Digerati Technologies, Inc. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(mark
one)
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x
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended July 31, 2008
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or
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¨
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _______to
_________
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Commission
File Number: 001-15687
ATSI
COMMUNICATIONS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Nevada
(State
or Other Jurisdiction of Incorporation or Organization)
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74-2849995
(IRS
Employer Identification No.)
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3201
Cherry Ridge, Building C, Suite 300
San
Antonio, Texas
(Address
of Principal Executive Offices)
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78230
(Zip
Code)
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Registrant’s
Telephone Number, Including Area Cod: (210)
614-7240
Securities
registered under Section 12(b) of the Securities Exchange Act: NONE
Securities
registered under Section 12(g) of the Securities Exchange Act:
Common
Stock, Par Value $0.001 Per Share
(Title
of
Class)
Indicate
by check mark if the registrant is a well-know seasoned issuer, as defined
in
Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act. ¨
Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 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. x
Yes
¨
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-KSB. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
|
Large
accelerated filer
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¨
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Accelerated
filer
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¨
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Non-accelerated
filer
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¨
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Smaller
reporting company
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x
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(Do
not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
¨
Yes x No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer was $6,723,569 based on the closing price of $0.17
per share on October 27, 2008, as reported on the over-the-counter bulletin
board.
There
were 39,550,415 shares of issuer’s Common Stock outstanding as of October 27,
2008.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Description
of Business
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3
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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14
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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14
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity; Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Item
6.
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Selected
Financial Data
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16
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Item
7A.
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Quantitive
and Qualitative Disclosures about Market Risk
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20
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Item
8.
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Financial
Statements and Supplementary Data
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21
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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38
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Item
9A(T).
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Controls
and Procedures
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38
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Item
9B.
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Other
Information
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39
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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39
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Item
11.
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Executive
Compensation
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41
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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46
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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47
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Item
14.
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Principal
Accountant Fees and Services
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47
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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47
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SIGNATURES
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49
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PART
I
ITEM
I. DESCRIPTION
OF BUSINESS.
Overview
We
are an
international telecommunications carrier that utilizes the Internet to provide
cost-efficient and economical international telecommunication services. Our
current operations consist primarily of providing digital voice communications
over the Internet using Voice-over-Internet-Protocol (“VoIP”). We provide high
quality voice and enhanced telecommunication services to carriers, telephony
resellers and other VoIP carriers through various agreements with service
providers in the United States, Mexico, Asia, the Middle East and Latin America
utilizing VoIP technology. Typically, these telecommunications companies offer
their services to the public for domestic and international long distance
services. In addition, we provide private communications links and VoIP gateway
services.
History
ATSI
Communications, Inc., a Nevada corporation, was formed in 2004 as the successor
to the business originally incorporated in 1994 as a Canadian holding company,
Latcomm International, Inc., with a Texas operating subsidiary, Latin America
Telecomm, Inc. Both corporations were renamed “American TeleSource
International, Inc.” in 1994. In May 1998, the Canadian corporation completed a
share exchange with a newly formed Delaware corporation, also called American
TeleSource International, Inc., which resulted in the Canadian corporation
becoming the wholly owned subsidiary of the Delaware Corporation. Our
stockholders voted to change our name from American TeleSource International,
Inc. to ATSI Communications, Inc. in 2003 and to reincorporate in the State
of
Nevada by merger into our wholly owned subsidiary in 2004. We operate through
our wholly owned subsidiary, Digerati Networks, Inc. (“Digerati”). Digerati is a
premier global VoIP carrier providing international communication services
that
consist primarily of transporting voice traffic across the world via the
Internet. Additionally, we own 49% of ATSI Comunicaciones S.A de C.V. (ATSICOM),
a Mexican corporation that holds a 30-year concession allowing for the sale
of
voice and data services, long distance transport, and the operation of a
telecommunications network in Mexico.
Recent
Developments
During
the year ended July 31, 2008 (“fiscal 2008”):
|
·
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We
entered into a $5 Million accounts receivable financing agreement
with
Wells Fargo Bank. The financing arrangement provides us with access
to
capital to fund our growth initiatives and allows us to service top
tier
customers that required extended payment
terms.
|
|
·
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Our
Board of Directors approved a $1 million stock repurchase plan allowing
us
to buy back our stock in the open market through December 31, 2008
based
on price and market conditions.
|
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·
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We
expanded our IP network capacity with XO Communications. The expansion
with XO Communications doubled our fixed capacity and gave us the
ability
to increase the same fixed capacity by 400% through the on-demand
capabilities of XO’s Ethernet
services.
|
|
·
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On
May 1, 2008, ATSI entered into a “Purchase Agreement” with Fiesta
Communications, Inc. Under the agreement ATSI agreed to sell all
of the
outstanding shares of Telefamilia Communications, Inc. to Fiesta
Communications, Inc. for 975,000 shares of common stock in Fiesta
Communications and $30,000 in cash.
|
|
·
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We
received an opinion from our auditors that does not contain a “going
concern” qualification.
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Services
and Products
We
provide two types of services: VoIP Services and Network Services
3
VoIP
Services:
We
currently provide VoIP communication services to U.S. and foreign
telecommunications companies that lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America. Typically, these
telecommunications companies offer their services to the public for domestic
and
international long distance services. Revenues from this service accounted
for
approximately 99% of our total revenue during the year ended July 31, 2008.
The
percentage of our total volume of carrier services traffic sent by customers
can
fluctuate dramatically, on an annual, quarterly and daily basis. During fiscal
2008, we entered into various reciprocal agreements with our customers that
allow them to transport and terminate traffic over our network and allowed
us to
transmit and terminate traffic over their networks. These reciprocals agreements
with our customers are not for a specific period of time and do not require
either party to transmit or terminate a specific volume of minutes on the others
network. Under the reciprocal agreements, both parties receive set of rates
for
services and each party decides the volume of minutes it will send to be
processed by the other party. Both parties are free to re-route their traffic
away from the other party to a lower priced provider.
Network
Services: We
provide network links and VoIP gateway services to multi-national and foreign
carriers and 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 currently available through the foreign telecommunication
networks. These services include data, voice and fax transmission between
multiple international offices and branches as well as Internet and collocation
services in the United States.
Voice
over Internet Protocol Networks
The
basic
technology of traditional telecommunications systems was designed for slow
mechanical switches. Communications over the traditional telephone network
are
routed through circuits that must dedicate all circuit resources to each call
from its inception until the call ends, regardless of whether anyone is actually
talking on the circuit. This circuit-switching technology incurs a significant
cost per call and does not efficiently support the integration of voice with
data services. Data networks, however, were designed for electronic switching.
They break the data stream into small, individually addressed packages of data
(“packets”) that are routed independently of each other from the origin to the
destination. Therefore, they do not require a fixed amount of bandwidth to
be
reserved between the origin and destination of each call and they do not waste
bandwidth when it is not being used for actual transmission of information.
This
allows multiple voice or voice and data calls to be pooled, resulting in these
networks being able to carry more calls with an equal amount of bandwidth.
Moreover, they do not require the same complex switching methods required by
traditional voice telephone networks, instead using a multiplicity of routers
to
direct each packet to its destination and they automatically route packets
around blockages, congestion or outages.
Packet
switching can be used within a data network or across networks, including the
public Internet. The Internet itself is not a single data network owned by
any
single entity, but rather a loose interconnection of networks belonging to
many
owners that communicate using the Internet Protocol (“IP”). By converting voice
signals to digital data and handling the voice signals as data, it can be
transmitted through the more efficient switching networks designed for data
transmissions and through the Internet using the IP. The transmission of voice
signals as digitalized data streams over the Internet is known as Voice over
Internet Protocol or “VoIP”. A VoIP network has the following advantages over
traditional networks:
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·
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Integration
of Voice and Data:
VoIP networks allow for the integration and transmission of voice,
data,
and images using the same network equipment.
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·
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Simplification:
An
integrated infrastructure that supports all forms of communication
allows
more standardization, a smaller equipment complement, and less equipment
management.
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4
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·
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Network
Efficiency:
The integration of voice and data fills up the data communication
channels
efficiently, thus providing bandwidth consolidation and reduction
of the
costs associated with idle bandwidth. The sharing of equipment and
operations costs across both data and voice users can also improve
network
efficiency since excess bandwidth on one network can be used by the
other,
thereby creating economies of scale for voice (especially given the
rapid
growth in data traffic). An integrated infrastructure that supports
all
forms of communication allows more standardization and reduces the
total
equipment complement. This combined infrastructure can support dynamic
bandwidth optimization and a fault tolerant design. The differences
between the traffic patterns of voice and data offer further opportunities
for significant efficiency improvements.
|
|
·
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Co-existence
with traditional communication mediums: IP
telephony can be used in conjunction with existing PSTN switches,
leased
and dial-up lines, PBXs and other customer premise equipment (CPE),
enterprise LANs, and Internet connections. IP telephony applications
can
be implemented through dedicated gateways, which in turn can be based
on
open standards platforms for reliability and scalability.
|
|
·
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Cost
reduction:
Under the VoIP network, the connection is directly to the Internet
backbone and as a result the telephony access charges and settlement
fees
are avoided.
|
The
growth of voice over the Internet was limited in the past due to poor sound
quality caused by technical issues such as delays in packet transmission and
by
bandwidth limitations related to Internet network capacity and local access
constraints. However, the continuing addition of data network infrastructure,
recent improvements in packet switching and compression technology, and new
software algorithms and improved hardware have substantially reduced delays
in
packet transmissions and resulted in better sound quality. Nevertheless, certain
VoIP routes into countries with limited or poor Internet infrastructure continue
to lack the consistent quality required for voice transport and termination.
A
number
of large long distance carriers have announced Internet telephony service
offerings. Smaller Internet telephony service providers have also begun to
offer
low-cost Internet telephony services from personal computers to telephones
and
from telephones to telephones. Traditional carriers have substantial investments
in traditional telephone network technology, and therefore have been slow to
embrace Internet technology.
We
believe that the infrastructure required for a global network is too expensive
for most companies to acquire and deploy on their own. As a result, many
companies use a network consisting of a combination of gateways owned by
different operators. For a network to achieve optimal functionality and quality,
however, the gateways need to be interoperable, or able to communicate with
one
another. Interoperability continues to be a challenge for VoIP providers and
recently. Technological solutions have emerged that support interoperability
between different protocols and/or gateways. Cisco Systems, Inc. has emerged
as
a dominant supplier of VoIP gateways and other manufacturers often seek to
make
their equipment interoperable with Cisco.
Long
distance telephone calls transported over the Internet are less expensive than
similar calls carried over the traditional telephone network primarily because
the cost of using the Internet is not determined by the distance those calls
need to travel. Also, routing calls over the Internet is more cost-effective
than routing calls over the traditional telephone network because the technology
that enables Internet telephony is more efficient than traditional telephone
network technology. The greater efficiency of the Internet creates cost savings
that can be passed on to the consumer in the form of lower long distance rates
or retained by the carrier as higher margins.
By
using
the public Internet, VoIP providers like ATSI are able to avoid direct payment
for transport of communications, instead paying for large “pipes” into the
public Internet, billed by bandwidth rather than usage, which transmits calls
to
a distant gateway. The Internet, which has its origins in programs devised
by
the Department of Defense to provide multiple routes and therefore redundancy
which was largely immune from the failure of a single network element, provides
great redundancy and can be “self healing” in the event of an outage in a
particular network element or transmission path. Moreover, adding an additional
entry or exit point (a Point of Presence or “PoP”) does not require any
expensive or time consuming reconfiguration or reprogramming of existing network
elements. The new element is simply installed with a specific IP address and
it
can send or receive information to or from any other IP address on the
Internet.
5
Strategy
and Competitive Conditions
The
long
distance telephony market and the Internet telephony market are highly
competitive. Our competitors include major telecommunications carriers in the
U.S., foreign telecommunications carriers (which may be owned by foreign
governments), and numerous small competitors. We expect to face continuing
competition based on price and service offerings from existing competitors
and
new market entrants in the future. The principal competitive factors in our
market include price, coverage, customer service, technical response times,
reliability, and network size/capacity. The competitive landscape is rapidly
altering the number, identity and competitiveness of the marketplace, and we
are
unable to determine with certainty the impact of potential consolidation in
our
industry.
A
number
of large long distance carriers have introduced services that make Internet
telephony or voice services over the Internet available to other carriers.
All
major telecommunications companies either presently do or could route traffic
to
destinations worldwide and compete directly with us. Smaller Internet telephony
service providers have also begun to offer low-cost Internet telephony services
from personal computers to telephones and from telephones to telephones. In
addition, Internet service providers and other companies currently in related
markets have begun to provide voice over the Internet services or adapt their
products to enable voice over the Internet services. These related companies
may
migrate into the Internet telephony market as direct competitors.
Many
of
our competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we have.
As
a result, certain of these competitors may be able to adopt more aggressive
pricing policies that could hinder our ability to market our services. We
believe that our key competitive advantages are our ability to deliver reliable,
high quality voice service over the Internet in a cost-effective manner. We
cannot provide assurances, however, that these advantages will enable us to
succeed against comparable service offerings from our competitors.
Our
strategy is to take advantage of the increasing demand for international
communication services and the global shift from the traditional circuit
switched network to the Internet for transporting voice traffic. We target
traditional telephone companies migrating towards voice over Internet protocol
(“VoIP”) and emerging VoIP service providers seeking reliable and competitively
priced worldwide routes. We are also capitalizing on the continued global trend
of demonopolization of foreign telecommunications markets. Historically,
telecommunication services in most foreign countries have been provided by
state-run companies, operating as a legal or
de
facto
monopoly. Although these companies historically failed to satisfy the demand
for
services in their countries, the regulatory scheme effectively precluded
competition by foreign carriers. As the demonopolization trend continues in
the
telecommunications industry throughout the world, many foreign countries are
in
various stages of migration toward a competitive, multi-carrier market. This
has
created an opportunity for emerging operators, that typically “leap frog” to the
most recent VoIP technology, to enter their respective market.
Our
global strategy also benefits from the continued growth in immigration to the
United States from foreign countries such as Mexico, Philippines and India.
In
addition U.S. based corporations expanding globally to decrease labor costs
has
contributed to the increased demand for global communication services.
The
worldwide demand for telecommunications services has been strengthened
by:
|
·
|
An
expanding global market for voice communications growing at approximately
10% per year
|
|
·
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A
growing demand for VoIP services that was approximately 30% of all
international voice traffic in
2007
|
6
|
·
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Deregulation
and demonopolization of government-owned telecommunication companies
in
foreign countries
|
|
·
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Global
proliferation of communications devices such as mobile and VoIP
phones
|
|
·
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Growth
in ethnic communities in the United States; approximately 90 million
people belong to an ethnic minority group
|
|
·
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Increase
in global trade and travel
|
|
·
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Declining
rates for communication services as a result of increased competition
|
We
operate through our wholly owned subsidiary, Digerati Networks, Inc., a premier
global VoIP carrier providing international communication services that consist
primarily of transporting voice traffic across the world via the Internet.
Digerati owns and operates its own VoIP network in San Antonio, Texas for
processing voice communication traffic between the United States and rapidly
expanding markets in Asia, Europe, the Middle East, and Latin America. Digerati
has placed a strong emphasis on Mexico as it is the top producer of voice
traffic with the U.S. and is considered the most lucrative communications
corridor in the world in terms of revenue.
Through
Digerati, we have established numerous partnerships with foreign carriers and
network operators to provide our international voice services. In our VoIP
operations, Digerati receives voice traffic from originating carriers who are
interconnected to its network via the Internet and routes that traffic over
the
Internet to local service providers and carriers in the destination countries
with whom the Company has agreements or partnerships to manage the completion
of
the call. Our global VoIP service enables carriers and other communications
service providers to outsource international voice and fax traffic.
Our
customers, while cost conscious, are increasingly demanding high reliability
and
quality in service delivery. Sustainability and growth in this segment depends
on specific competitive advantages including foreign partnerships or presence
of
an in-country business infrastructure, network reliability, and favorable
termination agreements for voice traffic. We compete with other telecom
operators, including dominant providers such as Qwest, IBASIS, and AT&T, for
transport and termination of international voice services. We believe that
our
low cost of operations, international relationships, and cost competitive
strategy utilizing VoIP technology provides us with a competitive advantage.
Our
strengths include our in-depth knowledge of, and relationships within, the
telecommunications industry in the United States and select foreign markets.
Our
strategy has been successful to date as evidenced by our growth over the last
3
fiscal years. The following table provides the total revenue and minutes for
the
fiscal years ended July 31, 2006, 2007 and 2008:
|
Period
|
Revenue
|
Minutes
|
|||||
|
FY-2006
|
$
|
14,695,000
|
266,366,712
|
||||
|
FY-2007
|
$
|
31,692,000
|
450,557,632
|
||||
|
FY-2008
|
$
|
41,961,000
|
564,064,005
|
||||
Government
Regulation
Our
operations are subject to federal, state and foreign laws and regulations.
There
is significant uncertainty regarding the application of the Communications
Act
of 1934 and the regulations adopted by the Federal Communications Commission
to
Internet telephone and there is a risk that either the FCC or Congress will
impose common carrier restrictions and other requirements of traditional
telecommunications providers to providers of VoIP services.
7
U.S
Federal and State Regulation of Carrier Services
We
believe that, under U.S. law, the Internet-related services that we provide
constitute information services as opposed to regulated telecommunications
services, and, as such, are not currently regulated as telecommunications common
carriers by the Federal Communications Commission (FCC) or state agencies
charged with regulating telecommunications carriers. Nevertheless, aspects
of
our operations may be subject to state or federal regulation, including
regulations governing universal service funding, disclosure of confidential
communications and excise tax issues. We cannot provide assurances that
Internet-related services will not be actively regulated in the future. Several
efforts have been made in the U.S. to enact federal legislation that would
either regulate or exempt from regulation services provided over the Internet.
Increased regulation of the Internet may slow its growth, particularly if other
countries also impose regulations. Such regulation may negatively impact the
cost of doing business over the Internet and materially adversely affect our
business, operating results, financial condition and future prospects.
To
date,
the FCC has declined to classify VoIP providers as telecommunications carriers
for regulatory purposes. However, the FCC has ruled that certain traffic carried
in part utilizing the Internet protocol format was nonetheless regulated
telecommunications for which certain regulatory obligations applied. The FCC
has
considered whether to impose surcharges or other common carrier regulations
upon
certain providers of Internet telephony, primarily those which, unlike us,
provide Internet telephony services directly to end users. The FCC ruled that
interconnected VoIP service providers must make contributions to the Universal
Service Fund. Additionally, the FCC has a pending proceeding to further examine
the question of whether certain forms of VoIP services are information services
or telecommunications services. The two are treated differently in several
respects, with certain information services being regulated to a lesser degree.
The FCC has noted that certain forms of phone-to-phone VoIP services bear many
of the same characteristics as more traditional voice telecommunications
services and lack the characteristics that would render them information
services. The FCC has indicated that the issues as to applicability of access
charges and other matters will be considered in that context. Adverse rulings
or
rulemakings could subject us to licensing requirements and additional fees
and
subsidies.
If
the
FCC were to determine that certain Internet-related services including Internet
telephony services are subject to FCC regulations as telecommunications
services, the FCC could subject providers of such services to traditional common
carrier regulation, including payment of access charges to local telephone
companies. A decision to impose such charges could also have retroactive effect.
It is also possible that the FCC may adopt a regulatory framework other than
traditional common carrier regulation that would apply to Internet telephony
providers. Any such determinations could materially adversely affect our
business, financial condition, operating results and future prospects to the
extent that any such determinations negatively affect the cost of doing business
over the Internet or otherwise slow the growth of the Internet.
Other
regulations affecting the Internet in the United States.
Congress
has enacted legislation that regulates certain aspects of the Internet,
including online content, user privacy and taxation. In addition, Congress
and
other federal entities are considering other legislative and regulatory
proposals that would further regulate the Internet. Congress has, for example,
considered legislation on a wide range of issues including Internet spamming,
database privacy, gambling, pornography and child protection, Internet fraud,
privacy and digital signatures. Various states have adopted and are considering
Internet-related legislation. Increased U.S. regulation of the Internet may
slow
its growth, particularly if other governments follow suit, which may negatively
impact the cost of doing business over the Internet and materially adversely
affect our business, financial condition, results of operations and future
prospects. Legislation has also been proposed that would clarify the regulatory
status of VoIP service. The Company has no way of knowing whether legislation
will pass or what form it might take.
Domestic
Service Regulation.
We
are
considered a non-dominant domestic interstate carrier subject to minimal
regulation by the FCC. We are not required to obtain FCC authority to initiate
or expand our domestic interstate operations, but we are required to obtain
FCC
approval to transfer control or discontinue service and to file various reports
and pay various fees and assessments. Among other things, interstate common
carriers must offer service on a nondiscriminatory basis at just and reasonable
rates. In addition, as a non-dominant carrier, we are subject to the FCC’s
complaint jurisdiction.
8
All
interstate telecommunications carriers are required to contribute to the federal
universal service programs. The FCC currently is considering revising its
universal service funding mechanism. We cannot predict the outcome of these
proceedings or their potential effect on us. Although we currently do not
provide VoIP services to the end users or consumers, VoIP services that we
may
provide in the future are not currently subject to direct regulation by the
FCC
or state regulatory commissions to the extent that they qualify as “enhanced” or
“information” services. The FCC defines enhanced services as services that (1)
employ computer processing applications that act on the format, content, code,
protocol or similar aspects of the subscriber’s transmitted information, (2)
provide the subscriber additional, different or restructured information, or
(3)
involve subscriber interaction with stored information. In 1998, in a
non-binding report, the FCC observed that “computer-to-computer” VoIP may be
appropriately considered to be unregulated but that “phone-to-phone” VoIP may
lack the characteristics that would render them unregulated “information”
services. In February 2004, the FCC ruled that free computer-to-computer VoIP
service is not “telecommunications service” and that it is an interstate
“information service.” Although this order clarifies some of the relevant VoIP
issues, the FCC has not yet issued a formal decision as to whether other
variations of VoIP services should be subject to traditional common carrier
telecommunications service regulation, such as access charge obligations. In
March 2004, the FCC released a Notice of Proposed Rulemaking (“NPRM”) regarding
VoIP service. The NPRM specifically addresses the regulatory classification
and
jurisdiction of VoIP; the application of access charges; and how to preserve
key
public policy objectives such as universal service, 911/emergency services,
law
enforcement surveillance requirements, and the needs of persons with
disabilities. In November 2004, the FCC ruled that services provided by a
particular VoIP provider are interstate in nature, and not subject to entry
regulations of the various state Public Service Commissions. The FCC, however,
declined to rule on whether the service is a regulated telecommunications
service or an unregulated information service. In addition, in December 2004,
the United States Court of Appeals for the 8th Circuit ruled that such VoIP
provider’s service is not subject to state regulation. Subsequently, in a series
of orders, the FCC has decided to apply universal service, 911/emergency
services, law enforcement surveillance requirements, customer privacy
requirements, and requirements relating to the provision of services to speech
and hearing-impaired persons to providers of “interconnected” VoIP services
(i.e., those that are capable of both originating calls from and terminating
calls to users of the public switched telephone network), but in each case
the
FCC has explicitly declined to decide whether such services are
“telecommunications” services subject to more comprehensive regulation. Instead,
the FCC continues to examine the appropriate regulatory treatment of VoIP on
a
piecemeal basis. While initial indications from the FCC suggest that regulation
of VoIP will be limited in nature, the future regulatory treatment of other
variations of VoIP by the FCC and state regulatory bodies continues to be
uncertain. Furthermore, Congressional dissatisfaction with the FCC’s treatment
of IP telephony could result in legislation requiring the FCC to impose greater
or lesser regulation. Changes to, and further clarifications of, the treatment
of VoIP services could result in the imposition of burdensome regulation and
fees on some of our services and/or increase certain of our operating costs.
International
Regulation
The
regulatory treatment of Internet telephony outside of the U.S. varies widely
from country to country. A number of countries that currently prohibit
competition in the provision of voice telephony also prohibit Internet
telephony. Other countries permit but regulate Internet telephony. Some
countries will evaluate proposed Internet telephony service on a case-by-case
basis and determine whether it should be regulated as a voice service or as
another telecommunications service. In many countries, Internet telephony has
not yet been addressed by legislation or regulation. Increased regulation of
the
Internet and/or Internet telephony providers or the prohibition of Internet
telephony in one or more countries could materially adversely affect our
business, financial condition, operating results and future prospects.
The
International Settlements Policy governs settlements between U.S. carriers’ and
foreign carriers’ costs of terminating traffic over each other’s networks. The
FCC recently enacted certain changes in rules designed to allow U.S. carriers
to
propose methods to pay for international call termination that deviate from
traditional accounting rates and the International Settlement Policy. The FCC
has also established lower benchmarks for the rates that U.S. carriers can
pay
foreign carriers for the termination of international services and these
benchmarks may continue to decline. These rule changes have lowered the costs
of
our competitors to terminate traffic in the United States and are contributing
to the downward pricing pressure facing us in the carrier market.
9
Other
General regulations
Congress
has recently enacted legislation that regulates certain aspects of the Internet,
including online content, user privacy and taxation. In addition, Congress
and
other federal entities are considering other legislative and regulatory
proposals on a wide range of issues including Internet spamming, database
privacy, gambling, pornography and child protection, Internet fraud, privacy
and
digital signatures. Various states have adopted and are considering
Internet-related legislation. Increased U.S. regulation of the Internet may
slow
its growth, particularly if other governments follow suit, which may negatively
impact the cost of doing business over the Internet and materially adversely
affect our business, financial condition, results of operations and future
prospects. The Company has no way of knowing whether legislation will pass
or
what form it might take.
The
Telecommunications Act of 1996 (the “Telecom Act”), which became law in February
1996, was designed to dismantle the monopoly system and promote competition
in
all aspects of telecommunications. The FCC has promulgated and continues to
promulgate major changes to their telecommunications regulations. One aspect
of
the Telecom Act that is of particular importance to us is that it allows Bell
Operating Companies or BOCs to offer in-region long distance service once they
have taken certain steps to open their local service monopoly to competition.
The FCC has now granted such in-region long distance authorization to BOCs
throughout the nation. Given their extensive resources and established customer
bases, the entry of the BOCs into the long distance market, specifically the
international market, has created increased competition for us.
Although
we do not know of any other specific new or proposed regulations that will
affect our business directly, the regulatory scheme for competitive
telecommunications market is still evolving and there could be unanticipated
changes in the competitive environment for communications in general. For
example, the FCC is currently considering rules that govern how Internet
providers compensate local telephone companies. These rules could affect the
role that the Internet ultimately plays in the telecommunications market.
The
International Settlements Policy governs settlements between top tier U.S.
carriers’ and foreign carriers’ costs of terminating traffic over each other’s
networks. The FCC recently enacted certain changes in these rules designed
to
allow U.S. carriers to propose methods to pay for international call termination
that deviate from traditional accounting rates and the International Settlement
Policy. The FCC has also established lower benchmarks for the rates that U.S.
carriers can pay foreign carriers for the termination of international services
and these benchmarks may continue to decline. These rule changes have lowered
the costs of our top tier competitors to terminate traffic in the United States
and are contributing to the downward pricing pressure facing us in the carrier
market.
Concession
License
The
Secretaría de Comunicaciones y Transportes and Comisión Federal de
Telecomunicaciones or Federal Telecommunications Comisión (“COFETEL”) issued
ATSICOM a 30-year license in June 1998 to install and operate a public network.
Under this license, ATSICOM is required to:
General
requirements
|
·
|
Maintain
approximately $10 million in registered and subscribed capital.
|
|
·
|
Install
and operate a network in Mexico according to an operating plan approved
by
the Mexican government..
|
|
·
|
Continuously
develop and conduct training programs for its staff.
|
|
·
|
Designate
an individual responsible for the technical functions to operate
the
concession.
|
10
Concession
services requirements
|
·
|
Provide
continuous and efficient services at all times to its customers.
|
|
·
|
Establish
a complaint center and correction facilities center and report to
the
Mexican government on a monthly basis the complaints received and
the
actions taken to resolve the problems.
|
Tariff
Requirements
|
·
|
Invoice
its customer only tariffs rates that have been approved by the Mexican
government.
|
Verification
and Information requirements
|
·
|
Provide
audited financial statements on a yearly basis that include a detailed
description of the fixed assets utilized in the network and reporting
by
region and location of where the services are being provided.
|
|
·
|
Provide
quarterly reports and updates on the expansion of the network in
Mexico
and a description of the training programs and research and development
programs.
|
|
·
|
Provide
statistical reports of traffic, switching capacity and other parameters
in
the network.
|
Guarantee
requirements
|
·
|
Post
a bond/insurance policy for approximately $500,000 payable to the
Mexican
Federal Treasury Department in the event the concession is revoked
for
failure to perform any of the
requirements.
|
Under
this concession, we have the right to terminate voice and data communications
in
Mexico. The revocation or modification of this concession would not have a
material adverse effect on our business.
Customers
and Suppliers
We
rely
on various suppliers to provide services in connection with our communication
services. We use various global VoIP companies to complete our voice over
Internet (VoIP) traffic between US, Mexico,
Asia, the Middle East and Latin America. We are not dependent upon any single
supplier.
Employees
As
of
July 31, 2008, we had twelve employees, all of whom performed operational,
technical and administrative functions. We believe our future success will
depend to a large extent on our continued ability to attract and retain highly
skilled and qualified employees. We consider our employee relations to be good.
None of these aforementioned employees belong to labor unions.
ITEM
1A. RISK
FACTORS.
Our
business is subject to various operational and financial risks that could have
an adverse effect on our financial condition or our results of operations.
In
addition the general economic risks associated with operation of a small company
in a regulated industry dominated by large well-financed competitors, some
of
the risk factors that may apply specifically to us are set forth below.
Our
results of operations fluctuate from period to period. Our
revenue and results of operations have fluctuated and will continue to fluctuate
from quarter to quarter in the future due to a number of factors over which
we
have no control, including:
11
|
·
|
Many
of our customers are not obligated to route a minimum amount of traffic
over our system and the amount of traffic we handle may decline if
our
customers elect to route traffic over systems they operate or systems
operated by other providers;
|
|
·
|
increased
competition from other telecommunication service providers or from
service
companies in related fields that offer telecommunication services
may
adversely affect the amount we can charge for traffic routed over
our
system;
|
|
·
|
we
may be required to reduce our charges for routing traffic to maintain
high
utilization of our equipment;
|
|
·
|
the
termination fees, connection fees and other charges from our
suppliers;
|
|
·
|
fraudulently
sent or received traffic for which we are obligated to pay but which
we
are unable to bill to any customer;
|
|
·
|
changes
in call volume among the countries to which we complete calls;
|
|
·
|
technical
difficulties or failures of our network systems or third party delays
in
expansion or provisioning system components;
and
|
|
·
|
our
ability to manage our traffic on a constant basis so that routes
are
profitable.
|
We
rely on third parties to provide and maintain the networks over which we
transmit traffic. Our
business model depends on the availability of the Internet and traditional
telephone networks to transmit voice and data. Third parties own and maintain
the equipment that translates calls from traditional voice networks to the
Internet and vice versa. If the owners of these systems fail to maintain their
lines properly, fail to maintain the ability to terminate calls, or otherwise
disrupt our ability to provide service to our customers, our ability to complete
calls or provide other services could be interrupted.
Our
suppliers could increase the cost of services they provide or deny us access
to
systems that they operate. We
maintain relationships with communications service providers in many countries
and with other carriers to carry traffic on their systems. There is no assurance
that these services will continue to be available to us on acceptable terms,
if
at all. If we are unable to replace any provider that ceases to provide services
to us on acceptable terms, or to identify and develop relationships with new
service providers, our ability to provide services in certain countries may
be
adversely affected.
We
are subject to downward pricing pressures and a continuing need to renegotiate
overseas rates. As
a
result of numerous factors, including increased competition and global
deregulation of telecommunications services, prices for international long
distance calls have been decreasing. This downward trend of prices to end-users
has caused us to lower the prices we charge communication service providers
for
call completion on our network. If this downward pricing pressure continues,
we
may not be able to offer VoIP services at costs lower than, or competitive
with,
the traditional voice network services with which we compete. Moreover, in
order
for us to lower our prices, we have to renegotiate rates with our foreign
service providers who complete calls for us. We may not be able to renegotiate
these terms favorably enough, or fast enough, to allow us to continue to offer
services in a particular country on a cost-effective basis. The continued
downward pressure on prices and our inability to renegotiate favorable terms
in
a particular country could have a material adverse effect on our ability to
operate our network.
We
are subject to risks relating to operations in foreign countries.
Because
we provide many of our services internationally, we are subject to additional
risks related to providing services into foreign countries. Associated risks
include:
|
·
|
unexpected
changes in tariffs, trade barriers and regulatory requirements relating
to
Internet access or VoIP;
|
|
·
|
economic
weakness, including inflation, or political instability in particular
foreign economies and markets;
|
|
·
|
difficulty
in collecting accounts receivable;
|
|
·
|
tax,
consumer protection, telecommunications, and other laws;
|
|
·
|
foreign
currency fluctuations, which could result in increased operating
expenses
and reduced revenues; and
|
|
·
|
unreliable
government power to protect our rights;
|
12
International
governmental regulation and legal uncertainties and other laws could limit
our
ability to provide our services, make them more expensive, or subject us to
legal liability. Many
countries currently prohibit or limit competition in the provision of
traditional voice telephony services. In some of those countries, licensed
telephony carriers as well as government regulators and law enforcement
authorities have questioned the legal authority of VoIP services. Our failure
to
qualify as a properly licensed service provider, or to comply with other foreign
laws and regulations, could materially adversely affect our business, financial
condition, and results of operations. It is also possible that countries may
apply to our activities laws relating to services provided over the Internet,
including laws governing:
|
·
|
user
privacy;
|
|
·
|
pricing
controls and termination costs;
|
|
·
|
characteristics
and quality of products and services;
|
|
·
|
qualification
to do business;
|
|
·
|
consumer
protection;
|
|
·
|
cross-border
commerce, including laws that would impose tariffs, duties and other
import restrictions;
|
|
·
|
copyright,
trademark and patent infringement; and
|
|
·
|
claims
based on the nature and content of Internet materials, including
defamation, negligence and the failure to meet necessary obligations.
|
If
foreign governments or other bodies begin to impose related restrictions on
VoIP
or our other services or otherwise enforce other laws against us or our foreign
suppliers, such actions could have a material adverse effect on our operations.
If
we are not able to keep up with rapid technological change in a cost-effective
way, the relative quality of our services could suffer. The
technology upon which our services depend is changing rapidly. Significant
technological changes could render the hardware and software that we use
obsolete, and competitors may begin to offer new services that we are unable
to
offer. If we are unable to respond successfully to these developments or do
not
respond in a cost-effective way, we may not be able to offer competitive
services and our business results may suffer.
We
may not be able to expand and upgrade our network adequately and
cost-effectively to accommodate any future growth. Our
VoIP
business requires that we handle a large number of international calls
simultaneously. As we expand our operations, we expect to handle significantly
more calls. If we do not expand and upgrade our hardware and software quickly
enough, we will not have sufficient capacity to handle the increased traffic
and
growth in our operating performance would suffer as a result. Even with such
expansion, we may be unable to manage new deployments or utilize them in a
cost-effective manner. In addition to lost growth opportunities, any such
failure could adversely affect customer confidence in our network and services.
Single
points of failure on our network may make our business vulnerable.
We
operate one network control center in San Antonio, Texas. We have not yet
designed a redundant system, provided for excess capacity, or taken other
precautions against platform and network failures as well as facility failures
relating to power, air conditioning, destruction, or theft. We are vulnerable
to
a network failure that may prohibit us from offering services.
We
depend on our current personnel and may have difficulty attracting and retaining
the skilled employees we need to execute our business plan.
Our
future success will depend, in large part, on the continued service of our
key
management and technical personnel. If any of these individuals or others we
employ are unable or unwilling to continue in their present positions, our
business, financial condition and results of operations could suffer.
13
If
the Internet infrastructure is not adequately maintained, we may be unable
to
maintain the quality of our services and provide them in a timely and consistent
manner. Our
future success will depend upon the maintenance of the Internet infrastructure,
including a reliable network backbone with the necessary speed, data capacity
and security for providing reliability and timely Internet access and services.
To the extent that the Internet continues to experience increased numbers of
users, frequency of use or bandwidth requirements, the Internet may become
congested and be unable to support the demands placed on it and its performance
or reliability may decline thereby impairing our ability to complete calls
and
provide other services using the Internet at consistently high quality. The
Internet has experienced a variety of outages and other delays as a result
of
failures of portions of its infrastructure or otherwise. Future outages or
delays could adversely affect our ability to complete calls and provide other
services. Moreover, critical issues concerning the commercial use of the
Internet, including security, cost, ease of use and access, intellectual
property ownership and other legal liability issues, remain unresolved and
could
materially and adversely affect both the growth of Internet usage generally
and
our business in particular. Finally, important opportunities to increase traffic
on our network will not be realized if the underlying infrastructure of the
Internet does not continue to be expanded to more locations worldwide.
ITEM
1B. UNRESOLVED
STAFF COMMENTS.
Not
Applicable
ITEM
2. PROPERTIES.
Our
executive office is located at 3201 Cherry Ridge, Building C, Suite 300, San
Antonio, Texas, in leased space consisting of 3,618 square feet. The lease
for
this facility will expire on November 15, 2011. We pay annual rent of $49,419.
We believe that our leased facilities are suitable and adequate for their
intended use.
ITEM
3. LEGAL
PROCEEDINGS.
In
August
2007, ATSI reached a confidential settlement agreement with the holders of
the
1,170 shares of Series E Preferred Stock. Under the confidential settlement
agreement ATSI paid $175,000 to the Series E Preferred Stock shareholders and
the 1,170 shares of Series E Preferred Stock have been cancelled.
In
June
2007, ATSI initiated a declaratory judgment action in the United States District
Court for the Western District of Texas against The Shaar Fund, Ltd., holder
of
series 6% Series D Cumulative Convertible Preferred Stock, to declare that
any
right to convert or redeem the shares of the Series D Preferred Stock was barred
by the applicable statute of limitations (the “Texas Case”). On August 2, 2007,
The Shaar Fund Ltd. filed a separate suit against ATSI in the United States
District Court for the Southern District Court of New York seeking damages
and
equitable relief for alleged defaults under the Securities Purchase
Agreement dated February 18, 2000 under which it acquired the Series D Preferred
Stock (the “New York Case”). The claims of the parties were consolidated in the
New York Case by agreement. In December 2007, the parties entered into a
settlement agreement in which they released each other from all claims relating
to the Series D Preferred Stock. Under the terms of the settlement agreement,
The Shaar Fund, Ltd. agreed to surrender all outstanding shares of Series D
Preferred Stock. Additionally, The Shaar Fund waived its claims
for alleged accrued and unpaid dividends thereon in the amount of
approximately $340,000. The cancellation of the preferred stock was
effective as of October 24, 2007. ATSI agreed to pay to The Shaar Fund,
Ltd. the sum of $75,000 in cash in December 2007 and issue to The
Shaar Fund a promissory note in the original principal amount of $450,000,
bearing interest at the rate of 7.5% per annum and payable in 16 quarterly
payments over 48 months. If paid in full within the first 18 months, ATSI will
be entitled to a discount of 22.5% on the then outstanding principal balance.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
14
PART
II
| ITEM 5. |
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES.
|
Market
for Common Equity
Our
common stock is quoted on the OTC Bulletin Board under the symbol “ATSX”. The
following table sets forth the high and low bid prices for our common stock
for
the two most recently completed fiscal years, as reported by Bloomberg, LP.
Price quotations on the OTC Bulletin Board reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not necessarily represent actual
transactions.
|
Fiscal
2007
|
Low
|
High
|
|||||
|
First Quarter
|
$
|
0.19
|
$
|
0.34
|
|||
|
Second
Quarter
|
$
|
0.22
|
$
|
0.36
|
|||
|
Third
Quarter
|
$
|
0.19
|
$
|
0.34
|
|||
|
Fourth
Quarter
|
$
|
0.23
|
$
|
0.24
|
|||
|
Fiscal
2008
|
Low
|
High
|
|||||
|
First Quarter
|
$
|
0.20
|
$
|
0.30
|
|||
|
Second
Quarter
|
$
|
0.17
|
$
|
0.28
|
|||
|
Third
Quarter
|
$
|
0.15
|
$
|
0.23
|
|||
|
Fourth
Quarter
|
$
|
0.16
|
$
|
0.24
|
|||
Holders
As
of
July 31, 2008 we had approximately 8,206 common stockholders of record.
Dividends
We
have
not paid cash dividends on our common stock and we do not anticipate paying
a
dividend in the future.
Equity
Compensation Plans
The
following table provides information regarding securities that have been or
are
authorized to be issued under our equity compensation plans as of July 31,
2008:
|
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
|
Weighted-Average Exercise
Price of Outstanding
Options, Warrants and
Rights
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
|
||||||||
|
Equity
Compensation plans approved by security holders
|
-0-
|
N/A
|
-0-
|
|||||||
|
Equity
Compensation Plans not approved by security
holders
|
8,239,000
|
$
|
.17
|
9,261,000
|
||||||
|
Total
|
8,239,000
|
$
|
.17
|
9,261,000
|
||||||
The
material features of each equity compensation plan are described in Note 2
of
the Notes to the Financial Statements.
15
Sales
of Unregistered Securities
On
June
1, 2008, the Company issued 391,348 shares of its common stock to the holders
of
its debentures dated June 1, 2006. The shares were exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, and were
restricted from further transfer without registration.
| ITEM 6. |
SELECTED
FINANCIAL DATA.
|
Not
Applicable
| ITEM 7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
SPECIAL
NOTE: This Annual Report on Form 10-KSB 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
listed in Item 1A of this Annual Report on Form 10-K .
The
following is a discussion of the consolidated financial condition and results
of
operations of ATSI Communications, Inc., for the fiscal years ended July 31,
2008 and 2007. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto, and the other financial information included
elsewhere in this annual report on Form 10-K. For purposes of the following
discussion, fiscal 2008 or 2008 refers to the year ended July 31, 2008 and
fiscal 2007 or 2007 refers to the year ended July 31, 2007.
Sources
of revenue and direct cost
Sources
of revenue:
VoIP
Services:
We
currently provide VoIP communication services to U.S. and foreign
telecommunications companies that lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America. Typically, these
telecommunications companies offer their services to the public for domestic
and
international long distance services
Network
Services:
We
provide private communication links and VoIP gateway services to multi-national
and foreign carriers and enterprise customers who require a high volume of
telecommunications services to communicate with their U.S. offices or businesses
and need greater dependability than is currently available through the foreign
telecommunication networks. These services include data, voice and fax
transmission between multiple international offices and branches as well as
Internet and co-location services in the United States.
Direct
Costs:
VoIP
Services: We
incur
transmission and termination charges from our suppliers and the providers of
the
infrastructure and network. The cost is based on rate per minute, volume of
minutes transported and terminated through the network. Additionally, we incur
fixed Internet bandwidth charges and per minute billing charges. In some cases
we incur installation charges from certain carriers. These installation costs
are passed on to our customers for the connection to our VoIP network.
Network
Services:
Under
the network services, we incur bandwidth and co-location charges. The bandwidth
charges are incurred as part of the connection links between the customer’s
different remote locations and sites to transmit data, voice and Internet
services. We also incur co-location charges that are passed through to our
customers.
16
Results
of Operations
The
following table sets forth certain items included in our results of operations
in thousands of dollars amounts and variances between periods for the years
ended July 31, 2008 and 2007.
|
Years
ended July 31,
|
|||||||||||||
|
2008
|
2007
|
Variances
|
%
|
||||||||||
|
TOTAL
OPERATING REVENUES
|
$
|
41,961
|
$
|
31,692
|
$
|
10,269
|
32
|
%
|
|||||
|
COST
OF SERVICES (exclusive of depreciation and amortization, shown
below)
|
38,884
|
29,521
|
9,363
|
32
|
%
|
||||||||
|
GROSS
PROFITS
|
3,077
|
2,171
|
906
|
42
|
%
|
||||||||
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
2,400
|
1,625
|
775
|
48
|
%
|
||||||||
|
Legal
and professional fees
|
352
|
258
|
94
|
36
|
%
|
||||||||
|
Bad
debt expense
|
(27
|
)
|
98
|
(125
|
)
|
-128
|
%
|
||||||
|
Depreciation
and amortization expense
|
160
|
99
|
61
|
62
|
%
|
||||||||
|
OPERATING
INCOME (LOSS)
|
192
|
91
|
101
|
111
|
%
|
||||||||
|
OTHER
INCOME (EXPENSE):
|
|||||||||||||
|
Debt
forgiveness income
|
41
|
-
|
41
|
100
|
%
|
||||||||
|
Minority
Interest
|
(16
|
)
|
-
|
(16
|
)
|
-100
|
%
|
||||||
|
Interest
income (expense)
|
(105
|
)
|
(348
|
)
|
243
|
70
|
%
|
||||||
|
Total
other income (expense), net
|
(80
|
)
|
(348
|
)
|
268
|
77
|
%
|
||||||
|
|
|
|
|
||||||||||
|
NET
INCOME (LOSS)
|
112
|
(257
|
)
|
369
|
144
|
%
|
|||||||
|
LESS:
PREFERRED DIVIDEND
|
(12
|
)
|
(56
|
)
|
44
|
79
|
%
|
||||||
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
340
|
828
|
(488
|
)
|
-59
|
%
|
|||||||
|
NET
INCOME TO COMMON STOCKHOLDERS
|
$
|
440
|
$
|
515
|
$
|
(75
|
)
|
-15
|
%
|
||||
Year
Ended July 31, 2008 Compared to Year ended July 31, 2007
Operating
Revenues.
Consolidated operating revenues increased by $10,269,000, or 32%, between
periods from $31,692,000 for the year ended July 31, 2007 to $41,961,000 for
the
year ended July 31, 2008. The increase in VoIP services revenue is attributed
to
the increase in carrier minutes. Our carrier services minutes increased
by 25% from approximately 450,557,632 minutes of voice traffic during the year
ended July 31, 2007 to approximately 564,064,005 minutes of voice traffic during
the year ended July 31, 2008. The
increase in revenue and VoIP minutes is attributable primarily to the upgrade
to
our NexPoint® Soft Switch, which allows us to offer high quality and dependable
VoIP services, serve more customers and efficiently process greater volume
of
data records and calls.
Cost
of Services (Exclusive of depreciation and amortization).
The
consolidated cost of services increased by $9,363,000, or 32%, from the year
ended July 31, 2007 to the year ended July 31, 2008. The increase in cost of
services is a direct result of the increase in voice traffic, which required
an
increase in service fees paid to our vendors for transmission services.
Consolidated cost of services, as a percentage of revenue, was comparable
between periods at 93%. Despite the increase in cost of services (exclusive
of
depreciation and amortization), gross profits increased from $2,171,000 during
the year ended July 31, 2007 to $3,077,000 during the year ended July 31, 2008
as a result of the increase in revenues.
Selling,
General and Administrative (SG&A) Expenses (exclusive of legal and
professional fees).
SG&A
expenses increased by $775,000, or 48%, from the year ended July 31, 2007 to
the
year ended July 31, 2008. The increase is primarily attributable to an increase
in salaries and wages of approximately $487,000 as a result of the hiring of
four new employees and bonuses paid to officers. Non-cash compensation expense
to employees and warrant expense increased by $268,000 from the year ended
July
31, 2007 to the year ended July 31, 2008. The increase is attributed to the
recognition during the year ended July 31, 2008 of approximately $695,000 of
non-cash compensation expense associated with the stock options issued to
employees and directors recorded under the adopted of FAS-123R, Modified Stock
based Compensation. We incurred approximately $473,000 on non-cash compensation
expense during the year ended July 31, 2007.
17
Legal
and Professional Fees.
Legal
and professional fees increased by $94,000, or 36%, from the year ended July
31,
2007 to the year ended July 31, 2008. The increase is primarily attributable
to
$57,000 in legal fees incurred during the year ended July 31, 2008 in connection
with the litigation and settlement of a dispute between ATSI and the holders
of
the 6% Series D Cumulative Convertible Preferred Stock. We did not incur similar
expenses during the year ended July 31, 2007.
Bad
debt expense. Bad
debt
expense decreased by $125,000, or 128%, from the year ended July 31, 2007 to
the
year ended July 31, 2008. During the year ended July 31, 2007 we recognized
$98,000 in bad debt expense associated with uncollectible accounts. During
the
year ended July 31, 2008 we recognized an adjustment in bad debt of $27,000
as a
result of changes in the VoIP market and historical uncollectible accounts,
thus
decreasing bad debt expense between periods.
Depreciation
and amortization.
Depreciation and amortization increased by $61,000, or 62%, from the year ended
July 31, 2007 to the year ended July 31, 2008. The increase is attributed to
the
amortization during fiscal 2008 of the new computers and the upgrade to our
Nextone soft-switch, which was acquired during the Fiscal 2008.
Operating
income (loss).
Our
operating income improved by $101,000, or 111%, from the year ended July 31,
2007 to the year ended July 31, 2008. The improvement in operating income is
primarily attributable to an increase in gross profits between periods, which
was partially offset by increases in salaries and wages, non-cash compensation
expenses and legal fees.
Other
Income (expense).
Other
income (expense) during fiscal 2008 included debt forgiveness income of $41,000,
which was attributed to the restructuring of the note payable and settlement
with Alfonso Torres and the recognition of $16,000 of a minority interest in
the
loss of our ownership in Fiesta Communications. Neither of these categories
of
other income was recognized in fiscal 2007. Interest expense in fiscal 2008
decreased by $243,000, or 70%, from $348,000 for the year ended July 31, 2007
to
$105,000 for the year ended July 31, 2008. The decrease can be attributed to
the
payoff of various promissory notes during fiscal 2008; and the related lower
average balance of notes payable during the year ended July 31, 2008. Interest
expense for the year ended July 31, 2007 also included $143,723 attributed
to
the beneficial conversion feature associated with the conversion of various
notes payable and accrued interest and the amortization of approximately $93,000
in deferred financing fees as part of a private placement common stock
financing.
Net
income (loss).
Net
income (loss) improved by $369,000 from the year ended July 31, 2008 compared
to
the year ended July 31, 2007. The improvement in net income (loss) is attributed
to the increase between periods in gross profit profits, the reduction in
interest expense. These improvements were offset by the increase of
approximately $775,000 in selling, general and administrative expenses.
Preferred
stock dividends.
Preferred stock dividends decreased by $44,000, or 79%, between periods, from
$56,000 for the year ended July 31, 2007 to $12,000 during the year ended July
31, 2008. The decrease in preferred dividends between periods is mainly
attributed to a decrease in dividends associated with Series A Convertible
Preferred Stock, Series H Convertible Preferred Stock and Series D Convertible
Preferred Stock. As of July 31, 2008 all Convertible Preferred Stock has been
converted or redeemed to common stock.
Reversal
of previously recorded preferred stock dividends. During
the year ended July 31, 2008, we recognized a reversal of previously recorded
dividend expense of $340,000. This reversal occurred as result of the settlement
agreement reached between ATSI and The Shaar Fund. As a result of the
settlement, The Shaar Fund agreed to surrender 742 shares of ATSI’s 6% Series D
Cumulative Convertible Preferred Stock and forgive accrued dividends of
approximately $340,000 as of October 24, 2007. During the year ended July 31,
2007 we recognized a reversal of previously recorded dividend expense of
$828,000. This reversal occurred as result of the conversion into common stock
of 2,750 shares of Series A Convertible Preferred Stock and 11,802,381 shares
of
Series H Convertible Preferred Stock.
18
Net
income applicable to common stockholders.
Net
income applicable to common stockholders decreased by $75,000, or 15%, from
the
year ended July 31, 2007 to the year ended July 31, 2008 even though we
recognized an increase in net income of $369,000. The decrease in net income
applicable to common stockholders is attributed to the reversal
of previously recorded preferred stock dividends of $828,000 recognized during
the year ended July 31, 2007 compared to a reversal of previously recorded
preferred stock dividend in the amount of $340,000 during the year ended July
31, 2008.
Liquidity
and Capital Resources
Cash
Position:
We had a
cash balance of $1,338,000 as of July 31, 2008. Net cash provided by operating
activities during the year ended July 31, 2008 was approximately $965,000.
Net
cash provided by operating activities consisted primarily of operating revenues
of $41,961,000 after deduction of cash expenses incurred in cost of services
and
selling, general and administrative expenses. Investing activities during the
year ended July 31, 2008 consumed $163,000 as a result of advances of $100,000
to NetSapiens, notes receivables of $25,000 with Fiesta Communications, a
related party, investments in certificates of deposit of $13,000 and purchases
of $25,000 of equipment. Financing activities during the year ended July 31,
2008 consumed $514,000 in cash. This cash was primarily consumed by debt
principal payments of $251,000 associated with various notes payable,
acquisition of the Redeemable Preferred stock Series D&E of $250,000,
acquisition of our common stock of $10,000 and principal payments of $3,000
associated with a capital lease obligation. Overall, our net operating,
investing and financing activities during the year ended July 31, 2008 resulted
in an increase of $288,000 in our available cash.
We
are
currently utilizing the factoring agreement with Wells Fargo Bank as necessary
to provide cash for operations. Under the agreement we are able to factor up
to
$5,000,000 of our monthly accounts receivable. On average, we are factoring
account receivables of $875,000 per month. As of July 31, 2008 we had $18,000
of
outstanding receivables under the Wells Fargo Factoring agreement. We believe
that the improvement in our cash flows from operations as a result of our growth
will facilitate our ability to obtain debt and/or equity funding from
institutional investors. Subsequent to our fiscal year end, we entered into
various promissory notes payable for $850,000; we believe that this financing
will allow us to support our growth during the following fiscal year.
Our
current cash expenses are expected to be approximately $150,000 per month,
including wages, rent, utilities and corporate professional fees. We are
currently generating sufficient cash from operations to cover all monthly cash
expenses. We anticipate that the July 31, 2008 balance of $1,338,000 in cash
combined with expected net cash flow generated from operations, cash received
from the subsequent financing of $850,000 and the factoring agreement with
Wells
Fargo Bank, will be sufficient to fund our operations, capital asset
expenditures and potential common stock repurchases for the next twelve
months.
Our
working capital was $427,000 as of July 31, 2008. This represents an improvement
of approximately $851,000 from our working capital deficit at July 31, 2007.
The
improvement can primarily be attributed to the reversal of previously recorded
preferred stock dividends of $340,000 as a result of the settlement with The
Shaar Fund and the net operating income generated from operations during Fiscal
2008.
Critical
Accounting Policies
Revenue
Recognition. We
derive
our revenue from VoIP Services and Network Services. Revenue
is recognized when persuasive evidence of an arrangement exists, service or
network capacity has been provided, the price is fixed or determinable,
collectibility is reasonably assured and there are no significant obligations
remaining.
We
record
and report our revenue on the gross amount billed to our customers in accordance
with the following “gross indicators” discussed in EITF 99-19:
19
|
·
|
ATSI
is the primary obligor in its
arrangements,
|
|
·
|
ATSI
has latitude in establishing
pricing,
|
|
·
|
ATSI
changes the product or performs part of the service and is involved
in the
determination of the product or service
specifications,
|
|
·
|
ATSI
has discretion in supplier selection;
and
|
|
·
|
ATSI
assumes credit risk for the amount billed to the
customer
|
We
recognize revenue from VoIP Services in the period the service is provided,
net
of revenue reserves for potential billing credits. Such disputes can result
from
disagreements with customers regarding the duration, destination or rates
charged for each call. ATSI recognizes network services revenue during the
period the service is provided.
Direct
Cost of Revenue. We
incur
termination charges in connection with providing VoIP services, installation
charges connection to the VoIP network of our carriers, and Internet,
co-location and fiber optic charges in connection with providing network
services. Termination charges, connection charges and other direct costs of
revenue are recognized in the period incurred.
Stock-based
Compensation.
We
record compensation expense associated with stock options and other forms of
equity compensation in accordance with Statement of Financial Accounting
Standards No. 123R,“Share-Based
Payment”, as
interpreted by SEC Staff Accounting Bulletin No. 107. Prior to February 1,
2006, ATSI had accounted for stock options according to the provisions of
Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees”,
and
related interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value. ATSI estimates the fair
market value of its stock options using the Black Scholes pricing model. ATSI
uses the following key assumptions in determining the fair market value of
its
options:
|
|
For
the Years Ended July 31,
|
||||||
|
2008
|
2007
|
||||||
|
Expected
dividends yield
|
0.00
|
%
|
0.00
|
%
|
|||
|
Expected
stock price volatility
|
75%
- 105
|
%
|
80
|
%
|
|||
|
Risk-free
interest rate
|
3.15% - 4.65
|
%
|
4.51
|
%
|
|||
|
Expected life of
options
|
4
- 6 years
|
7
years
|
|||||
Derivative
financial instruments.
We do
not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks. We evaluate the application of SFAS 133 and EITF 00-19
for all of its convertible financial instruments and freestanding
warrants.
For
derivative financial instruments that meet the definition of liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income. For option-based derivative financial instruments,
ATSI uses the Black-Scholes option-pricing model to value the derivative
instruments. The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether
or
not net-cash settlement of the derivative instrument could be required within
12
months of the balance sheet date.
| ITEM 7A. |
QUANTITIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not
Applicable
20
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Consolidated
Financial Statements of ATSI Communications, Inc. and
Subsidiaries
|
|
|
Report
of Independent Registered Public Accounting Firm
|
22
|
|
Consolidated
Balance Sheets as of July 31, 2008 and 2007
|
23
|
|
Consolidated
Statements of Operations for the Years Ended July 31, 2008 and 2007
|
24
|
|
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit) for the Years Ended
July 31, 2008 and 2007
|
25
|
|
Consolidated
Statements of Cash Flows for the Years Ended July 31, 2008 and 2007
|
26
|
|
Notes
to Consolidated Financial Statements
|
27
|
21
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
board of directors and Stockholders
ATSI
Communications, Inc.
San
Antonio, Texas
We
have
audited the accompanying consolidated balance sheets of ATSI
Communications, Inc. and subsidiaries as of July 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity
(deficit) and cash flows for each of the two years then ended. These
consolidated financial statements are the responsibility of ATSI’s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. ATSI is not required to have,
nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in
the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of ATSI’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
ATSI as
of
July 31, 2008 and 2007 and the consolidated results of their operations and
its
cash flows for each of the two years then ended in conformity with accounting
principles generally accepted in the United States of America.
MALONE
& BAILEY, PC
www.malone-bailey.com
Houston,
Texas
October
23, 2008
22
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share amounts)
|
|
July 31,
|
July 31,
|
|||||
|
|
2008
|
2007
|
|||||
|
|
|||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,338
|
$
|
1,050
|
|||
|
Accounts
receivable, net of allowance for bad debt of $60 and $98,
respectively
|
1,082
|
866
|
|||||
|
Note
receivable, related party
|
25
|
-
|
|||||
|
Note
receivable
|
-
|
50
|
|||||
|
Prepaid
& other current assets
|
124
|
94
|
|||||
|
Total
current assets
|
2,569
|
2,060
|
|||||
|
|
|||||||
|
LONG-TERM
ASSETS:
|
|||||||
|
Certificates
of deposit
|
319
|
306
|
|||||
|
Intangible
Assets
|
149
|
-
|
|||||
|
|
|||||||
|
PROPERTY
AND EQUIPMENT
|
611
|
499
|
|||||
|
Less
- accumulated depreciation
|
(439
|
)
|
(281
|
)
|
|||
|
Net
property and equipment
|
172
|
218
|
|||||
|
|
|||||||
|
Total
assets
|
$
|
3,209
|
$
|
2,584
|
|||
|
|
|||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable
|
$
|
1,361
|
$
|
1,071
|
|||
|
Wells
Fargo factoring collateral
|
18
|
-
|
|||||
|
Accrued
liabilities
|
116
|
516
|
|||||
|
Current
portion of obligation under capital leases
|
3
|
3
|
|||||
|
Notes
payable
|
566
|
818
|
|||||
|
Convertible
debentures, net of unamortized discount of $5 and $8, respectively
|
78
|
76
|
|||||
|
Total
current liabilities
|
2,142
|
2,484
|
|||||
|
|
|||||||
|
LONG-TERM
LIABILITIES:
|
|||||||
|
Notes
payable
|
588
|
177
|
|||||
|
Convertible
debentures, net of unamortized discount of $3 and $8, respectively
|
81
|
158
|
|||||
|
Obligation
under capital leases, less current portion
|
1
|
3
|
|||||
|
Other
|
3
|
4
|
|||||
|
Total
long-term liabilities
|
673
|
342
|
|||||
|
|
|||||||
|
Total
liabilities
|
2,815
|
2,826
|
|||||
|
|
|||||||
|
STOCKHOLDERS'
EQUITY (DEFICIT):
|
|||||||
|
Series
D Cumulative Preferred Stock, 3,000 shares authorized, 0 and 742
shares
issued and outstanding
|
-
|
1
|
|||||
|
Series
E Cumulative Preferred Stock, 10,000 shares authorized, 0 and 1,170
shares
issued and outstanding
|
-
|
1
|
|||||
|
Common
stock, $0.001 par value, 150,000,000 shares authorized, 39,550,415
and
37,620,513 shares issued and outstanding,
respectively
|
39
|
38
|
|||||
|
Additional
paid in capital
|
72,747
|
72,222
|
|||||
|
Accumulated
deficit
|
(72,393
|
)
|
(72,505
|
)
|
|||
|
Other
comprehensive income
|
1
|
1
|
|||||
|
Total
stockholders' equity (deficit)
|
394
|
(242
|
)
|
||||
|
Total
liabilities and stockholders' equity (deficit)
|
$
|
3,209
|
$
|
2,584
|
|||
See
accompanying summary of accounting policies and notes to financial
statements.
23
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
|
Years
ended July 31,
|
||||||
|
|
2008
|
2007
|
|||||
|
OPERATING
REVENUES:
|
|||||||
|
VoIP
services
|
$
|
41,961
|
$
|
31,692
|
|||
|
Total
operating revenues
|
41,961
|
31,692
|
|||||
|
|
|||||||
|
OPERATING
EXPENSES:
|
|||||||
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
38,884
|
29,521
|
|||||
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
2,400
|
1,625
|
|||||
|
Legal
and professional fees
|
352
|
258
|
|||||
|
Bad
debt expense (recovery)
|
(27
|
)
|
98
|
||||
|
Depreciation
and amortization expense
|
160
|
99
|
|||||
|
Total
operating expenses
|
41,769
|
31,601
|
|||||
|
|
|||||||
|
OPERATING
INCOME
|
192
|
91
|
|||||
|
|
|||||||
|
OTHER
INCOME (EXPENSE):
|
|||||||
|
Debt
forgiveness income
|
41
|
-
|
|||||
|
Investment
loss
|
(16
|
)
|
-
|
||||
|
Interest
expense
|
(105
|
)
|
(348
|
)
|
|||
|
Total
other expense
|
(80
|
)
|
(348
|
)
|
|||
|
|
|||||||
|
NET
INCOME (LOSS)
|
112
|
(257
|
)
|
||||
|
|
|||||||
|
LESS:
PREFERRED DIVIDEND
|
(12
|
)
|
(56
|
)
|
|||
|
ADD:
REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
|
340
|
828
|
|||||
|
|
|||||||
|
NET
INCOME TO COMMON STOCKHOLDERS
|
$
|
440
|
$
|
515
|
|||
|
|
|||||||
|
BASIC
INCOME PER SHARE TO COMMON STOCKHOLDERS
|
$
|
0.01
|
$
|
0.02
|
|||
|
DILUTED
INCOME PER SHARE TO COMMON STOCKHOLDERS
|
$
|
0.01
|
$
|
0.02
|
|||
|
|
|||||||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
39,143,748
|
27,908,044
|
|||||
|
DILUTED
COMMON SHARES OUTSTANDING
|
39,197,319
|
28,049,739
|
|||||
See
accompanying summary of accounting policies and notes to financial
statements.
24
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
||||||||||||||
|
|
|
Preferred
(D)
|
|
Preferred
(E)
|
|
Preferred
(H)
|
|
Common
|
|
|
|
Paid-in
|
|
Retained
|
|
Comp.
|
|
|
|
||||||||||||||||||
|
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Shares
|
|
Par
|
|
Capital
|
|
(Deficit)
|
|
Income/Loss
|
|
Totals
|
|||||||||||||
|
BALANCE,
JULY 31, 2006
|
742
|
1
|
1,170
|
1
|
11,802,420
|
12
|
16,444,403
|
16
|
$
|
68,775
|
$
|
(72,248
|
)
|
$
|
1
|
$
|
(3,442
|
)
|
|||||||||||||||||||
|
Shares
issued for Services
|
1,475,062
|
1
|
333
|
334
|
|||||||||||||||||||||||||||||||||
|
Common
shares issued for Preferred Stock Conversion
|
(11,802,420
|
)
|
(12
|
)
|
16,261,847
|
16
|
1,137
|
1,141
|
|||||||||||||||||||||||||||||
|
Exercise
of warrants
|
150,000
|
2
|
35
|
37
|
|||||||||||||||||||||||||||||||||
|
Dividends
declared
|
(56
|
)
|
(56
|
)
|
|||||||||||||||||||||||||||||||||
|
Reversal
of previously recorded preferred dividend
|
828
|
828
|
|||||||||||||||||||||||||||||||||||
|
Stock
option expense
|
267
|
267
|
|||||||||||||||||||||||||||||||||||
|
Proceeds
from exercise of options
|
100,000
|
1
|
16
|
17
|
|||||||||||||||||||||||||||||||||
|
Beneficial
Conversion Feature, private placement
|
144
|
144
|
|||||||||||||||||||||||||||||||||||
|
Shares
issued for conversion of notes payable
|
3,189,201
|
2
|
743
|
745
|
|||||||||||||||||||||||||||||||||
|
Net
(Loss)
|
(257
|
)
|
(257
|
)
|
|||||||||||||||||||||||||||||||||
|
BALANCE,
JULY 31, 2007
|
742
|
1
|
1,170
|
1
|
-
|
-
|
37,620,513
|
38
|
$
|
72,222
|
$
|
(72,505
|
)
|
$
|
1
|
$
|
(242
|
)
|
|||||||||||||||||||
|
Repurchase
of Common Shares
|
(44,002
|
)
|
-
|
$
|
(10
|
)
|
(10
|
)
|
|||||||||||||||||||||||||||||
|
Shares
issued for Services
|
1,448,686
|
1
|
348
|
349
|
|||||||||||||||||||||||||||||||||
|
Common
shares issued for Preferred Stock Conversion
|
3,434
|
-
|
1
|
1
|
|||||||||||||||||||||||||||||||||
|
Dividends
declared
|
(12
|
)
|
(12
|
)
|
|||||||||||||||||||||||||||||||||
|
Reversal
of previously recorded preferred dividend
|
340
|
340
|
|||||||||||||||||||||||||||||||||||
|
Stock
option expense
|
423
|
423
|
|||||||||||||||||||||||||||||||||||
|
Shares
issued for conversion of notes payable
|
-
|
-
|
521,784
|
-
|
135
|
135
|
|||||||||||||||||||||||||||||||
|
Retirement
of preferred stock, settlement of lawsuit
|
(742
|
)
|
(1
|
)
|
(1,170
|
)
|
(1
|
)
|
(700
|
)
|
(702
|
)
|
|||||||||||||||||||||||||
|
Net
income
|
112
|
112
|
|||||||||||||||||||||||||||||||||||
|
BALANCE,
July 31, 2008
|
-
|
-
|
-
|
-
|
-
|
-
|
39,550,415
|
39
|
$
|
72,746
|
$
|
(72,393
|
)
|
$
|
1
|
$
|
394
|
||||||||||||||||||||
See
accompanying summary of accounting policies and notes to the consolidated
financial statements.
25
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands, except per share amounts)
|
Years
ended July 31,
|
|||||||
|
2008
|
2007
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
NET
INCOME (LOSS)
|
$
|
112
|
$
|
(257
|
)
|
||
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|||||||
|
Investment
loss
|
16
|
-
|
|||||
|
Debt
forgiveness income
|
(41
|
)
|
-
|
||||
|
Depreciation
and amortization
|
160
|
99
|
|||||
|
Issuance
of stock grants and options, employees for services
|
695
|
473
|
|||||
|
Issuance
of common stock and warrants for services
|
77
|
129
|
|||||
|
Provisions
for losses on accounts receivables
|
(27
|
)
|
98
|
||||
|
Amortization
of debt discount
|
8
|
152
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(238
|
)
|
(343
|
)
|
|||
|
Prepaid
expenses and other
|
(96
|
)
|
(61
|
)
|
|||
|
Accounts
payable
|
322
|
174
|
|||||
|
Accounts
payable-related party
|
-
|
15
|
|||||
|
Accrued
liabilities
|
(23
|
)
|
83
|
||||
|
Net
cash provided by operating activities
|
965
|
562
|
|||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Investment
in certificates of deposit
|
(13
|
)
|
(306
|
)
|
|||
|
Note
receivable, related party
|
(25
|
)
|
-
|
||||
|
Purchase
of VoIP License
|
(100
|
)
|
(50
|
)
|
|||
|
Purchases
of property & equipment
|
(25
|
)
|
(145
|
)
|
|||
|
Net
cash used in investing activities
|
(163
|
)
|
(501
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Payments
on notes payable, related party
|
-
|
(106
|
)
|
||||
|
Payments
on notes payable
|
(251
|
)
|
(104
|
)
|
|||
|
Payments
on advances from shareholders
|
-
|
(148
|
)
|
||||
|
Retirement
of redeemable preferred stock series D&E
|
(250
|
)
|
-
|
||||
|
Acquisition
of common stock
|
(10
|
)
|
-
|
||||
|
Proceeds
from advances from shareholders
|
-
|
713
|
|||||
|
Proceeds
from Notes payables
|
-
|
550
|
|||||
|
Proceeds
from the exercise of stock options
|
-
|
16
|
|||||
|
Proceeds
from the exercise of warrants
|
-
|
35
|
|||||
|
Principal
payments on capital lease obligation
|
(3
|
)
|
(3
|
)
|
|||
|
Net
cash (used in) / provided by financing activities
|
(514
|
)
|
953
|
||||
|
INCREASE
IN CASH
|
288
|
1,014
|
|||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
1,050
|
36
|
|||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
1,338
|
$
|
1,050
|
|||
|
SUPPLEMENTAL
DISCLOSURES:
|
|||||||
|
Cash
paid for interest
|
$
|
62
|
$
|
77
|
|||
|
Cash
paid for income tax
|
-
|
-
|
|||||
|
NON-CASH
INVESTING AND FINANCING TRANSACTIONS
|
|||||||
|
Issuance
of common stock for conversion of debt
|
$
|
136
|
$
|
688
|
|||
|
Issuance
of common stock for accounts payable
|
-
|
58
|
|||||
|
Conversion
of preferred stock to common stock
|
1
|
1,141
|
|||||
|
Preferred
stock dividends
|
12
|
56
|
|||||
|
Reversal
of previously recorded preferred stock dividend
|
(340
|
)
|
(828
|
)
|
|||
|
Discount
for beneficial conversion feature on convertible debt
|
-
|
144
|
|||||
|
Gain
from the sale of Telefamilia
|
82
|
-
|
|||||
|
Acquisition
of VoIP license, conversion of note receivable
|
150
|
-
|
|||||
|
Acquisition
of fixed assets, conversion of accounts receivable
|
50
|
-
|
|||||
|
Note
payable, settlement of redeemable preferred stock
|
450
|
-
|
|||||
See
accompanying summary of accounting policies and notes to financial
statements.
26
ATSI
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business.
ATSI
Communications, Inc. was incorporated in Nevada on May 24, 2004. ATSI is an
international telecommunications carrier that utilizes the Internet to provide
economical international communication services to carriers and telephony
resellers around the world. ATSI’s continuing operations consist of VoIP carrier
services and network services. ATSI’s primary business consists of providing
VoIP communication services to U.S. and foreign telecommunications companies
that lack transmission facilities and require additional capacity or do not
have
the regulatory licenses to terminate traffic in Mexico, Asia, the Middle East
and Latin America.
Principles
of Consolidation. The
consolidated financial statements have been prepared on the accrual basis of
accounting under accounting principles generally accepted in the United States.
All significant inter-company balances and transactions have been eliminated
in
consolidation.
Reclassifications.
Certain
amounts in the consolidated financial statements of the prior year have been
reclassified to conform to the presentation of the current year for comparative
purposes.
Use
of Estimates.
In
preparing financial statements, management makes estimates and assumptions
that
affect the reported amounts of assets and liabilities in the balance sheet
and
revenue and expenses in the statement of expenses. Actual results could differ
from those estimates.
Concentration
of Credit Risk. Financial
instruments that potentially subject ATSI to concentration of credit risk
consist primarily of trade receivables. In the normal course of business, ATSI
provides credit terms to its customers. Accordingly, ATSI performs ongoing
credit evaluations of its customers and maintains allowances for possible
losses, which, when realized, have been within the range of management’s
expectations. ATSI maintains cash in bank deposits accounts, which, at times,
may exceed federally insured limits. ATSI has not experienced any losses in
such
accounts and ATSI does not believe ATSI is exposed to any significant credit
risk on cash and cash equivalents.
Revenue
Recognition. ATSI
derives revenue from two product offerings Carrier Services and Network
Services. Revenue
is recognized when persuasive evidence of an arrangement exists, service or
network capacity has been provided, the price is fixed or determinable,
collectibility is reasonably assured and there are no significant obligations
remaining.
ATSI
records and reports its revenue on the gross amount billed to its customers
in
accordance with the following indicators in EITF 99-19:
|
·
|
ATSI
is the primary obligor in its
arrangements,
|
|
·
|
ATSI
has latitude in establishing
pricing,
|
|
·
|
ATSI
changes the product or performs part of the service and is involved
in the
determination of the product or service
specifications,
|
|
·
|
ATSI
has discretion in supplier selection
and
|
|
·
|
ATSI
assumes credit risk for the amount billed to the
customer.
|
VoIP
Service:
ATSI
provides VoIP communication services to U.S. and foreign 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.
Carrier
service revenue is derived through transporting and terminating minutes of
telecommunications traffic over ATSI’s owned or leased VoIP network (Voice over
Internet Protocol). ATSI recognizes revenue in the period the service is
provided, net of revenue reserves for potential billing credits. Such disputes
can result from disagreements with customers regarding the duration, destination
or rates charged for each call.
27
Network
Services:
ATSI
provides
private communication links and VoIP gateway services to multi-national and
foreign carriers and 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 currently available through the foreign
telecommunication networks. These services include data, voice and fax
transmission between multiple international offices and branches as well as
Internet and collocation services in the United States.
ATSI
recognizes network services revenue during the period the service is provided.
Currently Network services is less than 0.01% of total revenue.
Direct
Cost of Revenue:
VoIP
Services:
Under
carrier services, ATSI incurs termination charges. These charges are related
to
the fees that ATSI is charged by carriers/vendors for the termination of phone
calls into their infrastructure and network to
terminate traffic in Mexico, Asia, the Middle East and Latin America.
The
cost
is based on a per minute rate and volume. ATSI also incurs installation charges
from various carriers; this cost is passed on to customers for the connection
to
the VoIP network from ATSI’s carriers.
Network
Services:
Under
network services, ATSI incurs Internet, co-location, and fiber optic charges.
The Internet and fiber optic charges are incurred as part of the connection
links between the customer’s different remote locations and sites to transmit
data, voice and Internet services. Co-location charges are incurred for space
utilized to install gateways, servers, and other communications equipment.
Cash
and Cash Equivalents.
For
purposes of the statement of cash flows, ATSI considers all highly liquid
investments purchased with an original maturity of three months or less to
be
cash equivalents.
Allowance
for Doubtful Accounts.
Bad debt
expense is recognized based on management’s estimate of likely losses each year
based on past experience and an estimate of current year uncollectible amounts.
As of July 31, 2008 and 2007, ATSI’s allowance for doubtful accounts balance was
approximately $60,000 and $98,000, respectively.
Investment
in unconsolidated subsidiaries.
ATSI
Comunicaciones S.A de C.V., (ATSICOM)
On
May
22, 2003 ATSI sold 51% of its interest in ATSI Comunicaciones S.A de C.V.,
(ATSICOM) As of July 31, 2008, ATSI has a 49% interest in the profits and equity
of ATSICOM, a Mexican corporation engaged in providing telecommunication
services. During fiscal 2003, ATSI recorded the investment in the unconsolidated
subsidiary in conformity with the equity method of accounting. During the year
ended July 31, 2004, ATSI determined that the estimated future cash flows
expected from the concession license were less than its carrying value. As
a
result ATSI recorded an impairment loss of approximately $702,000 to reduce the
recorded value of the concession license to zero. Although
there is no assurance of future value appreciation, from time to time ATSI
will
conduct a valuation of its investment in the concession license and record
the
determined value, if any, in its financial statements. As of July 31, 2008,
nothing has come to management’s attention that would require ATSI to make any
adjustment to its financial statement.
Fiesta
Communications, Inc.
On
May 1,
2008, ATSI agreed to sell all of the outstanding shares of Telefamilia
Communications, Inc. to Fiesta Communications, Inc. for 975,000 shares of common
stock in Fiesta Communications and $30,000 in cash to be paid in July
2008.
As of
July 31, 2008, ATSI has approximately 15% interest in the profits and equity
of
Fiesta Communications, Inc. During fiscal 2008, ATSI recorded the investment
in
the unconsolidated subsidiary in conformity with the equity method of accounting
and as a result recognized a minority interest loss on the investment of
$16,000.
28
Property
and equipment. Property
and equipment is recorded at cost. Additions are capitalized and maintenance
and
repairs are charged to expense as incurred. Gains and losses on dispositions
of
equipment are reflected in operations. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which are
one to five years.
Impairment
of Long-Lived Assets.
ATSI
reviews the carrying value of its long-lived assets annually or whenever events
or changes in circumstances indicate that the value of an asset may no longer
be
appropriate. ATSI assesses recoverability of the carrying value of the asset
by
estimating the future net cash flows expected to result from the asset,
including eventual disposition. If the future net cash flows are less than
the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset’s carrying value and fair value.
Derivative
financial instruments.
ATSI
does not use derivative instruments to hedge exposures to cash flow, market,
or
foreign currency risks. ATSI analyzes its convertible instruments and
free-standing instruments such as warrants for derivative liability accounting
according to Statement of Financial Accounting Standards No. 133 and Emerging
Issues Task Force 00-19.
For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income. For option-based derivative financial instruments,
ATSI uses the Black-Scholes option-pricing model to value the derivative
instruments.
The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Derivative instrument liabilities are classified in
the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months
of
the balance sheet date. There are no derivative instrument liabilities as of
July 31, 2008 or 2007, respectively.
Income
taxes.
ATSI
recognizes deferred tax assets and liabilities based on differences between
the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to be recovered. ATSI provides a valuation allowance for deferred
tax
assets for which it does not consider realization of such assets to be more
likely than not.
Stock-based
compensation. ATSI
records compensation expense associated with stock options and other forms
of
equity compensation in accordance with Statement of Financial Accounting
Standards No. 123R,
Share-Based Payment,
as
interpreted by SEC Staff Accounting Bulletin No. 107.
Basic
and diluted net loss per share.
The
basic net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss per
common share is computed by dividing the net loss adjusted on an “as if
converted” basis, by the weighted average number of common shares outstanding
plus potential dilutive securities.
Recently
issued accounting pronouncements.
ATSI
does not expect the adoption of any other recently issued accounting
pronouncements to have a significant impact on ATSI’s results of operations,
financial position or cash flows.
NOTE
2 - ACCOUNTS RECEIVABLE
On
December 12, 2007, ATSI entered into a $3,000,000 accounts receivable financing
agreement with Wells Fargo Business Credit (“WFBC”), a division of Wells Fargo
Bank, N.A. On March 26, 2008, WFBC increased the accounts receivable financing
to $5,000,000. ATSI may offer to sell with recourse not less than $350,000
and
no more than $5,000,000 of its accounts receivable to WFBC each month. WFBC
pays
to ATSI 85% of the aggregate amount of each account transferred under the
Account Transfer Agreement. Once the account is collected by WFBC, it retains
the amount originally paid for the account plus a daily factoring rate of
0.0349% for each day outstanding measured from the funding date and until the
account is paid by ATSI’s customer. If an account is not paid within 90 days,
ATSI must repurchase the account for the amount that it originally received
for
the account and pay the factor rate that has accrued prior to repurchase. The
factoring agreement is for twelve months and ATSI can terminate this agreement
upon 30 days written notice, subject to a $15,000 early termination fee. Under
the receivable financing agreement with WFBC, ATSI is factoring approximately
$875,000 of its monthly receivables. As of July 31, 2008, ATSI had approximately
$18,000 of factored account receivables outstanding; ATSI will continue to
factor its receivables on a monthly basis as services are rendered to its
customers.
29
NOTE
3 –
CERTIFICATES OF DEPOSIT
On
February 23, 2007 ATSI purchased a $200,000 certificate of deposit, with a
two
year maturity and a 4.50% annual yield of return, from Wells Fargo Bank, with.
The certificate of deposit is pledged as collateral on a $200,000 promissory
note with Wells Fargo Bank.
On
March
9, 2007 ATSI purchased a $100,000 certificate of deposit, with a two year
maturity and a 4.75% annual yield of return, from Wells Fargo Bank. The
certificate of deposit is pledged as collateral on a $100,000 promissory note
with Wells Fargo Bank.
NOTE
4 – INTANGIBLE ASSETS
During
fiscal 2008 ATSI
loaned $150,000 to NetSapiens Inc. The
note
receivable had a maturity date of June 26, 2008 with interest at 8% per year.
The
note
was secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution
modules. On June 26, 2008 ATSI converted the outstanding interest and principal
balance into a perpetual NetSapiens’ License. The License provides ATSI with the
ability to offer Hosted
PBX (Private Branch eXchange),
IP Centrex
application, prepaid calling, call center, conferencing, messaging and other
innovative telephony functionality necessary to offer standard and/or custom
services to the Residential
and
Enterprise
markets.
The NetSapiens’ License will be amortized equally over a period of 10 years.
NOTE
5 - PROPERTY
AND EQUIPMENT
Following
is a summary of ATSI’s property and equipment at July 31, 2008 and 2007 (in
thousands):
|
Useful
lives
|
2008
|
2007
|
||||||||
|
Telecom
equipment & software
|
1-5
years
|
$
|
611
|
$
|
499
|
|||||
|
Less:
accumulated depreciation
|
(439
|
)
|
(281
|
)
|
||||||
|
Net-property
and equipment
|
$
|
172
|
$
|
218
|
||||||
For
the
years ended July 31, 2008 and 2007, depreciation and amortization totaled
approximately $160,000 and $99,000, respectively.
30
NOTE
6 – DEBT
At
July 31, 2008 and 2007 outstanding debt consisted of the
following:
|
July
31,
|
|||||||
|
2008
|
2007
|
||||||
|
(in
thousands)
|
|||||||
|
9%
Convertible Subordinated Debenture, bering interest at 9.00% per
annum
maturing June 1, 2010, convertible into common stock annually at
the
higher of A) $0.27 per share or B) the average closing price of ATSI
common stock for the 10 days immediately preceding the date of conversion,
subject to a maximum number of 1,540,741 common shares issuable upon
conversion, outstanding balance, net of unamortized discount of $5
and $8,
respectively
|
$
|
159
|
$
|
234
|
|||
|
Note
payable to CCA Financial Services payable in monthly installments
bering
interest at 13.50% per annum, maturing December 31, 2008, collateralized
by ATSI's equipment deposit of accounts and accounts
receivables
|
101
|
207
|
|||||
|
Note
payable to Alfonso Torres, payable upon maturity bearing interest
of 6.00%
per annum, maturing October 1, 2009.
|
460
|
500
|
|||||
|
Note
payable to The Shaar Fund, payable in quarterly installments bearing
interest of 7.50% per annum, maturing April 12, 2012.
|
416
|
-
|
|||||
|
Note
payable to Wells Fargo bank payable in monthly installments bering
interest at 7.00% per annum, maturing April 1, 2009, collateralized
by
ATSI's certificates of deposit
|
39
|
88
|
|||||
|
Note
payable to Wells Fargo bank payable in monthly installments bering
interest at 7.25% per annum, maturing July 25, 2010, collateralized
by
ATSI's certificates of deposit
|
138
|
200
|
|||||
|
|
|
||||||
|
Total
outstanding long term debt
|
1,313
|
1,229
|
|||||
|
Current
portion of long-term debt
|
(644
|
)
|
(894
|
)
|
|||
|
Long-term
debt, net of current portion
|
$
|
669
|
$
|
335
|
|||
Payments
on long-term debt of ATSI as of July 31, 2008 are due as
follows:
|
(in
thousands)
|
||||
|
Fiscal
2009
|
$
|
414
|
||
|
Fiscal
2010
|
899
|
|||
|
Total
payments
|
$
|
1,313
|
||
ATSI
analyzed these instruments for derivative accounting consideration under SFAS
133 and EITF 00-19, and determined that derivative accounting is not applicable
for the new loans obtained during fiscal 2008 and 2007.
NOTE
7 - INCOME TAXES
At
July
31, 2008, ATSI had a consolidated net operating loss carry-forward (“NOL”) of
approximately $16,120,705 expiring ranging from 2009 through 2026. ATSI had
no
deferred tax asset resulting from its NOL. The loss carry forwards are subject
to certain limitations under the Internal Revenue Code including Section 382
of
the Tax Reform Act of 1986.
ATSI
conducts a periodic examination of its valuation allowance. Factors considered
in the evaluation include recent and expected future earnings and ATSI’s
liquidity and equity positions. As of July 31, 2008, ATSI has determined that
a
valuation allowance is necessary for the entire amount of deferred tax
assets.
31
Deferred
tax assets are comprised of the following as of July 31, 2008 and
2007:
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
$
|
5,642,000
|
$
|
5,675,000
|
|||
|
Valuation
allowance
|
(5,642,000
|
)
|
(5,675,000
|
)
|
|||
|
Total
deferred tax asset, net
|
$
|
-
|
$
|
-
|
|||
In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109” (FIN 48). This Interpretation
provides guidance on recognition, classification and disclosure concerning
uncertain tax liabilities. The evaluation of a tax position requires recognition
of a tax benefit if it is more likely than not it will be sustained upon
examination. We adopted this Interpretation effective January 1, 2007. The
adoption did not have a material impact on our consolidated financial
statements.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
Leases:
ATSI
leases its office space with monthly payments of $4,085; the lease expires
in
November 2011. The annual rent expense under the operating lease was $45,442
and
$49,419
for
2007
and 2008, respectively. The future minimum lease payments under the operating
lease are as follows:
NOTE
9 – EQUITY
Common
Stock
During
the year ended July 31, 2008 ATSI issued:
|
-
|
149,288
common shares valued at $30,820 to its placement agent and consultants
for
their services rendered.
|
| - |
1,299,398
common shares to its employees and directors for services rendered.
ATSI
recorded the fair value of $272,873 as the compensation expense in
its
statement of operations.
|
| - |
3,434
common shares to a Series H Preferred Stock stockholder for an conversion
of the Series H Preferred Stock.
|
| - |
130,436
common shares to Alfonso Torres in lieu of $30,000 in accrued interest
associated with the Alfonso Torres note payable.
|
| - |
391,348
common shares to the holders of the Convertible Debentures in lieu
of a
principal payment of $83,200 and $22,464 in accrued interest.
|
During
the year ended July 31, 2007 ATSI issued:
|
-
|
495,062
shares of common stock valued at $128,920 for its placement agent
fees and
legal and consulting services rendered by various
individuals.
|
|
-
|
980,000
shares of common stock to its employees and directors for services
rendered. ATSI recorded compensation expense of $205,800 in its
statement
of operations for the aggregate market value of the stock at the
date of
issuance.
|
|
-
|
16,149,938
shares of common stock in connection with the conversion and redemption
of
11,802,420 shares of Series H Preferred Stock and accrued premium
common
shares.
|
|
-
|
111,909
shares of common stock in connection with the conversion of 2,750
shares
of Series A Preferred Stock and accrued dividend.
|
|
-
|
150,000
shares of common stock upon exercise of outstanding warrants for
aggregate
proceeds of $34,500.
|
|
-
|
100,000
shares of common stock upon exercise of outstanding stock options
by an
employee for $16,000.
|
|
-
|
66,226
shares of common stock to Richard Benkendorf as a payment of $15,226
under
a settlement agreement.
|
|
-
|
137,412
shares of common stock to John Fleming as a payment of $42,600
under a
settlement agreement.
|
|
-
|
2,566,482
shares of common stock in connection with the conversion of various
notes
payable in the principal amount of $564,600 and accrued interest
of
$10,292.
|
|
-
|
419,081
shares of common stock valued at $113,152 in connection with the
annual
payment on the “New Debentures” dated June 1,
2006.
|
Preferred
Stock
The
terms
of ATSI’s preferred stock restrict ATSI from declaring and paying dividends on
ATSI’s common stock until such time as all outstanding dividends have been
fulfilled related to the preferred stock. The outstanding preferred stock have
liquidation preference prior to common stock and ratably with each
other.
32
Series
D Preferred Stock
Series
D
Preferred Stock were issued in February 2000. The Series D Preferred Stock
accrues cumulative dividends at the rate of 6% per annum payable quarterly.
The
Series D Preferred Stock and any accumulated, unpaid dividends may be converted
into Common Stock for up to two years at the lesser of a) the market price
on
the day prior to closing or b) 83% of the five lowest closing bid prices on
the
ten days preceding conversion. The terms of ATSI’s Series D Preferred Stock
allow for mandatory redemption by the holder upon certain conditions. The Series
D Preferred Stock allows the holder to elect redemption upon the change of
control of ATSI at 120% of the sum of $1,300 per share and accrued and unpaid
dividends. Additionally, the holder may elect redemption at $1,270 per share
plus accrued and unpaid dividends if ATSI refuses to honor conversion notice
or
if a third party challenges conversion. The Series D Preferred Stock holders
are
not entitled to vote.
On
December 10, 2007, ATSI and The Shaar Fund entered into a settlement agreement
relating to certain litigation. ATSI paid $75,000 on December 12, 2007 and
agreed to pay another $450,000 with interest at 7.5% per annum in quarterly
payments of $16,667 on each of January 31, 2008 and April 30, 2008, and in
quarterly payments of $26,042 commencing on July 31, 2008 and continuing until
April 30, 2012. If
paid in
full within the first 18 months, ATSI will be entitled to a discount of 22.5%
on
the then outstanding principal balance. The
Shaar
Fund surrendered for cancellation 742 shares of ATSI’s 6% Series D Cumulative
Convertible Preferred Stock and forgave approximately $340,000 in dividends
accrued thereon as of October 24, 2007.
Series
E Preferred Stock
Series
E
Preferred Stock were issued in October 2000 with a stated value of $1,000 per
share.. The Series E Preferred Stock contain certain conversion and redemption
features which provide that (1) they may be converted into Common Stock for
up
to three years at the lesser of a) the market price - defined as the average
of
the closing bid price for the five lowest of the ten trading days prior to
conversion or b) the fixed conversion price - defined as 120% of the lesser
of
the average closing bid price for the ten days prior to closing or the October
12, 2000 closing bid price and (2) allow for mandatory redemption by the holder
upon certain conditions. The Series E Preferred Stock allows the holder to
elect
redemption at $1,250 per share plus 6% per annum if: 1) ATSI refuses conversion
notice, 2) an effective registration statement was not obtained by prior to
March 11, 2001, 3) bankruptcy proceedings are initiated against ATSI, 4) The
Secretaría de Comunicaciones y Transportes of the SCT limits or terminates the
scope of the concession or, 5) if ATSI fails to maintain a listing on NASDAQ,
NYSE or AMEX. ATSI believes that the holders of the Series E Preferred Stock
can
no longer enforce the conversion or redemption features of the Preferred Stock
instruments due to, among other things, the expiration of the applicable statute
of limitations. Subsequent to July 31, 2007 the parties reached a confidential
settlement agreement. Under the confidential settlement agreement the 1,170
shares of Series E Preferred Stock have been cancelled. The
Series E Convertible Preferred Stock holders are not entitled to
vote.
In
August
2007, ATSI paid $175,000 to the Series E Preferred Stock stockholders and the
1,170
shares of Series E Preferred Stock have
been
cancelled.
NOTE
10 – STOCK-BASED COMPENSATION TO EMPLOYEES
In
September 2005, ATSI adopted its 2005 stock compensation plan. This plan
authorizes the grant of up to 7.5 million warrants, stock options, restricted
common shares, non-restricted common shares and other awards to employees,
directors, and certain other persons. The plan is intended to permit ATSI to
retain and attract qualified individuals who will contribute to the overall
success of ATSI. ATSI’s board of directors determines the terms of any grants
under the plan. Exercise prices of all warrants, stock options and other awards
vary based on the market price of the shares of common stock as of the date
of
grant. The warrants, stock options, restricted common stock, non-restricted
common stock and other awards vest based on the terms of the individual
grant.
In
August
2007, ATSI’s board of directors approved an amendment to the plan. Under the
amendment, ATSI’s board of directors increased the maximum aggregate number of
shares of Common Stock that may be issued under the Plan from 7.5 million shares
to 17.5 million shares.
33
The
grants under the plan during the year ended July 31, 2008 were as follows:
-
ATSI
granted options to purchase 1,835,000 common shares to certain employees and
Board Members with an exercise price of $0.21 per share, the closing price
of
ATSI’s common stock on the grant date, August 15, 2007. One third of the options
vested immediately on the grant date and the remaining two-thirds will vest
as
follows: one-third on the first anniversary of the grant date and one-third
on
the second anniversary of the grant date. All options expire if not exercised
on
or before the tenth anniversary of the grant date. Under the fair value option
method, ATSI recognized $89,000 of compensation expense associated with the
vested options on the date of grant. ATSI will recognize the remaining $177,000
of non-cash compensation expense related to un-vested options over the relevant
service periods.
-
ATSI
granted options to purchase 750,000 common shares to an employee with an
exercise price of $0.23 per share, the closing price of ATSI’s common stock on
the grant date, September 1, 2007. Upon successfully achieving performance
objectives set by ATSI’s board of directors, the options will vest one-third on
the first anniversary of the date of grant, one-third on the second anniversary
of the date of grant, and one-third on the third anniversary of the date of
grant. All options expire if not exercised on or before the tenth anniversary
of
the grant date. Under the fair value option method, ATSI will recognize $119,000
of non-cash compensation expense over the relevant service period.
-
ATSI
granted options to purchase 30,000 common shares to an employee with an exercise
price of $0.27 per share, the closing price of ATSI’s common stock on the grant
date, November 1, 2007. The options will vest one-third on the first anniversary
of the date of grant, one-third on the second anniversary of the date of grant,
and one-third on the third anniversary of the date of grant. All options expire
if not exercised on or before the tenth anniversary of the grant date. Under
the
fair value option method, ATSI will recognize $5,500 of non-cash compensation
expense over the relevant service period.
-
ATSI
granted options to purchase 100,000 common shares to an employee with an
exercise price of $0.18 per share, the closing price of ATSI’s common stock on
the grant date, January 28, 2008. The options will vest one-third on the first
anniversary of the date of grant, one-third on the second anniversary of the
date of grant, and one-third on the third anniversary of the date of grant.
All
options expire if not exercised on or before the tenth anniversary of the grant
date. Under the fair value option method, ATSI will recognize $14,753 of
non-cash compensation expense over the relevant service period.
-
ATSI
issued 1,299,398 shares of unrestricted common stock to its employees and
directors for services rendered with a value of $272,873.
The
grants under the plan during the year ended July 31, 2008 as follows:
-
1,345,000 options to purchase common stock to its employees and members of
the
Board of Directors with an exercise price of $0.21 per share, the closing
price
of ATSI’s common stock on the grant date, September 25, 2006. One third of the
options vested immediately at the issuance date and the remaining two-thirds
will vest equally over a period of two years. Under the fair value option
method, ATSI recognized $71,000 of compensation expense associated with the
vested options at the date of grant. ATSI will recognize the remaining $142,000
of non-cash compensation expense related to un-vested options over the service
period.
-
980,000
shares of unrestricted common stock to its employees and directors for
services
rendered
ATSI
recognized $695,000 and $473,000 in stock based compensation expense to
employees during fiscal 2008 and 2007, respectively.
The
fair
value of each option and warrant granted is estimated on the date of grant
using
the Black-Scholes option pricing model with the following
assumptions:
|
For
the Years Ended July 31,
|
|||||||
|
2008
|
2007
|
||||||
|
Expected
dividends yield
|
0.00
|
%
|
0.00
|
%
|
|||
|
Expected
stock price volatility
|
75%
- 105
|
%
|
80
|
%
|
|||
|
Risk-free
interest rate
|
3.15%
- 4.65
|
%
|
4.51
|
%
|
|||
|
Expected
life of options
|
4
-
6 years
|
7
years
|
|||||
ATSI
estimates its expected life of its options using the “simplified method” allowed
for under SAB 108 which is the average between the contract term and the vesting
period of the options.
34
A
summary
of the options as of July 31,
2008
and 2007 and the
changes during the years ended July 31,
2008
and 2007 are presented
below:
|
Weighted-average
|
||||||||||
|
Weighted-average
|
remaining contractual
|
|||||||||
|
2005 Stock Compensation Plan
|
Options
|
exercise price
|
term (years)
|
|||||||
|
|
|
|
|
|||||||
|
Outstanding
at July 31, 2006
|
4,354,000
|
$
|
0.16
|
6
|
||||||
|
|
|
|
|
|||||||
|
Granted
|
1,345,000
|
0.21
|
6
|
|||||||
|
Forfeited
|
(100,000
|
)
|
0.16
|
6
|
||||||
|
|
|
|
|
|||||||
|
Outstanding
at July 31, 2007
|
5,599,000
|
$
|
0.17
|
6
|
||||||
|
|
|
|
|
|||||||
|
Granted
|
2,715,000
|
0.22
|
6
|
|||||||
|
Forfeited
|
(75,000
|
)
|
0.21
|
6
|
||||||
|
|
|
|
|
|||||||
|
Outstanding
at July 31, 2008
|
8,239,000
|
0.19
|
6
|
|||||||
|
|
|
|
|
|||||||
|
Exercisable
at July 31, 2008
|
4,905,666
|
$
|
0.17
|
6
|
||||||
NOTE
11 –WARRANTS ISSUED FOR SERVICES
During
the year ended July 31, 2008 ATSI granted 375,000 warrants for consulting
services. The exercise price of the warrants was set at $.18 per warrant. ATSI
recognized a non-cash warrant expense of $45,753 during the year ended July
31,
2008.
The
fair
value of each warrant granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for fiscal
2008:
|
For
the year Ended
July
31,
|
||||
|
2008
|
||||
|
Expected
dividend yield
|
0.00
|
%
|
||
|
Expected
stock price volatility
|
105
|
%
|
||
|
Risk-free
interest rate
|
3.62
|
%
|
||
|
Contractual
life of warrants
|
7
years
|
|||
A
summary
of the warrants as of July 31,
2008
and 2007 and the
changes during the years ended July 31,
2008
and 2007 are presented
below:
|
Weighted-average
|
||||||||||
|
Weighted-average
|
remaining contractual
|
|||||||||
|
|
Warrants
|
exercise price
|
term (years)
|
|||||||
|
Outstanding
at July 31, 2006
|
150,000
|
$
|
0.23
|
3
|
||||||
|
Granted
|
-
|
-
|
-
|
|||||||
|
Exercised
|
(150,000
|
)
|
0.23
|
3
|
||||||
|
Forfeited
|
-
|
-
|
-
|
|||||||
|
Outstanding
at July 31, 2007
|
-
|
$
|
-
|
-
|
||||||
|
Granted
|
375,000
|
0.18
|
4
|
|||||||
|
Exercised
|
-
|
-
|
-
|
|||||||
|
Forfeited
|
-
|
-
|
-
|
|||||||
|
Outstanding
at July 31, 2008
|
375,000
|
$
|
0.18
|
4
|
||||||
|
Exercisable
at July 31, 2008
|
375,000
|
$
|
0.18
|
4
|
||||||
35
NOTE
12 – SHARE REPURCHASE PROGRAM
On
April
16, 2008, ATSI’s Board of Directors approved a share buyback plan allowing ATSI
to purchase up to $1 million of its common stock. The shares will be bought
through the open market through December 31, 2008 based on price and market
conditions. As of July 31, 2008, ATSI has repurchased 44,002 of its common
stock
at an average purchase price of $0.22.
NOTE
13 – NON-STANDARDIZED
PROFIT SHARING PLAN
We
currently provide a Non-Standardized Profit Sharing Plan. The board of directors
approved the plan on September 15, 2006. Under the plan our employees qualified
to participate in the plan after one year of employment. Contribution under
the
plan is based on 25% of the annual base salary of each eligible employee up
to
$46,000 per year. Contributions under the plan are fully vested upon funding.
During fiscal 2008 and 2007, the Company contributed under the plan $194,000
and
$99,000, respectively.
NOTE
14 – EARNINGS (LOSS) PER SHARE
In
accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share
have been computed based upon the weighted average common shares outstanding.
Diluted earnings per share give effect to outstanding convertible preferred
shares, warrants and stock options, unless their effect is anti-dilutive.
Earnings (loss) per common share have been computed as follows:
NOTE
15 – SALE OF TELEFAMILIA
On
May 1,
2008, ATSI sold all of the outstanding shares of Telefamilia Communications,
Inc. to Fiesta Communications, Inc. for 975,000 shares of common stock in Fiesta
Communications and $30,000 in cash to be paid through a promissory note in
July
2008. The shares of Fiesta were determined to have very minimal value due to
the
Company is still in the development stage and the shares has no fair market
value. Additionally, Fiesta Communications issued a three-year promissory note
in the amount of $52,984 for the services rendered by ATSI under the joint
management agreement dated January 1, 2006. The three-year promissory note
will
be paid quarterly starting July 31, 2008 and has a maturity date of May 1,
2010
and an annual interest rate of 8%. The note is secured by all assets of the
new
combined entity of Fiesta.
36
The
following table presents the allocation of the selling price of Telefamilia
for
the assets sold and liabilities transferred, based on their fair
values:
|
Promissory
notes from Fiesta/Telefamilia
|
$
|
82,984
|
||
|
Note
payable from Fiesta
|
15,000
|
|||
|
Total
purchase price
|
97,984
|
|||
|
Assets
sold
|
(67,165
|
)
|
||
|
Liabilities
transferred
|
50,728
|
|||
|
Gain
on sale of Telefamilia
|
$
|
81,547
|
As
of
August 1, 2008, ATSI and Fiesta agreed to extend the maturity date on the
$30,000 promissory note to October 31, 2008; all other terms remained the same.
Also
on
August 1, 2008, Fiesta entered into a note payable with ATSI for $25,000,
with a maturity date of October 31, 2008 and an interest rate of
8%.
With
the
975,000 shares obtained from Fiesta, ATSI owns approximately 15% of Fiesta.
Since ATSI’s CEO and President, Arthur L Smith, is also a 16% stockholder of
Fiesta, ATSI and its CEO and President have significant influence of Fiesta
and
the investment in Fiesta is accounted for by ATSI under Equity Method.
ATSI
has
evaluated its relationship with Fiesta and determined that Fiesta is a variable
interest entity under FIN 46(R) and also concluded that ATSI has no control
of
Fiesta and is not the primary beneficiary as defined by FIN 46(R). Based on
these findings, ATSI is not required to consolidate Fiesta.
For
the
year ended July 31, 2008, ATSI recognized $16,000 loss from its equity
investment in Fiesta and as of July 31, 2008, the balance of the investment
in
Fiesta was netted with the notes receivable from Fiesta to be
$25,000.
NOTE
16 – SUBSEQUENT EVENTS
On
September 26, 2008, ATSI borrowed $850,000 under several notes payable.
These
notes bear annual interest of 10%, and provide for twenty-four monthly payments
of principal and interest. These notes are secured by 1) Accounts receivables
other than accounts sold under the receivable
financing agreement
with
Wells
Fargo Business Credit (“WFBC”), a division of Wells Fargo Bank, N.A.;
2)
$100,000 certificate of deposit, and 3) ATSI’s ownership interest in ATSICOM.
Additionally, ATSI entered into a twenty-four month consulting / advisory
agreement with Texas Ventures, under the agreement ATSI will pay an annual
fee
of 1.5%, based on the total outstanding principal balance due to the holders
of
the $850,000 promissory notes. ATSI has the option of paying off the total
outstanding principal balance at any time without any penalties.
In
addition, ATSI issued 425,000 warrants to the note holders. The exercise price
of the warrants was set at $0.19 per warrant.
The
warrants have the following “Put” and “Call” rights:
Put
right.
From
and after the second anniversary of the notes payable, the holder shall have
the
right to “Put” to ATSI, upon five (5) Business days prior notice at a put price
of $.39 per warrant.
Call
right.
At any
time any warrants are outstanding, if the last sale price of ATSI’s common stock
is greater than $.80 per share for ten (10) consecutive trading days, ATSI
shall
be entitled to require the purchaser to exercise the warrants and pay the
exercise price therefore upon five (5) business days written
notice.
37
The
fair
value of the warrant granted to the Note holders was estimated to be
$70,760 on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
|
Expected
dividend yield
|
0.00
|
%
|
||
|
Expected
stock price volatility
|
126
|
%
|
||
|
Risk-free
interest rate
|
3.37
|
%
|
||
|
Contractual
life of warrants
|
7
years
|
|||
ATSI
analyzed these instruments for derivative accounting consideration under
SFAS
133 and EITF 00-19, and determined that the warrants did not meet the definition
of equity under SFAS 133 and EITF 00-19, due to the put right. ATSI estimated
the fair market value of the put to be the difference between the potential
cash
settlement price per share and the exercise price, or approximately $85,000
which is the maximum amount of potential cash settlement by ATSI. Because
the
maximum cash settlement was greater than the fair value of the warrants,
ATSI
recorded the maximum cash settlement of $85,000 as a
liability.
| ITEM 9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None
ITEM
9A(T). CONTROLS
AND PROCEDURES.
Disclosure
Controls and Procedures
We
maintain “disclosure controls and procedures,” as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms,
and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the “Evaluation”), under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer of
the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report pursuant to Rule
13a-15 of the Exchange Act. The evaluation of our disclosure controls and
procedures included a review of the disclosure controls’ and procedures’
objectives, design, implementation and the effect of the controls and procedures
on the information generated for use in this report. In the course of our
evaluation, we sought to identify data errors, control problems or acts of
fraud
and to confirm the appropriate corrective actions, if any, including process
improvements, were being undertaken. Our Chief Executive Officer and our Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective and were operating
at the reasonable assurance level.
Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and
15d-15(f) as amended). Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject
to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies or procedures may
deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of July 31, 2008. In making this assessment, we used the criteria
set forth by the committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control - Integrated Framework. Based on our
assessment using those criteria, our management concluded that our internal
control over financial reporting was effective as of July 31,
2008.
38
We
have
made no changes in our internal controls over financial reporting during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER
INFORMATION.
None
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE
GOVERNANCE.
Business
Experience
The
following table contains the name, age of our directors and executive
officers.
|
Name
|
Age
|
Position
Held
|
|||
|
Arthur
L. Smith
|
43
|
President,
Chief Executive Officer and Director
|
|||
|
Ruben
R. Caraveo
|
40
|
Sr.
Vice President, Operations and Technology
|
|||
|
Antonio
Estrada Jr.
|
34
|
Sr.
Vice President, Treasurer & Corporate Controller
|
|||
|
John
R. Fleming
|
54
|
Director,
Interim Executive Chairman of the Board
|
|||
|
Murray
R. Nye
|
54
|
Director
|
|||
Arthur
L. Smith
has
served as our Chief Executive Officer and Director since May 2003. Mr. Smith
also served as the President of ATSI de Mexico S.A de C.V. from August 2002
to
April 2003, as our Chief Executive Officer and a Director from June 1996 to
July
2002 and as our President since our formation in June 1996 to July 1998. Mr.
Smith also served as President, Chief Operating Officer and a director of
ATSI-Canada since its formation in May 1994. From December 1993 until May 1994,
Mr. Smith served in the same positions with Latcomm International Inc., which
amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in May 1994.
From
June 1989 to December 1993, Mr. Smith was employed as director of international
sales by GeoComm Partners, a satellite-based telecommunications company located
in San Antonio, providing telecommunications services to Latin America. Mr.
Smith has over 19 years’ experience in the telecommunications industry.
Ruben
R. Caraveo
has
served as our Sr. Vice President of Operations and Technology since August
2006,
and is also the President for our wholly-owned subsidiary Digerati Networks,
Inc. Mr. Caraveo also served as Vice President of Sales and Operations
from May 2003 to July 2006. Prior to joining ATSI, Mr. Caraveo served as
Vice President of Operations and Engineering at Vycera Communications where
he
was responsible for overseeing all daily operations, including Network
Operations, Engineering, Marketing, and the Network Trouble Reporting and
Resolution departments. His prior experience also includes positions with
Worldtel Interactive, Frontier, and WorldCom. Mr. Caraveo has more than 19
years’ telecommunications industry experience, specializing in the areas of
Carrier Sales, Network Operations, Engineering, Data and Systems Analysis,
Product Marketing, and Systems Development. Mr. Caraveo attended California
State University, Northridge, School of Engineering.
Antonio
Estrada Jr. has served
as
our Sr. Vice President of Finance since August 2007. From May 2003 to July
2007,
Mr. Estrada served as the Corporate Controller. From January 2002 through
January 2003, Mr. Estrada served as our Director of International Accounting
and
Treasurer. From January 2001 to January 2002, Mr. Estrada served in various
roles within ATSI, including International Accounting Manager and General
Accountant. Prior to joining ATSI in 1999 he served as a Senior Accountant
for
the Epilepsy Association of San Antonio and South Texas. Mr. Estrada has more
than 10 years’ experience in the telecommunications industry, financial
reporting, treasury management, internal audit, SOX compliance, and accounting.
Mr. Estrada graduated from the University of Texas at San Antonio, with a
Bachelors of Business Administration, with a concentration in Accounting.
39
John
R. Fleming
has
served as our Non-executive Chairman of the Board since August 2002 and as
one of our Directors since January 2001. Mr. Fleming is the principal and
founder of Vision Corporation, an early-stage investment company that focuses
on
communications technologies, service and hardware. Mr. Fleming also
owns Secure Media Solutions, Inc., which specializes
in digital medium transfer technologies for both the film and
television industries. Prior to forming Vision Corporation, Mr.
Fleming served as President, International of IXC Communications, Inc. from
April 1998 to December 1999. Immediately prior to that he served as IXC’s
President of Emerging Markets from December 1997, as Executive Vice President
of
IXC from March 1996 through November 1997 and as Senior Vice President of IXC
from October 1994 through March 1996. He served as Vice President of Sales
and
Marketing of IXC from its formation in July 1992 until October 1994. Prior
to
that, Mr. Fleming served as Director of Business Development and Director of
Carrier Sales of CTI from 1986 to March 1990 and as Vice President of Marketing
and Sales of CTI from March 1990 to July 1992. Mr. Fleming was a Branch Manager
for Satellite Business Systems from 1983 to 1986.
Murray
R. Nye
has
served as one of our Directors since its formation in June 1996. Mr. Nye also
served as of the Chief Executive Officer and a director of ATSI-Canada from
its
formation in May 1994. From December 1993 until May 1994, Mr. Nye served in
the
same positions with Latcomm International Inc., which company amalgamated with
Willingdon Resources Ltd. to form ATSI-Canada in May 1994. From 1992 to 1995,
Mr. Nye served as President of Kirriemuir Oil & Gas Ltd. From 1989 until
1992, Mr. Nye was self-employed as a consultant and Mr. Nye is again currently
self-employed as a consultant. Mr. Nye serves as a director of D.M.I.
Technologies, Inc., an Alberta Stock Exchange-traded company.
There
are
no family relationships between or among our directors and executive
officers.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers and persons who own more than 10% of a registered class
of our equity securities to file various reports with the Securities and
Exchange Commission concerning their holdings of, and transactions in,
securities we issued. Each such person is required to provide us with copies
of
the reports filed. Based on a review of the copies of such forms furnished
to us
and other information, we believe that, during the fiscal year ended July 31,
2008, none of our officers, directors or owners of 10% of any class of our
securities failed to report transactions in our securities or reported
transactions in our securities late.
|
Name and Position
|
Number of
Transactions
Not
Reported
|
Number of
Reports
Filed Late
|
Number of
Transactions
Reported
Late
|
|||||||
|
Ruben
R. Caraveo, Sr. Vice President of Operations and
Technology
|
0
|
12
|
15
|
|||||||
Code
of Ethics
ATSI
Communications, Inc. adopted an
Executive Code of Ethics that applies to the Chief Executive Officer, Chief
Financial Officer, Controller and other members of our management team. The
Executive Code of Ethics may be viewed on our Website, www.atsi.net.
Upon
request, a copy of the Executive Code of Ethics will be provided without charge
upon written request to ATSI Communications, Inc., 3201 Cherry Ridge, Building
C, Suite 300, San Antonio, Texas 78230.
Nominating
Committee and Nomination of Directors
We
do not
have a formal nominating committee because the size of our board of directors
is
too small to establish separate standing committees. Our directors perform
the
function of a nominating committee.
40
The
directors consider director candidates recommended by other members of the
board
of directors, by executive officers and by one or more substantial, long-term
stockholders. In addition, the board of directors may seek candidates through
a
third person recruiter. Generally, stockholders who individually or as a group
have held 5% of our shares for over one year will be considered substantial,
long-term stockholders. In considering candidates, the directors take into
consideration the needs of the board of directors and the qualifications of
the
candidate. The board of directors has not established a set of criteria or
minimum qualifications for candidacy and each candidate is considered based
on
the demonstrated competence and knowledge of the individual. To have a candidate
considered by the directors, a stockholder must submit the recommendation in
writing and must include the following information:
|
·
|
The
name of the stockholder and evidence of ownership of our shares,
including
the number of shares owned and the length of time of ownership;
and
|
|
·
|
The
name of the candidate, the candidate’s resume or a listing of her or his
qualifications to be one of our directors and the person’s consent to be
named as a director if nominated by the
directors.
|
The
stockholder’s recommendation and information described above must be sent to us
at 3201 Cherry Ridge, Building C, Suite 300, San Antonio, TX 78230 and, if
the
nominee is to be elected at a meeting of the stockholders, must be received
by
the Chief Executive Officer at least 180 days prior to the anniversary date
of
our most recent annual meeting of stockholders.
Audit
Committee and Audit Committee Financial Expert
We
do not
have an audit or other board committee performing equivalent functions. Our
board of directors performs all functions of the audit committee. We do not
have
an audit committee financial expert because none of our current directors have
the necessary training or experience to qualify as a financial
expert.
ITEM
11. EXECUTIVE
COMPENSATION.
Compensation
Discussion and Analysis
Our
compensation programs are designed to meet the following objectives:
|
·
|
Offer
compensation opportunities that attract highly qualified executives,
reward outstanding initiative and achievement, and retain the leadership
and skills necessary to build long-term stockholder value;
|
|
·
|
Emphasize
pay-for-performance by maintaining a portion of executives’ total
compensation at risk, tied to both our annual and long-term financial
performance and the creation of stockholder value; and
|
|
·
|
Further
our short and long-term strategic goals and values by aligning executive
officer compensation with business objectives and individual performance.
|
Our
board
of directors believes that an executive’s compensation should be tied to the
performance of the individual and the performance of the complete executive
team
against both financial and non-financial goals, some of which are subjective
and
within the discretion of the board of directors.
Our
executive compensation program is intended to be simple and clear, and consists
of the following elements (depending on individual performance):
|
·
|
Base
salary;
|
|
·
|
Annual
performance-based cash bonus;
|
|
·
|
Long-term
incentives in the form of stock options;
and
|
|
·
|
Benefits
that are offered to executives on the same basis as our non-executive
employees.
|
41
Role
of Management in Determining Compensation Decisions
At
the
request of our board of directors, our management makes recommendations to
our
board of directors relating to executive compensation program design, specific
compensation amounts, bonus targets, incentive plan structure and other
executive compensation related matters for each of our executive officers,
including our Chief Executive Officer. Our board of directors maintains
decision-making authority with respect to these executive compensation matters.
Our
board
of directors reviews the recommendations of our management with respect to
total
executive compensation and each element of compensation when making pay
decisions. In allocating compensation among compensation elements, we emphasize
incentive, not fixed compensation to ensure that executives only receive
superior pay for superior results. We equally value short- and long-term
compensation because both short- and long-term results are critical to our
success. In addition, our compensation program includes various benefits
provided to all employees, including life insurance, health insurance and other
customary benefits. The objectives and details of why each element of
compensation is paid are described below.
Base
Salary. Our
objective for paying base salaries to executives is to reward them for
performing the core responsibilities of their positions and to provide a level
of security with respect to a portion of their compensation. We consider a
number of factors when setting base salaries for executives, including:
|
·
|
Existing
salary levels;
|
|
·
|
Competitive
pay practices;
|
|
·
|
Individual
and corporate performance; and
|
|
·
|
Internal
equity among our executives, taking into consideration their relative
contributions to our success.
|
Annual
Incentive Awards. Our
objective for offering annual cash bonus awards to our named executive officers
is to motivate them to achieve our annual financial goals, while taking into
account their individual goals and responsibilities. Our board of directors
implemented our 2008 executive officer bonus plan, effective as of the first
quarter of fiscal 2008 pursuant to which our named executive officers became
eligible to receive cash bonus awards calculated and paid on a quarterly basis.
The amounts payable under our 2008 executive officer bonus plan were to be
calculated based on our revenue, margin, cash balance and net income for 2008
against the 2008 financial plan approved by our board of directors.
Under
our
2008 executive officer bonus plan, we assigned a specific bonus target to each
executive for performance in 2008. Our board of directors designed these bonus
targets to allow for additional compensation in the event we meet our targets
set fort under the financial plan approved by our board of directors. Cash
bonus
targets were determined based on individual responsibility levels and
performance expectations and would be payable in a proportionate amount
representing the percentage of our targeted corporate net income goal pursuant
to our 2008 financial plan. After discussion and deliberation, our board of
directors ultimately approved our management’s recommendations as detailed
below:
|
Name
|
Title
|
Bonus
|
|||||
|
Arthur
L. Smith
|
President,
Chief Executive Officer and Director
|
$
|
75,000
|
||||
|
Ruben
R. Caraveo
|
Sr.
Vice President, Operations and Technology
|
$
|
67,500
|
||||
|
Antonio
Estrada Jr.
|
Sr.
Vice President & Corporate Controller
|
$
|
55,000
|
||||
Payouts
under our 2008 executive officer bonus plan are dependent on our achievement
towards our revenue; margin, cash balance and net income goal such that 100%
of
the bonus target amounts would be paid upon achievement of 100% of the net
income goal. Above and below target performance methodologies were also
established. Cash bonuses for 2008 exceeded the amount set forth above because
we exceeded all targets established by the board of directors. Similar to the
2008 executive officer bonus plan, our 2009 executive compensation plan and
performance targets under the 2009 financial plan are dependent on our
achievement of revenue; margin, cash balance and net income goals.
42
We
consider the specific performance goals established in the 2008 and 2009
financial plan to be our confidential information, the disclosure of which
would
cause us to experience financial harm. We believe that tying annual bonus
payments for each of our named executive officers to the achievement of
challenging revenue, margin, cash balance and net income goals best aligns
the
interest of our executives with the interests of our stockholders and promotes
a
unity of purpose among our key business leaders. Regardless of our actual
financial performance under our 2008 financial plan, our board of directors
retained the discretion to adjust bonuses payable under our 2008 executive
officer bonus plan up or down as it deemed appropriate.
Long-term
Incentive Awards. We
award long-term incentive compensation to focus our executives on our long-term
growth and stockholder return, as well as to encourage our executives to remain
with us for the long-term. Long-term incentive awards are primarily in the
form
of grants of stock options and/or stock award pursuant to our 2005 Stock
Compensation Plan (the “Plan”). We selected this form because of the favorable
accounting and tax treatment and the expectation of key employees in our
industry that they would receive stock options and/or stock grants. We do not
have pre-established target award amounts for long-term incentive grants. In
determining long-term incentive awards for the named executive officers, our
board of directors relies on recommendations from our Chief Executive Officer,
who considers the individual performance of the executives, the relation of
the
award to base salary and annual incentive compensation, and associated
accounting expense The terms of and amount of awards are made by our board
of
directors in accordance with the Plan.
SUMMARY
COMPENSATION TABLE
|
Name and Principal
Position
|
Year
|
Salary
($)
|
Bonus(1)
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
|
Arthur
L. Smith
CEO
& President
|
2008
2007
|
$
$
|
150,000
150,000
|
$
$
|
90,392
42,187
|
$
$
|
7,012
47,250
|
(2)
(2)
|
$
$
|
94,500
63,000
|
(2)
(2)
|
$
$
|
50,738
22,154
|
(3)
(3)
|
$
$
|
392,642
324,591
|
||||||
|
Ruben
R. Caraveo
Senior
Vice President of Operations and Technology
|
2008
2007
|
$
$
|
135,000
130,000
|
$
$
|
127,371
48,750
|
$
$
|
-0-
36,750
|
(2)
|
$
$
|
78,750
52,500
|
(2)
(2)
|
$
$
|
47,327
19,904
|
(3)
(3)
|
$
$
|
388,448
287,904
|
||||||
|
Antonio
Estrada Jr.
Senior
Vice President of Finance & Corporate Controller
|
2008
2007
|
$
$
|
110,000
90,000
|
$
$
|
101,126
28,686
|
$
$
|
15,226
36,750
|
(2)
(2)
|
$
$
|
78,750
52,500
|
(2)
(2)
|
$
$
|
32,102
15,216
|
(3)
(3)
|
$
$
|
337,204
223,152
|
||||||
|
(1)
|
Bonus
amounts are based on the bonus payments for the 2008 fiscal year
|
|
(2)
|
A
description of the assumptions made in valuation of options granted
can be
found in Note 9 to the Financial Statements, which is deemed to be
a part
of this Item.
|
|
(3)
|
All
other compensation consists of contributions by the Company into
the
Non-Standardized Profit Sharing
Plan.
|
Equity-based
Compensation Plans
Our
board
of directors adopted the 2005 Stock Compensation Plan (the “Plan”). Under the
Plan the board of directors may grant up to 17,500,000 shares of our common
stock to our officers, directors, employees and consultants. Grants may be
in
the form of incentive stock options, non-statutory stock options, restricted
stock awards, and/or unrestricted stock awards. The number and terms of each
award is determined by the board of directors, subject to the limitation that
the exercise price of any option may not be less than the fair market value
of
the common stock on the date of grant. The board of directors has not
retroactively granted or repriced options under the Plan. The following tables
set forth information about the number of grants made during fiscal 2008 and
2007 and the number of outstanding stock options held by each of our named
executive officers as of July 31, 2008.
43
GRANTS
OF PLAN-BASED AWARDS
|
Name
|
Grant Date
|
Number of
Shares of
Stock or
Units
(#)
|
Number of
Securities
Underlying
Options
(#)
|
Exercise or
Base Price
of Option
Awards
($/Sh)
|
Grant Date
Fair Value
of Stock and
Option Awards
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Arthur
L. Smith
|
9/25/2006
|
225,000
|
300,000
|
$
|
0.21
|
$
|
288,000
|
|||||||||
|
|
8/14/2007
|
275,000
|
450,000
|
$
|
0.21
|
$
|
369,500
|
|||||||||
|
|
||||||||||||||||
|
Ruben
R. Caraveo
|
9/25/2006
|
175,000
|
250,000
|
$
|
0.21
|
$
|
227,500
|
|||||||||
|
|
8/14/2007
|
225,369
|
375,000
|
$
|
0.21
|
$
|
304,119
|
|||||||||
|
|
||||||||||||||||
|
Antonio
Estrada, Jr.
|
9/25/2006
|
175,000
|
250,000
|
$
|
0.21
|
$
|
227,500
|
|||||||||
|
|
8/14/2007
|
225,369
|
375,000
|
$
|
0.21
|
$
|
304,119
|
|||||||||
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Option Awards
|
Stock Awards
|
||||||||||||||||||
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock That
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
|||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
Arthur
L. Smith
|
420,000
|
-
|
$
|
0.16
|
9/29/2015
|
-
|
-
|
||||||||||||
|
|
350,000
|
175,000
|
$
|
0.16
|
10/3/2015
|
-
|
-
|
||||||||||||
|
|
200,000
|
100,000
|
$
|
0.21
|
9/25/2016
|
-
|
-
|
||||||||||||
|
|
150,000
|
300,000
|
$
|
0.21
|
8/15/2017
|
-
|
-
|
||||||||||||
|
Ruben
R. Caraveo
|
375,000
|
-
|
$
|
0.16
|
9/29/2015
|
-
|
-
|
||||||||||||
|
|
316,666
|
158,334
|
$
|
0.16
|
10/3/2015
|
-
|
-
|
||||||||||||
|
|
166,666
|
83,334
|
$
|
0.21
|
9/25/2016
|
-
|
-
|
||||||||||||
|
|
125,000
|
250,000
|
$
|
0.21
|
8/15/2017
|
-
|
-
|
||||||||||||
|
Antonio
Estrada Jr.
|
347,000
|
-
|
$
|
0.16
|
9/29/2015
|
-
|
-
|
||||||||||||
|
|
316,666
|
158,334
|
$
|
0.16
|
10/3/2015
|
-
|
-
|
||||||||||||
|
|
166,666
|
83,334
|
$
|
0.21
|
9/25/2016
|
-
|
-
|
||||||||||||
|
|
125,000
|
250,000
|
$
|
0.21
|
8/15/2017
|
-
|
-
|
||||||||||||
Non-Standardized
Profit Sharing Plan
We
currently provide a Non-Standardized Profit Sharing Plan. The board of directors
approved the plan on September 15, 2006. Under the plan our employees qualified
to participate in the plan after one year of employment. Contribution under
the
plan by the Company is based on 25% of the annual base salary of each eligible
employee up to $46,000 per year. Contributions under the plan are fully vested
upon funding. The following table contains certain information relating to
the
benefits accrued under the Non-Standardized Profit Sharing Plan for the named
executive officers.
44
NONQUALIFIED
DEFERRED COMPENSATION
|
Name
|
Executive
Contribution in
Last FY
($)
|
Registrant
Contribution in
Last FY
($)(1)
|
Aggregate
Earnings in Last
FY
($)
|
Aggregate
Withdrawals /
Distributions
($)
|
Aggregate
Balance at Last
FYE
($)(2)
|
|||||||||||
|
Arthur
L. Smith
|
$
|
50,738
|
$
|
22,154
|
||||||||||||
|
Ruben
R. Caraveo
|
$
|
47,327
|
$
|
19,904
|
||||||||||||
|
Antonio
Estrada, Jr.
|
$
|
32,102
|
$
|
15,216
|
||||||||||||
|
(1)
|
All
amounts reported in this column are included as Other Compensation
for
fiscal 2008 in the Summary Compensation
Table.
|
|
(2)
|
All
amounts reported in this column are included as Other Compensation
for
fiscal 2007 in the Summary Compensation
Table.
|
Compensation
of Directors
The
following table sets forth information relating to compensation of directors
who
are not also named executive officers during the year ended July 31,
2008.
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||
|
John
R. Fleming
|
$
|
36,750
|
(1)
|
$
|
52,500
|
(1)
|
$
|
89,250
|
|||||||||||
|
Murray
R. Nye
|
$
|
36,750
|
(2)
|
$
|
52,500(2
|
(2)
|
$
|
89,250
|
|||||||||||
|
(1)
|
As
of July 31, 2008, Mr. Fleming had options to purchase an aggregate
of
1,075,000 shares of common stock and 175,000 shares of common stock
issued
pursuant to Stock awards. A description of the assumptions made in
valuation of options granted can be found in Note 10 to the Financial
Statements, which is deemed to be a part of this Item.
|
|
(2)
|
As
of July 31, 2008, Mr. Nye had options to purchase an aggregate of
1,075,000 shares of common stock and 175,000 shares of common stock
issued
pursuant to Stock awards. A description of the assumptions made in
valuation of options granted can be found in Note 2 to the Financial
Statements, which is deemed to be a part of this Item.
|
Each
Director that is not an officer of the Company receives $2,000 for each meeting
of the Board attended in person and $500 for each meeting attended by telephone.
In addition to the foregoing, each Director is reimbursed the reasonable
out-of-pocket expenses in connection with their travel to an attendance at
meetings of the board of directors.
Compensation
Committee Interlocks and Insider Participation
Mr.
Arthur L. Smith is presently our Chief Executive Officer and serves on our
board
of directors. In addition, we entered into a transaction with Fiesta
Communications, Inc., in which Mr. Smith owns 16% of the outstanding equity
interests, in which we transferred all of the issued and outstanding shares
of
Telefamilia Communications, Inc. to Fiesta Communications, Inc. for a $30,000
secured promissory note and 975,000 shares of common stock of Fiesta. The
transaction is discussed in more detail under Item 13 below. Except for Mr.
Smith, none of our directors are or have been an officer or employee of the
Company or had any relationship with that required disclosure in this report.
45
| ITEM 12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
Information
regarding securities authorized to be issued under equity compensation plans
is
set forth under Item 5 of this Annual Report on Form 10-K.
The
following table lists the beneficial ownership of shares of our Common Stock
(i)
each person know to the Company to own more than 5% of the outstanding voting
securities issued by the Company, (ii) each director and nominee, (iii) the
named executive officers, and (iv) all directors and officers as a group.
Information with respect to officers, directors and their families as of July
31, 2008 and is based on the books and records of the Company and information
obtained from each individual. Information with respect to other stockholders
is
based upon the Schedule 13D or Schedule 13G filed by such stockholders with
the
Securities and Exchange Commission. Unless otherwise stated, the business
address of each individual or group is the same as the address of the Company’s
principal executive office and all securities are beneficially owned solely
by
the person indicated.
|
|
|
|
|
|||||||
|
NAME
OF
|
COMMON
|
%
OF
|
TOTAL
VOTING
|
|||||||
|
INDIVIDUAL
OR GROUP
|
STOCK
|
CLASS
(1)
|
INTEREST
|
|||||||
|
|
||||||||||
|
INDIVIDUAL
OFFICERS, DIRECTORS AND NOMINEES
|
||||||||||
|
|
||||||||||
|
Arthur
L. Smith
|
2,690,152
|
(2)
|
5.9
|
%
|
2,690,152
|
(2)
|
||||
|
President,
Chief Executive Officer
|
||||||||||
|
Director
|
||||||||||
|
|
||||||||||
|
Ruben
R. Caraveo
|
1,880,148
|
(3)
|
4.1
|
%
|
1,880,148
|
(3)
|
||||
|
Sr.
Vice President of Operations and Technology
|
||||||||||
|
|
||||||||||
|
Antonio
Estrada Jr.
|
1,894,827
|
(4)
|
4.1
|
%
|
1,894,827
|
(4)
|
||||
|
Sr.
VP of Finance & Corporate Controller
|
||||||||||
|
|
||||||||||
|
John
R. Fleming
|
1,641,757
|
(5)
|
3.6
|
%
|
1,641,757
|
(5)
|
||||
|
Director
|
||||||||||
|
|
||||||||||
|
Murray
R. Nye
|
1,641,757
|
(6)
|
3.6
|
%
|
1,641,757
|
(6)
|
||||
|
Director
|
||||||||||
|
|
||||||||||
|
ALL
OFFICERS AND
|
||||||||||
|
DIRECTORS
AS A GROUP
|
9,748,641
|
(7)
|
21.3
|
%
|
9,748,641
|
(7)
|
||||
| (1) |
Based
upon 45,750,739 shares of common stock outstanding as of July 31,
2008.
Any shares represented by options exercisable within 60 days after
July
31, 2008 are treated as being outstanding for the purpose of computing
the
percentage of the class for such person but not
otherwise.
|
| (2) |
Includes
1,120,000 shares subject to options exercisable at July 31,
2008.
|
| (3) |
Includes
983,333 shares subject to options exercisable at July 31,
2008.
|
| (4) |
Includes
955,333 shares subject to options exercisable at July 31,
2008.
|
| (5) |
Includes
725,000 shares subject to options exercisable at July 31,
2008.
|
| (6) |
Includes
725,000 shares subject to options exercisable at July 31, 2008.
|
| (7) |
Includes
4,508,666 shares subject to options exercisable at July 31,
2008.
|
46
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
On
May 1,
2008, ATSI sold all of the outstanding shares of Telefamilia Communications,
Inc. to Fiesta Communications, Inc. for 975,000 shares of common stock in Fiesta
Communications and $30,000 in cash to be paid in July 2008. As of August 1,
2008, ATSI and Fiesta agreed to extend the maturity date on the $30,000
promissory note to October 31, 2008; all other terms remained the same.
Additionally, Fiesta Communications issued a three-year promissory note in
the
amount of $52,984 for the services rendered by ATSI under the joint management
agreement dated January 1, 2006. The three-year promissory note will be paid
quarterly starting July 31, 2008 and has a maturity date of May 1, 2010 and
an
annual interest rate of 8%. The note is secured by all assets of the new
combined entity of Fiesta. Also,
on
August 1, 2008 Fiesta entered into a note payable with ATSI for $25,000,
with a maturity date of October 31, 2008 and an interest rate of 8%. ATSI’s
CEO and President, Arthur L Smith, is a 16% stockholder of Fiesta.
Except
as
set forth above, we have not engaged in any transactions in which a member
of
the board of directors had an interest. Our board of directors has determined
that the directors other than Mr. Smith are independent as that term is defined
in New York Stock Exchange Rule 303A.02.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
The
following table sets forth the aggregate fees paid to Malone & Bailey, PC
for audit services rendered in connection with the audits and reviews of ATSI’s
consolidated financial statements and reports for the years ended July 31,
2008
and 2007.
|
Year Ended July 31,
|
|||||||
|
Description
of Fees
|
2008
|
2007
|
|||||
|
Audit
Fees
|
$
|
68,000
|
$
|
57,640
|
|||
|
Tax
fees
|
-0-
|
-0-
|
|||||
The
board
of directors has instructed Malone and Bailey, PC that any fees for non-audit
services must be approved before being incurred. All such fees incurred in
fiscal 2008 were approved by the board of directors before they were
incurred.
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
The
following documents are exhibits to this report.
|
2.1
|
Plan
and Agreement of Merger of ATSI Communications, Inc. with and into
ATSI
Merger Corporation, dated as of March 24, 2004. (Exhibit
2.1 to Form 8-K of ATSI filed on May 24,
2004)
|
|
3.1
|
Articles
of Incorporation of ATSI Merger Corporation. (Exhibit
3.1 to Form 8-K of ATSI filed on May 24,
2004)
|
|
3.2
|
Bylaws
of ATSI Merger Corporation. (Exhibit
3.2 to Form 8-K of ATSI filed on May 24,
2004)
|
|
3.3
|
Articles
of Merger of ATSI Communications, Inc. with and into ATSI Merger
Corporation. (Exhibit
3.3 to Form 8-K of ATSI filed on May 24,
2004)
|
47
| 4.1 |
Secured
Promissory Note and Security Agreement dated November 4, 2005 between
ATSI
Communications, Inc.
and CSI Business Finance, Inc. (Exhibit
4.2 to form 10-QSB for the period Ended October 31, 2005 filed
December
15, 2005)
|
| 4.3 |
Convertible
Debenture Agreement (Exhibit
4.18 to Annual Report on Form 10-KSB for the year ended July 31,
2006
filed October 30, 2006)
|
| 4.4 |
Promissory
note payable to Alfonso Torres dated October 1, 2007 in the principal
amount of $459,170. (Exhibit
10.4 to Form 10-QSB for the period ended October 31, 2006 filed December
1
4, 2007)
|
| 4.5 |
Promissory
note payable to The Shaar Fund dated December 10, 2007 in the principal
amount of $460,000. (Exhibit
10.2 to Form 10-QSB for the period ended October 31, 2006 filed December
1
4, 2007)
|
| 4.6 |
Promissory
Notes payable to several holders dated September 26, 2008 in the
principal
amount of $850,000.*
|
|
10.1
|
Interconnection
Agreement TELMEX and ATSICOM (English summary) (Exhibit
10.26 to Annual Report on Form 10-K for year ended July 31, 2003
filed
November 12, 2003)
|
| 10.2 |
Interconnection
Agreement TELMEX and ATSICOM (English Translation) (Exhibit
10.27 to Amended Annual Report on Form 10-K/A for the year ended
July 31,
2003 filed March 2, 2004)
|
|
10.3
|
Settlement
Agreement dated December 10, 2007 between ATSI Communications, Inc.
and
The Shaar Fund, Inc.
(Exhibit 10.3 to Form 10-QSB for the period ended October 31, 2006
filed
December 1 4, 2007)
|
| 10.4 |
Confidential
Settlement Agreement dated August 27, 2007 between ATSI Communications,
Inc. and RGC International Investors, LDC.
(Exhibit 10.7 to Annual Report on Form 10-KSB for the period ended
July
31, 2007 filed October 17,
2007)
|
|
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.
*
|
48
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
ATSI COMMUNICATIONS, INC.
|
||
|
Date:
October 29, 2008
|
By:
|
/s/
Arthur L. Smith
|
|
Arthur
L. Smith
|
||
|
President
and
|
||
|
Chief
Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
|
Title
|
Date
|
|||
|
/s/
Arthur L. Smith
|
Principal
Executive Officer and Director
|
October
29, 2008
|
||
| Arthur L. Smith | ||||
|
/s/
Antonio Estrada Jr.
|
Principal
Accounting Officer
|
October
29, 2008
|
||
|
Antonio
Estrada Jr.
|
Principal
Finance Officer
|
|
||
|
/s/
John R. Fleming
|
Director
|
October
29, 2008
|
||
|
John
R. Fleming
|
||||
|
Director
|
October
29, 2008
|
|||
|
Murray
R. Nye
|
49
EXHIBIT
INDEX
| 4.6 |
Promissory
Notes payable to several holders dated September 26, 2008 in the
principal
amount of $850,000.*
|
|
31.3
|
Certification
of our President and Chief Executive Officer, under Section 302 of
the
Sarbanes-Oxley Act of 2002. *
|
|
31.4
|
Certification
of our Corporate Controller and Principal Financial Officer, under
Section
302 of the Sarbanes-Oxley Act of 2002.
*
|
|
33.1
|
Certification
of our President and Chief Executive Officer, under Section 906 of
the
Sarbanes-Oxley Act of 2002.
*
|
|
32.3
|
Certification
of our Corporate Controller and Principal Financial Officer, under
Section
906 of the Sarbanes-Oxley Act of 2002.
*
|
50