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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2005
[_] 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 (IRS Employer
Incorporation or Organization) 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 [_] No [X]
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
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 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. 8
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Unregistered Sales of Equity Securities and use of proceeds. . . . . . . . . . . . . . 17
Item 3. Default upon senior securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
April 30,
2005
-----------
ASSETS
-------
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
-----------
Total assets $ 423
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable 506
Accrued liabilities 520
Current portion of obligation under capital leases 3
Notes payable 128
Convertible debentures 275
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 1,327
Liabilities from discontinued operations, net of assets 1,152
-----------
Total current liabilities 5,082
-----------
LONG-TERM LIABILITIES:
Notes payable 500
Obligation under capital leases, less current portion 9
Other 8
Total long-term liabilities 517
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, 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 72,185
Accumulated deficit (77,887)
Other comprehensive income 502
-----------
Total stockholders' deficit (5,176)
-----------
Total liabilities and stockholders' deficit $ 423
-----------
1
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended April 30, Nine months ended April 30,
------------------------------ ------------------------------
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 140 164 314 413
Legal and professional fees 60 52 365 201
Non-cash issuance of common stock and warrants for services 220 - 944 30
Non-cash stock-based compensation, employees - - 474 -
Bad debt expense - - 4 4
Depreciation and amortization 32 6 79 6
-------------- -------------- -------------- --------------
Total operating expenses 2,112 723 6,034 1,422
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) (315) (162) (1,874) (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)
Interest income (expense) 20 (29) (46) (82)
-------------- -------------- -------------- --------------
Total other income (expense) 12,133 (29) 12,531 (141)
NET INCOME (LOSS) 11,818 (191) 10,657 (676)
LESS: PREFERRED DIVIDENDS (38) (82) (114) (268)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) TO COMMON
STOCKHOLDERS $ 11,780 ($273) $ 10,543 ($944)
============== ============== ============== ==============
BASIC AND DILUTED INCOME (LOSS) PER SHARE $ 1.35 ($0.23) $ 1.68 ($0.87)
============== ============== ============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,719,307 1,174,662 6,272,332 1,081,806
-------------- -------------- -------------- --------------
2
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(unaudited)
Three months ended April 30, Nine months ended April 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income (loss) to common stockholders $ 11,780 ($273) $ 10,543 ($944)
Foreign currency translation adjustment - - - -
------------- ------------- ------------- -------------
Comprehensive income (loss) to common stockholders $ 11,780 ($273) $ 10,543 ($944)
============= ============= ============= =============
3
ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended April 30,
2005 2004
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 10,657 ($676)
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 944 32
Provision for losses on accounts receivable 4 4
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 55 78
--------------- ---------------
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 -
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM 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. 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 - 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 Nine Months Ended
April 30, April 30,
2005 2004 2005 2004
----------- ----------- ------------ -----------
Net income (loss) to common
shareholders, as reported $11,780,000 $ (273,000) $10,543,000 $ (944,000)
Add: stock based
compensation
determined under
intrinsic value-
based method - - 42,080 -
Less: stock based
compensation
determined under
fair value-
based method - - (1,000,493) -
----------- ----------- ------------ -----------
Pro forma net income
5
(loss) $11,780,000 $ (273,000) $ 9,584,587 $ (944,000)
=========== =========== ============ ===========
Basic and diluted net income
(loss) per common share:
As reported $ 1.35 $ (.23) $ 1.68 $ (.87)
Pro forma $ 1.35 $ (.23) $ 1.52 $ (.87)
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
6
ORIGINATION DATE AMOUNT MATURITY DATE
----------------------- -------- ------------------
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 FY 2005 $414,000
========
On November 1, 2004, ATSI entered into a note payable with Franklin Cardwell and
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.
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
$7,053,000 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,
7
2005. At signing of the extension to the consulting agreements ATSI recognized
$591,000 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
$220,000 of non-cash compensation expense associated with the issuance of these
warrants.
NOTE 6 - 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 7 - 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
8
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 and nine months ended April 30, 2005
and 2004. 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 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. Our operating losses were $8,485,000, for the year
ending July 31, 2004. We had an operating loss of $1,874,000, for the nine
months ended April 30, 2005 and a working capital deficit of $4,431,000 at April
30, 2005. Due to such recurring losses, as well as the negative cash flows
9
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.
10
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 140 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 220 12% - 0% 944 23% 30 3%
for services
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) (315) -18% (162) -29% (1,874) -45% (535) -60%
Debt forgiveness income - 0% - 0% 460 11% - 0%
Gain on disposal of investment 12,104 674% - 0% 12,104 291% - 0%
Other income (expense) 29 2% (29) -5% (33) -1% (141) -16%
-------- ------ ------- ------ -------- ------ ------- ------
Net income (loss) 11,818 658% (191) -34% 10,657 256% (676) -76%
-------- ------ ------- ------ -------- ------ ------- ------
Less: preferred stock dividends (38) -2% (82) -15% (114) -3% (268) -30%
-------- ------ ------- ------ -------- ------ ------- ------
Net income (loss) to applicable to
common shareholders $11,780 656% ($273) -49% $10,543 253% ($944) -106%
======== ======= ======== =======
THREE MONTHS ENDED APRIL 30, 2005 COMPARED TO THREE MONTHS ENDED APRIL 30, 2004
11
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. SG&A expenses
decreased by approximately $24,000, 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.
Non-cash issuance of common stock and warrants for services. Non-cash
issuance of common stock and warrants for services increased by $220,000 from
the quarter ended April 30, 2004 to the quarter ended April 30, 2005. This
increase is primarily due to recognition of $220,000 in non-cash compensation
expense associated with the repricing of the warrants granted under the
amendment to the consulting agreements entered into with certain individual
affiliates of Recap Marketing & Consulting, LLP. The amendment to the extension
to the consulting agreement provided for the issuance of compensation warrants
to purchase a total of 1,250,000 shares of ATSI's common stock at price's
ranging from $0.30 per share to $0.40 per share.
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) increased
by approximately $153,000 or 94% from the quarter ended April 30, 2004 to the
quarter ended April 30, 2005. The increase in operating income (loss) is
attributed to the recognition of $220,000 of non-cash warrant expense associated
with the repricing of the warrants granted under the amendment to the consulting
agreements entered into with certain individual affiliates of Recap Marketing &
Consulting, LLP. The increase in the operating loss was slightly offset by the
increase in gross profit margin of $77,000 from the quarter ended April 30, 2004
to the quarter ended April 30, 2005.
12
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.
Other income (expense). Other income (expense) decreased by approximately
$58,000 or 200% 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 $11,780,000 net income from $273,000
net (loss) for the quarter ended April 30, 2004. The decrease 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
increase on net income (loss) was slightly offset by the recognition of $220,000
of non-cash warrant expense associated with the repricing of the warrants
granted under the amendment to the consulting agreements entered into with
certain individual affiliates of Recap Marketing & Consulting, LLP.
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.
13
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. 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 $914,000 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 $811,000 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 $1,339,000 or 250% 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 $811,000 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
14
$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.
Other income (expense). Other income (expense) decreased by approximately
$108,000 or 77% 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 decreased to $10,543,000 net income from
$944,000 net (loss) for the nine months ended April 30, 2004. The decrease 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 $811,000 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 $944,000
in non-cash warrant expense associated with the consulting services agreement
entered into during the second quarter of fiscal 2005. We also recognized an
increase in accounts payable of approximately $120,000 and an increase in
accrued liabilities of approximately $18,000. 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 $62,000 associated with the billing to our
customers during the quarter ending April 30, 2005. We also recognized an
increase in prepaid expenses for $54,000 related to the prepayments/retainers to
our attorneys for legal services.
15
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 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 April 30, 2005 was approximately $4,831,000.
This represents a decrease of approximately $14,117,000 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.
- $1,327,000 associated with the Series E Cumulative preferred
stock. Of this balance, $1,058,000 is associated with the full
redemption of this security and $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
16
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
$2,498,000. 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 that evaluation,
the President and Chief Executive Officer and the Controller and Principal
Financial Officer have concluded that these disclosures controls and procedures
are effective as of the end of the fiscal quarter covered by this report, except
in a few areas that significant adjustments were proposed by the independent
registered public accounting firm. The Company is in the process of improving
its controls and procedures in these areas.
17
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
18
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: June 14, 2005 By: /s/ Arthur L. Smith
-------------- -------------------
Name: Arthur L. Smith
Title: President and
Chief Executive Officer
Date: June 14, 2005 By: /s/ Antonio Estrada
-------------- -------------------
Name: Antonio Estrada
Title: Corporate Controller
(Principal Accounting and
Principal Financial Officer)
19