Digerati Technologies, Inc. - Quarter Report: 2010 April (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 April 30, 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
San Antonio,
Texas
|
78230
|
|
|
(Address of Principal Executive
Offices)
|
(Zip
Code)
|
(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 ¨ 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. (Check one):
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
|
||
|
45,504,120
|
$001.
par value
|
June
8, 2010
|
ATSI
COMMUNICATIONS, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED APRIL 30, 2010
INDEX
|
Page
|
||
|
PART
I. FINANCIAL INFORMATION
|
||
|
Item
1.
|
Financial
Statements
|
|
|
Consolidated
Balance Sheets as of April 30, 2010 and July 31, 2009
(unaudited)
|
3
|
|
|
Consolidated
Statements of Operations for the Three and Nine Months Ended April 30,
2010 and 2009 (unaudited)
|
4
|
|
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the Nine Months Ended
April 30, 2010 (unaudited)
|
5
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended April 30, 2010
and 2009 (unaudited)
|
6
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
7
|
|
|
Item
2.
|
Management’s
Discussions and Analysis of Financial Condition and Results of
Operations
|
9
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
13
|
|
Item
4.
|
Controls
and Procedures
|
13
|
|
PART
II. OTHER INFORMATION
|
||
|
Item
6.
|
Exhibits
|
14
|
2
PART 1. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
ATSI COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(Unaudited; in thousands, except per
share amounts)
|
April 30,
|
July 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash and cash
equivalents
|
$ | 309 | $ | 637 | ||||
|
Certificates of
deposit
|
25 | 325 | ||||||
|
Accounts receivable, net of
allowance for bad debt of $10 and $10, respectively
|
684 | 337 | ||||||
|
Prepaid and other current
assets
|
43 | 77 | ||||||
|
Total
current assets
|
1,061 | 1,376 | ||||||
|
LONG-TERM
ASSETS:
|
||||||||
|
Intangible Assets, net of
amortization of $28 and $16, respectively
|
122 | 134 | ||||||
|
Property and
Equipment
|
855 | 794 | ||||||
|
Less - accumulated
depreciation
|
(695 | ) | (576 | ) | ||||
|
Net
property and equipment
|
160 | 218 | ||||||
|
Total
assets
|
$ | 1,343 | $ | 1,728 | ||||
|
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 833 | $ | 585 | ||||
|
Accrued
liabilities
|
122 | 192 | ||||||
|
Notes payable, net of unamortized
discount of $5 and $33, respectively
|
552 | 1,173 | ||||||
|
Derivative
liability
|
85 | - | ||||||
|
Total
current liabilities
|
1,592 | 1,950 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Notes
payable
|
700 | 291 | ||||||
|
Derivative
liability
|
- | 85 | ||||||
|
Other
|
16 | 3 | ||||||
|
Total
long-term liabilities
|
716 | 379 | ||||||
|
Total
liabilities
|
2,308 | 2,329 | ||||||
|
STOCKHOLDERS'
DEFICIT:
|
||||||||
|
Preferred stock, 16,063,000 shares
authorized, none issued and outstanding
|
- | - | ||||||
|
Common
stock, $0.001 par value, 150,000,000 shares authorized, 45,504,120 and
45,504,120 shares issued and outstanding,
respectively
|
46 | 46 | ||||||
|
Additional paid in
capital
|
73,274 | 73,253 | ||||||
|
Noncontrolling
interest
|
(138 | ) | (114 | ) | ||||
|
Accumulated
deficit
|
(74,148 | ) | (73,787 | ) | ||||
|
Other comprehensive
income
|
1 | 1 | ||||||
|
Total
stockholders' deficit
|
(965 | ) | (601 | ) | ||||
|
Total
liabilities and stockholders' deficit
|
$ | 1,343 | $ | 1,728 | ||||
See accompanying notes to financial
statements
3
ATSI COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited; in thousands, except per
share amounts)
|
Three months ended April 30,
|
Nine months ended April 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
OPERATING
REVENUES:
|
||||||||||||||||
|
VoIP
services
|
$ | 6,574 | $ | 3,660 | $ | 16,456 | $ | 16,250 | ||||||||
|
Total operating
revenues
|
6,574 | 3,660 | 16,456 | 16,250 | ||||||||||||
|
OPERATING
EXPENSES:
|
||||||||||||||||
|
Cost of services (exclusive of
depreciation and amortization)
|
6,089 | 3,461 | 15,309 | 15,011 | ||||||||||||
|
Selling, general and
administrative expense (exclusive of legal and professional
fees)
|
368 | 455 | 1,094 | 1,517 | ||||||||||||
|
Legal and professional
fees
|
52 | 61 | 191 | 230 | ||||||||||||
|
Bad debt
expense
|
- | - | - | 2 | ||||||||||||
|
Depreciation and amortization
expense
|
44 | 33 | 131 | 117 | ||||||||||||
|
Total operating
expenses
|
6,553 | 4,010 | 16,725 | 16,877 | ||||||||||||
|
OPERATING INCOME
(LOSS)
|
21 | (350 | ) | (269 | ) | (627 | ) | |||||||||
|
OTHER INCOME
(EXPENSE):
|
||||||||||||||||
|
Gain on early extinguishment of
debt
|
- | - | - | 108 | ||||||||||||
|
Investment
loss
|
- | (15 | ) | - | (42 | ) | ||||||||||
|
Interest
expense
|
(34 | ) | (53 | ) | (116 | ) | (146 | ) | ||||||||
|
Total other
expense
|
(34 | ) | (68 | ) | (116 | ) | (80 | ) | ||||||||
|
NET LOSS
|
(13 | ) | (418 | ) | (385 | ) | (707 | ) | ||||||||
|
Net loss applicable to
noncontrolling interest
|
- | - | 24 | - | ||||||||||||
|
NET LOSS TO
COMMON STOCKHOLDERS
|
$ | (13 | ) | $ | (418 | ) | $ | (361 | ) | $ | (707 | ) | ||||
|
LOSS PER SHARE TO COMMON
STOCKHOLDERS - BASIC AND DILUTED
|
$ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||
|
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED
|
45,504,120 | 39,892,157 | 45,504,120 | 39,758,501 | ||||||||||||
See accompanying notes to financial
statements
4
ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS'
DEFICIT
FOR
THE NINE MONTHS ENDED APRIL 30, 2010
(Unaudited;
in thousands, except share amounts)
|
Additional
|
||||||||||||||||||||||||||||
|
Common
|
Paid-in
|
Noncontrolling
|
Accumulated
|
Other Comp.
|
||||||||||||||||||||||||
|
Shares
|
Par
|
Capital
|
interest
|
Deficit
|
Income/Loss
|
Totals
|
||||||||||||||||||||||
|
BALANCE,
July 31, 2009
|
45,504,120 | $ | 46 | $ | 73,253 | $ | (114 | ) | $ | (73,787 | ) | $ | 1 | $ | (601 | ) | ||||||||||||
|
Stock
option expense
|
- | - | 21 | - | - | - | 21 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | (24 | ) | (361 | ) | - | (385 | ) | ||||||||||||||||||
|
BALANCE,
April 30, 2010
|
45,504,120 | $ | 46 | $ | 73,274 | $ | (138 | ) | $ | (74,148 | ) | 1 | $ | (965 | ) | |||||||||||||
See accompanying notes to financial
statements
5
ATSI COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited; in thousands, except per
share amounts)
|
Nine months ended April 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
||||||||
|
NET LOSS
|
$ | (385 | ) | $ | (707 | ) | ||
|
Adjustments to reconcile net loss
to cash used in operating activities:
|
||||||||
|
Investment
loss
|
- | 42 | ||||||
|
Gain
on early extinguishment of debt
|
- | (108 | ) | |||||
|
Depreciation
and amortization
|
131 | 117 | ||||||
|
Issuance
of stock grants and options, for services
|
21 | 143 | ||||||
|
Provisions
for losses on accounts receivables
|
- | 2 | ||||||
|
Amortization
of debt discount
|
28 | 46 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(347 | ) | 568 | |||||
|
Prepaid
expenses and other
|
34 | (52 | ) | |||||
|
Accounts
payable
|
248 | (1,151 | ) | |||||
|
Wells
Fargo Factoring Collateral
|
- | (6 | ) | |||||
|
Accrued
liabilities
|
14 | 109 | ||||||
|
Net cash used in operating
activities
|
(256 | ) | (997 | ) | ||||
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
||||||||
|
Investment
in certificates of deposit
|
301 | (7 | ) | |||||
|
Note
receivable, related party
|
- | (70 | ) | |||||
|
Purchases
of property & equipment
|
(61 | ) | (67 | ) | ||||
|
Net cash provided by / ( used in)
investing activities
|
240 | (144 | ) | |||||
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
||||||||
|
Payments
on notes payable
|
(561 | ) | (374 | ) | ||||
|
Acquisition
of common stock
|
- | (48 | ) | |||||
|
Proceeds
from Notes payables
|
250 | 1,275 | ||||||
|
Principal
payments on capital lease obligation
|
(1 | ) | (2 | ) | ||||
|
Net cash (used in) / provided by
financing activities
|
(312 | ) | 851 | |||||
|
DECREASE IN CASH AND CASH
EQUIVALENTS
|
(328 | ) | (290 | ) | ||||
|
CASH AND CASH EQUIVALENTS,
beginning of period
|
637 | 1,338 | ||||||
|
CASH AND CASH EQUIVALENTS, end of
period
|
$ | 309 | $ | 1,048 | ||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
|
Cash paid
for interest
|
$ | 69 | $ | 88 | ||||
|
Cash paid
for income tax
|
- | - | ||||||
|
NON-CASH INVESTING AND
FINANCING TRANSACTIONS
|
||||||||
|
Issuance
of common stock for conversion of debt
|
$ | - | $ | 172 | ||||
|
Warrants
issued for services
|
- | 85 | ||||||
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, 2009, as reported in
Form 10-K filed on October 15, 2009, have been omitted.
NOTE
2 – ACCOUNTS RECEIVABLE FINANCING
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 automatically renews for an additional twelve
months. ATSI can terminate this agreement upon 30 days’ written
notice, subject to a $15,000 early termination fee. As of April 30,
2010, all receivables sold to WFBC had been collected and the entire $5,000,000
facility was available. ATSI will continue to factor its receivables
on a monthly basis as necessary to provide funds for operations.
NOTE
3 – OUTSTANDING DEBT
At April
30, 2010 and July 31, 2009 outstanding debt consisted of the following: (In
thousands, except per share amounts)
|
April
30,
|
July
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Note
payable to Alfonso Torres, payable upon maturity, bearing interest of
6.00% per annum, maturing October 31, 2011, unsecured.
|
$ | 531 | $ | 460 | ||||
|
Note
payable to Wells Fargo Bank, payable in monthly installments, bearing
interest at 7.25% per annum, maturing July 25, 2010,
collateralized by ATSI's certificates of deposit.
|
18 | 72 | ||||||
|
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 $5 and
$33, respectively
|
260 | 604 | ||||||
|
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.
|
225 | 328 | ||||||
|
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.
|
81 | - | ||||||
|
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.
|
89 | - | ||||||
|
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.
|
48 | - | ||||||
|
Total
outstanding debt long-term debt
|
1,252 | 1,464 | ||||||
|
Current
portion of long-term debt
|
(552 | ) | (1,173 | ) | ||||
|
Long-term
debt, net of current portion
|
$ | 700 | $ | 291 | ||||
7
Payments
on long-term debt of ATSI are due as follows:
|
(in thousands)
|
||||
|
Fiscal
2011
|
$ | 552 | ||
|
Fiscal
2012
|
700 | |||
|
Total
payments
|
$ | 1,252 | ||
ATSI analyzed these instruments for
derivative accounting consideration under ASC 815-15 and ASC 815-40, and
determined that the warrants issued to ATVF, Scott Crist, Roderick Ciaccioa
& Vencore Solutions did not meet the definition of equity under ASC 815-15
and ASC 815-40, 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. As of April 30, 2010, ATSI was not in compliance of its loan
covenants for its outstanding promissory note with ATVF.
NOTE
4 – STOCK-BASED COMPENSATION TO EMPLOYEES
In September 2005, ATSI adopted its 2005
stock compensation plan (the "Plan"). This plan 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.
ATSI did not grant any awards under the
Plan during the nine months ended April 30, 2010.
ATSI recognized $20,505 and $143,000 in stock based compensation expense to
employees during nine
months ended April 30, 2010 and 2009,
respectively. Unamortized compensation cost totaled $5,784 and $35,613 at April 30, 2010 and April 30, 2009,
respectively.
8
As of April 30, 2010, ATSI had outstanding options totaling
8,249,000 with a weighted
average exercise price of $0.04, a weighted average remaining term of 6.21 years
and an intrinsic value of
$244,170.
As of April 30, 2010, ATSI had
outstanding warrants totaling 800,000 with a weighted average exercise price of
$0.18, a weighted average remaining term of 5.10 years and an intrinsic value of
zero.
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 15,
2009.
The
following is a discussion of the consolidated financial condition and results of
operations of ATSI for the three and nine months ended April 30, 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, 2009. For purposes of the
following discussion, fiscal 2010 or 2010 refers to the year ended July 31, 2010
and fiscal 2009 or 2009 refers to the year ended July 31,
2009.
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 and nine months ended April 30, 2010
and 2009. All dollar amounts are in thousands.
9
|
Three
months ended April 30,
|
Nine
months ended April 30,
|
|||||||||||||||||||||||||||||||
|
2010
|
2009
|
Variances
|
%
|
2010
|
2009
|
Variances
|
%
|
|||||||||||||||||||||||||
|
OPERATING
REVENUES:
|
||||||||||||||||||||||||||||||||
|
VoIP
services
|
$ | 6,574 | $ | 3,660 | $ | 2,914 | 80 | % | $ | 16,456 | $ | 16,250 | $ | 206 | 1 | % | ||||||||||||||||
|
Total
operating revenues
|
6,574 | 3,660 | 2,914 | 80 | % | 16,456 | 16,250 | 206 | 1 | % | ||||||||||||||||||||||
|
Cost
of services (exclusive of depreciation and amortization, shown
below)
|
6,089 | 3,461 | 2,628 | 76 | % | 15,309 | 15,011 | 298 | 2 | % | ||||||||||||||||||||||
|
GROSS
MARGIN
|
485 | 199 | 286 | 144 | % | 1,147 | 1,239 | (92 | ) | -7 | % | |||||||||||||||||||||
|
Selling,
general and administrative expense (exclusive of legal and professional
fees)
|
368 | 455 | (87 | ) | -19 | % | 1,094 | 1,517 | (423 | ) | -28 | % | ||||||||||||||||||||
|
Legal
and professional fees
|
52 | 61 | (9 | ) | -15 | % | 191 | 230 | (39 | ) | -17 | % | ||||||||||||||||||||
|
Bad
debt expense
|
- | - | - | 0 | % | - | 2 | (2 | ) | -100 | % | |||||||||||||||||||||
|
Depreciation
and amortization expense
|
44 | 33 | 11 | 33 | % | 131 | 117 | 14 | 12 | % | ||||||||||||||||||||||
|
OPERATING
INCOME (LOSS)
|
21 | (350 | ) | 371 | -106 | % | (269 | ) | (627 | ) | 358 | -57 | % | |||||||||||||||||||
|
OTHER
INCOME (EXPENSE):
|
||||||||||||||||||||||||||||||||
|
Gain
on early extinguishment of debt
|
- | - | - | 0 | % | - | 108 | (108 | ) | -100 | % | |||||||||||||||||||||
|
Minority
Interest
|
- | (15 | ) | 15 | -100 | % | - | (42 | ) | 42 | -100 | % | ||||||||||||||||||||
|
Interest
income (expense)
|
(34 | ) | (53 | ) | 19 | -36 | % | (116 | ) | (146 | ) | 30 | -21 | % | ||||||||||||||||||
|
Total
other income (expense), net
|
(34 | ) | (68 | ) | 34 | -50 | % | (116 | ) | (80 | ) | (36 | ) | 45 | % | |||||||||||||||||
|
NET
LOSS
|
$ | (13 | ) | $ | (418 | ) | $ | 405 | -97 | % | $ | (385 | ) | $ | (707 | ) | $ | 322 | -46 | % | ||||||||||||
|
Net
loss applicable to noncontrolling interest
|
- | - | - | 0 | % | 24 | - | 24 | 100 | % | ||||||||||||||||||||||
|
NET
LOSS TO COMMON STOCKHOLDERS
|
$ | (13 | ) | $ | (418 | ) | $ | 405 | -97 | % | $ | (361 | ) | $ | (707 | ) | $ | 346 | -49 | % | ||||||||||||
Three
Months ended April 30, 2010 Compared to Three Months ended April 30,
2009
VoIP Service. VoIP services revenue
increased by $2,914,000, or 80%, from the quarter ended April 30, 2009 to the
quarter ended April 30, 2010. VoIP minutes carried by our network
increased by 75% from approximately 74,237,464 minutes of voice traffic during
the quarter ended April 30, 2009 to approximately 129,668,211 minutes of voice
traffic during the quarter ended April 30, 2010. Our average revenue
per minute increased from $0.049 during the quarter ended April 30, 2009 to
$0.0505 for the quarter ended April 30, 2010. The increase in revenue and the
average revenue per minute is attributable primarily to our efforts of providing
higher quality routes at higher prices to our key customers.
Cost of Services (exclusive of
depreciation and amortization). The consolidated cost of
services increased by $2,628,000, or 76%, from the quarter ended April 30, 2009
to the quarter ended April 30, 2010. The increase in cost of services
is a direct correlation to the increase in VoIP services
revenue. Cost of services, as a percentage of revenue decreased by
1.95 % between periods, from 94.56% of revenue during the quarter ended April
30, 2009 to 92.61% of revenue during the quarter ended April 30,
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
April 30, 2010. Also, as a result of the increase in VoIP revenues and decrease
in costs of service as a percent of sales, our gross margin improved by
$286,000, or 144%, from $199,000 for the three months ended April 30, 2009
compared to $485,000 for the three months ended April 30, 2010.
Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees). SG&A expenses decreased by $87,000, or 19%, from
the quarter ended April 30, 2009 to the quarter ended April 30,
2010. The decrease is primarily attributable to the decrease between
periods in salaries and wages of $67,000 as a result of the termination of
various employees during fiscal 2010. Additionally, we realized a decrease
between periods in non-cash compensation expense to employees. During
the quarter ended April 30, 2009, we recognized $13,254 in non-cash compensation
expense to employees, but during the quarter ended April 30, 2010 we only
recognized $3,240 in non-cash compensation expense to
employees.
10
Legal and professional
fees. Legal and professional fees decreased by $9,000, or 15%,
from the quarter ended April 30, 2009 to the quarter ended April 30,
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 2010.
Depreciation and
amortization. Depreciation and amortization increased by
$11,000 or 33%, from the quarter ended April 30, 2009 to the quarter ended April
30, 2010. The increase is attributed to the additional amortization
associated with the new computers and servers acquired during the three months
ended April 30, 2010.
Operating income
(loss). The Company reported operating income of $21,000 for
the three months ended April 30, 2010 compared to an operating loss of $350,000
for the three months ended April 30, 2009. The improvement between
periods was primarily attributed to the increase in gross margin, decline in
selling and general administrative expenses and professional fees.
Other income
(expense). Other expenses decreased by $34,000, or 50% from
the quarter ended April 30, 2009 to the quarter ended April 30,
2010. The primary reason for the decrease in other expenses is
related to the decrease of $15,000 in expenses associated with our minority
interest in Fiesta Communications recognized during the quarter ended April 30,
2009. Additionally, interest expense between periods decreased by
$19,000, or 36%, from $53,000 for the quarter ended April 30, 2009 to $34,000
for the quarter ended April 30, 2010. The decrease in interest
expense is attributed to the decrease in outstanding principal balances under
various promissory notes. As a result, our interest expense decreased
between periods.
Net Loss to common
stockholders. The Company reported a net loss to common
stockholders of $13,000 for the three months ended April 30, 2010 compared to a
net loss of $418,000 to common stockholders for the three months ended April 30,
2009. The decrease in net loss between periods was primarily the
result of the increase in gross margin, reduction in selling, general and
administrative expenses, legal fees and professional fees.
Nine
Months ended April 30, 2010 Compared to Nine Months ended April 30,
2009
VoIP Service. VoIP services
revenue increased by $206,000, or 1%, from the nine months ended April 30, 2009
to the nine months ended April 30, 2010. VoIP minutes carried on our
network on which we generated revenues, increased by 47% from approximately
282,057,374 minutes of voice traffic during the nine months ended April 30, 2009
to approximately 414,714,613 minutes of voice traffic during the nine months
ended April 30, 2010. Despite the increase in VoIP minutes, our
average revenue per minute decreased from $0.0574 during the nine months ended
April 30, 2009 to $0.03955 for the nine months ended April 30,
2010. This represents a decrease in our average revenue rate per
minute of 31%. The decrease in average revenue per minute is
attributable primarily to our customers constantly seeking low cost service
providers to terminate their VoIP services as a result of the overall price
pressure in the international VoIP market.
Cost of Services (exclusive of
depreciation and amortization). The consolidated cost of
services increased by $298,000, or 2%, from the nine months ended April 30, 2009
to the nine months ended April 30, 2010. The increase in cost of
services is a direct correlation of the increase in VoIP services
revenue. Cost of services, as a percentage of revenue increased by
.63 % between periods, from 92.37% of revenue during the nine months ended April
30, 2009 to 93% of revenue during the nine months ended April 30,
2010. The increase in cost of services as a percentage of revenue is
due to the increase in costs from our vendors as a result of the quality
requirements and fixed costs required to operate our network. Also, our gross
margin declined by $92,000 or 7% from $1,239,000 for the nine months ended April
30, 2009 compared to $1,147,000 for the nine months ended April 30,
2010.
11
Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees). SG&A expenses decreased by $423,000, or 28%, from
the nine months ended April 30, 2009 to the nine months ended April 30,
2010. The decrease is primarily attributable to the decrease between
periods in salaries and wages of approximately $280,266 as a result of the
termination of various employees during fiscal 2010. Also, we realized a
decrease in non-cash compensation expense to employees; during the nine months
ended April 30, 2009 we recognized $143,000 in non-cash compensation expense to
employees. In comparison, we only recognized $21,000 in non-cash
compensation expense to employees during the nine months ended April 30,
2010.
Legal and Professional
Fees. Legal and professional fees decreased by $39,000, or
17%, from the nine months ended April 30, 2009 to the nine months ended April
30, 2010. The decrease is attributable to $30,000 in Board of
Directors fees incurred during the nine months ended April 30,
2009. We did not incur similar expenses during the nine months ended
April 30, 2010.
Bad Debt
Expense. Bad debt expense improved by $2,000, or 100%, from
the nine months ended April 30, 2009 to the nine months ended April 30,
2010. During the nine months ended April 30, 2009, we recognized
$2,000 in bad debt expense associated with uncollectible accounts. We
did not incur similar expenses during the nine months ended April 30,
2010.
Depreciation and
Amortization. Depreciation and amortization increased by
$14,000 or 12%, from the nine months ended April 30, 2009 to the nine months
ended April 30, 2010. The increase is attributed to additional
amortization expense associated with the new computers acquired during the
period ending April 30, 2010.
Operating Income
(loss). The Company’s operating loss decreased by $358,000, or
57%, from the nine months ended April 30, 2009 to the nine months ended April
30, 2010. The improvement in operating loss between periods is
attributed to the decrease between periods in SG&A expenses and the decrease
in legal and professional fees.
Other Income
(expense). Other expense increased by $36,000 from the nine
months ended April 30, 2009 to the nine months ended April 30,
2010. Other expense during the nine months ended April 30, 2009,
included a gain on early extinguishment of debt of $108,000 which was attributed
to a discount recognized as part of a settlement of a promissory note with The
Shaar Fund. However, the gain was offset by our equity interest in
Fiesta Communications of $42,000 and interest expense of $146,000. We
did not recognize a gain on early extinguishment of debt during the nine months
ended April 30, 2010, thus the increase in other expense between
periods.
Net Loss. Net loss
decreased by $322,000 or 46%, from the nine months ended April 30, 2009 to the
nine months ended April 30, 2010. The improvement in net loss between
periods is attributed to the improvement between periods in operating income and
the decrease between periods in other expenses.
Net Loss Applicable to
Noncontrolling Interest. Loss attributed to noncontrolling
interest increased by $24,000, or 100%, from the nine months ended April 30,
2009 to the nine months ended April 30, 2010. During the nine months
ended April 30, 2010, we recognized $24,000 associated to the losses incurred in
Fiesta and Telefamilia. We did not recognize any noncontrolling
interest expenses during the nine months ended April 30, 2009.
Net Loss to Common
Stockholders. The Company reported a net loss to common
stockholders of $361,000 for the nine months ended April 30, 2010 compared to a
net loss to common stockholders of $707,000 for the nine months ended April 30,
2010. The improvement in net loss to common stockholders between
periods is attributed to the decrease between periods in SG&A expenses and
the decrease in legal and professional fees.
Liquidity
and Capital Resources
Cash
Position: We had
a cash balance of $309,000 as of April 30, 2010. Net cash consumed by
operating activities during the nine months ended April 30, 2010 was
approximately $256,000. Investing activities during the nine months
ended April 30, 2010 generated $240,000, consisting of $301,000 from the sale of
certificates of deposit. This was slightly offset by $61,000
associated with the acquisition of various servers and
computers. Financing activities during the nine months ended April
30, 2010 consumed $312,000 in cash. The cash consumed during the
period is associated with the debt principal payments of $561,000 related to
various notes payable and principal payments of $1,000 associated with a capital
lease obligation. Additionally, we received proceeds of $250,000 from
various promissory notes during the nine months ended April 30,
2010. Overall, our net operating, investing and financing activities
during the nine months ended April 30, 2010 consumed $328,000 of our available
cash.
12
We are currently utilizing our
available cash to fund any deficiencies in our cash flows from
operations. During the nine months ended April 30, 2010, we received
$250,000 from Texas Ventures under three 24 month promissory
notes. As of April 30, 2010, there was a total of $5,000,000
available under our account receivable factoring line with WFBC.
Our
current cash expenses are expected to be approximately $135,000 per month,
including wages, rent, utilities and corporate professional fees. We
are currently using $162,000 in cash generated from operations and approximately
$18,000 per month of our available cash to cover all monthly cash
outflows. We anticipate
that the April 30, 2010 cash balance of $309,000, certificate of deposit of
$25,000, combined with our ability to raise additional cash from our funding
source, expected net cash flow generated from future operations and the
factoring agreement with WFBC, will be sufficient to fund our operations and
capital asset expenditures for the next twelve months.
Our
working capital (deficit) was $531,000 as of April 30, 2010. This
represents an improvement of approximately $43,000 from our working capital
(deficit) at July 31, 2009.
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 April
30, 2010.
Changes in Internal Control over
Financial Reporting
There
were no changes in our internal control over financial reporting during the nine
months ended April 30, 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
13
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 March 16, 2010
in the principal amount of $50,000.
|
|
|
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.
|
SIGNATURE
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:
June 09, 2010
|
By:
|
/s/ Arthur L. Smith
|
|
Name:
|
Arthur
L. Smith
|
|
|
Title:
|
President
and
|
|
|
Chief
Executive Officer
|
||
|
Date:
June 09, 2010
|
By:
|
/s/ Antonio Estrada Jr.
|
|
Name:
|
Antonio
Estrada Jr.
|
|
|
Title:
|
Sr.
VP of Finance & Corporate Controller
|
|
|
(Principal
Accounting and Principal Financial
Officer)
|
||
14
EXHIBIT
INDEX
|
Number
|
Description
|
|
|
10.1
|
Promissory note payable and
security agreement with ATV Texas Ventures III, LP., dated March 16, 2010
in the principal amount of $50,000.
|
|
|
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.
|