--------------------------------------------------------------------------------
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, 2002
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 0-23007
ATSI COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2849995
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6000 Northwest Parkway, Suite 110
San Antonio, Texas 78249
(210) 547-1000
(Address, including zip code, of registrant's principal executive
offices and 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
---
The number of shares outstanding of the registrant's common stock at
June 13, 2002 was 91,670,700
--------------------------------------------------------------------------------
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2002
INDEX
Part I FINANCIAL INFORMATION
Page
----
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 2001 and April 30, 2002 ............................................. 3
Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2001 and 2002 .............. 4
Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended April 30, 2001 and 2002 ...... 5
Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2001 and 2002 ........................ 6
Notes to Consolidated Financial Statements ..................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................... 10
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................................................................... 19
2
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
July 31, April 30,
2001 2002
---------- -----------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 103 $ 504
Accounts receivable, net of allowance of $92 and $46, respectively 2,667 2,642
Inventory 75 73
Prepaid expenses & other current assets 786 710
---------- ----------
Total current assets 3,631 3,929
---------- ----------
PROPERTY AND EQUIPMENT (At cost): 21,784 22,328
Less - Accumulated depreciation and amortization (11,993) (14,807)
---------- ----------
Net property and equipment 9,791 7,521
---------- ----------
OTHER ASSETS, net
Goodwill, net 4,856 4,743
Concession cost, net 4,208 4,095
Cute FTP costs, net 390 255
Other 487 315
---------- ----------
Total assets $ 23,363 $ 20,858
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable 4,714 8,404
Accrued liabilities 2,528 3,861
N/P current 677 603
Current portion of obligations under capital leases 4,938 4,525
Deferred revenue 119 147
---------- ----------
Total current liabilities 12,976 17,540
---------- ----------
LONG-TERM LIABILITIES:
Obligations under capital leases, less current portion 123 105
Customer deposits 128 132
---------- ----------
Total long-term liabilities 251 237
---------- ----------
Minority Interest 351 108
COMMITMENTS AND CONTINGENCIES:
REDEEMABLE PREFERRED STOCK
Series D Cumulative Convertible Preferred Stock, 3,000 shares authorized,
1,642 shares issued and outstanding at July 31, 2001, 742 shares issued
and outstanding at April 30, 2002 1,302 754
Series E Cumulative Convertible Preferred Stock, 10,000 shares authorized,
3,490 shares issued and outstanding at July 31, 2001, 1,655 shares issued
and outstanding at April 30, 2002 2,227 1,401
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized Series A
Cumulative Convertible Preferred Stock, 50,000 shares authorized, 4,370
shares issued and outstanding at July 31, 2001 and January 31, 2002,
respectively - -
Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized,
9,210 shares issued and outstanding at July 31, 2001 and 8,510 shares
issued and outstanding at April 30, 2002 - -
Series G Cumulative Convertible Preferred Stock, 42,000 shares authorized,
6,500 shares issued and outstanding at July 31, 2001 and April 30, 2002,
respectively - -
Common stock, $0.001 par value, 200,000,000 shares authorized,
77,329,379 issued and outstanding at July 31, 2001
91,670,700 issued and outstanding at April 30, 2002 77 92
Additional paid in capital 58,105 60,712
Accumulated deficit (52,503) (59,757)
Warrants outstanding 1,835 1,031
Deferred compensation (12) -
Other comprehensive loss (1,246) (1,260)
---------- ----------
Total stockholders' equity 6,256 818
---------- ----------
Total liabilities and stockholders' equity $ 23,363 $ 20,858
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
OPERATING REVENUES:
Telco services
Carrier services $ 7,733 $ 10,758 $ 15,801 $ 30,784
Network services 597 510 2,003 1,786
Retail services 1,689 1,983 5,088 5,640
Internet e-commerce 1,449 1,335 4,125 3,809
------------ ------------ ------------ ------------
Total operating revenues $ 11,468 $ 14,586 $ 27,017 $ 42,019
OPERATING EXPENSES:
Cost of services 7,619 11,425 18,564 31,926
Selling, general and administrative 4,498 3,933 13,776 11,760
Bad debt expense 39 (8) 169 106
Depreciation and amortization 1,041 1,205 3,277 3,494
------------ ------------ ------------ ------------
Total operating expenses 13,197 16,555 35,786 47,286
------------ ------------ ------------ ------------
Operating loss (1,729) (1,969) (8,769) (5,267)
OTHER INCOME(EXPENSE):
Other income (expense), net 28 (85) 779 (149)
Interest expense (250) (517) (1,110) (1,580)
------------ ------------ ------------ ------------
Total other income (expense) (222) (602) (331) (1,729)
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) (1,951) (2,571) (9,100) (6,996)
INCOME TAX EXPENSE (BENEFIT) - 26 65 84
MINORITY INTEREST 122 207 251 198
------------ ------------ ------------ ------------
NET LOSS (1,829) (2,390) (8,914) (6,882)
LESS: PREFERRED DIVIDENDS (475) (96) (1,596) (373)
------------ ------------ ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $ (2,304) $ (2,486) $ (10,510) $ (7,255)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE ($0.03) ($0.03) ($0.15) ($0.09)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 74,331 91,486 69,831 84,271
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
For the three months ended April 30, For the nine months ended April 30,
------------------------------------ -----------------------------------
2001 2002 2001 2002
----------------- ----------------- ----------------- ----------------
Net loss to common stockholders ($2,304) ($2,486) ($10,510) ($7,255)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $185 $30 ($101) ($14)
----------------- ----------------- ----------------- ----------------
Comprehensive loss to common stockholders ($2,119) ($2,456) ($10,611) ($7,269)
================= ================= ================= ================
The accompanying notes are an integra part of these consolidated financial
statements.
5
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended April 30,
2001 2002
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,914) $ (6,882)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization 3,277 3,494
Amortization of debt discount 129 -
Deferred compensation 724 12
Minority Interest (251) (242)
Provision for losses on accounts receivable 169 106
Changes in operating assets and liabilities-
net of effects from acquisition
Change in accounts receivable 163 (140)
Change in other assets-current and long-term (313) 210
Change in accounts payable 1,269 3,774
Change in accrued liabilities (160) 1,284
Change in deferred revenue (25) 43
---------- -----------
Net cash (used in) provided by operating activities (3,932) 1,659
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (716) (854)
---------- -----------
Net cash used in investing activities (716) (854)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 432 11
Principal payments under capital lease obligations (945) (510)
Payments on debt (445) (65)
Net increase in advanced funding arrangements 116 -
Proceeds (costs) from issuance of preferred stock, net 3,564 (20)
Proceeds from issuance of common stock, net 614 180
---------- -----------
Net cash provided by (used in) financing activities 3,336 (404)
---------- -----------
Net (decrease) increase in cash (1,312) 401
Cash, beginning of period 1,550 103
---------- -----------
Cash, end of period $ 238 $ 504
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
ATSI COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which
include the following subsidiaries: ATSI-Delaware, ATSI-Canada, ATSI-Texas,
ATSI-Mexico, ATSI-COM, Computel, ATSI de CentroAmerica, Telespan, Sinfra and
GlobalSCAPE have been prepared in accordance with Rule 10-01 of Regulation S-X,
"Interim Financial Statements," and accordingly do not include all information
and footnotes required under accounting principles generally accepted in the
U.S. for complete financial statements. In the opinion of management, these
interim financial statements contain all adjustments, without audit, necessary
to present fairly the consolidated financial position of ATSI and its
subsidiaries ("ATSI" or "the Company") as of April 30, 2002, the results of
their operations for the three and nine months ended April 30, 2001 and 2002,
comprehensive loss for the three and nine months ended April 30, 2001 and 2002,
and cash flows for the nine months ended April 30, 2001 and 2002. All
adjustments are of a normal recurring nature. All significant intercompany
balances and transactions have been eliminated in consolidation. It is
recommended that these interim consolidated financial statements be read in
conjunction with the audited consolidated financial statements and the notes
thereto for the year ended July 31, 2001 included in the Company's annual report
on Form 10-K filed with the SEC on October 30, 2001. Certain prior period
amounts have been reclassified for comparative purposes. The results of
operations for any interim period are not necessarily indicative of the results
to be expected for the full year.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142, which supercedes APB Option No. 17,
"Intangible Assets" provides financial accounting and reporting for acquired
goodwill and other intangible assets. While SFAS 142 is effective for fiscal
years beginning after December 15, 2001, early adoption is permitted for
companies whose fiscal years begin after March 15, 2001. SFAS 142 addresses how
intangible assets that are acquired individually or with a group of assets
should be accounted for in financial statements upon their acquisition as well
as after they have been initially recognized in the financial statements. While
the Company is not yet required to adopt SFAS 142, it believes the adoption will
not have a material effect on the financial condition or results of the Company
unless at some future time it is determined that an impairment of its intangible
assets exists.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared
on the basis of accounting principles applicable to a going concern. For the
period from December 17, 1993 to April 30, 2002, the Company has incurred
cumulative net losses of approximately $59.8 million. Further, we have a working
capital deficit of approximately $13.6 million at April 30, 2002. We have
limited capital resources available to us, and these resources may not be
available to support our ongoing operations until such time as we are able to
continuously generate positive cash flows from operations. There is no assurance
we will be able to achieve future revenue levels sufficient to support
operations or recover our investment in property and equipment, goodwill and
other intangible assets. These matters raise substantial doubt about our ability
to continue as a going concern. Our ability to continue as a going
7
concern is dependent upon the ongoing support of our stockholders and customers,
our ability to obtain capital resources to support operations and our ability to
successfully market our services.
We are likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support our ongoing operations. We plan on securing funds through equity
offerings and entering into lease or long-term debt financing agreements to
raise capital. There can be no assurances, however, that such equity offerings
or other financing arrangements will actually be consummated or that such funds,
if received, will be sufficient to support existing operations until revenue
levels are achieved sufficient to generate positive cash flow from operations.
If we are not successful in completing additional equity offerings or entering
into other financial arrangements, or if the funds raised in such stock
offerings or other financial arrangements are not adequate to support us until a
successful level of operations is attained, we have limited additional sources
of debt or equity capital and would likely be unable to continue operating as a
going concern.
3. PREFERRED STOCK
During the quarter, holders of the Series F Preferred Stock converted
700 of the 9,210 shares outstanding and accumulated interest into common stock
resulting in the issuance of 269,230 shares of common stock.
4. SEGMENT REPORTING
We have determined that we have three reportable segments: (1) U.S.
Telco; (2) Mexico Telco; and (3) Internet e-commerce. Our Internet e-commerce
subsidiary, GlobalSCAPE, Inc. and its operations can be differentiated from the
telecommunication focus of the rest of ATSI. Additionally, we believe that our
U.S. and Mexican subsidiaries should be separate segments even though many of
the products are borderless. Both the U.S. Telco and Mexican Telco segments
include revenues generated from Retail Services and Network Services. Our
Carrier Services revenues, generated as a part of our U.S. Telco segment, are
the only revenues not currently generated by both the U.S. Telco and Mexico
Telco segments. We have included the operations of ATSI-Canada, ATSI-Delaware
and all businesses falling below the reporting threshold in the "Other" segment.
The "Other" segment also includes intercompany eliminations.
We have used earnings (loss) before interest, taxes, depreciation and
amortization (EBITDA) in our segment reporting as it is the chief measure of
profit or loss used in assessing the performance of each of our segments.
For the three months ended For the nine months ended
April 30, April 30, April 30, April 30,
2001 2002 2001 2002
U.S. Telco
------------------------------------------------------------------------------------------
External revenues $8,246,234 $ 11,112,916 $ 17,737,946 $ 32,092,673
Intercompany revenues $ 344,533 $ 790,517 $ 1,215,183 $ 1,089,229
---------- ------------- ------------- -------------
Total revenues $8,590,767 $ 11,903,433 $ 18,953,129 $ 33,181,902
========== ============= ============= =============
EBITDA ($133,714) ($930,876) ($3,807,677) ($1,684,243)
Operating loss ($631,095) ($1,435,621) ($5,504,418) ($3,088,642)
8
Net loss ($712,676) ($529,033) ($1,482,782) ($2,301,394)
Total assets $ 19,873,827 $ 15,935,517 $ 19,873,827 $ 15,935,517
Mexico Telco
------------------------------------------------------------------------------------------------------------------------------
External revenues $ 1,773,424 $ 2,138,303 $ 5,154,830 $ 6,117,955
Intercompany revenues $441,865 $ 532,825 $ 1,417,660 $ 1,472,966
------------ ------------ ------------- ------------
Total revenues $ 2,215,289 $ 2,671,128 $ 6,572,490 $ 7,590,921
============ ============ ============= ============
EBITDA ($245,954) ($133,408) ($1,306,958) ($698,631)
Operating loss ($654,065) ($696,105) ($2,505,993) ($2,367,015)
Net loss ($803,680) ($1,299,858) ($3,054,152) ($3,999,192)
Total assets $ 8,421,175 $ 11,262,523 $ 8,421,175 $ 11,262,523
Internet e-commerce
------------------------------------------------------------------------------------------------------------------------------
External revenues $ 1,448,773 $ 1,335,236 $ 4,124,653 $ 3,808,857
Intercompany revenues - - - -
------------ ------------ ------------- ------------
Total revenues $ 1,448,773 $ 1,335,236 $ 4,124,653 $ 3,808,857
============ ============ ============= ============
EBITDA ($307,722) $ 301,599 ($376,733) $ 610,745
Operating income (loss) ($442,989) $ 163,713 ($757,791) $ 189,812
Net loss ($451,697) ($767,854) ($856,247) ($735,574)
Total assets $ 1,680,654 $ 1,598,864 $ 1,680,654 $ 1,598,864
Other
-------------------------------------------------------------------------------------------------------------------------------
External revenues - - - -
Intercompany revenues ($786,398) ($1,323,342) ($2,632,843) ($2,562,195)
------------ ------------ ------------- ------------
Total revenues ($786,398) ($1,323,342) ($2,632,843) ($2,562,195)
============ ============ ============= ============
EBITDA - - - -
Operating loss - - - -
Net loss ($336,158) $ 111,150 ($5,116,337) ($217,787)
Total assets ($6,430,483) $ 7,991,996) ($6,430,483) ($7,991,997)
Total
------------------------------------------------------------------------------------------------------------------------------
External revenues $ 11,468,431 $ 14,586,455 $ 27,017,429 $ 42,019,485
Intercompany revenues - - - -
------------ ------------ ------------- ------------
Total revenues $ 11,468,431 $ 14,586,455 $ 27,017,429 $ 42,019,485
============ ============ ============= ============
EBITDA ($687,390) ($762,685) ($5,491,368) ($1,772,129)
Depreciation and Amortization ($1,040,759) ($1,205,327) ($3,276,834) ($3,493,716)
Operating loss ($1,728,149) ($1,968,013) ($8,768,202) ($5,265,845)
Net loss to Common Stockholders ($2,304,211) ($2,485,595) ($10,509,518) ($7,253,948)
Total assets $ 23,545,173 $ 20,814,908 $ 23,545,173 $ 20,814,908
9
5. LEGAL PROCEEDINGS
We are also a party to additional claims and legal proceedings arising in
the ordinary course of business. We believe it is unlikely that the final
outcome of any of the claims or proceedings to which we are a party would have a
material adverse effect on our financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on our results of operations in the period in which it occurred.
6. SUBSEQUENT EVENTS
The Company's current liabilities include a total of approximately $4.7
million and $1.4 million, respectively, owed to IBM de Mexico and NTFC Capital
Corporation. The Company has classified all amounts as current under the note
obligations due to being in technical default on both notes. As such, each
lender could call their notes as immediately due and payable.
In May 2002, the Company announced that it had renegotiated its capital
lease agreement with IBM. The modification will result in a reduction in our
capital lease obligations of approximately $2.3 million, and a reduction in
current liabilities of approximately $4.3 million. The agreement calls for
forty-two payments commencing August 1, 2002, consisting of six payments of
$50,000 and thirty-six payments of $75,000.
In May 2002, the Company entered into a Forbearance Agreement with NTFC
Capital Corporation related to its capital lease facility. In exchange for a
payment of approximately $500,000 NTFC agreed to release GlobalSCAPE, Inc. as a
co-borrower under the facility. Additionally, NTFC agreed to waive the default
of covenants until the earliest of 1) July 31, 2002, 2) a default by the Company
under the Forbearance Agreement, 3) any other default under the facility by the
Company or 4) the date an amended agreement is executed. Both parties have
agreed to make their best efforts to negotiate the terms of an amended
agreement, the purpose of which will be to restructure the current facility
including the financial covenants. On June 12, 2002, the Company completed the
sale of its majority ownership of GlobalSCAPE, our Internet e-commerce segment,
for $2.25 million resulting in a gain. A portion of the proceeds were used to
make payment to NTFC in accordance with the forbearance agreement to release
GlobalSCAPE as a co-borrower on the facility.
The Company's current liabilities also include approximately $1.3 million
of equipment purchased from Northern Telecom, a subsidiary of Nortel Networks in
fiscal 2001. In June 2002, the Company reached an agreement with Nortel related
this payable. In return for a price reduction of $314,000 and technical support
related to the equipment, ATSI has agreed to make payments over a ten-month
period beginning July 15, 2002 totaling approximately $936,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE: Certain Statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Securities
Act.
10
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, 2001
and 2002. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included
elsewhere in the annual report on Form 10-K filed with the SEC on October 30,
2001.
General
ATSI Communications, Inc. is an international carrier serving the rapidly
expanding communications markets in and between Latin America and the United
States. The Company's mission is to connect the Americas with exceptional
communications services guided by our core values that drive everything we do.
The Company's strategy is to become a dominant provider of services to
businesses and consumers in this American/Latin American corridor through the
deployment of a high quality, `next generation' network. Founded in 1993, the
Company's traffic is generated from more than 650 retail points of presence
throughout Mexico, as well as from relationships with major carriers based in
the United States. ATSI carries the traffic generated from these sources over a
hybrid, redundant satellite and fiber-based ATM network between the United
States and Mexico, as well as a satellite-based network between the United
States, Costa Rica and El Salvador.
The Company's current core focus today is on the communications corridor
between the United States and Mexico. Already one of the two largest
international communications corridors in the world, this corridor is growing
due to increasing phone density in Mexico and large-scale emigration of Mexicans
to the United States. The Company is uniquely positioned within this growing
market niche as one of only a handful of viable carriers, and the only operating
company whose focus is international services, as opposed to domestic services.
Operationally, the Company's strength lies in its framework of licenses,
interconnection agreements and business relationships in Mexico, as well as in
its customer relationships and industry knowledge in the United States. The
Company has over 400 employees based in Mexico, and operates Mexican
subsidiaries with licenses that allow it to sell local and long distance
traffic, transport long distance traffic, and operate a network utilizing
packet-switching technology. Utilizing these strengths, the Company has
leveraged off of the networks of third parties to build a reliable customer
base, and has established its own international satellite and fiber-based
network to long haul consumer, corporate and carrier-generated traffic between
the U.S. and Mexico.
We also own approximately 70% of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies. On June 12, 2002, the Company
completed the sale of its majority ownership of GlobalSCAPE.
As discussed in Note 4 to our consolidated financial statements we have
determined that we have three reportable segments: 1) U.S Telco; 2) Mexico
Telco; and 3) Internet e-commerce.
Additionally, we have determined that our U.S. and Mexican subsidiaries
should be reported as separate segments although many of our products are
borderless and utilize the operations of entities in both the U.S. and Mexico.
Both the U.S. Telco and Mexico Telco segments include revenues generated from
Network Services and Retail Services. All of the carrier services revenues are
recorded in the U.S. Telco segment. GlobalSCAPE, Inc. and its operations are
accounted for exclusively as a part of the Internet e-commerce operating
segment.
11
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred losses since inception and
have a working capital deficit as of April 30, 2002. Additionally, we have had
recurring negative cash flows from operations with the exception of the quarters
ended January 31, 1998, October 31, 2001, January 31, 2002 and April 30, 2002.
For the reasons stated in Liquidity and Capital Resources and subject to the
risks referred to in Liquidity and Capital Resources, we expect improved results
of operations and liquidity in the last quarter of fiscal 2002 and in fiscal
2003. However, we cannot assure you that this will be the case.
Results of Operations
The following table sets forth certain items included in our results of
operations in dollar amounts and as a percentage of total revenues for the three
and nine-month periods ended April 30, 2001 and 2002.
Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
2001 2002 2001 2002
---- ---- ---- ----
(unaudited)
$ % $ % $ % $ %
----------- -------- ---------- -------- ------------ -------- ------------ --------
Operating revenues:
-------------------
Telco Services
Carrier services $7,733 67% $10,758 74% $15,801 59% $30,784 73%
Network services 597 5% 510 3% 2,003 7% 1,786 5%
Retail services 1,689 15% 1,983 14% 5,088 19% 5,640 13%
Internet e-commerce 1,449 13% 1,335 9% 4,125 15% 3,809 9%
----------- -------- ---------- -------- ------------ -------- ------------ --------
Total operating revenues 11,468 100% 14,586 100% 27,017 100% 42,019 100%
----------- -------- ---------- -------- ------------ -------- ------------ --------
Cost of services 7,619 66% 11,425 78% 18,564 69% 31,926 76%
----------- -------- ---------- -------- ------------ -------- ------------ --------
Gross margin 3,849 34% 3,161 22% 8,453 31% 10,093 24%
Selling, general and administrative
expense 4,498 39% 3,933 27% 13,776 51% 11,760 28%
Bad debt expense 39 1% (8) 0% 169 0% 106 0%
Depreciation and amortization 1,041 9% 1,205 8% 3,277 12% 3,494 9%
----------- -------- ---------- -------- ------------ -------- ------------ --------
Operating loss (1,729) (15%) (1,969) (13%) (8,769) (32%) (5,267) (13%)
Other, net (222) (2%) (602) (4%) (331) (2%) (1,729) (4%)
----------- -------- ---------- -------- ------------ -------- ------------ --------
Loss before income tax expense and
minority interest (1,951) (17%) (2,571) (17%) (9,100) (34%) (6,996) (17%)
Income tax & minority interest, net 122 1% 181 1% 186 1% 114 1%
Net loss (1,829) (16%) (2,390) (16%) (8,914) (33%) (6,882) (16%)
Less: preferred dividends (475) (4%) (96) (1%) (1,596) (6%) (373) (1%)
----------- -------- ---------- -------- ------------ -------- ------------ --------
Net loss to common stockholders ($2,304) (20%) ($2,486) (17%) ($10,510) (39%) ($7,255) (17%)
=========== ======== ========== ======== ============ ======== ============ ========
12
Three Months ended April 30, 2002 Compared to Three Months ended April 30, 2001
Operating Revenues. Consolidated operating revenues increased 30% between
quarters from $11.5 million to $14.6 million.
Telco revenues (all revenues other than e-commerce) increased from $10.0
million to $13.3 million while e-commerce revenues generated by GlobalSCAPE
declined by approximately $114,000 between periods.
Carrier services revenues increased approximately $3.0 million, or 39% from
the quarter ended April 2001 to the quarter ended April 2002. The increased
revenue resulted from an increase in traffic from approximately 75.5 million
units during the quarter ended April 30, 2001 to approximately 123.6 million
units during the quarter ended April 30, 2002. The increased traffic was
partially offset by reduced revenues per unit, quarter to quarter.
Network services declined by approximately $87,000 or 15% between periods.
The decline is primarily due to the net loss of two private network customers
between periods. Additionally, our 800- service business declined between
periods by approximately $17,000. The decline is attributed to decreased volume
of units transported via our network. Units transported declined from 1.0
million to 860,000, period to period.
Retail services revenues increased approximately $294,000 between periods.
Our integrated prepaid revenues within Mexico, collected at the point of sale,
increased approximately $344,000 between quarters. This increase in revenues was
reduced by an approximate $50,000 decline in postpaid, primarily
operated-assisted service revenues. The improved revenues between quarters
resulted from our efforts to become more competitive in the products we offered
as we evaluated our core business to strategically relocate communication
centers to concentrated areas where growth would be realized. As for the
declining operated-assisted services, management does not expect this revenue
stream to contribute significantly to the Company's operating results in fiscal
2002 and beyond.
Our Internet e-commerce services decreased approximately $114,000 between
periods. The decline in revenues between quarters was due to the loss of
advertising revenues, quarter to quarter and a decline in the number of
registrations, quarter to quarter.
Cost of Services. Cost of services increased as a percentage of revenue
from 66% to 78%, period to period. Cost of services for e-commerce slightly
increased from 4% for the quarter ended April 2001 to 8% for the period ended
April 2002. The increase was a result of increased royalty expense related to
GlobalSCAPE's distribution agreement with Trellix Corporation. Cost of services
as a percentage of revenues on the Company's telco business increased from 75%
to 85% between quarters due primarily to lower carrier services margins in the
current quarter. The Company continues to try to improve its carrier services
margins through reductions in variable costs and improvements realized from the
installation of Nortel Passport equipment in the latter half of fiscal 2001. The
increase in carrier services traffic as a percentage of overall revenues from
67% to 74%, between quarters, contributed to the increased cost of services.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $565,000, or 13% between periods. SG&A expenses
associated with our e-commerce subsidiary decreased approximately $356,000, or
28% between periods due to the decline in expenses
13
related to research and development, professional fees, recruiting and
compensation expense associated with the granting of options. SG&A expenses
associated with our telco operations decreased approximately 7% or $209,000
between periods and decreased as a percentage of revenues from 32% to 23%.
Bad Debt Expense. Bad Debt Expense decreased by approximately $47,000
between periods due primarily to positive adjustments to GlobalSCAPE's bad debt
during the quarter.
Depreciation and Amortization. Depreciation and amortization increased by
approximately 16% or $164,000 between periods due to equipment purchases.
Operating Loss. The Company's operating loss increased by approximately 14%
or $240,000 from the third quarter of fiscal 2001, primarily due to decreased
gross margins and increased depreciation and amortization.
Other Income(expense). Other expense increased approximately $380,000
between quarters due to the recording of additional incremental interest expense
under the provision of the IBM capital lease of approximately $401,000.
Preferred Stock Dividends. During the quarter ended April 2002, we recorded
approximately $96,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximate $475,000
of non-cash dividends and beneficial conversion feature expense recognized
during the quarter ended April 2001.
Net loss to Common Stockholders. The net loss for the quarter ended April
2002 declined by approximately $182,000 to $2.5 million from the $2.3 million
net loss for the quarter ended April 2001. The decline was due primarily to
decreased gross margins and increased other expense offset somewhat by the
reduced selling, general and administrative expenses.
Nine Months Ended April 30, 2002 Compared to Nine Months Ended April 30, 2001
Operating Revenues. Consolidated operating revenues increased 56% between
periods from $27.0 million for the nine months ended April 30, 2001 to $42.0
million for the nine months ended April 30, 2002. In response to the increasing
demand for its services, the Company began adding capacity to both its switch
and its network backbone in October 2001. The Company continues to work to
increase its terminating capacity with third party carriers to process traffic
outside of its own network backbone in Mexico. The net effect of our efforts
during the nine months was three of the four highest quarters of revenues in our
history.
Telco revenues (all revenues other than e-commerce) increased from $23.0
million to $38.2 million while e-commerce revenues generated by GlobalSCAPE
declined by approximately $316,000 between periods.
Carrier services revenues increased approximately $15.0 million, or 95%
from the nine months ended April 2001 to the nine months ended April 2002. As a
result of the Company's effort to add capacity, the units transported via our
network increased from approximately 171.2 million units during the period ended
April 2001 to approximately 331.1 million units during the period ended April
2002.
Network services decreased by approximately $217,000 or 11% between
periods. Our 800-
14
service business declined between periods by approximately $138,000. The decline
is attributable to a decreased volume of units transported via our network.
Units transported declined from 4.3 million to 3.3 million, period to period.
Our private network services decreased approximately $79,000 between periods
primarily due to the net loss of two customers from April 2001 to April 2002.
Retail services revenues increased approximately $552,000 between periods.
Our integrated prepaid revenues within Mexico, collected at the point of sale,
increased approximately $853,000 between quarters, but were offset by an
approximate $301,000 decline in postpaid, primarily operated-assisted service
revenues. The improved revenues between quarters resulted from our efforts to
become more competitive in the products we offered as we evaluated our core
business to strategically relocate communication centers to concentrated areas
where growth would be realized. As for the declining operated-assisted services,
management does not expect this revenue stream to contribute significantly to
the Company's operating results in fiscal 2002 and beyond.
Our Internet e-commerce services decreased approximately $316,000, or 8%
between periods. The expected elimination of advertising revenue accounted for
approximately $41,000 of the decline. As for the remaining decline, it was
attributed to a decline in CuteFTP site license sales between periods. This
decline, however, was partially offset by the sales of a desktop web-site
creation and management tool, and the introduction of CuteFTP Pro. Additionally,
other product sales, such as CuteHTML, CuteMAP, and CuteZIP, increased between
periods to contribute to the offset.
Cost of Services. Cost of services increased as a percentage of revenue
from 69% to 76%, period to period. Cost of services for e-commerce increased
from 4% for the nine months ended April 2001 to 8% for the nine months ended
April 2002. The increase was a result of increased royalty expense related to
GlobalSCAPE's distribution agreement with Trellix Corporation. Cost of services
as a percentage of revenues on the Company's telco business increased from 80%
to 83% between periods. The Company continues to try to improve its carrier
services margins through reductions in variable costs and improvements realized
from the installation of Nortel Passport equipment in the latter half of fiscal
2001. The increase in carrier services traffic as a percentage of overall
revenues from 59% to 73%, between periods, contributed greatly to the increased
cost of services.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $2.0 million, or 15% between periods. SG&A expenses
associated with our e-commerce subsidiary decreased approximately $1.4 million,
or 33% between periods due to the decline in expenses related to research and
development, recruiting, professional fees and compensation expense associated
with the granting of stock options. SG&A expenses associated with our telco
operations decreased approximately 6% or $586,000 between periods. This
improvement resulted from management's efforts to cut excess spending by each
department. Also, during the quarter ended October 2000, telco operations
recognized significant expenses related to severance packages, professional fees
associated with the Genesis transaction, and strategic research services. As a
percentage of revenues, telco SG&A declined from 42% to 23% period to period.
Bad Debt Expense. Bad Debt Expense declined by approximately 37% or $63,000
between periods due primarily to the decline in the Company's postpaid call
services business between periods and positive adjustments to GlobalSCAPE's bad
debt. These improvements were partially offset by approximately $37,000 of
expense related to one of our carrier service customers.
15
Depreciation and Amortization. Depreciation and amortization increased by
approximately 7% or $217,000 between periods due to equipment purchases.
Operating Loss. The Company's operating loss improved significantly by
approximately 40% or $3.5 million period to period, primarily due to increased
revenues and consequently increased gross margins and reductions in selling,
general and administrative expenses.
Other Income(expense). Other expense increased approximately $1.4 million
between periods primarily due to three factors. First, during the quarter ended
January 2001, the Company recognized a gain of $500,000 related to the
settlement of a litigation case with one of our carrier customers. Secondly,
during the nine months ended April 30, 2001, the Company recognized a gain
related to the extinguishment of a liability for approximately $184,000.
Finally, during the nine months ended April 30, 2002, the Company recognized
approximately $1.0 million of additional interest expense under the provision of
the IBM capital lease.
Preferred Stock Dividends. During the nine months ended April 30, 2002, we
recorded approximately $373,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximate $1.6
million of non-cash dividends and beneficial conversion feature expense
recognized during the nine months ended April 2001.
Net loss to Common Stockholders. The net loss for the nine months ended
April 2002 improved by approximately $3.3 million to $7.2 million from the $10.5
million net loss for the nine months ended April 2001. The improvement was due
primarily to a significant increase in revenues, which improved our gross margin
dollars. Additionally, the reduction in selling, general and administrative
expenses and preferred dividends contributed to our improved net loss to
stockholders between periods.
Liquidity and Capital Resources
During the nine months ended April 30, 2002, we generated positive cash
flows from operations of approximately $1.7 million. The Company was able to
generate this positive cash flow from operations by reducing the net loss
incurred during the period, shortening the cash conversion cycle of customer
receivables, and working with vendors related to payments. As a result, the
Company had the ability to operate with minimal assistance from private equity
placements or issuances of debt.
For the nine months ended April 30, 2002, after adjustments for non-cash
items (depreciation and amortization, amortization of debt discount, deferred
compensation, provision for losses on accounts receivable and minority
interest), we had a net loss of approximately $3.5 million. Management of the
operating assets and liabilities, which consist mainly of collections on
accounts receivable and payments made on outstanding payables and accrued
liabilities, produced positive cash flows of approximately $5.2 million,
resulting in positive operating cash flows for the period of $1.7 million. By
generating positive cash flows during the nine months ended April 30, 2002, we
improved over the nine months ended April 30, 2001 by $5.6 million or 142% in
operating cash flows. Due primarily to the positive operating cash flows
produced during the first nine months of fiscal 2002, our net loss, after
adjustments for non-cash items, improved over the nine months ended April 30,
2001, when our net loss, after adjustments for non-cash items, was $4.9 million.
Although we were able to produce positive cash flows from operations during
the quarters ended October 31, 2001, January 31, 2002 and April 30, 2002, we
must produce positive cash flows on a
16
recurring basis, and reduce or eliminate our working capital deficit. Until that
time, management will be faced with deciding whether to use available funds to
pay vendors and suppliers for services necessary for operations, to service our
debt requirements, or to purchase equipment to be used in the growth of our
business. Should our available funds not be sufficient to pay vendors and
suppliers, to service debt requirements and purchase equipment, we will need to
continue to raise additional capital. As noted in the risk factors of the Form
10-K filed with the SEC on October 30, 2001, we have not always paid all of our
suppliers on time. Some of these suppliers are critical to our operations. These
suppliers have given us payment extensions in the past, although there is no
guarantee they will do so in the future.
During the nine months ended April 30, 2002, the Company acquired
approximately $854,000 in equipment which was not financed through capital lease
or financing arrangements. Additional cash outflows included the payment of
approximately $510,000 towards our capital lease obligations and an additional
$65,000 towards debt.
During the nine months ended April 2002, we received cash proceeds, net of
issuance costs, of approximately $180,000 from the issuance of common stock as a
result of an investment option exercise. These funds along with the cash flows
generated from operations were used to pay payables, to make payments on our
debt and capital lease obligations, and to purchase additional equipment used in
our network operations.
Overall, the Company's net operating, investing and financing activities
during the nine months ended April 2002 provided approximately $401,000 in cash
flows. The Company's working capital deficit at April 30, 2002 was approximately
$13.6 million. This represents an increase of approximately $4.3 million from
the working capital deficit of $9.3 million at July 31, 2001. The Company's
current liabilities include a total of approximately $4.7 million and $1.4
million, respectively, owed to IBM de Mexico and NTFC Capital Corporation. The
Company classified all amounts as current under the note obligations due to
being in technical default on both notes.
In May 2002, the Company announced that it had renegotiated its capital
lease agreement with IBM. The modification will result in a reduction in our
capital lease obligations of approximately $2.3 million, and a reduction in
current liabilities of approximately $4.3 million. The agreement calls for
forty-two payments commencing August 1, 2002, consisting of six payments of
$50,000 and thirty-six payments of $75,000.
In May 2002, the Company entered into a Forbearance Agreement with NTFC
Capital Corporation related to its capital lease facility. In exchange for a
payment of approximately $500,000 NTFC agreed to release GlobalSCAPE, Inc. as a
co-borrower under the facility. Additionally, NTFC agreed to waive the default
of covenants until the earliest of 1) July 31, 2002, 2) a default by the Company
under the Forbearance Agreement, 3) any other default under the facility by the
Company or 4) the date an amended agreement is executed. Both parties have
agreed to make their best efforts to negotiate the terms of an amended
agreement, the purpose of which will be to restructure the current facility
including the financial covenants. On June 12, 2002, the Company completed the
sale of its majority ownership of GlobalSCAPE, our Internet e-commerce segment,
for $2.25 million resulting in a gain. A portion of the proceeds were used to
make payment to NTFC in accordance with the forbearance agreement to release
GlobalSCAPE as a co-borrower on the facility.
The Company's current liabilities also include approximately $1.3 million
of equipment purchased from Northern Telecom, a subsidiary of Nortel Networks in
fiscal 2001. In June 2002, the Company reached an agreement with Nortel related
to this payable. In return for a reduction of $314,000
17
in the price of the equipment and additional technical support related to the
equipment, ATSI has agreed to make payments over a ten-month period beginning
July 15, 2002 totaling approximately $936,000.
The Company's current obligations also include approximately $437,000 owed
to the former owners of Grupo Intelcom, S.A. de C.V., the entity purchased by
the Company in July 2000 and through which the Company obtained its Mexican long
distance concession. Additionally, the Company has current notes payable of
$603,000.
We continue to focus on enhancing the capacity and efficiency of our
international network backbone between the U.S. and Mexico, adding alternate
carriers to transport our traffic outside of that backbone in Mexico, and
changing the mix of our traffic to better utilize our network capabilities. A
direct result of our producing positive cash flows from operations relates to
the Company's focus on its core revenue stream and reducing the cash conversion
cycle of its primary customers. To allow these trends to continue, the Company
needs to expand its network and switch capacity in order to provide additional
capacity to existing and potential customers.
The Company has limited availability to capital resources, and these
resources may not be available to support our ongoing operations until such time
as we are able to generate positive cash flows from operations. There is no
assurance we will be able to achieve future revenue levels sufficient to support
operations or recover our investment in property and equipment, goodwill and
other intangible assets. These matters raise substantial doubt about our ability
to continue as a going concern. Our ability to continue as a going concern is
dependent upon the ongoing support of our stockholders and customers, our
ability to obtain capital resources to support operations and our ability to
successfully market our services.
Inflation/Foreign Currency
Inflation has not had a significant impact on the Company's operations.
With the exception of revenues from the Company's communication centers and
payphones, almost all of the Company's revenues are generated and collected in
U.S. dollars. Integrated prepaid services from the Company's communication
centers and payphones are provided at the time of the call in exchange for cash
payment, so the Company does not maintain receivables on its books that are
denominated in pesos. In an effort to reduce foreign currency risk, the Company
attempts to convert pesos collected to U.S. dollars quickly and attempts to
maintain minimal cash balances denominated in pesos. Some expenses related to
certain services provided to the Company are incurred in foreign currencies,
primarily Mexican pesos. The devaluation of the Mexican peso over the past
several years has not had a material adverse effect on the Company's financial
condition or operating results.
Market Risk
We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.
Commodity Price Risk
Certain of our businesses, namely network services, operate in an extremely
price sensitive environment. The network services business over the past twelve
months has seen significant reductions in the price per unit charged for
transporting traffic. While we have been able to withstand these pricing
18
pressures, certain of our competitors are much larger and better positioned to
continue to withstand these price reductions. Our ability to further absorb
these price reductions may be dependent on our ability to further reduce our
costs of transporting this traffic.
Equity Price Risks
Until such time as we are able to consistently produce positive cash flows
from operations, we will be dependent on our ability to continue to access debt
and equity sources of capital. While recent history has shown us capable of
raising equity sources of capital; future equity financings and the terms of
those financings will be largely dependent on our stock price, our operations
and the future dilution to our shareholders.
Foreign Currency Exchange Risk
We face two distinct risks related to foreign currency exchange risk;
transaction risk and translation risk.
As previously discussed under the caption "Inflation", we face risks
related to certain of our revenue streams, namely, integrated prepaid services
from our own Mexican communication centers and payphones and the transacting of
business in pesos as opposed to U.S. dollars. Historically, we have been able to
minimize foreign currency exchange risk by converting from pesos to U.S. dollars
quickly and by maintaining minimal cash balances denominated in pesos. As we
grow our retail business in Mexico it is likely that we will face increasing
foreign currency transaction risks.
Historically, we have recorded foreign currency translation gains/losses in
our assets and liabilities due to the volatility of the peso exchange rate as
compared to the U.S. dollar over time. We anticipate we will continue to
experience translation gains/losses in our assets and liabilities, specifically
in fixed assets which are accounted for at historical pesos amounts on the books
of our Mexican subsidiaries but converted to U.S. dollars for consolidation
purposes at current exchange rates.
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
Exhibit Number
11 Computation of Earnings per Share (Exhibit to this Form 10-Q filed June 14,
2002)
(b) Current Reports on Form 8-K.
None.
19
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ATSI COMMUNICATIONS, INC.
(Registrant)
Date: June 14, 2002 By: /s/H. Douglas Saathoff
--------------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
20