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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2004
[ ] 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: 1-15687
ATSI COMMUNICATIONS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 74-2849995
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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 [ ]
As of December 08, 2004, there were outstanding 6,180,787 shares of the
registrant's common stock, $.001 par value per share.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
2
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 2004
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of October 31, 2004 . . . . . . 4
Consolidated Statements of Operations for the Three Months
Ended October 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Comprehensive Loss for the
Three Months Ended October 31, 2004 and 2003. . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the Three Months
Ended October 31,2004 and 2003. . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Control and procedures. . . . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Unregistered sales of equity securities and use of proceeds . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 18
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(unaudited)
October 31,
2004
-------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 14
Accounts receivable 160
Prepaid & other current assets 46
-------------
Total current assets 220
-------------
PROPERTY AND EQUIPMENT 150
Less - Accumulated depreciation and amortization (25)
-------------
Net property and equipment 125
-------------
OTHER ASSETS, net
Intangible Assets, net 24
-------------
Total assets $ 369
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Pre-petition liabilities of bankrupt subsidiaries, net of assets $ 12,104
Accounts payable 595
Accrued liabilities 659
Current portion of obligation under capital leases 3
Notes payable 707
Convertible debentures 275
Series D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares issued and
outstanding. 1,149
Series E Cumulative Preferred Stock, 10,000 shares authorized and 1,170 shares issued and
outstanding 1,292
Liabilities from discontinued operations, net of assets 1,152
-------------
Total current liabilities 17,936
-------------
LONG-TERM LIABILITIES:
Notes payable 500
Obligation under capital leasses, less current portion 11
Other 9
-------------
Total long-term liabilities 520
-------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 3,750 issued
and outstanding -
Series H Convertible Preferred Stock, 16,000,000 shares authorized, 14,114,716 issued
and outstanding 14
Common stock, $0.001, 150,000,000 shares authorized, 5,478,340 issued and outstanding 6
Additional paid in capital 69,948
Accumulated deficit (88,557)
Other comprehensive Income 502
-------------
Total stockholders' deficit (18,087)
-------------
Total liabilities and stockholders' deficit $ 369
=============
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended October 31,
------------------------------
2004 2003
-------------- --------------
OPERATING REVENUES:
Services
Carrier services $ 769 $ 33
Network services 73 42
-------------- --------------
Total operating revenues 842 75
OPERATING EXPENSES:
Cost of services (exclusive of depreciation
and amortization, shown below) 772 50
Selling, general and administrative 250 196
Legal and professional fees 239 -
Bad debt expense - 4
Depreciation and amortization 23 -
-------------- --------------
Total operating expenses 1,284 250
-------------- --------------
OPERATING LOSS (442) (175)
OTHER INCOME (EXPENSE):
Other income (expense), net - 1
Debt forgiveness income 460 -
Loss on an unconsolidated affiliate - (7)
Interest expense (31) (26)
Gain/(loss) from sale of assets - -
-------------- --------------
Total other income (expense) 429 (32)
NET INCOME / (LOSS) (13) (207)
LESS: PREFERRED DIVIDENDS (38) (94)
-------------- --------------
NET INCOME / (LOSS) TO COMMON STOCKHOLDERS ($51) ($301)
============== ==============
BASIC AND DILUTED GAIN / (LOSS) PER SHARE ($0.01) ($0.29)
============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,598,383 1,036,390
============== ==============
5
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
For the three months ended October 31,
------------------------------------------
2004 2003
------------------- ---------------------
Net loss to common stockholders
Other comprehensive income (loss), net of tax: ($51) ($301)
Foreign currency translation adjustment - -
------------------- ---------------------
Comprehensive loss to common stockholders ($51) ($301)
=================== =====================
6
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Three months ended October 31,
------------------------------
2004 2003
-------------- --------------
NET INCOME (LOSS) ($13) ($207)
Adjustments to net income (loss)
Debt forgiveness income (460) -
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss
operating activities-
Depreciation and amortization 23 -
Loss on an unconsolidated affiliate - 7
Issuance of common stock for services 40 -
Issuance of warrants for services - 14
Provision for losses on accounts receivable - 4
Changes in operating assets and liabilities:
(Increase) decrease in
Accounts receivable (131) 5
Prepaid expenses and other (20) (6)
Increase (decrease) in
Accounts payable 90 58
Accrued liabilities 105 29
-------------- --------------
Net cash used in operating activities (366) (96)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (6) -
Cash proceeds from sale of ATSICOM - 62
Investment in joint venture in ATSICOM - (36)
Acquisition of business, net of assets (8) -
-------------- --------------
Net cash (used in) provided by investing activities (14) 26
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 286 50
Proceeds from the exercise of warrants 14 -
-------------- --------------
Net cash provided by financing activities 300 50
-------------- --------------
NET (DECREASE) INCREASE IN CASH (80) (20)
CASH AND CASH EQUIVALENTS, beginning of period 94 140
CASH AND CASH EQUIVALENTS, Allocated to discontinued operations - -
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 14 $ 120
============== ==============
NON-CASH TRANSACTIONS
Issuance of common stock for conversion of debts $ 733
Issuance of common stock for purchase of Intangible assets 24
7
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
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. Notes to the
financial statements, which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year
ended July 31, 2004, as reported in the Form 10-K, have been omitted.
NOTE 2 - PRE-PETITION LIABILITIES (NET OF ASSETS) OF THE BANKRUPT SUBSIDIARIES
ATSI's subsidiaries, American TeleSource International, Inc. (ATSI Texas) and
TeleSpan, Inc. (TeleSpan) 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 centers 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
will manage 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 negotiate all claims with creditors.
ATSI has not received any creditor objections to these court proceedings.
The following represents the pre-petition liabilities of the bankrupt
subsidiaries, net of assets (in thousands):
CURRENT LIABILITIES: October 31, 2004
--------------------- -----------------
Accounts payable $ 7,496
Accrued liabilities 2,015
Notes payable 386
Capital leases 2,207
-----------------
TOTAL CURRENT LIABILITIES: $ 12,104
=================
8
NOTE 3 - NOTES PAYABLE
During the first quarter of fiscal 2005, ATSI borrowed a total of $300,000 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 25, 2004 15,000 October 25, 2005
--------
$300,000
========
Additionally, during the first quarter of fiscal 2005, individual affiliates of
Recap Marketing & Consulting LLP elected to exercise 1,348,000 warrants and
Recap Marketing & Consulting LLP forgave notes in the amount of $13,473 as the
conversion price. As a result ATSI issued 1,348,000 common shares.
NOTE 4 - 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
$7,052,999 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 fist quarter of fiscal 2005, individual affiliates of Recap Marketing &
Consulting, LLP or their assignees exercised the following warrants:
EXERCISE DATE EXERCISE PRICE COMMON SHARES
------------------ --------------- -------------
September 21, 2004 $ 0.01/share 762,000
October 14, 2004 $ 0.01/share 436,000
October 15, 2004 $ 0.01/share 150,000
-------------
1,348,000
=============
NOTE 5 - 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
9
agreement all amounts owed of $1,359,500 were restructured and settled in
exchange for the issuance by ATSI of 687,600 common shares for the payment of
$859,500 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.
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.
NOTE 6 - 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 $31,500,
paid in 40,000 shares of ATSI common stock and $7,500 in cash.
NOTE 7 - SUBSEQUENT EVENTS
NOTES PAYABLE
-------------
Subsequent to October 31, 2004, ATSI borrowed a total of $50,000 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
----------------- ------- -----------------
November 5, 2004 $25,000 November 5, 2005
November 15, 2004 15,000 November 15, 2005
December 1, 2004 10,000 December 1, 2005
-------
$50,000
=======
Additionally, subsequent to October 31, 2004, individual affiliates of Recap
Marketing & Consulting, LLP or their assignees exercise the following warrants:
EXERCISE DATE EXERCISE PRICE COMMON SHARES
----------------- --------------- -------------
November 2, 2004 $ 0.01/share 50,000
November 11, 2004 $ 0.01/share 36,100
November 11, 2004 $ 0.25/share 495,072
-------------
581,172
=============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: This Quarterly Report on Form 10-QSB contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
"Forward looking statements" are those statements that describe management's
beliefs and expectations about the future. We have identified forward-looking
statements by using words such as "anticipate," "believe," "could," "estimate,"
"may," "expect," and "intend." Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
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 months ended October 31, 2004 and
2003. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included in
the annual report on Form 10-K filed with the SEC on November 8, 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 others through various agreements with local service
providers in the United States, Mexico, Asia, the Middle East and Latin America
utilizing VoIP telephony services.
On August 1, 2004, we acquired a Local Exchange Carrier ("CLEC") based in
South Texas. This acquisition will serve 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
arena 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 $19,000 in retail services
revenue during the first quarter of fiscal 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. Our operating losses were $8,485,000, for the year
ending July 31, 2004. We had an operating loss of $442,000, for the quarter
ended October 31, 2004 and a working capital deficit of $17,716,000 at October
31, 2004. Due to such losses and our 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 quarter ended October 31, 2004 management
continued to pursue different avenues for funding and we entered into various
short-term convertible promissory notes in the aggregate amount of $300,000.
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.
11
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three-month periods ended October 31, 2004 and 2003.
Three months ended October 31,
--------------------------------
2004 2003
---- ----
(Unaudited)
-----------
$ % $ %
------- ------ ------- ------
Operating revenues
------------------
Services
Carrier services $ 769 91% $ 33 44%
Network services 73 9% 42 56%
------- ------ ------- ------
Total operating revenues 842 100% 75 100%
Cost of services (Exclusive of depreciation
and amortization, shown below) 772 92% 50 67%
------- ------ ------- ------
Gross Margin 70 8% 25 33%
Selling, general and administrative
expense 250 30% 196 261%
Legal and professional fees 239 28% - 0%
Bad debt expense - 0% 4 5%
Depreciation and amortization 23 3% - 0%
------- ------ ------- ------
Operating loss (442) -52% (175) -233%
Debt forgiveness income 460 55% - 0%
Other income (expense), net (31) -4% (32) -43%
------- ------ ------- ------
Net loss (13) -2% (207) -276%
------- ------ ------- ------
Less: preferred stock dividends (38) -5% (94) -125%
------- ------ ------- ------
Net loss to applicable to
common shareholders ($51) -6% ($301) -401%
======= =======
12
THREE MONTHS ENDED OCTOBER 31, 2003 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
2002
Operating Revenues. Consolidated operating revenues increased 1,023%
between periods from $75,000 for the quarter ended October 31, 2003 to
approximately $842,000 for the quarter ended October 31, 2004.
Carrier services revenues increased approximately $736,000, or 100% from
the quarter ended October 31, 2003 to the quarter ended October 31, 2004. Our
carrier traffic increased from approximately 680,480 minutes in the first
quarter of fiscal 2004 to approximately 16,304,526 minutes in the first quarter
ended October 31, 2004. The increase in revenue and carrier traffic can mainly
be attributed to the growth in carrier services revenue since implementation of
the NexTone VoIP soft-switch during the last quarter of fiscal 2004.
Network services revenues increased approximately 74% or $31,000 from the
quarter ended October 31, 2003 to the quarter ended October 31, 2004. 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, from February 2004
through June 2004 and generated monthly revenues of approximately $22,000. The
agreement has expired and we are providing service to this customer on a
month-to-month basis at the same rate.
Cost of Services. (Exclusive of depreciation and amortization) The
consolidated cost of services increased by approximately $722,000 from the
quarter ended October 31, 2003 to the quarter ended October 31, 2004. 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 680,480 minutes in the first quarter of
fiscal 2004 to approximately 16,304,526 minutes in the quarter ended October 31,
2004, thus increasing our cost of services between quarters.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased approximately $54,000, or 28% from the quarter ended October 31, 2003
to the quarter ended October 31, 2004. The increase is attributable to the
recognition of approximately $45,000 in wages and contract labor associated with
the operations of the retail services acquired during the first quarter of
fiscal 2005.
Legal and professional Fees. Legal and professional fees increased
approximately $240,000, or 100% from the quarter ended October 31, 2003 to the
quarter ended October 31, 2004. 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 quarter we recognized approximately $90,000 in legal fees associated
to the lawsuit for stock fraud and manipulation by various institutions, as
describe in the legal preceding section of this report.
Depreciation and Amortization. Depreciation and amortization increased by
approximately 100% or $23,000 from the quarter ended October 31, 2003 to the
quarter ended October 31, 2004. The increase is attributed to the recognition of
depreciation expense and amortization on the NexTone VoIP soft-switch that was
acquired at the last quarter of fiscal 2004.
Operating Loss. The Company's operating loss increased by approximately
$267,000 or 153% from the quarter ended October 31, 2003 to the quarter ended
October 31, 2004. The increase in operating loss is attributed to the increase
of $293,000 in SG&A and the increase of approximately $23,000 in depreciation
and amortization in the first quarter of fiscal 2005 compared to the first
quarter of fiscal 2004. The increase in SG&A and depreciation and amortization
were offset slightly by the increase in gross margin of approximately $45,000.
Debt forgiveness income. Our debt forgiveness income increased
approximately $460,000 from the
13
quarter ended October 31, 2003 to the quarter ended October 31, 2004. During the
quarter ended October 31, 2004, we negotiated an exchange of 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.
Other Income (expense). Other income and expense is comparable between
quarter at approximately $31,000 for the quarter ended October 31, 2004 and
$32,000 for the quarter ended October 31, 2003.
Preferred Stock Dividends. Preferred Stock Dividends expense decreased by
approximately $56,000 between periods, from $94,000 for the quarter ended
October 31, 2003 to $38,000 during the quarter ended October 31, 2004. 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 October 2004 related to these securities.
Net loss to Common Stockholders. The net loss for the quarter ended
October 31, 2004 decreased to $51,000 from $301,000 for the quarter ended
October 31, 2003. The decrease in net loss to common stockholders was due
primarily to the recognition of debt forgiveness income of $460,000 during the
quarter and the $56,000 reduction of preferred stock dividends payable.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities: During the quarter ended October 31,
2004, operations consumed approximately $366,000 in cash. This cash consumed by
operations is primarily due to net losses of approximately $13,000 incurred
during the quarter ending October 31, 2004 and the non-cash income of $460,000
arising from the forgiveness of debts. We recognized an increase in accounts
payable of approximately $90,000, increase in accrued liabilities of
approximately $105,000. The increase in accrued liabilities and accounts payable
is primarily due to the company recognizing approximately $31,000 in interest
expense associated with various notes, the accrual of preferred stock dividends
of $38,000 and the accrual of professional fees of approximately $16,000
associated with the first quarter review and legal consulting work rendered
during the quarter. Also, we recognized an increase in accounts receivables of
$131,000 associated with the billing to our customers at the end of the quarter,
which we collected subsequent to the quarter ending October 31, 2004. We also
recognized an increase in prepaid expenses for $20,000 related to the
prepayments made to our vendors for the additional services and additional
capacity required form our vendors.
Cash provided used in investing activities: During the quarter ended
October 31, 2004, the Company acquired a new router, copier and printer for
$20,000. During the quarter we paid $6,000 in cash towards this acquisition. The
new router was acquired to compensate the increase in volume of minutes
processed through our network during the quarter ending October 31, 2004.
Additionally, during 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 (used in)/ provided by financing activities: During the quarter ended
October 31, 2004 we received approximately $286,000 for the issuance of debt and
received $14,000 from the exercise of warrants.
14
Overall, our net operating, investing and financing activities during the
quarter ended October 31, 2004 provided a decrease of approximately $80,000 in
cash balances. We intend to cover our monthly operating expenses with our
remaining available cash. Additionally, we will continue to pursue additional
equity offerings to cover our deficiencies in cash reserves. However, there is
no assurance that we will be able to secure the equity offerings required to
supplement our deficiencies in cash reserves.
Our working capital deficit at October 31, 2004 was approximately
$17,716,000. This represents a decrease of approximately $1,232,000 from our
working capital deficit at July 31, 2004. The decrease can primarily be
attributed to the settlement of various liabilities through the issuance of
common stock. These settlement were related to 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 working capital deficit at October 31, 2004 included approximately
$12,104,000 related to the pre-petition liabilities (net of assets), associated
with ATSI-Texas and TeleSpan, the two subsidiaries currently under Chapter 7
Bankruptcy. The pre-petition liability balance is composed primarily of the
following:
- $3 million in debt owed to IBM Corporation associated to a capital lease;
- $1.3 million in debt to Northern Telecom, a subsidiary of Nortel Networks,
associated with some telecommunications equipment acquired during fiscal
year 2001;
- $5.1 million in debt to various international and domestic
telecommunications carriers for services provided during fiscal year 2002
and 2003;
- $250,000 in property taxes to various taxing entities,
- $550,000 to Universal Service Fund for telecommunication taxes; and
- $2.4 million associated with rent expense, salaries and wages and
professional services to various entities.
Our working capital deficit after exclusion of the pre-petition liabilities is
approximately $5,612,000.
Our current obligations include $690,861 owed to Recap Marketing &
Consulting; LLP related various unsecured convertible promissory notes bearing
interest at the rate of 12% per annum. We entered into these promissory notes
during fiscal 2004 and the first quarter of fiscal 2005.
Our current liability includes approximately $1,149,000 associated with the
Series D Cumulative preferred stock. Of this balance, $942,000 is associated
with the full redemption of this security and $207,000 is related to the accrued
dividends as of October 31, 2004.
Our current liabilities include approximately $1,292,000 associated with
the Series E Cumulative preferred stock. Of this balance, $1,058,000 is
associated with the full redemption of this security and $234,000 is related to
the accrued dividends as of October 31, 2004. 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 Southern District Court of
New York against two financial institutions, Rose Glen Capital and Shaar Fund,
the holders of Series D and E Redeemable Preferred Stock, for stock fraud and
manipulation. These liabilities combined for a total of approximately
$2,441,000. Accounting rules dictate that these liabilities remain in 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.
15
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 October 31, 2004.
ONGOING OPERATIONS
We believe that, based on our limited access to capital resources and our
current cash balances, that 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 3 and 7 to the financial statements, we have incurred
amounts of debt to finance our working capital requirements. During the quarter
ended October 31, 2004, we borrowed a total of $300,000 and subsequent to the
quarter ended October 31, 2004 we barrowed an additional $50,000 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 that evaluation,
the President and Chief Executive Officer and the Controller and Principal
Financial Officer have concluded that these disclosure controls and procedures
are effective as of the end of the fiscal quarter covered by this report. There
were no changes in the Company's internal control over financial reporting
during the fiscal quarter covered by this report that have had a material affect
or are reasonably likely to have a material affect on internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PRECEDINGS
In March 2001, Comdisco sued our subsidiary, ATSI-Texas, for breach of
contract for failing to pay lease amounts due under a lease agreement for
telecommunications equipment. Comdisco claims that the total amount owed
pursuant to the lease was $926,185 and that the lease terms called for 36 months
of lease payments. Comdisco is claiming that ATSI-Texas only paid thirty months
of lease payments. ATSI-Texas disputes that the
16
amount owed was $926,185 since it received only $375,386 in financing and has
paid over $473,000 in lease payments and, thus, believe that it has satisfied
its obligation under the lease terms. Comdisco has filed a claim with the United
States Bankruptcy Court of the Western District of Texas in which the bankruptcy
of ATSI-Texas is pending. The Company does not have a liability for the lease
payments and expects the obligation of ATSI-Texas will be discharged in the
pending Chapter 7 case.
In July 2002, we were notified by the Dallas Appraisal District that the
administrative appeal from the appraisal of the ATSI-Texas office in the Dallas
InfoMart was denied. The property was appraised at over $6 million dollars.
The property involved included a Nortel DMS 250/300 switch, associated
telecommunications equipment and office furniture and computers. ATSI-Texas was
unable to proceed in its appeal of the appraisal due to its failure to pay the
taxes under protest. During fiscal 2002 we recorded approximately $260,000 of
property tax expense related to the ATSI-Texas Dallas office. Currently the
Dallas County taxing authority has filed claim with the United States Bankruptcy
Court of the Western District of Texas for approximately $783,843. This amount
also included a property tax estimate of approximately $230,572 for calendar
year 2003. We believe this amount is incorrect. All of the property was
removed and impaired from the Dallas site as a result of ATSI-Texas filing for
protection under Chapter 11 of the Bankruptcy code. We believe that this
liability ATSI-Texas will be discharged upon the completion of the pending
Chapter 7 case.
In October 2002, we filed a lawsuit in the Southern District of New York
against several financial parties for stock fraud and manipulation. The case is
based on convertible preferred stock financing transactions involving primarily
two firms: Rose Glen Capital and the Shaar Fund. We believe that Rose Glenn and
the Shaar Fund engaged in a scheme to defraud us into selling multiple series of
convertible preferred stock and to manipulate the price of our stock downward in
order to take advantage of increased conversion rates resulting from the decline
in stock price. We are not able to determine the likelihood of an adverse
outcome or the amount or range of any losses that could result from this matter.
If we receive an adverse decision in this suit, it is likely we would be
required to issue a substantial amount of our common shares to our Series D and
Series E holders and the current owners of our common shares would be
substantially diluted.
In December 2003, we filed a cause of action in the 407th Judicial District
of Bexar County, Texas against James C. Cuevas, Raymond G. Romero, Texas
Workforce Commission, ATSI-Texas and Martin W. Seidler seeking judicial review
on the decision issued by the Texas Workforce Commission awarding a claim for
$81,092 against us for unpaid wages. The District Court has set a trial date for
July 11, 2005. We are vigorously pursuing this action but cannot predict the
outcome of this litigation or the amount or range of a potential loss. An
adverse decision in this matter would have a material adverse effect on our
financial condition in the period in which it is entered.
In January 2004, we filed a petition in the 150th Judicial District of
Bexar County, Texas against Inter-tel.net, Inc. and Vianet Communications, Inc.
d/b/a Inter-tel.net seeking declaratory relief that ATSI Communications, Inc. is
not bound by the Carrier Services Agreement between Vianet Communications, Inc.
and ATSI-Texas. On February 27, 2004 the Bankruptcy Court in the ATSI-Texas
Bankruptcy case allowed Vianet Communications, Inc. to amend its claim pending
in the Bankruptcy of ATSI-Texas and assert against ATSI its claim for $1,720,387
arising from an alleged breach of contract by ATSI-Texas. The Bankruptcy Court
then ordered the lawsuit to be remanded back to state court for hearing. The
District Court has set a trial date for March 9, 2005. We cannot predict the
outcome of this litigation or the amount or range of a potential loss. An
adverse decision in our declaratory judgment action and in the claim by Vianet
Communications, Inc. would have a material adverse effect on our financial
condition in the period in which it is entered.
We are also a party to additional claims and legal proceedings arising in
the ordinary course of business. We believe it is unlikely that the final
outcome of any of the claims or proceedings to which we are a party would have a
material adverse effect on our financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be no
17
assurance that the resolution of any particular claim or proceeding would not
have an adverse effect on our results of operations in the period in which it
occurred.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains the names, number of shares, dates and
consideration paid for common stock by persons who purchased securities in
private placements during the three months ended October 31, 2004. All such
transactions were exempt from registration under the Securities Act under
Section 4(2) as transactions not involving a public offering because of the
limited number of persons involved in each transaction, the access of such
persons to information about the Company that would have been available in a
public offering, and the absence of any public solicitation or advertising.
NUMBER
PURCHASE OF SHARES CONSIDERATION DATE
---------------------- --------- ----------------------------------- ----------------
Alexandro Hinojosa Sr. 40,000 Acquisition of Hinotel for $24,000 August 1, 2004
Alfonso Torres Roqueni 687,600 Settlement of debt for $859,500 October 1, 2004
Tomas Revesz 30,000 Settlement of debt for $250,000 October 26, 2004
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
EXHIBIT NUMBER
---------------
4.1 Convertible Promissory Notes issued to Recap Marketing & Consulting,
LLP. *
10.1 Confidential Settlement Agreement and Mutual Release, Note Payable and
Lock out agreement between ATSI and Alfonso Torres Roqueni, dated
October 1, 2004. *
10.2 Confidential Settlement Agreement and Mutual Release between ATSI and
Infraestructura Especial and Tomas Revesz, dated October 26, 2004. *
31.1 Certification of our President and Chief Executive Officer, under
Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of our Corporate Controller and Principal Financial
Officer, under Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certification of our President and Chief Executive Officer, under
Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification of our Corporate Controller and Principal Financial
Officer, under Section 906 of the Sarbanes-Oxley Act of 2002. *
99.1 Public Utility Commission of Texas ("PUC") approval of transfer of the
Service Provider Certificate of Authority ("SPCOA") from Hinotel, Inc.
to ATSI's subsidiary, Telefamilia Communications, Inc. Dated
October 25, 2004. *
* Filed herewith
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(b) Reports on Form 8-K
- On August 1, 2004, we filed a Current Report on Form 8-K under Items
1.01, 2.01, 3.02 and 9.01, we announced that ATSI Communications, Inc.
and Hinotel, Inc. entered into an asset purchase agreement under which
ATSI acquired all of Hinotel's retail customer base, a customer
management and billing system, certain supplier contracts and the
Competitive Local Exchange Carrier (CLEC) license in exchange for
$7,500 in cash and 40,000 shares of ATSI common stock.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: December 15, 2004 By: /s/ Arthur L. Smith
------------------- -------------------
Name: Arthur L. Smith
Title: President and
Chief Executive Officer
Date: December 15, 2004 By: /s/ Antonio Estrada
----------------- -------------------
Name: Antonio Estrada
Title: Corporate Controller
(Principal Accounting and Financial Officer)
19