Digerati Technologies, Inc. - Quarter Report: 2010 October (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended October 31, 2010
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____________ to ___________
Commission
File Number 001-15687
ATSI
COMMUNICATIONS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Nevada
|
74-2849995
|
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
3201
Cherry Ridge
|
||
|
Building
C, Suite 300
|
||
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San
Antonio, Texas
|
78230
|
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
|
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(210)
614-7240
(Registrant’s
Telephone Number, Including Area
Code)
|
||
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. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).Yes x No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filler,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.:
Large
accelerated filer ¨ Accelerated
filer ¨
Non-accelerated
filer ¨ Smaller
reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨ No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date.
|
Number
of Shares
|
Class
Common Stock
|
As
of
|
|
52,962,850
|
$001.
par value
|
December
13, 2010
|
ATSI
COMMUNICATIONS, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED OCTOBER 31, 2010
INDEX
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Page
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|||
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PART
I. FINANCIAL INFORMATION
|
|
||
|
Item
1.
|
Financial
Statements
|
||
|
Consolidated
Balance Sheets as of October 31, 2010 and July 31, 2010
(unaudited)
|
3
|
||
|
Consolidated
Statements of Operations for the Three Months Ended October 31, 2010and
2009 (unaudited)
|
4
|
||
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the Three Months Ended
October 31, 2010 (unaudited)
|
5
|
||
|
Consolidated
Statements of Cash Flows for the Three Months Ended
October 31, 2010 and 2009 (unaudited)
|
6
|
||
|
Notes
to Consolidated Financial Statements (unaudited)
|
7
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||
|
Item
2.
|
Management’s
Discussions and Analysis of Financial Condition and
Results of Operations
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9
|
|
|
Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
|
12
|
|
|
Item
4.
|
Controls
and Procedures
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12
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|
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PART
II. OTHER INFORMATION
|
|||
|
Item
6.
|
Exhibits
|
12
|
|
2
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share amounts)
|
October
31,
|
July
31,
|
|||||||
|
2010
|
2010
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 261 | $ | 73 | ||||
|
Accounts
receivable, net of allowance for bad debt of $10 and $10,
respectively
|
645 | 526 | ||||||
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Prepaid
and other current assets
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37 | 48 | ||||||
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Total
current assets
|
943 | 647 | ||||||
|
LONG-TERM
ASSETS:
|
||||||||
|
Deferred
financing fees
|
64 | - | ||||||
|
Intangible
assets, net of accumulated amortization of $35 and $16,
respectively
|
115 | 119 | ||||||
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Property
and equipment
|
859 | 856 | ||||||
|
Less
- accumulated depreciation
|
(748 | ) | (727 | ) | ||||
|
Net
property and equipment
|
111 | 129 | ||||||
|
Total
assets
|
$ | 1,233 | $ | 895 | ||||
|
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 550 | $ | 637 | ||||
|
Accrued
liabilities
|
82 | 106 | ||||||
|
Notes
payable, net of unamortized discount of $0 and $1,
respectively
|
376 | 409 | ||||||
|
Derivative
liability
|
10 | 85 | ||||||
|
Total
current liabilities
|
1,018 | 1,237 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Notes
payable
|
1,157 | 639 | ||||||
|
Customer
deposits
|
115 | 16 | ||||||
|
Total
long-term liabilities
|
1,272 | 655 | ||||||
|
Total
liabilities
|
2,290 | 1,892 | ||||||
|
STOCKHOLDERS'
DEFICIT:
|
||||||||
|
Preferred
stock, 16,063,000 shares authorized, none issued
and outstanding
|
- | - | ||||||
|
Common
stock, $0.001 par value, 150,000,000 shares authorized, 52,962,850 and
45,504,120 shares issued and outstanding, respectively
|
53 | 46 | ||||||
|
Additional
paid in capital
|
73,527 | 73,276 | ||||||
|
Accumulated
deficit
|
(74,500 | ) | (74,182 | ) | ||||
|
Other
comprehensive income
|
1 | 1 | ||||||
|
Total
ATSI Communications, Inc. stockholders' deficit
|
(919 | ) | (859 | ) | ||||
|
Noncontrolling
interest
|
(138 | ) | (138 | ) | ||||
|
Total
stockholders' deficit
|
(1,057 | ) | (997 | ) | ||||
|
Total
liabilities and stockholders' deficit
|
$ | 1,233 | $ | 895 | ||||
Unaudited,
see accompanying notes to financial statements
3
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
Three
months ended October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
OPERATING
REVENUES:
|
||||||||
|
VoIP
services
|
$ | 4,252 | $ | 4,985 | ||||
|
Total
operating revenues
|
4,252 | 4,985 | ||||||
|
OPERATING
EXPENSES:
|
||||||||
|
Cost
of services (exclusive of depreciation and amortization)
|
3,865 | 4,705 | ||||||
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
577 | 368 | ||||||
|
Legal
and professional fees
|
56 | 98 | ||||||
|
Depreciation
and amortization expense
|
25 | 44 | ||||||
|
Total
operating expenses
|
4,523 | 5,215 | ||||||
|
OPERATING
LOSS
|
(271 | ) | (230 | ) | ||||
|
OTHER
INCOME (EXPENSE):
|
||||||||
|
Interest
expense
|
(47 | ) | (43 | ) | ||||
|
Total
other expense
|
(47 | ) | (43 | ) | ||||
|
NET
LOSS
|
(318 | ) | (273 | ) | ||||
|
NET
LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
- | 24 | ||||||
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NET
LOSS ATTRIBUTABLE TO ATSI COMMUNICATIONS, INC.
|
$ | (318 | ) | $ | (249 | ) | ||
|
LOSS
PER SHARE - BASIC AND DILUTED
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
|
45,990,559 | 45,504,120 | ||||||
Unaudited,
see accompanying notes to financial statements
4
|
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
|
|
FOR
THE QUARTER ENDED OCTOBER 31, 2010
|
|
(In
thousands, except share amounts)
|
|
Additional
|
||||||||||||||||||||||||||||
|
Common
|
Paid-in
|
Noncontrolling
|
Accumulated
|
Other
Comp.
|
||||||||||||||||||||||||
|
Shares
|
Par
|
Capital
|
interest
|
Deficit
|
Income/Loss
|
Totals
|
||||||||||||||||||||||
|
BALANCE,
July 31, 2010
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45,504,120 | $ | 46 | $ | 73,276 | $ | (138 | ) | $ | (74,182 | ) | 1 | $ | (997 | ) | |||||||||||||
|
Stock
option expense
|
7,458,730 | 7 | 251 | - | - | - | 258 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (318 | ) | - | (318 | ) | |||||||||||||||||||
|
BALANCE,
October 31, 2010
|
52,962,850 | $ | 53 | $ | 73,527 | $ | (138 | ) | $ | (74,500 | ) | 1 | $ | (1,057 | ) | |||||||||||||
Unaudited,
see accompanying notes to financial statements
5
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands, except per share amounts)
|
Three
months ended October 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
loss
|
$ | (318 | ) | $ | (273 | ) | ||
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
25 | 44 | ||||||
|
Amortization
of deferred financing fees
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9 | - | ||||||
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Issuance
of stock grants and options for services
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258 | 14 | ||||||
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Amortization
of debt discount
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1 | 12 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(119 | ) | (280 | ) | ||||
|
Prepaid
expenses and other
|
12 | (7 | ) | |||||
|
Accounts
payable
|
(88 | ) | 115 | |||||
|
Accrued
liabilities
|
(18 | ) | (33 | ) | ||||
|
Customer
deposits
|
100 | - | ||||||
|
Net
cash used in operating activities
|
(138 | ) | (408 | ) | ||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Investment
in certificates of deposit
|
- | 264 | ||||||
|
Purchases
of property & equipment
|
(3 | ) | (15 | ) | ||||
|
Net
cash (used in) provided by investing activities
|
(3 | ) | 249 | |||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Payment
of deferred financing fees
|
(73 | ) | - | |||||
|
Payments
on notes payable
|
(200 | ) | (172 | ) | ||||
|
Proceeds
from notes payables
|
677 | - | ||||||
|
Acquisition
of put option on warrants
|
(75 | ) | - | |||||
|
Principal
payments on capital lease obligation
|
- | (1 | ) | |||||
|
Net
cash provided by (used in) financing activities
|
329 | (173 | ) | |||||
|
DECREASE
IN CASH AND CASH EQUIVALENTS
|
188 | (332 | ) | |||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
73 | 637 | ||||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 261 | $ | 305 | ||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
|
Cash
paid for interest
|
$ | 30 | $ | 25 | ||||
|
Cash
paid for income tax
|
- | - | ||||||
Unaudited,
see accompanying notes to financial statements
6
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION
The
accompanying unaudited interim consolidated financial statements of ATSI
Communications, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the United
States Securities and Exchange Commission. In the opinion of
management, these interim financial statements contain all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full
year. Notes to the consolidated financial statements, which would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year ended July 31, 2010, as reported in
Form 10-K filed on October 8, 2010, have been omitted.
NOTE
2 – OUTSTANDING DEBT
|
Outstanding debt consisted of the following: (In
thousands)
|
||||||||
|
October 31,
|
July
31,
|
|||||||
|
2010
|
2010
|
|||||||
|
Note
payable to Alfonso Torres, payable upon maturity, bearing interest of
6.00% per annum, maturing July 31, 2012, unsecured.
|
$ | 545 | $ | 537 | ||||
|
Note
payable to ATVF, Scott Crist, Roderick Ciaccio & Vencore Solutions,
payable in monthly installments, bearing interest at 10.00% per annum,
maturing September 10, 2010, collateralized by ATSI's accounts receivables
(other than accounts factored with Wells Fargo), $100,000 certificate of
deposit with Wells Fargo and ATSI's ownership in ATSICOM. Additionally, we
issued 425,000 warrants to the note holders, at an exercise price per
warrant of $0.19. 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 request from ATSI, upon five (5)
Business days prior notice, to acquire from the holders the warrants at a
price $0.39 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. Net of unamortized discount of
$0 and $1, respectively
|
- | 133 | ||||||
|
Note
payable to San Antonio National Bank payable in monthly installments,
bearing interest at 8.00% per annum, maturing October 25, 2011,
collateralized by ATSI's assets.
|
153 | 189 | ||||||
|
Note
payable to ATV Texas Ventures payable in monthly installments, bearing
interest at 12.00% per annum, maturing November 10, 2011, collateralized
by ATSI's assets.
|
57 | 69 | ||||||
|
Note
payable to ATV Texas Ventures payable in monthly installments, bearing
interest at 12.00% per annum, maturing January 10, 2012, collateralized by
ATSI's assets.
|
65 | 77 | ||||||
|
Note
payable to ATV Texas Ventures payable in monthly installments, bearing
interest at 12.00% per annum, maturing March 10, 2012, collateralized by
ATSI's assets.
|
37 | 43 | ||||||
|
Note
payable to ATV Texas Ventures payable in monthly installments, bearing
interest at 12.00% per annum, maturing October 10, 2012, collateralized by
ATSI's assets.
|
200 | - | ||||||
|
Note
payable to Thermo Credit, LLC., interest payment for the first
twenty-three months with a balloon payment on the twenty-fourth month,
maturing August 2, 2012, collateralized by ATSI's accounts receivable.
Bearing an annual interest rate equivalent to the lesser of the maximum
rate and the greater of the prime rate plus 8.25% and 11.5%, a commitment
fee of 2% and weekly monitoring fee of .05%. ATSI is required to maintain
the following financial covenants: 1) A consolidated debt service coverage
ratio, for the 12-month period, of not less than 1.0 as of the last day of
each quarter and 2) A consolidated operating income, for the 12-month
period, of not less than zero as of the last day of each fiscal
year
|
476 | - | ||||||
|
Total
outstanding long-term debt
|
1,533 | 1,048 | ||||||
|
Current
portion of long-term debt
|
(376 | ) | (409 | ) | ||||
|
Long-term
debt, net of current portion
|
$ | 1,157 | $ | 639 | ||||
|
Payments
on long-term debt of ATSI are due as follows:
|
||||||||
|
(in
thousands)
|
||||||||
|
Fiscal
2011
|
$ | 376 | ||||||
|
Fiscal
2012
|
1,157 | |||||||
|
Total
payments
|
$ | 1,533 | ||||||
7
ATSI
analyzed these instruments for derivative accounting consideration and
determined that the warrants issued to ATVF, Scott Crist, Roderick Ciaccioa
& Vencore Solutions qualify as derivative instruments, 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. Additionally, ATSI
analyzed the rest of the instruments for derivative accounting and determined
that liability treatment was not applicable.
On
October 12, 2010, three of the warrant holders exercised their put rights and as
a result, the Company made payments to the related warrant holders amounting to
$75,000 which was charged to derivative liability. The Company
cancelled the related warrants as a result of the payment made for the put
rights.
NOTE
3 – STOCK-BASED COMPENSATION
In
September 2005, ATSI adopted its 2005 stock compensation plan. This plan,
as amended, authorizes the grant of up to 17.5 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.
During
the quarter ended October 31, 2010:
|
|
-
|
ATSI
granted 1,333,333 common shares to its directors for services
rendered. The Company recognized stock-based compensation
expense of $40,000 equivalent to the value of the shares calculated
based on the share’s closing price at the grant
date.
|
|
|
-
|
ATSI
granted 6,125,396 common shares to various employees as part of the
Company’s profit sharing plan contribution. The Company
recognized stock-based compensation expense of $183,762 equivalent to the
value of the shares calculated based on the share’s closing price at the
grant date.
|
|
|
-
|
ATSI
extended the term of existing options totaling 7,359,000 to July 31,
2015. As a result, the Company recognized incremental
compensation expense of $34,501.
|
|
|
-
|
375,000
warrants were cancelled as a result of the warrant holders exercising
their related put rights (see Note
2).
|
ATSI
recognized $258,000 and $14,000 in stock based compensation expense to employees
during the quarter ended October 31, 2010 and 2009, respectively.
Unamortized compensation cost totaled $1,621 and $14,028 at October 31,
2010 and October 31, 2009, respectively.
As of
October 31, 2010, ATSI had outstanding options totaling 7,494,000 with a
weighted average exercise price of $0.04, a weighted average remaining term of 5
years and an intrinsic value of zero.
As of
October 31, 2010, ATSI had outstanding warrants totaling 425,000 with a weighted
average exercise price of $0.18, a weighted average remaining term of 4.50 years
and an intrinsic value of zero.
NOTE
4 – 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 qualify to participate in the plan after one year of employment.
Contributions under the plan are 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 the quarters ended October 31, 2010 and
2009, we contributed $183,762 and $0, respectively.
8
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL
NOTE: This Quarterly Report on Form 10-Q contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. “Forward looking statements” are those statements that
describe management’s beliefs and expectations about the future. We
have identified forward-looking statements by using words such as “anticipate,”
“believe,” “could,” “estimate,” “may,” “expect,” ”plan,” and
“intend.” Although we believe these expectations are reasonable, our
operations involve a number of risks and uncertainties. Some of these
risks include the availability and capacity of competitive data transmission
networks and our ability to raise sufficient capital to continue
operations. Additional risks are included in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission on October 8,
2010.
The
following is a discussion of the consolidated financial condition and results of
operations of ATSI for the three months ended October 31, 2010 and
2009. It should be read in conjunction with our Consolidated
Financial Statements, the Notes thereto, and the other financial information
included in the Company’s Annual Report on Form 10-K for the year ended July 31,
2010. For purposes of the following discussion, fiscal 2011 or 2011
refers to the year ended July 31, 2011 and fiscal 2010 or 2010 refers to the
year ended July 31, 2010.
General
We are an
international telecommunications carrier that utilizes the internet to provide
cost-efficient and economical international telecommunications
services. Our current operations consist 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.
We also provide enhanced hosted VoIP
Services, which include fully hosted IP/PBX services, IP trunking, call center
applications, prepaid services, and customized VoIP solutions for specialized
applications. Under our current network, we provide interactive voice
response auto attendant, call recording, simultaneous calling, voicemail to
email conversion, and multiple other IP/PBX features in a hosted
environment. As an outsourced VoIP technology enabler, we are
marketing new and synergistic services to other carriers and to enterprise
customers through established channel partners.
Results
of Operations
The
following table sets forth certain items included in our results of operations
and variances between periods for the three months ended October 31, 2010 and
2009. All dollar amounts are in thousands.
|
Three
months ended October 31,
|
||||||||||||||||
|
2010
|
2009
|
Variances
|
%
|
|||||||||||||
|
OPERATING
REVENUES:
|
||||||||||||||||
|
VoIP
services
|
$ | 4,252 | $ | 4,985 | $ | (733 | ) | -15 | % | |||||||
|
Total
operating revenues
|
4,252 | 4,985 | (733 | ) | -15 | % | ||||||||||
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
3,865 | 4,705 | (840 | ) | -18 | % | ||||||||||
|
GROSS
MARGIN
|
387 | 280 | 107 | 38 | % | |||||||||||
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
577 | 368 | 209 | 57 | % | |||||||||||
|
Legal
and professional fees
|
56 | 98 | (42 | ) | -43 | % | ||||||||||
|
Depreciation
and amortization expense
|
25 | 44 | (19 | ) | -43 | % | ||||||||||
|
OPERATING
LOSS
|
(271 | ) | (230 | ) | (41 | ) | 18 | % | ||||||||
|
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
|
Interest
expense
|
(47 | ) | (43 | ) | (4 | ) | 9 | % | ||||||||
|
Total
other expense, net
|
(47 | ) | (43 | ) | (4 | ) | 9 | % | ||||||||
|
NET
LOSS
|
$ | (318 | ) | $ | (273 | ) | $ | (45 | ) | 16 | % | |||||
|
NET
LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
- | 24 | (24 | ) | -100 | % | ||||||||||
|
NET
LOSS ATTRI BUTABLE TO
ATSI COMMUNICATIONS, INC.
|
$ | (318 | ) | $ | (249 | ) | $ | (69 | ) | 28 | % | |||||
9
Three
Months ended October 31, 2010 Compared to Three Months ended October 31,
2009
VoIP Service. VoIP services revenue
decreased by $733,000, or 15%, from the quarter ended October 31, 2009 to the
quarter ended October 31, 2010. VoIP minutes carried by our network
decreased by 9% from approximately 133,538,511 minutes of voice traffic during
the quarter ended October 31, 2009 to approximately 120,992,987 minutes of voice
traffic during the quarter ended October 31, 2010. Our average
revenue per minute decreased from $0.037 during the quarter ended October 31,
2009 to $0.035 for the quarter ended October 31, 2010. The decrease in revenue
and the average revenue per minute is attributable primarily to the price
pressure in our market due to a reduction of international
termination.
Cost of Services (exclusive of
depreciation and amortization). The consolidated cost of
services decreased by $840,000, or 18%, from the quarter ended October 31, 2009
to the quarter ended October 31, 2010. The decrease in cost of
services is a direct correlation to the decrease in VoIP services
revenue. Cost of services, as a percentage of revenue decreased by
3.48 % between periods, from 94.38% of revenue during the quarter ended October
31, 2009 to 90.90% of revenue during the quarter ended October 31,
2010. The decrease in cost of services as a percentage of revenue was
due to the decrease in costs from our vendors realized during the quarter ended
October 31, 2010. Also, as a result of the decrease in VoIP revenues and
decrease in costs of service as a percent of sales, our gross margin improved by
$107,000, or 38%, from $280,000 for the three months ended October 31, 2009
compared to $387,000 for the three months ended October 31, 2010.
Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees). SG&A expenses increased by $209,000, or 57%, from
the quarter ended October 31, 2009 to the quarter ended October 31,
2010. The increase in SG&A is primarily attributed to the
increase in non-cash compensation expense to employees between periods. During
the quarter ended October 31, 2010, we recognized $258,000 in non-cash
compensation expense to employees, but during the quarter ended October 31, 2009
we only recognized $14,000 in non-cash compensation expense to
employees.
Legal and professional
fees. Legal and professional fees decreased by $42,000, or
43%, from the quarter ended October 31, 2009 to the quarter ended October 31,
2010. The decrease is attributable to the decrease in investor
relations fees, audit fees and attorney's fees as a result of expense control
measures implemented during fiscal 2011.
Depreciation and
amortization. Depreciation and amortization decreased by
$19,000 or 43%, from the quarter ended October 31, 2009 to the quarter ended
October 31, 2010. The decrease is attributed to the decline in
amortization on assets that had reached their useful life; as a result the
assets were no longer required to be depreciated during the three months ended
October 31, 2010.
Operating
loss. The Company reported an operating loss $271,000 for the
three months ended October 31, 2010 compared to an operating loss of $230,000
for the three months end October 31, 2009. The increase in operating
loss is primarily attributed to the recognition of $258,000 in non-cash
compensation expense to employees during the quarter ended October 31, 2010; we
only recognized $14,000 of non-cash compensation expense to employees during the
quarter ended October 31, 2009.
10
Other income
(expense). Other expenses increased by $4,000, or 9% from the
quarter ended October 31, 2009 to the quarter ended October 31,
2010. The primary reason for the increase in other expenses is
attributed to the increase in interest expense as a result of the increase in
outstanding financings secured during the quarter ended October 31,
2010.
Net Loss. Net loss
increased by $45,000 or 16%, from the quarter ended October 31, 2009 to the
quarter ended October 31, 2010. The increase in net loss is primarily
attributed to the recognition of $258,000 in non-cash compensation expense to
employees during the quarter ended October 31, 2010: we only recognized $14,000
of non-cash compensation expense to employees during the quarter ended October
31, 2009.
Net Loss Attributable to
Noncontrolling Interest. Loss attributed to noncontrolling
interest improved by $24,000, or 100%, from the quarter ended October 31, 2009
to the quarter ended October 31, 2010. During the quarter October 31, 2009, we
recognized $24,000 associated to the losses incurred in Fiesta and Telefamilia,
however, during the quarter ended October 31, 2010 we did not incur any losses
related to Fiesta and Telefamilia, since the related investment has been written
off.
Net Loss Attributable to ATSI
Communications, Inc. The Company reported a net loss of $318,000 for the
quarter ended October 31, 2010 compared to a net loss to common stockholders of
$249,000 for the quarter ended October 31, 2009. The increase in net loss to
common stockholders between periods is attributed to the recognition of $258,000
in non-cash compensation expense to employees during the quarter ended October
31, 2010; we only recognized $14,000 of non-cash compensation expense to
employees during the quarter ended October 31, 2009. The increase in non-cash
compensation expense to employees was slightly offset between periods by the
increase in margin of $107,000 and the decrease in legal and professional fees
of $36,000.
Liquidity
and Capital Resources
Cash Position: We
had a cash balance of $261,000 as of October 31, 2010. Net cash
consumed by operating activities during the quarter ended October 31, 2010 was
approximately $138,000. Investing activities during the quarter ended October
31, 2010 consumed $3,000, consisting of the acquisition of various servers and
computers. Financing activities during the quarter ended October 31,
2010 provided $329,000 in cash. We received proceeds of $677,000 from
various promissory notes during the quarter ended October 31, 2010. The cash
consumed during the period is associated with the debt principal payments of
$200,000 related to various notes payable, the acquisition of a put option
on certain warrants for $75,000 and the payment of financing fees on the Thermo
Credit note of $73,000. Overall, our net operating, investing and financing
activities during the quarter ended October 31, 2010 contributed $188,000 of our
available cash.
We are
currently utilizing our available cash to fund any deficiencies in our cash
flows from operations. During the quarter ended October 31, 2010 we
received $200,000 from Texas Ventures under the 24 month promissory
note. On August 2, 2010, we entered into a $750,000 revolving credit
facility with Thermo Credit to finance our expected growth during the year
ending July 31, 2011.
Our
current cash expenses are expected to be approximately $165,000 per month,
including wages, rent, utilities, corporate professional fees and debt
service. We are currently using $128,000 in cash generated from
operations of our available cash to cover all monthly cash
outflows. We anticipate that the cash balance of $261,000, the
$750,000 revolving credit facility with Thermo Credit, combined with our ability
to raise additional cash from our funding sources and expected net cash flow
generated from future operations, will be sufficient to fund our operations and
capital asset expenditures for the next twelve months.
Our
working capital (deficit) was $75,000 as of October 31, 2010. This
represents an improvement of $515,000 from our working capital (deficit) at July
31, 2010 of $590,000.
11
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
NONE
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
In
accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of October 31, 2010.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
three months ended October 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
6. EXHIBITS
The
following documents are filed as exhibits to this report.
|
Number
|
Description
|
|
10.1
|
Promissory
note payable and security agreement with ATV Texas Ventures III, LP.,
dated October 10, 2010 in the principal amount of
$200,000.
|
|
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.
|
12
SIGNATURES
Pursuant
with the requirements 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.
|
||
|
(Registrant)
|
||
|
Date:
December 13, 2010
|
By:
|
/s/ Arthur L. Smith
|
|
Name:
|
Arthur
L. Smith
|
|
|
Title:
|
President
and
|
|
|
Chief
Executive Officer
|
||
|
Date:
December 13, 2010
|
By:
|
/s/ Antonio Estrada Jr.
|
|
Name:
|
Antonio
Estrada Jr.
|
|
|
Title:
|
Sr.
VP of Finance & Corporate Controller
|
|
|
(Principal
Accounting and Principal Financial
Officer)
|
||
13
EXHIBIT
INDEX
|
Number
|
Description
|
|
|
10.1
|
Promissory
note payable and security agreement with ATV Texas Ventures III, LP.,
dated October 10, 2010 in the principal amount of
$200,000.
|
|
|
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.
|
14