UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from ____________ to ___________
Commission
File Number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| ||
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name
of each exchange on which registered | ||
| N/A | N/A | N/A |
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting Company | ||
| Emerging growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
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: | As of: | |
| Common Stock $0.001 par value | March 17, 2022 |
DIGERATI TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2022
INDEX
| Item 1. | Consolidated Financial Statements (Unaudited) | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39 |
| Item 4. | Controls and Procedures | 39 |
| PART II-- OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 40 |
| Item 1A. | Risk Factors | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 |
| Item 3. | Defaults Upon Senior Securities | 40 |
| Item 4. | Mine Safety Disclosures | 40 |
| Item 5. | Other Information | 40 |
| Item 6. | Exhibits | 41 |
| SIGNATURES | 42 | |
i
DIGERATI TECHNOLOGIES, INC.
CONTENTS
ii
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
| January 31, | July 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| LONG-TERM ASSETS: | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Investment in Itellum | ||||||||
| Right-of-use asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Equipment financing | ||||||||
| Convertible note payable, current, net $ | ||||||||
| Note payable, current, related party, net $ | ||||||||
| Note payable, current, net $ | ||||||||
| Acquisition payable | ||||||||
| Deferred income | ||||||||
| Derivative liability | ||||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Notes payable, related party, net $ | ||||||||
| Note payable, net $ | ||||||||
| Operating lease liability | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock, $0.001, 50,000,000 shares authorized | ||||||||
| Convertible Series A Preferred stock, $ | ||||||||
| Convertible Series B Preferred stock, $ | ||||||||
| Convertible Series C Preferred stock, $ | ||||||||
| Series F Super Voting Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Other comprehensive income | ||||||||
| Total Digerati’s stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to consolidated unaudited financial statements
1
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
| Three
months ended January 31, | Six
months ended January 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Cloud software and service revenue | $ | $ | $ | $ | ||||||||||||
| Total operating revenues | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | ||||||||||||||||
| Selling, general and administrative expense | ||||||||||||||||
| Legal and professional fees | ||||||||||||||||
| Bad debt expense | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Gain (loss) on derivative instruments | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on settlement of debt | ||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS INCLUDING NONCONTROLLING INTEREST | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Net loss attributable to the noncontrolling interests | ||||||||||||||||
| NET LOSS ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deemed dividend on Series A Convertible preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| LOSS PER COMMON SHARE - BASIC | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| LOSS PER COMMON SHARE - DILUTED | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | ||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
2
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Six Months Ended January 31, 2022
(In thousands, except for share amounts, unaudited)
| Equity Digerati’s Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Additional | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | Paid-in | Accumulated | Comprehensive | Stockholders | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series C Shares | Par | Series F Shares | Par | Shares | Par | Capital | Deficit | Income | Deficit | Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
3
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Six Months Ended January 31, 2021
(In thousands, except for share amounts, unaudited)
| Equity Digerati’s Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Additional | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | Paid-in | Accumulated | Comprehensive | Stockholders | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series F Shares | Par | Shares | Par | Capital | Deficit | Income | Deficit | Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services, to employees | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liability resolved to APIC due to note conversion | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of accounts payable | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liability resolved to APIC due to note conversion | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
4
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Six
months ended January 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash (used in)/provided by operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock compensation and warrant expense | ||||||||
| Bad debt expense | ||||||||
| Amortization of ROU Asset - operating | ||||||||
| Amortization of debt discount | ||||||||
| (Gain) on derivative liabilities | ( | ) | ( | ) | ||||
| Loss on extinguishment of debt | ||||||||
| (Gain) on settlement of debt | ( | ) | ||||||
| Accrued interest added to principal | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| Right of use operating lease liability | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Deferred income | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid in acquisition of equipment | ( | ) | ( | ) | ||||
| Proceeds from Nexogy | ||||||||
| Acquisition of VoIP assets, net of cash received | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Borrowings from convertible debt, net of original issuance cost and discounts | ||||||||
| Borrowings from debt, net of original issuance cost and discounts | ||||||||
| Principal payments on debt, net | ( | ) | ||||||
| Principal payments on convertible notes, net | ( | ) | ||||||
| Principal payments on related party notes, net | ( | ) | ( | ) | ||||
| Principal payment on equipment financing | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | ||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Income tax paid | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Accrued interest rolled into principal | $ | $ | ||||||
| Incentive earnout adjustment on Active PBX acquisition | $ | $ | ||||||
| Stock issued with convertible debt - debt discount | $ | $ | ||||||
| Beneficial conversion feature on convertible debt | $ | $ | ||||||
| Debt discount from common stock issued with debt | $ | $ | ||||||
| Debt discount from derivative liabilities | $ | $ | ||||||
| Promissory note reclassed to convertible debt | $ | $ | ||||||
| Capitalization of ROU assets and liabilities - operating | $ | $ | ||||||
| Common Stock issued for debt conversion | $ | $ | ||||||
| Common Stock issued for accounts payable | $ | $ | ||||||
| Dividend declared | $ | $ | ||||||
| Derivative liability resolved to APIC due to debt conversion | $ | $ | ||||||
See accompanying notes to consolidated unaudited financial statements
5
DIGERATI TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Digerati Technologies, Inc. (“we;” “us,” “our,” or the “Company”) 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 consolidated financial statements for the year ended July 31, 2021 contained in the Company’s Form 10-K filed on October 26, 2021 have been omitted.
Treasury Shares
Basic and diluted net income (loss) per share.
The basic net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the quarter ended January 31, 2022, and the year ended July 31, 2021, potential dilutive securities including options and warrants were not included in the calculation of diluted net loss per common share. Potential dilutive securities, which are not included in dilutive weighted average shares are as follows:
| 1/31/2022 | 7/31/2021 | |||||||
| Options to purchase common stock | ||||||||
| Warrants to purchase common stock | ||||||||
| Convertible debt | ||||||||
| Convertible Series A Preferred stock | ||||||||
| Convertible Series B Preferred stock | ||||||||
| Convertible Series C Preferred stock | ||||||||
| Total: | ||||||||
Customers and Suppliers
We rely on various suppliers to provide services in connection with our VOIP and UCaaS offerings. Our customers include businesses in various industries including Healthcare, Banking, Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single supplier or customer.
During the six months ended January 31, 2022, and 2021, the Company did not derive a significant amount of revenue from one single customer.
As of the six months ended January 31, 2022, and 2021, the Company did not derive a significant number of accounts receivable from one single customer.
6
Sources of revenue:
Cloud-based hosted Services. The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
Service Revenue
Service revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time, generally as services are activated for the customer.
Product Revenue
The Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
Disaggregation of Cloud software and service revenue
Summary of disaggregated revenue is as follows (in thousands):
| For the Three Months ended January 31, | For the Six Months ended January 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cloud software and service revenue | $ | $ | $ | $ | ||||||||||||
| Product revenue | ||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | ||||||||||||
Contract Assets
Contract
assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed.
The revenue is recognized when the customer receives services or equipment for a reduced consideration at the onset of an arrangement;
for example, when the initial month’s services or equipment are discounted. Contract assets are included in prepaid and other current
assets in the consolidated balance sheets, depending on if their reduction is recognized during the succeeding 12-month period or beyond.
Contract assets as of January 31, 2022, and July 31, 2021, were $
Deferred Income
Deferred
income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control. Balances
consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred revenues
that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance sheets,
with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of January 31, 2022,
and July 31, 2021, were $
7
Customer deposits
The
Company in some instances requires customers to make deposits for equipment, installation charges and training. As equipment is installed
and training takes places the deposits are then applied to revenue. As of January 31, 2022, and July 31, 2021, Digerati’s customer
deposits balance was $
Costs to Obtain a Customer Contract
Sales commissions are paid upon collections of related revenue and are expensed during the same period. Sales commissions for the six
months ended January 31, 2022, and January 31, 2021, were $
Direct Costs - Cloud software and service
We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
Derivative financial instruments.
Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, Digerati analyzes its convertible instruments and free-standing instruments such as warrants for derivative liability accounting.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date. Any changes in fair value are recorded as non-operating, non-cash income or expense for each reporting period. For derivative notes payable conversion options and warrants Digerati uses the Black-Scholes option-pricing model to value the derivative instruments.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet date.
Fair Value of Financial Instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs that may be used to measure fair value are as follows:
| Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. |
For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt of the same remaining maturities.
Our
derivative liabilities as of January 31, 2022 and July 31, 2021 are approximately $
8
The following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable inputs:
| Fair value measurements at reporting date using. | ||||||||||||||||
| Quoted prices in | Significant | |||||||||||||||
| active markets | other | Significant | ||||||||||||||
| for identical | observable | unobservable | ||||||||||||||
| liabilities | inputs | inputs | ||||||||||||||
| Description | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Convertible promissory notes derivative liability at July 31, 2021 | $ | $ | ||||||||||||||
| Convertible promissory notes derivative liability at January 31, 2022 | $ | $ | ||||||||||||||
The fair market value of all derivatives during the year ended July 31, 2021 was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | |
| Expected stock price volatility | |
| Risk-free interest rate | |
| Expected term |
The fair market value of all derivatives during the six months ended January 31, 2022 was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | |
| Expected stock price volatility | |
| Risk-free interest rate | |
| Expected term |
The following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:
| Balance at July 31, 2020 | $ | |||
| Derivative from new convertible promissory notes recorded as debt discount | ||||
| Derivative liability resolved to additional paid in capital due to debt conversion | ( | ) | ||
| Derivative loss | ||||
| Balance at July 31, 2021 | $ | |||
| Derivative from new convertible promissory notes recorded as debt discount | ||||
| Derivative liability resolved to additional paid in capital due to debt conversion | ||||
| Derivative gain | ( | ) | ||
| Balance at January 31, 2022 | $ |
Noncontrolling interest
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. The net income (loss) attributed to the NCI is separately designated in the accompanying consolidated statements of operations and other comprehensive income (loss).
9
On
May 1, 2018,
For
the six months ending January 31, 2022, and 2021, the Company accounted for a noncontrolling interest of $
Recently issued accounting pronouncements.
Recent accounting pronouncements, other than below, issued by the Financial Accounting Standards Board (“FASB”) (including its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s present or future financial statements.
In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential on its financial statements.
NOTE 2 – GOING CONCERN
Financial Condition
The
Company’s consolidated financial statements for the six months ending January 31, 2022, have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s
inception in 1993, the Company has incurred net losses and accumulated a deficit of approximately $
Management Plans to Continue as a Going Concern
Management believes that available resources as of January 31, 2022, will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
10
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2022 certain members of our executive management team have taken a significant portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from our recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, we have also secured numerous agent agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.
We have been successful in raising debt and equity capital in the past and as described in Notes 6,7 and 8. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful.
On
November 17, 2020, the Company and T3 Communications, Inc (“T3 Nevada”), a majority owned subsidiary entered into a credit
agreement (the “Credit Agreement”) with Post Road Administrative LLC and its affiliate Post Road Special Opportunity Fund
II LLP (collectively, “Post Road”). Pursuant to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of
up to $
The
Company used $
On
December 20, 2021, T3 Nevada and Post Road entered into an amendment to the Credit Agreement (the “Amendment”) in connection
with which T3 Nevada issued an Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the
Term Loan A Note. Under the First Amendment, the Term Loan B Note principal of $
Pursuant
to the First Amendment, the proceeds of $
Subsequently,
on February 4, 2022, T3 Nevada and Post Road entered into a Credit Agreement in connection with which T3 Nevada issued a Term Loan C
Note, Pursuant to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of $
The current Credit Agreement will allow the Company to continue acquiring UCaaS service providers that meet the Company’s acquisition criteria. Management anticipates that future acquisitions will provide additional operating revenues to the Company as it continues to execute on its consolidation strategy. There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management.
The Company will continue to work with various funding sources to secure additional debt and equity financings. However, Digerati cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Digerati’s consolidated financial statements as of January 31, 2022, do not include any adjustments that might result from the inability to implement or execute Digerati’s plans to improve our ability to continue as a going concern.
11
NOTE 3 – INTANGIBLE ASSETS
Below are summarized changes in intangible assets at January 31, 2022, and July 31, 2021:
| Gross | ||||||||||||
| Carrying | Accumulated | Net Carrying | ||||||||||
| January 31, 2022 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Customer relationships 7 years | ( | ) | ||||||||||
| Trademarks, 7 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Define-lived Assets | ( | ) | ||||||||||
| Goodwill, Indefinite | ||||||||||||
| Balance, January 31, 2022 | $ | $ | ( | ) | $ | |||||||
| Gross | ||||||||||||
| Carrying | Accumulated | Net Carrying | ||||||||||
| July 31, 2021 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Customer relationships 7 years | ( | ) | ||||||||||
| Trademarks, 7 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Define-lived Assets | ( | ) | ||||||||||
| Goodwill, Indefinite | ||||||||||||
| Balance, July 31, 2021 | $ | $ | ( | ) | $ | |||||||
Total
amortization expense for the six months ended January 31, 2022, and 2021 was $
12
NOTE 4 – STOCK-BASED COMPENSATION
In
November 2015, the Company adopted the Digerati Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes
the grant of up to
During
the six months ended January 31, 2022, the Company extended the expiration date until July 31,
2025, on
During the six months ended January 31, 2021, we issued:
During
the six months ended January 31, 2021 Digerati recognized $
The
Company recognized approximately $
A summary of the stock options as of January 31, 2022, and July 31, 2021, and the changes during the six months ended January 31, 2022, are presented below:
| Weighted average | ||||||||||||
| Weighted average | remaining contractual | |||||||||||
| Options | exercise price | term (years) | ||||||||||
| Outstanding at July 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited and cancelled | ||||||||||||
| Outstanding at January 31, 2022 | $ | |||||||||||
| Exercisable at January 31, 2022 | $ | |||||||||||
The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) of the 9,230,000 and 9,230,000 stock options outstanding at January 31, 2022, and July 31, 2021, was $359,160 and $392,891, respectively.
The
aggregate intrinsic value of
13
NOTE 5 – WARRANTS
During the six months ended January 31, 2022, the Company did not issue any warrants.
During the six months ended January 31, 2021, the Company issued the following warrants:
On
November 17, 2020,
The number of Warrant Shares is adjustable to allow the holder to maintain, subject to certain share issuances that are exceptions, the right to purchase twenty-five percent (25%) of the Company’s total shares, calculated on a fully-diluted basis. The Warrant has an exercise price of $0.01 per share and the Warrant expires on November 17, 2030. Seventy-five percent (75%) of the Warrant Shares are immediately fully vested and not subject to forfeiture at any time for any reason. The remaining twenty-five percent (25%) of the Warrant Shares are subject to forfeiture based on the Company achieving certain performance targets which, if achieved, would result in twenty percent (20%) warrant coverage. If the minority shareholders of T3 Nevada convert their T3 Nevada shares into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), the Warrant Shares percentage shall also be lowered such that when combined with the achievement of the performance targets, the warrant coverage could be reduced to fifteen percent (15%).
In
connection with the issuance of the Warrant, the three executives of the Company, Art Smith, Antonio Estrada, and Craig Clement entered
into a Tag-Along Agreement (the “Tag-Along Agreement”) whereby they agreed that the holder of the Warrant or Warrant Share
will have the right to participate or “tag-along” in any agreements to sell any shares of their Common Stock that such executives
enter into. The Company also agreed, in connection with the issuance of the Warrant and pursuant to a Board Observer Agreement (the “Board
Observer Agreement”), to grant Post Road the right to appoint a representative to each of the boards of directors of the Company
and each of its subsidiaries, to attend all board meeting in a non-voting observer capacity. In addition, at issuance the Company recognized
$
A summary of the warrants as of January 31, 2022, and July 31, 2021, and the changes during the six months ended January 31, 2022, are presented below:
| Weighted average | ||||||||||||
| Weighted average | remaining contractual | |||||||||||
| Warrants | exercise price | term (years) | ||||||||||
| Outstanding at July 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited and cancelled | ( | ) | $ | |||||||||
| Outstanding at January 31, 2022 | $ | |||||||||||
| Exercisable at January 31, 2022 | $ | |||||||||||
The
aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the
exercise price, multiplied by the number of in-the-money warrants) of the
The
aggregate intrinsic value of
Warrant
expense for the six months ended January 31, 2022 and 2020 was $
For
the six months ended January 31, 2022,
14
NOTE 6 – NOTES PAYABLE NON-CONVERTIBLE
On
October 22, 2018, the Company issued a secured promissory note for $
Credit Agreement and Notes
On
November 17, 2020, T3 Communications, Inc., a Nevada corporation (“T3 Nevada”), a majority owned subsidiary of Digerati Technologies,
Inc. (the “Company”) and the Company’s other subsidiaries entered into a credit agreement (the “Credit Agreement”)
with Post Road. The Company is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road will
provide T3 Nevada with a secured loan of up to $
During
the six months ended January 31, 2022, the Company amortized $
Term
Loan A Note has maturity dates of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent
(12%).
On
December 20, 2021, T3 Nevada and Post Road entered into an amendment to the Credit Agreement (the “Amendment”) in connection
with which T3 Nevada issued an Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the
Term Loan A Note. Under the First Amendment, the Term Loan B Note principal of $
Pursuant
to the First Amendment, the additional proceeds of $
The
A&R Term Loan A Note has maturity dates of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of
15
Subsequently,
on February 4, 2022, T3 Nevada and Post Road entered into a Credit Agreement in connection with which T3 Nevada issued a Term Loan C
Note, Pursuant to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of $
The
Term Loan C Note has maturity dates of August 4, 2023, and an interest rate of LIBOR (with a minimum rate of
The Credit Agreement contains customary representations, warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the loan parties as well as financial performance. Below are key covenants requirements, (measured quarterly):
Under the second amendment to the Credit Agreement, dated as of February 4, 2022, the Company and the lender agreed to defer the financial covenants requirements testing mentioned above until April 30, 2022.
T3
Nevada’s obligations under the Credit Agreement are secured by a first-priority security interest in all of the assets of T3 Nevada
and guaranteed by the other subsidiaries of the Company pursuant to the Guaranty and Collateral Agreement, dated November 17, 2020, subsequently
amended on December 31, 2021, and February 4, 2022, by and among T3 Nevada, the Company’s other subsidiaries, and Post Road Administrative
LLC (the “Guaranty and Collateral Agreement”). In addition, T3 Nevada’s obligations under the Credit Agreement are,
pursuant to a Pledge Agreement (the “Pledge Agreement”), secured by a pledge of a first priority security interest in T3
Nevada’s
NOTE 7 – RELATED PARTY TRANSACTIONS
During
the six months ended January 31, 2022, and 2021, the Company provided VoIP Hosted and fiber services to a Company owned by one of the
Board members of T3 Communications, Inc., for $
On
November 17, 2020, as a result of the of the acquisition of ActiveServe’s asset, the two sellers became related parties as they
continued to be involved as consultants to manage the customer relationship, the Company paid on an annual basis $90,000 to each of the
consultants. These agreements expired as of January 17, 2022, and the parties agreed not to extend. A of January 31, 2022, there’s
no balance outstanding under the consulting agreements. In addition, part of the Purchase Price is payable in 8 equal quarterly
payments to the sellers. During the six months ended January 31, 2022, the Company paid $
On
December 31, 2021, as a result of the of the acquisition of Skynet’s asset, the two sellers became related parties as they continued
to be involved as consultants for 12 months to manage the customer relationship, the Company will pay on an annual basis $
16
Acquisition Payable
As
part of the acquisition of Skynet’s assets, the Company will pay to the Seller’s a $
NOTE 8 – CONVERTIBLE NOTES PAYABLE
At January 31, 2022, and July 31, 2021, convertible notes payable consisted of the following:
| January 31, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2021 | ||||||
| On October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000, annual interest rate of 8% and an original maturity date of October 13, 2021, the maturity date was extended until December 15, 2021 and subsequently the maturity date was extended until July 31, 2022. After payment of transaction-related expenses and closing fees of $32,000, net proceeds to the Company from the Note totaled $298,000. The Company recorded $32,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 1,000,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $45,003 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $134,423 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $17,620 as interest expense during the six months ended January 31, 2022. The total unamortized discount on the Note as of January 31, 2022, and July 31, 2021, were $0 and $17,620, respectively. The total principal balance outstanding as of January 31, 2022 and July 31, 2021 was $165,000. (See below variable conversion terms No.1) | $ | $ | ||||||
| On January 27, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of January 27, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $24,368 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $44,368 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.05 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On January 17, 2022, the lender agreed to extend the maturity date until July 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $25,000 and recognizing $25,000 as interest expense at the time of the extension. The Company amortized $34,368 as interest expense during the six months ended January 31, 2022. The total unamortized discount on the Note as of January 31, 2022 and July 31, 2021, were $0 and $34,368, respectively. The total principal balance outstanding as of January 31, 2022 and July 31, 2021, were $275,000 and $250,000, respectively. | ||||||||
17
| On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of April 14, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $80,100 as interest expense during the six months ended January 31, 2022. The total unamortized discount on the Note as of January 31, 2022 and July 31, 2021, were $26,699 and $106,799, respectively. The total principal balance outstanding as of January 31, 2022 and July 31, 2021, was $250,000. | ||||||||
| On August 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of August 31, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized as interest expense during the six months ended January 31, 2022, $5,680. The total unamortized discount on the Note as of January 31, 2022, was $7,955. The total principal balance outstanding as of January 31, 2022, was $75,000. | ||||||||
| On September 29, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of September 29, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $3,596 as interest expense during the six months ended January 31, 2022. The total unamortized discount on the Note as of January 31, 2022, was $7,192. The total principal balance outstanding as of January 31, 2022, was $75,000. |
18
| On October 22, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $150,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of October 22, 2022. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $3,492 as interest expense during the six months ended January 31, 2022. The total unamortized discount on the Note as of January 31, 2022, was $10,473. The total principal balance outstanding as of January 31, 2022, was $150,000. | ||||||||
| Total convertible notes payables non-derivative : | $ | $ |
| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | ||||||||
| On July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of 8% and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees of $35,000, net proceeds to the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $11,626 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.05 (five) cents or (b). 75% of the lowest traded price in the prior fifteen trading days immediately preceding the Notice of Conversion. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The Company recognized $61,678 of derivative liability and directly amortized all associated debt discount of $61,678 as interest expense. On July 31, 2021, the holder agreed to extend the maturity date until January 31, 2022. Subsequently, on February 14, 2022, the holder agreed to extend the maturity date until July 31, 2022. The total principal balance outstanding as of January 31, 2022, and July 31, 2021, was $355,000. |
19
| On January 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of February 17, 2022. Subsequently, on March 7, 2022, the holder agreed to extend the maturity date until July 31, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $61,819, of which $61,819 was recorded as debt discount and amortized over the term of the note. The Company amortized $27,840 of debt discount as interest expense during the six months ended January 31, 2022. The total unamortized discount on the Note as of January 31, 2022, and July 31, 2021, were $0 and $27,840, respectively. The total principal balance outstanding as of January 31, 2022, and July 31, 2021, was $80,235. | ||||||||
| On February 17, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $175,000, annual interest rate of 8% and a maturity date of February 17, 2022. After payment of transaction-related expenses and closing fees of $5,000, net proceeds to the Company from the Note totaled $170,000. Additionally, the Company recorded $5,000 as a discount to the Note and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily volume weighted average price (“VWAP”) over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $346,091, of which $170,000 was recorded as debt discount and amortized over the term of the note, and $176,091 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of January 31, 2022, and July 31, 2021, were $14,576 and $102,083, respectively. The Company amortized $87,507 of debt discount as interest expense during the six months ended January 31, 2022. The total principal balance outstanding as of January 31, 2022, and July 31, 2021, was $175,000. Subsequently, on March 7, 2022, the Company paid in full the total principal balance outstanding of $175,000 and accrued interest and prepayment penalty of $30,000. |
20
| On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, annual interest rate of 8% and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 100,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 (fifteen) cents or (b). seventy-five percent (75%) of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $64,561, of which $42,822 was recorded as debt discount and amortized over the term of the note. On January 15, 2022, the lender agreed to extend the maturity date until March 31, 2022. As consideration for the extension on the note, the Company agreed to add $15,000 to the principal amount outstanding and recognized $15,000 as interest expense. The total unamortized discount on the Note as of January 31, 2022, and July 31, 2021, were $0 and $50,945, respectively. The Company amortized $50,945 of debt discount as interest expense during the six months ended January 31, 2022. The total principal balance outstanding as of January 31, 2022, and July 31, 2021, were, $128,000 and $113,000, respectively. | ||||||||
| On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of January 31, 2022, was $56,446. The Company amortized $0 of debt discount as interest expense during the six months ended January 31, 2022. The total principal balance outstanding as of January 31, 2022, was $230,000. | - |
21
| On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of January 31, 2022, was $56,446. The Company amortized $0 of debt discount as interest expense during the six months ended January 31, 2022. The total principal balance outstanding as of January 31, 2022, was $230,000. | ||||||||
| Total convertible notes payable - derivative: | $ | $ | ||||||
| Total convertible notes payable derivative and non-derivative | ||||||||
| Less: discount on convertible notes payable | ( | ) | ( | ) | ||||
| Total convertible notes payable, net of discount | ||||||||
| Less: current portion of convertible notes payable | ( | ) | ( | ) | ||||
| Long-term portion of convertible notes payable | $ | $ |
Additional
terms No.1: The Holder shall have the right at any time on or after six (6) months from the Issue Date to convert any portion
of the outstanding and unpaid principal balance into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall
equal
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Variable
Conversion No.2: The notes are immediately convertible into shares of the Company’s Common Stock, at any time, at a conversion
price for each share of Common Stock equal to the lesser of
The
total unamortized discount on the convertible notes as of January 31, 2022, and July 31, 2021, were $
NOTE 9 - LEASES
The leased properties have a remaining lease term of twelve to thirty-seven months as of August 1, 2021. At the option of the Company, it can elect to extend the term of the leases. See table below:
| Location | Annual Rent | Lease
Expiration Date | Business Use | Approx. Sq. Ft. | ||||||||
| 825 W. Bitters, Suite 104, San Antonio, TX 78216 | $ | |||||||||||
| 8023 Vantage Dr., Suite 660, San Antonio, Texas 78230 | $ | |||||||||||
| 1610
Royal Palm Avenue, Suite 300, Fort Myers, FL 33901 | $ | |||||||||||
| 2121
Ponce de Leon Blvd., Suite 200, Coral Gables FL 33134 | $ | |||||||||||
| 7218 McNeil Dr., FL-1, Austin, TX 78729 | $ | |||||||||||
| 6606
Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240 | $ | |||||||||||
| 9701 S. John Young Parkway, Orlando, FL 32819 | $ | |||||||||||
| 50 NE 9th St, Miami, FL 3313 | $ | |||||||||||
| 350 NW 215 St., Miami Gardens, FL 33169 | $ | |||||||||||
| 8333 NW 53rd St, Doral, FL 33166 | $ | |||||||||||
| 100 SE 2nd Street, Miami, FL 33131 | $ | |||||||||||
| 9055 SW 73rd Ct, Miami, FL 33156 | $ | |||||||||||
| 9517 Fontainebleau Blvd., Miami, FL 33172 | $ | |||||||||||
The Company has not entered into any sale and leaseback transactions during the six months ended January 31, 2022
In December 2021, as part of the acquisition of SkyNet’s assets, the Company assumed an office lease in San Antonio, Texas. The lease is identified in the table above. The lease expires in September 2022, and at the option of the Company, the lease can be extended for a period of five years, with a base rent at the prevailing market rate at the time of the renewal.
In
January 2021,
In November 2020, as part of the acquisition of Nexogy, Inc., the Company assumed an office lease in Coral Gable Florida, two network facilities and five wireless internet network leases. These leases are identified in the table above. The leases’ expiration dates range from May 2022 to July 2025, and at the option of the Company, the leases can be extended for various periods ranging from one to five years, with a base rent at the prevailing market rate at the time of the renewal.
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Amounts recognized on July 31, 2021, and January 31, 2022, for operating leases are as follows:
| ROU Asset | July 31, 2021 | $ | ||||
| Amortization | $ | ( | ) | |||
| Addition - Asset | $ | |||||
| ROU Asset | January 31, 2022 | $ | ||||
| Lease Liability | July 31, 2021 | $ | ||||
| Amortization | $ | ( | ) | |||
| Addition - Liability | $ | |||||
| Lease Liability | January 31, 2022 | $ | ||||
| Lease Liability | Short term | $ | ||||
| Lease Liability | Long term | $ | ||||
| Lease Liability | Total: | $ |
| Operating lease cost: | $ | |||
| Cash paid for amounts included in the measurement of lease labilities | ||||
| Operating cashflow from operating leases: | $ | |||
| Weighted-average remain lease term-operating lease: | ||||
| Weighted-average discount rate | % |
For
the period ended January 31, 2022, the amortization of operating ROU assets was $
For
the period ended January 31, 2022, the amortization of operating lease liabilities was $
The future minimum lease payment under the operating leases are as follows:
| Lease | ||||
| Period Ending July, 31 | Payments | |||
| 2022 (remaining 6 Months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total: | $ | |||
NOTE 10 – PREFERED STOCK
CONVERTIBLE SERIES A PREFERRED STOCK
In
March 2019, the Company’s Board of Directors designated and authorized the issuance up to
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The “Conversion Price” at which shares of Common Stock shall be issuable upon conversion of any shares of Series A Preferred Stock shall initially be the greater of (i) $0.30 per share, (ii) a 30% discount to the offering price of the Common Stock (or Common Stock equivalent) in a $10 million or greater equity financing that closes concurrently with an up-listing of the Company Common Stock on the NYSE American or Nasdaq, in the event of such up-listing, and (iii) a 30% discount to the average closing price per share of the Common Stock for the 5 consecutive trading days commencing upon the date the Common Stock is up-listed on either the NYSE American or Nasdaq in which there is no concurrent $10 million equity financing.
During the six months ended January 31, 2022, the Company evaluated Series A Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible shares were classified as equity instruments.
CONVERTIBLE SERIES B PREFERRED STOCK
In
April 2020, the Company’s Board of Directors designated and authorized the issuance up to
The
Company had
The terms of our Series B Preferred Stock allow for:
Mandatory
Conversion. Upon
25
During the six months ended January 31, 2022, the Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible shares were classified as equity instruments.
CONVERTIBLE SERIES C PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance up to
On
February 25, 2021,
| ● | Arthur L. Smith – 28,928 shares of Series C Convertible Preferred Stock | |
| ● | Antonio Estrada – 19,399 shares of Series C Convertible Preferred Stock | |
| ● | Craig Clement – 7,073 shares of Series C Convertible Preferred Stock |
The
Series C Convertible Preferred Stock were issued for accrued compensation to the management team of $
The
Company had
The terms of our Series C Preferred Stock allow for:
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SERIES F SUPER VOTING PREFERRED STOCK
In
July 2020, the Company’s Board of Directors designated and authorized the issuance up to
On
November 17, 2020,
| ● | Arthur L. Smith - 34 shares of Series F Super Voting Preferred Stock | |
| ● | Antonio Estrada - 33 shares of Series F Super Voting Preferred Stock | |
| ● | Craig Clement - 33 shares of Series F Super Voting Preferred Stock |
The Company had 100 shares outstanding of the Series F Super Voting Preferred Stock as of January 31, 2022. No dividends are payable on the Series F Super Voting Preferred Stock.
The terms of our Series F Super Voting Preferred Stock allow for:
Voting Rights. As long as any shares of Series F Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series F Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series F Preferred Stock or alter or amend this Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series F Preferred Stock, (d) sell or otherwise dispose of any assets of the Corporation not in the ordinary course of business, (e) sell or otherwise effect or undergo any change of control of the corporation, (f) effect a reverse split of its Common Stock, or (g) enter into any agreement with respect to any of the foregoing.
Conversion. No conversion rights apply to the Series F Preferred Stock.
NOTE 11 – EQUITY
During the six months ended January 31, 2022, the Company issued the following shares of common stock:
On
August 31, 2021, the Company entered into a $
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On
September 29, 2021, the Company entered into a $
On
January 21, 2022, the Company secured two promissory notes for $
Subsequently,
on February 14, 2022, the Company entered into a note extension agreement, and as consideration for the extension, the Company issued
NOTE 12 – ACQUISTION
On December 31, 2021, our indirect, wholly owned subsidiary, Shift8 Networks, Inc., a Texas corporation (“Shift8”), executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with Skynet Telecom LLC, a Texas limited liability company (“Seller” “Skynet”), and Paul Golibart and Jerry Ou, each an individual resident in the State of Texas (each, an “Owner” and collectively, the “Owners”). The Company also executed the Purchase Agreement.
Pursuant to the Purchase Agreement, Shift8 acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s communications business, including but not limited to subscriber-based Interconnected Voice Over Internet Protocol communication services (“I-VoIP”), Unified Cloud Communications Services (“UCCS”), and IPPBX based systems of telephony (collectively, the “Purchased Assets”).
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The acquisition was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated fair values as of December 31, 2020. Allocation of the purchase price is based on the best estimates of management.
The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Skynet Asset Acquisition. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.
| Skynet | ||||
| (in thousands) | ||||
| Accounts receivable, net | $ | |||
| Inventory | ||||
| Intangible assets and Goodwill | ||||
| Property and Equipment, net | ||||
| Operating lease right-of-use asset | ||||
| Deposits and other assets | ||||
| Total identifiable assets | $ | |||
| Less: Liabilities assumed | ||||
| Total Purchase price | $ | |||
The following table summarizes the cost of intangible assets related to the acquisition:
| Skynet | Useful Life | |||||||
| (in thousands) | (in Years) | |||||||
| Customer Relationships | $ | |||||||
| Trade Names and Trademarks | ||||||||
| Non-Compete Agreement | ||||||||
| Goodwill | - | |||||||
| Total intangible assets | $ | |||||||
In
addition, the Company incurred approximately $
As
part of the acquisitions of Skynet’s assets,
Proforma
The results of Skynet Telecom LLC are included in the consolidated financial statements effective August 1, 2020.
The following schedule contains proforma consolidated results of operations for the six months ended January 31, 2022 and 2021 as if the acquisition occurred on August 1, 2020. The proforma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.
| (In thousands) | ||||||||||||||||
| Six months ended January 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Reported | Proforma | Reported | Proforma | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings (loss) per common share-Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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NOTE 13 – SUBSEQUENT EVENTS
PRG Term Loan C Note
On
February 4, 2022, Digerati Technologies, Inc. (the “Company”), T3 Communications, Inc., a controlled subsidiary of the Company
(“T3 Nevada”) and Post Road entered into a Credit Agreement in connection with which T3 Nevada issued a Term Loan C Note,
Pursuant to the Credit Agreement, Post Road provided T3 Nevada with a secured loan of $
The
Term Loan C Note has maturity dates of
Next Level Equity Purchase Agreement
On February 4, 2022, Digerati Technologies, Inc. (the “Company”), T3 Communications, Inc., a controlled subsidiary of the Company (“T3”) and the two owners of Next Level Internet, Inc. (the “Sellers”), entered into and closed on an Equity Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, T3 bought all of the equity interests in Next Level Internet, Inc. (“Next Level”) from the Sellers. Next Level is engaged in the business of providing cloud based Unified Communications as a Service, collaboration, contact center, managed connectivity and other voice and data services to small, medium, and large enterprises.
The
total purchase price is up to $
T3
paid $
In addition, 120 days after the closing of the transaction, T3 will pay the Sellers the amount by which net working capital deficit is better than $2.16 million or the Sellers will pay T3 the amount by which net working capital deficit is worse than $2.36 million.
The acquisition was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated fair values as of February 4, 2022. Allocation of the purchase price is based on the best estimates of management.
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The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Next Level Internet Acquisition. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.
| Next Level | ||||
| Internet | ||||
| (in thousands) | ||||
| Cash | $ | |||
| Accounts receivable, net | ||||
| Prepaid and other current assets | ||||
| Intangible assets and Goodwill | ||||
| Property and Equipment, net | ||||
| Deposits and other assets | ||||
| Operating lease right-of-use asset | ||||
| Total identifiable assets | $ | |||
| Less: Liabilities assumed | ||||
| Less: Operating lease liability | ||||
| Total Purchase price | $ | |||
The following table summarizes the cost of intangible assets related to the acquisition:
| Next Level | ||||||||
| Internet | Useful Life | |||||||
| (in thousands) | (in Years) | |||||||
| Customer Relationships | $ | |||||||
| Trade Names and Trademarks | ||||||||
| Non-Compete Agreement | ||||||||
| Goodwill | - | |||||||
| Total intangible assets | $ | |||||||
In
addition, the Company incurred approximately $
Proforma
The results of Next Level Internet, Inc. are included in the consolidated financial statements effective August 1, 2020.
The following schedule contains proforma consolidated results of operations for the six months ended January 31, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.
| (In thousands) | ||||||||||||||||
| Six months ended January 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Reported | Proforma | Reported | Proforma | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings (loss) per common share-Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
As
part of the acquisition of Next Level Internet, Inc., the Company secured an office lease, with a monthly base lease payment of $
Promissory Note paid in full
On
March 7, 2022, the Company paid in full a promissory note originally date February 17, 2021. The amount paid was the total principal
balance outstanding of $
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 for the fiscal year ended July 31, 2021, filed with the Securities and Exchange Commission on October 26, 2021.
The following is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three and six months ended January 31, 2022, and 2021. It should be read in conjunction with our audited Consolidated Financial Statements, the Notes thereto, and the other financial information included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021, filed with the Securities and Exchange Commission on October 26, 2021. For purposes of the following discussion, fiscal 2022 or 2022 refers to the year that will end on July 31, 2022, and fiscal 2021 or 2021 refers to the year ended July 31, 2021.
Overview
Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”), through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., dba, T3 Communications and T3 Communications, Inc. (both referred to herein as “T3”), respectively, and Nexogy Inc., a Florida corporation, provides cloud services specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions (SD WAN). Our services are designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™.
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As a provider of cloud communications solutions to the SMB, we are seeking to capitalize on the migration by businesses from the legacy telephone network to the Internet Protocol (“IP”) telecommunication network and the migration from hardware-based on-premise telephone systems to software-based communication systems in the cloud. Most SMBs are lagging in technical capabilities and advancement and seldom reach the economies of scale that their larger counterparts enjoy, due to their achievement of a critical mass and ability to deploy a single solution to a large number of workers. SMBs are typically unable to afford comprehensive enterprise solutions and, therefore, need to integrate a combination of business solutions to meet their needs. Cloud computing has revolutionized the industry and opened the door for businesses of all sizes to gain access to enterprise applications with affordable pricing. This especially holds true for cloud telephony applications, but SMBs are still a higher-touch sale that requires customer support for system integration, network installation, cabling, and troubleshooting. We have placed a significant emphasis on that “local” touch when selling, delivering, and supporting our services which we believe will differentiate us from the national providers that are experiencing high attrition rates due to poor customer support.
The adoption of cloud communication services is being driven by the convergence of several market trends, including the increasing costs of maintaining installed legacy communications systems, the fragmentation resulting from use of multiple on-premise systems, and the proliferation of personal smartphones used in the workplace. Today, businesses are increasingly looking for an affordable path to modernizing their communications system to improve productivity, business performance and customer experience.
Our cloud solutions offer the SMB reliable, robust, and full-featured services at affordable monthly rates that eliminates high-cost capital expenditures and provides for integration with other cloud-based systems.
Recent events
On December 31, 2021, the Company closed on an Asset Purchase Agreement with Skynet Telecom LLC. Pursuant to the Purchase Agreement, the Company acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s communications business, including but not limited to subscriber-based Interconnected Voice Over Internet Protocol communication services (“I-VoIP”), Unified Cloud Communications Services (“UCCS”), and IPPBX based systems of telephony.
On February 4, 2022, the Company acquired the equity interest in San Diego based Next Level Internet, Inc., a service provider engaged in the business of providing cloud based Unified Communications as a Service, collaboration, contact center, managed connectivity and other voice and data services to small, medium, and large enterprises. The acquisition of Next Level Internet expands the Company’s growing nationwide footprint and adds a strong West Coast presence with nearly 1,000 SMB clients in California.
Sources of revenue:
Cloud Software and Service Revenue: We provide UCaaS or cloud communication services and managed cloud-based solutions to small and medium size enterprise customers and to other resellers. Our Internet-based services include fully hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized IP/PBX features in a hosted or cloud environment. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, mobile broadband, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery.
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Direct Costs:
Cloud Software and Service: We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
Results of Operations
Three Months ended January 31, 2022, Compared to Three Months ended January 31, 2021.
Cloud Software and Service Revenue. Cloud software and service revenue increased by $693,000, or 21% from the three months ended January 31, 2021, to the three months ended January 31, 2022. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisitions of Skynet in December 2021 and the acquisitions of Nexogy and ActivePBX during FY2021. Our total number of customers increased from 2,583 for the three months ended January 31, 2021, to 2,960 customers for the three months ended January 31, 2022.
Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $119,000, or 8%, from the three months ended January 31, 2021, to the three months ended January 31, 2022. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet on December 2021 and the acquisitions of Nexogy and ActivePBX during FY2021. Our total number of customers increased from 2,583 for the three months ended January 31, 2021, to 2,960 customers for the three months ended January 31, 2022. However, our consolidated gross margin improved by $574,000 from the three months ended January 31, 2021, to the three months ended January 31, 2022.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $172,000, or 9%, from the three months ended January 31, 2021, to the three months ended January 31, 2022. The increase in SG&A is attributed to the acquisition of Skynet in December 2021 and the acquisitions of Nexogy and ActivePBX during FY2021, as part of the consolidation, the Company absorbed all of the employees responsible for managing the customer base, technical support, sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $10,000, from the three months ended January 31, 2021, to the three months ended January 31, 2022. The decrease between periods is attributed to the recognition during the three months ended January 31, 2021 of stock option expense of $33,000. During the three months ended January 31, 2022, the Company only recognized $23,000 in stock compensation for the amortization of stock options issued to our team over the last few years.
Legal and professional fees. Legal and professional fees increased by $920,000, from the three months ended January 31, 2021, to the three months ended January 31, 2022. The increase between periods is attributed to the recognition during the three months ended January 31, 2022 of $1,021,720 in professional fees for the audits, quality of earnings and due diligence related to the acquisitions of Skynet and Next Level Internet.
Bad debt. Bad debt decreased by $2,000, from the three months ended January 31, 2021, to the three months ended January 31, 2022. The decrease is attributed to the recognition of $4,000 in bad debt for accounts deemed uncollectible during the period ended January 31, 2021.
Depreciation and amortization. Depreciation and amortization increased by $49,000, from the three months ended January 31, 2021, to the three months ended January 31, 2022. The increase is primarily attributed to the acquisitions and related amortization of $434,000 for intangible assets, in addition to the depreciation of the assets acquired from Nexogy and ActivePBX.
Operating loss. The Company reported an operating loss of $1,319,000 for the three months ended January 31, 2022 compared to an operating loss of $764,000 for the three months ended January 31, 2021. The increase in operating loss between periods is primarily due to the increase in legal fees of $920,000, the increase in depreciation of $49,000, and the increase in SG&A of $172,000. These increases were slightingly offset by the decrease in stock compensation expense of $10,000, the decrease of $2,000 in bad debt expense and the improvement of $574,000 gross margin.
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Gain (loss) on derivative instruments. Gain (loss) on derivative instruments increased by $3,265,000 from the three months ended January 31, 2021, to the three months ended January 31, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re- measurement of all derivative instruments we recognized a loss between periods.
Loss on extinguishment of debt. Loss on extinguishment of debt increased by $5,480,000 from the three months ended January 31, 2021, to the three months ended January 31, 2022. On December 20, 2021, the Company and our lender entered into an amendment to a Credit Agreement, as described in Note 6, in connection with the amendment, the Company recognized a loss on extinguishment of debt for the amendment fee of $1,419,000 and the debt discount associated with the note of $4,061,000 was also recognized as a loss on extinguishment of debt.
Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased by $197,000 from the three months ended January 31, 2021, to the three months ended January 31, 2022. The Company determined that a previously accrued obligation was satisfied with our vendors and recognized a gain of $197,000 during the three months ended January 31, 2021.
Income tax benefit (expense). During the three months ended January 31, 2022, the Company recognized an income tax expense of $41,000. During the three months ended January 31, 2021, the Company recognized an income tax expense of $51,000.
Other income (expense). Other income (expense) improved by $1,000 from the three months ended January 31, 2021, to the three months ended January 31, 2022. During the three months ended January 31, 2022, the Company recognized other income of $1,000 and during the period ended January 31, 2021, the Company did not recognize other income.
Interest expense. Interest expense increased by $178,000 from the three months ended January 31, 2021, to the three months ended January 31, 2022. During the quarter ended January 31, 2022, the Company recognized non-cash interest / accretion expense of $663,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $506,000 in interest expense for cash interest payments on various promissory notes, accrual of $172,000 for interest expense for various promissory notes and $40,000 in interest expense added to the principal balance on two promissory notes as consideration for extension of the maturity date.
Net income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the three months ended January 31, 2022, was $11,644,000, an increase in net loss of $9,664,000, as compared to a net loss for the three months ended January 31, 2021, of $1,980,000. The increase in net loss including noncontrolling interest between periods is primarily due to the increase in derivative loss of $3,265,000, increase in loss on extinguishment of debt of $5,480,000, the increase of $172,000 in SG&A, the increase of $920,000 in legal and professional fees, and the increase of $49,000 in depreciation expense. These increases were slightingly offset by the decrease of $10,000 in stock compensation expense, the decrease of $2,000 in bad debt and the improvement of $574,000 in gross margin.
Net loss attributable to the noncontrolling interest. During the three months ended January 31, 2022, and 2021, the consolidated entity recognized net income in noncontrolling interest of $602,000 and $30,000, respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders equity section of the balance sheet.
Net income (loss) attributable to Digerati’s shareholders. Net loss for the three months ended January 31, 2022, was $11,042,000 compared to a net loss for the three months ended January 31, 2021, of $1,950,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the three months ended January 31, 2022 and 2021, was $5,000, respectively.
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Net income (loss) attributable to Digerati’s common shareholders. Net loss for the three months ended January 31, 2022, was $11,047,000 compared to a net loss for the three months ended January 31, 2021, of $1,955,000.
Six Months ended January 31, 2022, Compared to Six Months ended January 31, 2021.
Cloud Software and Service Revenue. Cloud software and service revenue increased by $2,918,000, or 60% from the six months ended January 31, 2021, to the six months ended January 31, 2022. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisitions of Skynet on December 2021 and the acquisitions of Nexogy and ActivePBX during FY2021. Our total number of customers increased from 2,583 for the six months ended January 31, 2021, to 2,960 customers for the six months ended January 31, 2022.
Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $860,000, or 39%, from the six months ended January 31, 2021, to the six months ended January 31, 2022. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet on December 2021 and the acquisitions of Nexogy and ActivePBX during FY2021. Our total number of customers increased from 2,583 for the six months ended January 31, 2021, to 2,960 customers for the six months ended January 31, 2022. However, our consolidated gross margin improved by $2,058,000 from the six months ended January 31, 2021, to the six months ended January 31, 2022.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $1,268,000, or 49%, from the six months ended January 31, 2021, to the six months ended January 31, 2022. The increase in SG&A is attributed to the acquisition of Skynet on December 2021 and the acquisitions of Nexogy and ActivePBX during FY2021., as part of the consolidation, the Company absorbed all of the employees responsible for managing the customer base, technical support, sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $329,000, from the six months ended January 31, 2021, to the six months ended January 31, 2022. The decrease between periods is attributed to the recognition during the six months ended January 31, 2021 of stock option expense of $53,000, the recognition of $247,000 in stock compensation expense associated with the funding of the 401(K)-profit sharing plan, the recognition of $18,000 in stock compensation for stock issued in lieu of cash payments to an employee and the recognition of $58,000 in stock issued consultants for professional services. During the six months ended January 31, 2022, the Company only recognized $47,000 in stock compensation for the amortization of stock options issued to our team over the last few years.
Legal and professional fees. Legal and professional fees increased by $1,236,000, from the six months ended January 31, 2021, to the six months ended January 31, 2022. The increase between periods is attributed to the recognition during the six months ended January 31, 2022 of $1,389,260 in professional fees for the audits, quality of earnings and due diligence related to the acquisitions of Skynet and Next Level Internet.
Bad debt. Bad debt increased by $11,000, from the six months ended January 31, 2021, to the six months ended January 31, 2022. The increase is attributed to the recognition of $15,000 in bad debt for accounts deemed uncollectible during the period ended January 31, 2022.
Depreciation and amortization. Depreciation and amortization increased by $381,000, from the six months ended January 31, 2021, to the six months ended January 31, 2022. The increase is primarily attributed to the acquisitions and related amortization of $868,000 for intangible assets, in addition to the depreciation of the assets acquired from Nexogy and ActivePBX.
Operating loss. The Company reported an operating loss of $1,899,000 for the six months ended January 31, 2022, compared to an operating loss of $1,390,000 for the six months ended January 31, 2021. The increase in operating loss between periods is primarily due to the increase in legal fees of $1,236,000, the increase in depreciation of $381,000, the increase of $11,000 in bad debt and the increase in SG&A of $1,268,000. These increases were slightingly offset by the decrease in stock compensation expense of $329,000 and the improvement of $2,058,000 gross margin.
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Gain (loss) on derivative instruments. Gain (loss) on derivative instruments improved by $991,000 from the six months ended January 31, 2021, to the six months ended January 31, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re-measurement of all derivative instruments we recognized a loss between periods.
Loss on extinguishment of debt. Loss on extinguishment of debt increased by $5,480,000 from the six months ended January 31, 2021, to the six months ended January 31, 2022. On December 20, 2021, the Company and our lender entered into an amendment to a Credit Agreement, as described in Note 6, in connection with the amendment, the Company recognized a loss on extinguishment of debt for the amendment fee of $1,419,000 and the debt discount associated with the note of $4,061,000 was also recognized as a loss on extinguishment of debt.
Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased by $197,000 from the six months ended January 31, 2021, to the six months ended January 31, 2022. The Company determined that a previously accrued obligation was satisfied with our vendors and recognized a gain of $197,000 during the six months ended January 31, 2021.
Income tax benefit (expense). During the six months ended January 31, 2022, the Company recognized an income tax expense of $119,000. During the six months ended January 31, 2021, the Company recognized an income tax expense of $59,000.
Other income (expense). Other income (expense) increased by $2,000 from the six months ended January 31, 2021, to the six months ended January 31, 2022. During the six months ended January 31, 2022, the Company recognized other expense of $2,000 and during the six months ended January 31, 2021, the Company did not recognize other expense.
Interest expense. Interest expense increased by $1,385,000 from the six months ended January 31, 2021, to the six months ended January 31, 2022. During the six months ended January 31, 2022, the Company recognized non-cash interest / accretion expense of $1,605,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $861,000 in interest expense for cash interest payments on various promissory notes, accrual of $381,000 for interest expense for various promissory notes and $40,000 in interest expense added to the principal balance on two promissory notes as consideration for extension of the maturity date.
Net income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the six months ended January 31, 2022, was $9,378,000, an increase in net loss of $6,642,000, as compared to a net loss for the six months ended January 31, 2021, of $2,736,000. The increase of $1,268,000 in SG&A, the increase of $1,236,000 in legal and professional fees, the increase of $11,000 in bad debt expense, the increase of $381,000 in depreciation expense and the increase of $5,480,000 in loss on extinguishment of debt. These increases were slightingly offset by the decrease of $329,000 in stock compensation expense, the improvement of $991,000 in derivative loss, and the improvement of $2,058,000 in gross margin.
Net loss attributable to the noncontrolling interest. During the six months ended January 31, 2022, and 2021, the consolidated entity recognized net income in noncontrolling interest of $760,000 and $65,000, respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders equity section of the balance sheet.
Net income (loss) attributable to Digerati’s shareholders. Net loss for the six months ended January 31, 2022, was $8,618,000 compared to a net loss for the six months ended January 31, 2021, of $2,671,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the six months ended January 31, 2022 and 2021, was $10,000, respectively.
Net income (loss) attributable to Digerati’s common shareholders. Net loss for the six months ended January 31, 2022, was $8,628,000 compared to a net loss for the six months ended January 31, 2021, of $2,681,000.
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Liquidity and Capital Resources
Cash Position: We had a consolidated cash balance of $2,844,000 as of January 31, 2022. Net cash consumed by operating activities during the six months ended January 31, 2022 was approximately $1,003,000, primarily as a result of operating expenses, that included $47,000 in stock compensation and warrant expense, bad debt expense of $15,000, loss on extinguishment of debt of $5,480,000, amortization of debt discount of $1,605,000, gain on derivative liability of $1,009,000, depreciation and amortization expense of $974,000, increase in accrued expense of $631,000, increase in accounts receivable of $110,000, increase of $484,000 in accounts payable and decrease in deferred revenue of $17,000. Additionally, we had an decrease in prepaid expenses and other current assets of $12,000, increase in inventory of $27,000 and the recognition of $40,000 in accrued interest added to principal.
Cash used in investing activities during the six months ended January 31, 2022, was $4,003,000, $65,000 was used for the purchase of VoIP equipment, $4,100,000 was used to acquire the Skynet’s assets and the Company received $162,000 from Nexogy as an adjustment consideration for payables from the acquisition.
Cash provided by financing activities during the six months ended January 31, 2022, was $6,361,000. The Company secured $707,000 from convertible notes, net of issuance costs and discounts and secured $6,000,000 from debt financing, net of issuance costs and discounts. The Company made principal payments of $328,000 on related party notes, and $18,000 in principal payments on equipment financing. Overall, our net operating, investing, and financing activities during the six months ended January 31, 2022, contributed approximately $1,355,000 of our available cash.
Digerati’s consolidated financial statements for the six months ending January 31, 2022, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, Digerati has incurred net losses and accumulated a deficit of approximately $113,998,000 and a working capital deficit of approximately $22,102,000 which raises doubt about Digerati’s ability to continue as a going concern.
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2022 certain members of our management team will continue to receive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, we have also secured various agent agreements to accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.
Management believes that available resources as of January 31, 2022, will not be sufficient to fund the Company’s operations, debt service and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
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Our current cash expenses are expected to be approximately $700,000 per month, including wages, rent, utilities, corporate expenses, and legal professional fees associated with potential acquisitions. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our corporate and ongoing operating expenses, or to pay our current liabilities. As of January 31, 2022, our total liabilities were approximately $48,607,000, which included $15,824,000 in derivative liabilities. We will continue to use our available cash on hand to cover our deficiencies in operating expenses.
We estimate that we need approximately $80,000 per month of additional working capital to fund our corporate expenses during Fiscal 2022.
We have been successful in raising debt capital and equity capital in the past and as described in Notes 6, 7, and 8 to our consolidated financial statements. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this quarterly report on Form 10-Q for the quarter ended January 31, 2022, our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our PEO and PFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as there has been no implementation to date of processes and/or procedures to remedy internal control weaknesses and deficiencies.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 21, 2021, T3 Communications, Inc.(“T3”), a subsidiary of the Company, entered into a settlement agreement with Carolina Financial Securities, LLC (“CFS”). Under the settlement agreement the parties agreed to resolve all issues and claims related to the lawsuit. Pursuant to the settlement agreement, T3 agreed to pay CFS a total of $300,000, payable as follows: $100,000 by October 15, 2021, and $200,000 payable in 15 monthly installments of $13,333.33 beginning November 15, 2021. On October 15, 2021, the Company submitted a payment of $100,000 and as of the date of this filing, the Company submitted five (5) monthly payment for $13,333.33 each.
Item 1A. Risk Factors.
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Company’s equity securities during the period ended January 31, 2022, that were not previously reported in a Current Report on Form 8-K or in a Quarterly Report on Form 10-Q except:
On January 21, 2022, the Company secured two promissory notes for $460,000, with a maturity date of October 21, 2022, and annual interest rate of 8%. In conjunction with the promissory notes, we issued 600,000 shares of common stock.
Subsequently, on February 14, 2022, the Company entered into a note extension agreement, and as consideration for the extension, the Company issued 250,000 shares of common stock. At the time of issuance, the Company recognized the fair market value of the shares of $34,150 as interest expense. In addition, the Company agreed to add $75,000 to the principal amount outstanding and the Company recognized $75,000 as interest expense.
The sales and issuances of the securities described above were made pursuant to the exemptions from registration contained into Section 4(a) (2) of the Securities Act under the Securities Act. Each purchaser represented that such purchaser’s intention to acquire the shares for investment only and not with a view toward distribution. We requested our stock transfer agent to affix appropriate legends to the stock certificate issued to each purchaser and the transfer agent affixed the appropriate legends. Each purchaser was given adequate access to sufficient information about us to make an informed investment decision. Except as described in this Quarterly Report on Form 10-Q, none of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not Applicable
Item 5. Other Information.
| Item 1.01 | Entry into a Material Definitive Agreement. |
| Item 2.03 | Creation of Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant. |
| Item 3.02 | Unregistered Sales of Equity Securities. |
On January 21, 2022, the Company secured two promissory notes for $460,000, with a maturity date of October 21, 2022, and annual interest rate of 8%.
For a description of this transaction, see the paragraph that begins with the words “On January 21, 2022” in Note 8 – Convertible Notes Payable to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Note 8 – Convertible Notes Payable and Part II, Item 5 of this Quarterly Report on Form 10-Q contains only a brief description of the material terms of the January 21st convertible promissory notes and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such description is qualified in its entirety by reference to the full text of the January 21st convertible promissory notes along with the Securities Purchase Agreement entered into in connection with the January 21st convertible promissory notes, filed as Exhibit 4.4 to the Quarterly Report on this Form 10-Q filed with the SEC.
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Item 6. Exhibits
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| # | Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish supplementally copies of omitted schedules and exhibits to the Securities and Exchange Commission or its staff upon its request. |
| * | Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information is (i) not material and (ii) would likely be competitively harmful if publicly disclosed. The Company will furnish supplementally an unredacted copy of such exhibit to the Securities and Exchange Commission or its staff upon its request. |
| * | Filed herewith |
| + | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
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SIGNATURES
Pursuant to 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.
| DIGERATI TECHNOLOGIES, INC. | ||
| Date: March 17, 2022 | By: | /s/ Arthur L. Smith |
| Name: | Arthur L. Smith | |
| Title: | President and Chief Executive Officer | |
| (Duly
Authorized Officer and Principal Executive Officer) |
||
| Date: March 17, 2022 | By: | /s/ Antonio Estrada Jr. |
| Name: | Antonio Estrada Jr. | |
| Title: | Chief Financial Officer | |
| (Duly
Authorized Officer and Principal Financial Officer) |
||
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