
offer
private communication links for multi-national and Latin American corporations
or enterprise customers who use a high volume of telecommunications services
to
communicate with their U.S. offices or businesses and need greater dependability
than is available through public networks. These services include data, voice
and fax transmission as well as Internet services between the customers multiple
international offices and branches
On
August
1, 2004, we acquired a
Local
Exchange Carrier (“CLEC”) based in South Texas. This acquisition served as a
gateway to reach out to the Hispanic communities residing along the US and
Mexico border. Our strategy is to provide reliable and affordable local and
long
distance services to the underserved Hispanic community through Texas. Our
entry
to the retail services under our TeleFamilia brand and subsidiary will allow
us
to leverage our existing international VoIP network with additional services
that have the potential to deliver higher margins than our wholesale
international VoIP services. We have deployed various postpaid and prepaid
retail services and generated approximately $72,500 in retail services revenue
during the nine months ended April 30, 2005.
We
have
incurred operating losses and deficiencies in operating cash flows in each
year
since our inception in 1994 and expect our losses to continue through July
31,
2005. We had an operating loss of $1,463,000, for the nine months ended April
30, 2005 and a working capital deficit of $5,228,000 at April 30, 2005.
Due
to
such recurring losses, as well as the negative cash flows generated from our
operations and our substantial working capital deficit, the auditor’s opinion on
our financial statements as of July 31, 2004 calls attention to substantial
doubts about our ability to continue as a going concern. This means that there
is substantial doubt that we will be able to continue in business through July
31, 2005.
We
have
experienced difficulty in paying our vendors and lenders on time in the past.
As
a result, during the nine months ended April 30, 2005 management continued
to
pursue different avenues for funding and we entered into various short-term
convertible promissory notes in the aggregate amount of $414,000. These funds
have allowed the Company to pay those operating and corporate expenses that
were
not covered by our current cash inflows from operations. We will continue to
require additional funding until the cash inflows from operations are sufficient
to cover the monthly operating expenses. There is no assurance that we will
be
successful in securing additionally funding over the next twelve
months.
Results
of Operations
The
following table sets forth certain items included in the Company’s results of
operations in dollar mounts and as a percentage of total revenues for the three
and nine month period ended April 30, 2005 and 2004.
|
|
Three
months ended April 30,
|
|
Nine
months ended April 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
$ |
|
%
|
|
$ |
|
%
|
|
$ |
|
%
|
|
$ |
|
%
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
services
|
|
$
|
1,727
|
|
|
96
|
%
|
$
|
484
|
|
|
86
|
%
|
$
|
3,943
|
|
|
95
|
%
|
$
|
726
|
|
|
82
|
%
|
Network
services
|
|
|
70
|
|
|
4
|
%
|
|
77
|
|
|
14
|
%
|
|
217
|
|
|
5
|
%
|
|
161
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
|
1,797
|
|
|
100
|
%
|
|
561
|
|
|
100
|
%
|
|
4,160
|
|
|
100
|
%
|
|
887
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (Exclusive of depreciation and amortization, shown
below)
|
|
|
1,660
|
|
|
92
|
%
|
|
501
|
|
|
89
|
%
|
|
3,854
|
|
|
93
|
%
|
|
768
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
137
|
|
|
8
|
%
|
|
60
|
|
|
11
|
%
|
|
306
|
|
|
7
|
%
|
|
119
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense (exclusive of legal and professional
fees,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non
cash stock compensation to employees and warrants for services, shown
below)
|
|
|
139
|
|
|
8
|
%
|
|
164
|
|
|
29
|
%
|
|
314
|
|
|
8
|
%
|
|
413
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
and professional fees
|
|
|
60
|
|
|
3
|
%
|
|
52
|
|
|
9
|
%
|
|
365
|
|
|
9
|
%
|
|
201
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
issuance of common stock and warrants for services
|
|
|
-
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
533
|
|
|
13
|
%
|
|
30
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
stock-based compensation, employees
|
|
|
-
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
474
|
|
|
11
|
%
|
|
-
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
-
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
4
|
|
|
0
|
%
|
|
4
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
32
|
|
|
2
|
%
|
|
6
|
|
|
1
|
%
|
|
79
|
|
|
2
|
%
|
|
6
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(94
|
)
|
|
-5
|
%
|
|
(162
|
)
|
|
-29
|
%
|
|
(1,463
|
)
|
|
-35
|
%
|
|
(535
|
)
|
|
-60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
-
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
460
|
|
|
11
|
%
|
|
-
|
|
|
0
|
%
|
Gain
on disposal of investment
|
|
|
12,104
|
|
|
674
|
%
|
|
-
|
|
|
0
|
%
|
|
12,104
|
|
|
291
|
%
|
|
-
|
|
|
0
|
%
|
Gain
(loss) on derivative instrument liabilities
|
|
|
135
|
|
|
8
|
%
|
|
-
|
|
|
0
|
%
|
|
(317
|
)
|
|
-8
|
%
|
|
-
|
|
|
0
|
%
|
Other
income (expense)
|
|
|
20
|
|
|
1
|
%
|
|
(32
|
)
|
|
-6
|
%
|
|
(55
|
)
|
|
-1
|
%
|
|
(149
|
)
|
|
-17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
12,165
|
|
|
677
|
%
|
|
(194
|
)
|
|
-35
|
%
|
|
10,729
|
|
|
258
|
%
|
|
(684
|
)
|
|
-77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
preferred stock dividends
|
|
|
(38
|
)
|
|
-2
|
%
|
|
(82
|
)
|
|
-15
|
%
|
|
(114
|
)
|
|
-3
|
%
|
|
(268
|
)
|
|
-30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) to applicable to common shareholders
|
|
$
|
12,127
|
|
|
675
|
%
|
|
($276
|
)
|
|
-49
|
%
|
$
|
10,615
|
|
|
255
|
%
|
|
($952
|
)
|
|
-107
|
%
|
Three
Months ended April 30, 2005 Compared to Three Months ended April 30,
2004
Operating
Revenues.
Consolidated operating revenues increased by 220% between periods from $561,000
for the quarter ended April 30, 2004 to $1,797,000 for the quarter ended April
30, 2005.
Carrier
services revenues increased approximately by $1,243,000, or 257% from the
quarter ended April 2004 to the quarter ended April 2005. Our carrier traffic
increased from approximately 19.7 million minutes in the quarter ended April
30,
2004 to approximately 47.6 million minutes during the quarter ended April 30,
2005. The increase in revenue and carrier traffic can mainly be attributed
to
the growth in VoIP carrier services since the implementation of the NexTone
VoIP
soft-switch during the last quarter of fiscal 2004.
Network
services revenues decreased by approximately 9% or $7,000 from the quarter
ended
April 30, 2004 to the quarter ended April 30, 2005.
The
decrease in network services revenue is primarily due to termination of the
network service agreement with one of our customers. As a result, ATSI will
loss
about $22,000 of monthly revenue.
Cost
of Services (Exclusive of depreciation and amortization).
The
consolidated cost of services increased by approximately $1,159,000 from the
quarter ended April 30, 2004 to the quarter ended April 30, 2005. The increase
in cost of services is a direct result of the increase in carrier services
revenue and network services revenue. As mentioned above, our carrier traffic
increased from approximately 19.7 million minutes during the quarter ended
April
30, 2004 to approximately 47.6 million minutes in the quarter ended April 30,
2005, thus increasing our cost of services between quarters.
Selling,
General and Administrative (SG&A) Expenses.
(exclusive
of legal and professional fees, non-cash stock compensation to employees
and
common stock and warrants for services). SG&A
expenses decreased by approximately $25,000, or 15% from the quarter ended
April
30, 2004 to the quarter ended April 30, 2005. The decrease is attributable
to an
adjustment of $16,408 in salaries and wages and a reversal of an over-accrual
for services previously recognized.
Legal
and professional Fees.
Legal
and professional fees increased by approximately $8,000, or 15% from the
quarter
ended April 30, 2004 to the quarter ended April 30, 2005. During the quarter
ended April 30, 2005, the company incurred approximately $20,000 in legal
and
professional services associated with various litigations and settlements.
These
legal and professional expenses were not incurred during the quarter ended
April
30, 2004.
Depreciation
and Amortization.
Depreciation and amortization increased by $26,000 from the quarter ended
April
30, 2004 to the quarter ended April 30, 2005. The increase is attributed
to the
recognition of depreciation expense and amortization on the NexTone VoIP
soft-switch that was acquired during the last quarter of fiscal
2004.
Operating
Income (Loss).
The
Company’s operating income (loss) improved by approximately $68,000 or 42% from
the quarter ended April 30, 2004 to the quarter ended April 30, 2005. The
improvement in operating income (loss) is attributed to increase in gross
profit
margin of $77,000 and decrease in SG&A of $25,000 from the quarter ended
April 30, 2004 to the quarter ended April 30, 2005. The increase in gross
profit
margin and decrease in SG&A was slightly offset by the increase in
depreciation of $26,000 between periods.
Gain
on disposal of investment. During
the quarter ending April 30, 2005 ATSI recognized a gain on disposal of
investment of approximately $12,104,000. The gain on disposal of investment
was
associated with the disposal of ATSI’s subsidiaries, American TeleSource
International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan). These entities
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February
4,
2003 and February 18, 2003 respectively. The court ordered joint administration
of both cases on April 9, 2003 and on May 14, 2003 the court converted the
cases
to Chapter 7. The two bankrupt subsidiaries have ceased operations.
Gain
(loss) on derivative instruments liabilities, net. The
Company recognized a gain on derivative instruments of $135,000 during the
quarter ended April 30, 2005 compared to a gain of $0 during the quarter
ended
April 30, 2004, an increase of $135,000. The increase is as a result of the
net
unrealized (non-cash) change in the fair value of our derivative instrument
liabilities related to certain, warrants, and embedded derivatives in our
debt
instruments that have been bifurcated and accounted for separately.
Other
income (expense).
Other
(expense) decreased by approximately $52,000 or 163% from the quarter ended
April 30, 2004 to the quarter ended April 30, 2005. The decrease in other
income
(expense) is attributed to the decrease in loss in investment in ATSICOM
of
approximately $25,000 recognized during the quarter ended April 30, 2004
associated with our portion of the losses on our investment in ATSICOM. During
the quarter ended April 30, 2005 the Company did not recognized any loss
associated to ATSICOM.
Preferred
Stock Dividends.
Preferred Stock Dividends expense decreased by approximately $44,000 between
periods, from $82,000 for the quarter ended April 30, 2004 to $38,000 during
the
quarter ended April 30, 2005. During fiscal 2004 we converted all Redeemable
Preferred Series F and Series G shares to common. As a result of these
conversions, no dividends were incurred during the quarter ended April 2005
related to these securities.
Net
income (loss) to Common Stockholders.
The net
income (loss) for the quarter ended April 30, 2005 decrease to $12,127,000
net
income from $276,000 net (loss) for the quarter ended April 30, 2004. The
improvement in net income (loss) to common stockholders is mainly attributed
to
the recognition of a gain on disposal of investment of $12,104,000. The gain
on
disposal of investment was associated with the disposal of ATSI’s subsidiaries,
American TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc.
(TeleSpan). These entities filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively. The
court ordered joint administration of both cases on April 9, 2003 and on
May 14,
2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
have ceased operations. Additionally, the improvement in net income (loss)
is
attributed to increase in gross profit margin of $77,000 and decrease in
SG&A of $25,000 from the quarter ended April 30, 2004 to the quarter ended
April 30, 2005. The increase in gross profit margin and decrease in SG&A was
slightly offset by the increase in depreciation of $26,000 between periods.
Nine
months ended April 30, 2005 Compared to nine months ended April 30,
2004
Operating
Revenues.
Consolidated operating revenues increased by 369% between periods from $887,000
for the nine months ended April 30, 2004 to $4.2 million for the nine months
ended April 30, 2005.
Carrier
services revenues increased by approximately $3.2 million, or 443% from the
nine
months ended April 2004 to the nine months ended April 2005. Our VoIP carrier
traffic increased from approximately 19.1 million minutes during the nine
months
ended April 30, 2004 to approximately 113 million minutes during the nine
months
ended April 30, 2005. The increase in revenue and carrier traffic can mainly
be
attributed to the growth in VoIP carrier services since the implementation
of
the NexTone VoIP soft-switch during the last quarter of fiscal
2004.
Network
services revenues increased approximately 35% or $56,000 from the nine month
period ended April 30, 2004 to the nine month period ended April 30, 2005.
The
increase in network services revenue is primarily due to the purchase and
assignment of a network services contract from American TeleSource International
de Mexico S.A de C.V. (ASTIMEX). Under the assignment and purchase agreement
with ATSIMEX, we acquired the remaining term of the contract, which extended
from February 2004 through June 2004 and generated monthly revenues of
approximately $22,000. The
agreement was terminated during the quarter ended April 30, 2005 and as a
result
we expect a reduction of network service revenue by $22,000 per month.
Cost
of Services (Exclusive of depreciation and amortization).
The
consolidated cost of services increased by approximately $3.1 million, or
402%
from the nine months ended April 30, 2004 to the nine months ended April
30,
2005. The increase in cost of services is a direct result of the increase
in
carrier services revenue and network services revenue. As mentioned above,
our
carrier traffic increased from approximately 19.1 million minutes during
the
nine months ended April 30, 2004 to approximately 113 million minutes in
the
nine months ended April 30, 2005, thus increasing our cost of services between
periods.
Selling,
General and Administrative (SG&A) Expenses.
(exclusive
of legal and professional fees, non-cash stock compensation to employees
and
common stock and warrants for services). SG&A
expenses decreased by approximately $99,000, or 24% from the nine months
ended
April 30, 2004 to the nine months ended April 30, 2005. The decrease is
attributable to an adjustment of $108,648 in salaries and wages and a reversal
of an over-accrual for services previously recognized.
Legal
and professional Fees.
Legal
and professional fees increased by approximately $164,000, or 82% from the
nine
months ended April 30, 2004 to the nine months ended April 30, 2005. The
increase is attributable to the recognition of approximately $150,000 in
professional fees associated with a marketing campaign that commenced during
the
first quarter of fiscal 2005. Additionally, during the nine month period
we
recognized approximately $90,000 in legal fees associated to the lawsuit
for
stock fraud and manipulation by various institutions.
Non-cash
issuance of common stock and warrants for services.
Non-cash issuance of common stock and warrants for services increased by
$503,000 from the nine months ended April 30, 2004 to the nine months ended
April 30, 2005. This increase is primarily due to recognition of approximately
$533,000 in non-cash compensation expense associated with the consulting
agreements entered into with certain individual affiliates of Recap Marketing
& Consulting, LLP.
Non-cash
stock-based compensation, employees.
Non-cash compensation expense to employees increased by $474,000 from the
nine
months ended April 30, 2004 to the nine months ended April 30, 2005. This
increase is attributed to recognition of approximately $474,000 in non-cash
compensation expense associated with the grant of stock options and stock
grants
to our employees and board of directors.
Bad
debt expense. Bad
debt
expense remained consistent at $4,000 over the nine months ended April 30,
2004
and the nine months ended April 30, 2005. During the nine months ended April
30,
2005 we recognized $4,000 in bad debt expense associated with the write-off
of a
carriers services customer that ceased operations.
Depreciation
and Amortization.
Depreciation and amortization increased by $73,000 from the nine months ended
April 30, 2004 to the nine months ended April 30, 2005. The increase is
attributed to the recognition of depreciation expense and amortization on
the
NexTone VoIP soft-switch that was acquired during the last quarter of fiscal
2004.
Operating
income (loss).
The
Company’s operating income (loss) increased by approximately $928,000 or 173%
from the nine months ended April 30, 2004 to the nine months ended April
30,
2005. The increase in operating loss is attributed to the recognition of
$533,000 in non-cash warrant expense associated with the consulting agreements
entered into with certain individual affiliates of Recap Marketing &
Consulting, LLP and the recognition of $474,000 in non-cash stock based
compensation expense associated with the stock options and stock grants awarded
to the company employees and board of directors. The increase in non-cash
warrant and compensation expense was offset slightly by the increase in gross
margin of approximately $187,000.
Debt
forgiveness income. Our
debt
forgiveness income increased by approximately $460,000 from the nine months
ended April 30, 2004 to the nine months ended April 30, 2005. During the
nine
month period ended April 30, 2005, we negotiated and exchanged various
liabilities for equity. These settlements were related to the settlement
of the
$859,500 liability with Alfonso Torres Roqueni, the former owner of the
concession license acquired in July 2000, and the settlement of a $250,000
note
payable with Infraestructura Espacial, S.A de C.V. and Tomas Revesz, a former
ATSI director. The debt forgiveness income was based on the difference between
the market price of ATSI equity at the time of issuance and the market price
calculated at the time of the settlement of the debt.
Gain
on disposal of investment. During
the nine month period ended April 30, 2005 ATSI recognized a gain on disposal
of
investment of approximately $12,104,000. The gain on disposal of investment
was
associated with the disposal of ATSI’s subsidiaries, American TeleSource
International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan). These entities
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February
4,
2003 and February 18, 2003 respectively. The court ordered joint administration
of both cases on April 9, 2003 and on May 14, 2003 the court converted the
cases
to Chapter 7. The two bankrupt subsidiaries have ceased operations.
Gain
(loss) on derivative instruments liabilities, net. The
Company recognized a loss on derivative instruments of $317,000 during the
quarter ended April 30, 2005 compared to a gain of $0 during the quarter
ended
April 30, 2004, an increase of $317,000. The increase is as a result of the
net
unrealized (non-cash) change in the fair value of our derivative instrument
liabilities related to certain, warrants, and embedded derivatives in our
debt
instruments that have been bifurcated and accounted for separately.
Other
income (expense).
Other
income (expense) decreased by approximately $94,000 or 63% from the nine
months
ended April 30, 2004 to the nine months ended April 30, 2005. The decrease
in
other income (expense) is attributed to the decrease in loss in investment
in
ATSICOM of approximately $85,000 recognized during the nine months ended
April
30, 2004 associated with our portion of the losses on our investment in ATSICOM.
During the nine months ended April 30, 2005 the Company did not incurred
any
loss in ATSICOM.
Preferred
Stock Dividends.
Preferred Stock Dividends expense decreased by approximately $154,000 between
periods, from $268,000 for the nine months ended April 30, 2004 to $114,000
during the nine months ended April 30, 2005. During fiscal 2004 we converted
all
Redeemable Preferred Series F and Series G shares to common. As a result
of
these conversions, no dividends were incurred during the nine months ended
April
2005 related to these securities.
Net
income ( loss) to Common Stockholders.
The net
income (loss) for the nine months ended April 30, 2005 improved to $10,615,000
net income from $952,000 net (loss) for the nine months ended April 30, 2004.
The improvement in net income (loss) to common stockholders is mainly attributed
to the recognition of a gain on disposal of investment of $12,104,000. The
gain
on disposal of investment was associated with the disposal of ATSI’s
subsidiaries, American TeleSource International, Inc. (ATSI Texas) and TeleSpan,
Inc. (TeleSpan). These entities filed for protection under Chapter 11 of
the
U.S. Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively.
The
court ordered joint administration of both cases on April 9, 2003 and on
May 14,
2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
have ceased operations. The gain on disposal of investment was offset slightly
by the recognition of $533,000 in non-cash warrant expense and $474,000 in
non-cash stock based compensation expense associated with the stock options
and
stock grants awarded to the company employees and board of directors. Also,
there was an increase in depreciation and amortization of approximately $73,000
from the nine months ended April 30, 2004 to the nine months ended April
30,
2005.
Liquidity
and Capital Resources
Cash
used in operating activities:
During
the nine months ended April 30, 2005, operations consumed approximately $427,000
in cash. This cash consumed by operations is primarily due to the recognition
of
$474,000 in non-cash compensation expense associated with the stock grants
and
stock options awarded to the employees and board of directors. Additionally,
we
recognized $533,000 in non-cash warrant expense associated with the consulting
services agreement entered into during the second quarter of fiscal 2005.
Furthermore, we recognized $317,000 as a loss on derivative instrument
liabilities. We also recognized an increase in accounts payable of approximately
$62,000 and an increase in accrued liabilities of approximately $77,000.
The
increase in accrued liabilities and accounts payable is primarily due to
the
company recognizing approximately $56,000 in interest expense associated
with
various notes and the accrual of preferred stock dividends of $114,000. Also,
we
recognized an increase in accounts receivables of $120,000 associated with
the
billing to our customers during the quarter ending April 30, 2005. We also
recognized an increase in prepaid expenses for $18,000 related to the
prepayments/retainers to our attorneys for legal services.
Cash
provided used in investing activities:
During
the nine months ended April 30, 2005, the Company made various payments for
$8,000 related to the acquisition of some telecommunications equipment acquired
during fiscal 2005. Additionally, during the quarter ended October 31,
2004,
ATSI
entered into an Asset Purchase Agreement with Hinotel, Inc., a Hispanic owned
Competitive Local Exchange Carrier (“CLEC”) based in South Texas. The assets
purchase under the agreement included Hinotel’s customer base, a customer
management and billing system, and supplier contracts. The transaction also
included the assignment and transfer of the CLEC license in the State of
Texas.
The purchase price of the assets was $31,500, paid in 40,000 shares of ATSI
common stock and $7,500 in cash.
Cash
provided by financing activities:
During
the nine months ended April 30, 2005 we made principal payments on our capital
lease obligation for approximately $2,000 and we received $810,000 from the
exercise of warrants and $414,000 from proceeds from various notes payables.
In
addition, a result of the exercise of warrants we also recognized payments
of
$810,000 on our notes payable.
Overall,
our net operating, investing and financing activities during the nine months
ended April 30, 2005 provided a decrease of approximately $31,000 in cash
balances. We
had a
cash balance of $63,000 as of April 30, 2005.
Our
current operating expenses are expected to be approximately $70,000 per month,
including wages, rent, utilities, litigation fees and corporate professional
fees. We will require approximately $30,000 per month to cover the deficiencies
in cash from operations during Fiscal 2005. We intend to cover our initial
monthly operating expenses with our available cash and the factoring of our
receivables. We expect to continue conserving cash resources by paying executive
compensation, fees for certain consultants and professional services with
shares
of our common stock. In addition, outstanding indebtedness payable to a law
firm
is being paid through conversions to common stock. Furthermore, we will continue
to pursue additional debt and equity financings to cover our deficiencies
in
cash reserves. However, we presently do not have a definitive agreement in
place
to obtain such financing. Any additional debt or equity financing may not
be
available in sufficient amounts or on acceptable terms. If such financing
is not
available in sufficient amounts or on acceptable terms, the Company's results
of
operations and financial condition may be adversely affected.
Additionally,
in an effort to continue to conserve cash, we are not presently paying quarterly
interest and dividends on our outstanding convertible debentures and Redeemable
Preferred stock. However, we have continued to accrue dividends and interest
on
such debentures and Redeemable Preferred stock. The increase in accrued
liabilities related to the dividends and interest in arrears contributed
approximately $160,000 in cash flow savings during the nine months ended
April
30, 2005.
Our
working capital deficit at April 30, 2005 was approximately $5,228,000. This
represents a decrease of approximately $15,448,000 from our working capital
deficit at July 31, 2004. The decrease can primarily be attributed to the
recognition of a gain on disposal of investment of $12,104,000. The gain
on
disposal of investment was associated with the disposal of ATSI’s subsidiaries,
American TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc.
(TeleSpan). These entities filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively. The
court ordered joint administration of both cases on April 9, 2003 and on
May 14,
2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
have ceased operations. Additionally, the decrease in working capital deficit
is
also attributed to the settlement of various liabilities through the issuance
of
common stock. These
settlements were associated with the settlement of $859,500 liability with
Alfonso Torres Roqueni, the former owner of the concession license acquired
in
July 2000 and the settlement of a $250,000 note payable with Infraestructura
Espacial, S.A de C.V. and Tomas Revesz, a former ATSI director.
Our
current liabilities include:
· |
$103,454
owed to Attorneys for legal services rendered during fiscal 2004.
|
· |
$1,171,000
associated with the Series D Cumulative preferred stock. Of this
balance,
$942,000 is associated with the full redemption of this security
and
$229,000 is related to the accrued dividends as of April 30, 2005.
|
· |
$1,732,000
associated with the Series E Cumulative preferred stock. Of this
balance,
$1,463,000 is associated with the full redemption of this security
and
$269,000 is related to the accrued dividends as of April 30, 2005.
During
the fiscal year ended July 31, 2003, the Company was de-listed
from AMEX
and according to the terms of the Series E Cumulative preferred
stock
Certificate of Designation, if the Company fails to maintain a
listing on
NASDAQ, NYSE or AMEX the Series E preferred stockholder could request
a
mandatory redemption of the total outstanding preferred stock.
As of the
date of this filing we have not received such redemption
notice.
On
October 31, 2002, we filed a lawsuit in the United States District
Court
for the Southern District Court of New York against several individuals
and financial institutions, including Rose Glen Capital and Shaar
Fund,
the holders of our Series D and E Redeemable Preferred Stock, for,
among
other things, stock fraud and manipulation. On February 25, 2005,
Judge
Lewis A. Kaplan issued a memorandum opinion and order dismissing
the
complaint as to defendants that included the holders of our Series
D and E
Redeemable Preferred Stock. We plan to appeal that decision once
a final
judgment has been entered. These liabilities combined for a total
of
approximately $2,903,000. Accounting rules dictate that these liabilities
must remain on our books under Current Liabilities until the lawsuit
is
resolved in the judicial system or otherwise. At this time we cannot
predict the outcome or the time frame for this to
occur.
|
We
also
have approximately $1,152,000 of current liabilities (net of assets) associated
to the discontinued operations of the retail services unit. This balance
is
composed primarily of approximately $453,000 owed to the Mexican taxing
authorities related to a note assumed through the acquisition of Computel
and
approximately $699,000 related to income taxes owed as of April 30, 2005.
Ongoing
operations
We
believe that, based on our limited access to capital resources and our current
cash balances, financial resources may not be available to support our ongoing
operations for the next twelve months or until we are able to generate income
from operations. These matters raise substantial doubt about our ability
to
continue as a going concern. Our ability to continue as a going concern is
dependent upon the ongoing support of our stockholders and customers, our
ability to obtain capital resources to support operations and our ability
to
successfully market our services.
As
outlined in Note 4 to the financial statements, we have incurred amounts
of debt
to finance our working capital requirements. During the nine months ended
April
30, 2005, we borrowed a total of $414,000 from Recap Marketing & Consulting,
LLP; to fund our operating expenses and other corporate expenses. This debt
will
be applied to the payment of warrants issued to certain individual affiliates
of
Recap Marketing & Consulting, LLP.
We
will
continue to pursue cost cutting or expense deferral strategies in order to
conserve working capital. These strategies will limit the implementation
of our
business plan and increase our future liabilities. We are dependent on our
operations and the proceeds from future debt or equity investments to fund
our
operations and fully implement our business plan. If we are unable to raise
sufficient capital, we will be required to delay or forego some portion of
our
business plan, which will have a material adverse effect on our anticipated
results from operations and financial condition. Alternatively, we may seek
interim financing in the form of private placement of debt or equity securities.
Such interim financing may not be available in the amounts or at the time
when
is required, and will likely not be on the terms favorable to the Company.
ITEM
3. CONTROLS AND PROCEDURES
The
Company has adopted and implemented disclosure controls and procedures designed
to provide reasonable assurance that all reportable information will be
recorded, processed, summarized and reported within the time period specified
in
the SEC’s rules and forms. Under the supervision and with the participation of
the Company’s management, including the Company’s President and Chief Executive
Officer and the Company’s Controller and Principal Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e)
as of
the end of the fiscal quarter covered by this report. Based on the evaluation
of
the
President and Chief Executive Officer and the Controller and Principal Financial
Officer have identified weaknesses in the accounting for convertible instruments
and disclosure of embedded derivatives.
Specifically,
we identified deficiencies in our internal controls and disclosure controls
related to the accounting for convertible debt with conversion features
contingent upon future prices of our stock and convertible debt with detachable
warrants, primarily with respect to accounting for derivative liabilities
in
accordance with EITF 00-19 and SFAS 133. We restated our consolidated financial
statements for the year ended July 31, 2005 and for each of the interim periods
ending April 30, 2005, October 31, 2005 and January 31, 2006, in order to
correct the accounting in such financial statements with respect to derivative
liabilities in accordance with EITF 00-19 and SFAS 133. Since January 2006,
we
have undertaken improvements to our internal controls in an effort to remediate
these deficiencies through the following efforts: 1) implementing a review
of
all convertible securities to identify any securities that are not conventional
convertible securities and 2) improving supervision and training of our
accounting staff to understand and implement the requirements of EITF 00-19
and
SFAS 133.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
October 31, 2002, we filed a lawsuit in the United States District Court
for the
Southern District Court of New York against several individuals and financial
institutions, including the holders of our Series D and E Redeemable Preferred
Stock, for, among other things, stock fraud and manipulation. On February
25,
2005, Judge Lewis A. Kaplan issued a memorandum opinion and order dismissing
the
complaint as to all defendants with prejudice. We plan to appeal that decision
once a final judgment has been entered. On July 9, 2004, we filed a separate
but
related lawsuit in the same court against Sam Levinson and Uri Wolfson. On
April
27, 2005, the court entered a final judgment dismissing that action with
prejudice based on the February 25, 2005 decision in the first action. On
May
25, 2005, we appealed the dismissal of the second action to the United States
Court of Appeals for the Second Circuit. Our attorneys are also in the process
of investigating whether any other institutions participated in the manipulation
of the company's stock and to advise us whether to pursue other legal
proceedings. Currently we cannot predict the outcome of this litigation or
the
financial impact on our ongoing operations.
On
February 3, 2005 Helen G. Schwartz, Trustee for ATSI Communications, Inc.
(a
Texas corporation) and TeleSpan, Inc. filed in the U.S. Bankruptcy Court
for the
Western District of Texas an Adversary Proceeding against ATSI Communications,
Inc., a Nevada corporation alleging that ATSI-Nevada had received preferential
payments as defined by the U.S. Bankruptcy Code in the amount of $510,836.
On
March 31, 2005 ATSI filed its response denying any such payments were received
by ATSI Nevada, formerly ATSI Delaware. A hearing has been scheduled for
September 7, 2005. Currently
we cannot predict the outcome of this litigation or the financial impact
on our
ongoing operations.
On
March
28, 2005, we entered into a Settlement Agreement, which resolved all claims
in
the case filed in the 407th
Judicial
District Court of Bexar County Texas by with James C. Cuevas, Raymond G.
Romero,
Texas Workforce Commission and ATSI-Texas for unpaid wages. The Settlement
Agreement was subject to board approval. The Board of Directors met on April
28,2005 and approved the Settlement Agreement. We subsequently issued 169,280
shares of our common stock.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On
April
28, 2005, we issued 169,280 shares of our common stock in settlement of all
claims made by James C. Cuevas, Raymond G. Romero, Texas Workforce Commission
and ATSI-Texas for unpaid wages. These shares were issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act because
of
the limited size of the group, the direct relationship between us and the
individuals to whom they were issued, the absence of public solicitation
or
advertising, and restrictions on resale of the shares.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
As
of
April 30, 2005, the Company was in arrears with respect to the declaration
of
the following dividends payable on outstanding shares of its Preferred
Stock:
Series
A Cumulative Preferred Stock |
|
$ |
203,000 |
|
Series
D Cumulative Preferred Stock |
|
|
229,000 |
|
Series
E Cumulative Preferred Stock |
|
|
269,000 |
|
TOTAL |
|
$ |
701,000 |
|
ITEM
6. EXHIBITS
(a) Exhibits:
The following documents are filed as exhibits to this report.
Exhibit
Number
Description
4.1 |
Convertible
Promissory
Notes issued to Recap Marketing & Consulting, LLP.
*
|
10.1 |
Extension
of consulting agreements (Amendment No:1) with Hunter M. A. Carr
and
Donald W. Sapaugh. *
|
10.2 |
Settlement
Agreement (at mediation) with James C. Cuevas, Raymond G. Romero,
Texas
Workforce Commission and ATSI-Texas.
*
|
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:
April 14, 2006 By: /s/
Arthur L. Smith
Name:
Arthur
L.
Smith
Title: President
and Chief
Executive Officer
Date:
April 14, 2006 By: /s/
Antonio Estrada
Name:
Antonio
Estrada
Title:
Corporate
Controller (Principal
Accounting and Principal Financial Officer)