##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007
 Commission File Number: 1-32736
 American Telecom Services, Inc.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    77-0602480(State of incorporation)
    
    (I.R.S. EmployerIdentification Number)
 2466 Peck Road
City of Industry, California 90601
 (562) 908-1287
  þ o
  o o þ
 o þ
  Class
    
    Outstanding at March 31, 2007Common Stock, par value $0.001 per share
    
    6,502,740 shares




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##### 



AMERICAN TELECOM SERVICES, INC.
 FORM 10-Q
 FOR THE PERIOD ENDED MARCH 31, 2007
 TABLE OF CONTENTS
 PART IITEM 1 FINANCIAL STATEMENTSCONDENSED CONSOLIDATED BALANCE SHEETS
    
    
    4CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
    
    
    5CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (UNAUDITED)
    
    
    6CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    7NOTES TO UNAUDITED CONDENSED CONSOLIDATED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    8ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    17ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    24ITEM 4 CONTROLS AND PROCEDURES
    
    
    25PART IIITEM 1 LEGAL PROCEEDINGS
    
    
    25ITEM 1A. RISK FACTORS
    
    
    25ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    25ITEM 3 DEFAULTS UPON SENIOR SECURITIES
    
    
    25ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    25ITEM 5 OTHER INFORMATION
    
    
    25ITEM 6 EXHIBITS
    
    
    25EX-31.1: CERTIFICATIONSEX-32.1: CERTIFICATIONS
   2




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3




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##### Table of Contents



PART I
 
  AMERICAN TELECOM SERVICES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31, 2007
    
    
    June 30, 2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,216,286
    
    
    $
    12,372,765Accounts receivable, net
    
    
    5,787,486
    
    
    
    1,060,968Prepaid expenses
    
    
    1,632,489
    
    
    
    808,523Inventory, net
    
    
    3,001,197
    
    
    
    2,181,019Total current assets
    
    
    18,637,458
    
    
    
    16,423,275Property and equipment, net
    
    
    296,178
    
    
    
    174,880Deposit and other assets
    
    
    91,254
    
    
    
    75,391Total assets
    
    $
    19,024,890
    
    
    $
    16,673,546LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,691,292
    
    
    $
    372,916Accrued expenses (Note 3)
    
    
    4,022,866
    
    
    
    987,777Total current liabilities
    
    
    5,714,158
    
    
    
    1,360,693Redeemable convertible preferred stock, $0.01 par value, 5,000
shares authorized, 5,000 shares issued and outstanding
(liquidation value of $12,669,355) (Note 3)
    
    
    7,365,758
    
    
    
    Commitments (Note 5)Stockholders equity (Notes 3 and 6) :Common stock, $.001 par value, 40,000,000 shares authorized;
6,502,740 shares and 6,502,740 shares issued and
outstanding, respectively
    
    
    6,503
    
    
    
    6,503Additional paid-in capital
    
    
    25,439,415
    
    
    
    21,239,702Accumulated deficit
    
    
    (19,500,945
    )
    
    
    (5,933,352
    )Total stockholders equity
    
    
    5,944,973
    
    
    
    15,312,853Total liabilities and stockholders equity
    
    $
    19,024,890
    
    
    $
    16,673,546
  4




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AMERICAN TELECOM SERVICES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 For the three months
    
    
    For the three months
    
    
    For the nine months
    
    
    For the nine monthsended March 31
    
    
    ended March 31
    
    
    ended March 31,
    
    
    ended March 31,2007 (Unaudited)
    
    
    2006 (Unaudited)
    
    
    2007 (Unaudited)
    
    
    2006 (Unaudited)Gross Revenue
    
    $
    6,868,998
    
    
    $
    126,249
    
    
    $
    21,312,410
    
    
    $
    453,546Rebates
    
    
    (2,172,457
    )
    
    
    
    
    
    
    (4,591,362
    )
    
    
    (9,429
    )Other Promotional Allowances
    
    
    (918,606
    )
    
    
    
    
    
    
    (1,066,524
    )Provision for Sales Returns
    
    
    (796,584
    )
    
    
    (8,358
    )
    
    
    (1,516,095
    )
    
    
    (17,857
    )Net Revenue
    
    
    2,981,351
    
    
    
    117,891
    
    
    
    14,138,429
    
    
    
    426,260Costs of sales
    
    
    4,206,373
    
    
    
    105,778
    
    
    
    14,029,389
    
    
    
    337,375Gross profit(loss)
    
    
    (1,225,022
    )
    
    
    12,113
    
    
    
    109,040
    
    
    
    88,885Operating Expenses:Selling, marketing and development
    
    
    5,419,264
    
    
    
    428,063
    
    
    
    9,365,283
    
    
    
    882,497General and administrative
    
    
    1,593,215
    
    
    
    605,363
    
    
    
    4,463,350
    
    
    
    1,277,445Total expenses
    
    
    7,012,479
    
    
    
    1,033,426
    
    
    
    13,828,633
    
    
    
    2,159,942Operating loss
    
    
    (8,237,501
    )
    
    
    (1,021,313
    )
    
    
    (13,719,593
    )
    
    
    (2,071,057
    )Other expenses (income):Interest expense and bank charges
    
    
    8,333
    
    
    
    
    
    
    
    32,866
    
    
    
    29,058Interest income
    
    
    (68,161
    )
    
    
    (62,828
    )
    
    
    (184,866
    )
    
    
    Amortization of debt discounts and
debt issuance costs
    
    
    
    
    
    
    2,220,275
    
    
    
    
    
    
    
    2,424,366Loss before provision for income taxes
    
    
    (8,177,673
    )
    
    
    (3,178,760
    )
    
    
    (13,567,593
    )
    
    
    (4,524,481
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (8,177,673
    )
    
    $
    (3,178,760
    )
    
    $
    (13,567,593
    )
    
    $
    (4,524,481
    )Preferred stock dividends
    
    
    (169,355
    )
    
    
    
    
    
    
    (169,355
    )
    
    
    Accretion of redeemable preferred stock
    
    
    (133,355
    )
    
    
    
    
    
    
    (133,355
    )
    
    
    Net loss attributed to common stockholders
    
    $
    (8,480,383
    )
    
    $
    (3,178,760
    )
    
    $
    13,870,303
    
    
    $
    (4,524,481
    )Net loss per common share:Basic and diluted
    
    $
    (1.30
    )
    
    $
    (0.71
    )
    
    $
    (2.13
    )
    
    $
    (1.60
    )Weighted average shares outstanding:Basic and diluted
    
    
    6,502,740
    
    
    
    4,495,002
    
    
    
    6,502,740
    
    
    
    2,819,526
  5




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##### Table of Contents



AMERICAN TELECOM SERVICES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited)
 Common stockShares
    
    
    Amount
    
    
    Additional paid-in capital
    
    
    Accumulated deficit
    
    
    Total stockholders equityBalance, July 1, 2006
    
    
    6,502,740
    
    
    $
    6,503
    
    
    $
    21,239,702
    
    
    $
    (5,933,352
    )
    
    $
    15,312,853Stock-based compensation expense related to employee stock options (Notes 2 and 6)
    
    
    
    
    
    
    
    
    
    
    207,678
    
    
    
    
    
    
    
    207,678Stock-based compensation expense related to non-employee stock options (Notes 2 and 6)
    
    
    
    
    
    
    
    
    
    
    18,109
    
    
    
    
    
    
    
    18,109Reduction of initial public offering issuance costs
    
    
    
    
    
    
    
    
    
    
    57,871
    
    
    
    
    
    
    
    57,871Dividends
payable on redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    (169,355
    )
    
    
    
    
    
    
    (169,355
    )Accretion of redeemable preferred stock discount
    
    
    
    
    
    
    
    
    
    
    (133,355
    )
    
    
    
    
    
    
    (133,355
    )Value of warrants issued to placement agent
    
    
    
    
    
    
    
    
    
    
    471,315
    
    
    
    
    
    
    
    471,315Value of warrants issued with redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    2,241,372
    
    
    
    
    
    
    
    2,241,372Value of beneficial conversion issued with redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    1,506,078
    
    
    
    
    
    
    
    1,506,078Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,567,593
    )
    
    
    (13,567,593
    )Balance, March 31, 2007
    
    
    6,502,740
    
    
    $
    6,503
    
    
    $
    25,439,415
    
    
    $
    (19,500,945
    )
    
    $
    5,944,973
  6




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AMERICAN TELECOM SERVICES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the nine months ended
    
    
    For the nine months endedMarch 31, 2007
    
    
    March 31, 2006Cash flows from operating activities:Net loss
    
    $
    (13,567,593
    )
    
    $
    (4,524,481
    )Adjustment to reconcile net loss to net cash used in operating activities:Amortization of debt financing costs
    
    
    1,590
    
    
    
    Depreciation
    
    
    62,834
    
    
    
    6,272Common stock and capital contributed for services
    
    
    
    
    
    
    2,080Allowance for doubtful accounts
    
    
    637,583
    
    
    
    Inventory reserve
    
    
    
    
    
    
    218,245Employee and non-employee share based compensation
    
    
    225,787
    
    
    
    125,518Non-cash interest expense
    
    
    
    
    
    
    87,220Amortization of debt discounts and issuance costs
    
    
    
    
    
    
    2,424,366Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,364,101
    )
    
    
    (164,703
    )Prepaid expenses and other
    
    
    (823,966
    )
    
    
    (795,885
    )Inventory
    
    
    (1,038,423
    )
    
    
    (1,867,498
    )Deposit and other assets
    
    
    (17,453
    )
    
    
    (28,170
    )Accounts payable
    
    
    1,318,376
    
    
    
    1,078,719Accrued expenses
    
    
    2,746,274
    
    
    
    293,605Net cash used in operating activities
    
    
    (15,600,847
    )
    
    
    (3,362,957
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (184,132
    )
    
    
    (109,907
    )Net cash used in investing activities
    
    
    (184,132
    )
    
    
    (109,907
    )Cash flows from financing activities:Proceeds from senior convertible notes
    
    
    
    
    
    
    2,113,500Proceeds from redeemable, convertible preferred stock
    
    
    12,500,000Net proceeds from public offering of securities
    
    
    
    
    
    
    16,781,904Proceeds from underwriter purchase option
    
    
    
    
    
    
    100Issuance
costs on preferred stock
    
    
    (871,500
    )
    
    
    Debt issuance costs
    
    
    
    
    
    
    (531,120
    )Net cash provided by financing activities
    
    
    11,628,500
    
    
    
    18,364,384Net (decrease) increase in cash and cash equivalents
    
    
    (4,156,479
    )
    
    
    14,891,520Cash and cash equivalents  beginning of period
    
    
    12,372,765
    
    
    
    50,780Cash and cash equivalents  end of period
    
    $
    8,216,286
    
    
    $
    14,942,300Supplementary disclosure of cash flow information:Cash paid for income taxes
    
    $
    
    
    
    $
    Cash paid for interest
    
    $
    
    
    
    $
    Non-cash financing activities:Conversion of Notes to equity
    
    $
    
    
    
    $
    2,250,720Dividends payable on preferred stock
    
    $
    169,355
    
    
    $
    2,250,720(Reduction of ) accrued financing cost on public offering
    
    $
    (57,871
    )
    
    $
    157,871Accrued issuance costs on preferred stock
    
    $
    177,332
    
    
    
    Fair value of underwriter purchase option included in offering cost
    
    $
    
    
    
    $
    711,000
  7




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##### Table of Contents



AMERICAN TELECOM SERVICES, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Description of the Business
   2. Summary of Significant Accounting Policies:
 Interim reporting
  Basis of Presentation of Consolidated Financial Statements and Use of Estimates
  Revenue recognition
  8




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##### Table of Contents



AMERICAN TELECOM SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Phone Products
        Carrier Agreements
   9




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Allowance for doubtful accounts
  Share-Based Compensation
    10




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Cash and Cash Equivalents
  Fair value of financial instruments
  Inventory and Shipping
    11




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Internal Use Software
 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use
 Concentrations
    Net loss per share
  Recent accounting pronouncements
 Accounting For Uncertainty in Income Taxes Accounting For Income Taxes
 Fair Value Measurements
  12




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3. Capital Stock:
 Initial Public Offering
    Purchase Option
 .
 Redeemable Warrants
    13




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##### Table of Contents



Preferred Stock Offering
 st
    4. Related party transactions:
 Marketing
  Carrier Relations
  14




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##### Table of Contents



5. Commitments:
 Guarantee to supplier
   Employment Agreements
   15




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Other
  6. Stock Based Compensation Plan:
       Weighted Average
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Fair ValueOptions Outstanding as of June 30, 2006
    
    
    240,000
    
    
    $
    4.79
    
    
    $
    2.11Granted
    
    
    160,000
    
    
    
    3.42
    
    
    
    1.57Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited and Expired
    
    
    
    
    
    
    
    
    
    
    Options Outstanding, March 31, 2007
    
    
    400,000
    
    
    $
    4.31
    
    
    $
    2.11Exercisable, March 31, 2007
    
    
    150,000
    
    
    $
    3.91
    
    
    $
    1.76
  16




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##### Table of Contents



AMERICAN TELECOM SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Stock Options Outstanding
    
    
    Stock Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    WeightedRemaining
    
    
    Average
    
    
    Aggregate
    
    
    
    
    
    
    Remaining
    
    
    Average
    
    
    AggregateContractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    
    
    
    
    Contractual
    
    
    Exercise
    
    
    IntrinsicExercise Prices
    
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Value
    
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Value$
    5.05
    
    
    
    195,000
    
    
    
    3.85
    
    
    $
    5.05
    
    
    $
    
    
    
    
    45,000
    
    
    
    3.85
    
    
    $
    5.05
    
    
    $
    $
    3.35 - $3.95
    
    
    
    130,000
    
    
    
    4.49
    
    
    $
    3.51
    
    
    $
    16,600
    
    
    
    25,000
    
    
    
    4.08
    
    
    $
    3.95
    
    
    $
    $
    2.25 - $2.80
    
    
    
    20,000
    
    
    
    4.46
    
    
    $
    2.66
    
    
    $
    18,750
    
    
    
    20,000
    
    
    
    4.25
    
    
    $
    3.35
    
    
    $
    5,000$
    4.20
    
    
    
    55,000
    
    
    
    4.07
    
    
    $
    4.20
    
    
    
    
    
    
    
    20,000
    
    
    
    4.76
    
    
    $
    2.80
    
    
    $
    16,00020,000
    
    
    
    4.67
    
    
    $
    3.55
    
    
    $
    1,00020,000
    
    
    
    4.76
    
    
    $
    3.32
    
    
    $
    5,600Total
    
    
    400,000
    
    
    
    
    
    
    
    
    
    
    
    35,350
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    27,600
    Year ending June 30, 2007
    
    $
    43,704Year ending June 30, 2008
    
    $
    119,882Year ending June 30, 2009
    
    
    13,558$
    177,144
 Performance Accelerated Restricted Stock (PARS)
  17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS
  OVERVIEW
    RESULTS OF OPERATIONS
 Three and nine months ended March 31, 2007 and 2006
 Revenues
    18




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Cost of Revenues
 Gross Margin
    19




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Three Months Ended
    
    
    Nine Months EndedGAAP to Adjusted Net Revenue
    
    3/31/2007
    
    
    3/31/2006
    
    
    3/31/2007
    
    
    3/31/2006Net Revenue
    
    $
    2,981,351
    
    
    $
    117,891
    
    
    $
    14,138,429
    
    
    $
    426,260Add Rebates Allocated to Revenue
    
    
    2,172,457
    
    
    
    
    
    
    
    4,591,362
    
    
    
    9,429Add Promotional Allowance in Revenue
    
    
    918,606
    
    
    
    
    
    
    
    1,066,524Adjusted Net Revenue
    
    $
    6,072,414
    
    
    $
    117,891
    
    
    $
    19,796,315
    
    
    $
    435,689


Three Months Ended
    
    Nine Months EndedGAAP to Adjusted Gross Margin
    
    3/31/2007
    
    
    3/31/2006
    
    
    3/31/2007
    
    
    3/31/2006Gross Margin
    
    $
    (1,225,022
    )
    
    $
    12,113
    
    
    $
    109,040
    
    
    $
    88,885as a % of Net Revenue
    
    
    -41.1
    %
    
    
    10.3
    %
    
    
    0.8
    %
    
    
    20.9
    %Add Rebates Allocated to Revenue
    
    
    2,172,457
    
    
    
    
    
    
    
    4,591,362
    
    
    
    9,429Add Promotional Allowance in Revenue
    
    
    918,606
    
    
    
    
    
    
    
    1,066,524
    
    
    
    Adjusted Gross Margin
    
    $
    1,866,041
    
    
    $
    12,113
    
    
    $
    5,766,926
    
    
    $
    98,314as a % of Adjusted Net Revenue
    
    
    30.7
    %
    
    
    10.3
    %
    
    
    29.1
    %
    
    
    22.6
    %


Selling, Marketing and Development ®










General and Administrative  20




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Interest and Bank Charges, net


Amortization of Debt Discounts and Issuance Costs -


Net
loss


LIQUIDITY AND CAPITAL RESOURCES






Operating Cash Flows




21




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Accounts Receivable




Prepaid Expenses and Inventory






Accounts Payable and Accrued Expenses




Cash Flows from Investing Activities.






Cash Flows from Financing Activities.












22




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23



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ITEM3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity
  Exchange Rate Sensitivity
  
 ITEM 4 CONTROLS AND PROCEDURES
  24




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##### Table of Contents



PART II
 
 ITEM 1 LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3 DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5 OTHER INFORMATION
  
 ITEM 6 EXHIBITS
 Exhibit Number
    
    Description31.1
    
    Rule 13a-14(a) Certifications32.1
    
    Section 1350 Certifications




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##### Table of Contents



SIGNATURES
  AMERICAN TELECOM SERVICES, INC.Date: May 21, 2007
    
    By:
    
    /s/ Bruce Hahn

Bruce HahnChief Executive Officer
 By:
    
    /s/ Edward James

Edward JamesChief Financial Officer